Edgar Filing: PIMCO CALIFORNIA MUNICIPAL INCOME FUND

Filed pursuant to Rule 497(h)
Registration No. 333-61300

PROSPECTUS________________________________________________________June 26, 2001

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

15,200,000 Shares

PIMCO logo
PIMCO California Municipal Income Fund
Common Shares
-------------------------------------------------------------------------------

Investment Objective. 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 and California income tax. In
pursuing this objective, the portfolio manager also seeks to preserve and
enhance the value of the Fund's holdings relative to the municipal bond market
generally, using proprietary analytical models that test and evaluate the
sensitivity of those holdings to changes in interest rates and yield
relationships.

Portfolio Contents. Under normal market conditions, the Fund will invest
substantially all (at least 90%) of its total assets in municipal bonds which
pay interest that, in the opinion of bond counsel to the issuer (or on the
basis of other authority believed by the Fund's portfolio manager to be
reliable), is exempt from federal and California income taxes. The Fund will
seek to avoid bonds generating interest potentially subjecting individuals to
the alternative minimum tax. The Fund will invest at least 80% of its net
assets in investment grade quality municipal bonds, including bonds that are
unrated but judged to be of investment grade quality by the Fund's portfolio
manager. The Fund may invest up to 20% of its net assets in municipal bonds
that are rated Ba/BB or B or that are unrated but judged to be of comparable
quality by the Fund's portfolio manager. The Fund cannot assure you that it
will achieve its investment objective.

No Prior History. Because the Fund is newly organized, its common shares have
no history of public trading. Shares of closed-end investment companies
frequently trade at a discount from their net asset value. The Fund's common
shares have been approved for listing on the New York Stock Exchange, subject
to notice of issuance. The trading or "ticker" symbol of the common shares is
expected to be "PCQ."

Before buying any common shares you should read the discussion of the material
risks of investing in the Fund in "Risks" beginning on page 15. These risks
are summarized in "Special Risk Considerations" beginning on page 4.

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.

Price to Proceeds
Public Sales Load to Fund
------------------------------------------------

Per Share $ 15.000 $ 0.675 $ 14.325
------------------------------------------------
Total $228,000,000 $10,260,000 $217,740,000
------------------------------------------------

The Fund will pay organizational and offering expenses estimated at $456,000
from the proceeds of the offering. PIMCO Advisors L.P. has agreed to pay the
amount by which the aggregate of all of the Fund's organizational expenses and
all offering costs (other than the sales load) exceeds $0.03 per share.

The underwriters expect to deliver the common shares to purchasers on or about
June 29, 2001.

UBS Warburg

CIBC World Markets Corp. A.G. Edwards & Sons, Inc.

Wedbush Morgan Securities Inc.

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

(continued from previous page)

You should read this Prospectus, which contains important information about the
Fund, before deciding whether to invest and retain it for future reference. A
Statement of Additional Information, dated June 26, 2001, containing additional
information about the Fund, has been filed with the Securities and Exchange
Commission and is incorporated by reference in its entirety into this
Prospectus, which means that it is part of the Prospectus for legal purposes.
You can review the table of contents of the Statement of Additional Information
on page 33 of this Prospectus. You may request a free copy of the Statement of
Additional Information by calling (877) 819-2224 or by writing to the Fund, or
obtain a copy (and other information regarding the Fund) from the Securities
and Exchange Commission web site (http://www.sec.gov).

The Fund's common 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.

The underwriters named in this Prospectus may purchase up to 2,280,000
additional common shares from the Fund under certain circumstances.

You should rely only on the information contained or incorporated by reference
in this Prospectus. The Fund has not, and the underwriters have not, authorized
anyone to provide you with different information. If anyone provides you with
different or inconsistent information, you should not rely on it. The Fund is
not, and the underwriters are 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. The Fund's business, financial
condition, results of operations and prospects may have changed since that
date.

Until July 21, 2001 (25 days after the date of this Prospectus), all dealers
that buy, sell or trade the common 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.

TABLE OF CONTENTS
--------------------------------------------------------------------------------

Prospectus Summary............. 1
Summary of Fund expenses....... 6
The Fund....................... 8
Use of proceeds................ 8
The Fund's investments......... 8
Preferred shares and related
leverage..................... 12
Risks.......................... 15
How the Fund manages risk...... 19
Management of the Fund......... 20
Net asset value................ 22
Distributions.................. 23
Dividend reinvestment plan..... 23

Description of shares................. 25
Certain provisions in the Declaration
of Trust............................ 27
Repurchase of Fund shares; conversion
to open-end fund.................... 28
Tax matters........................... 29
Underwriting.......................... 31
Custodian and transfer agent.......... 32
Legal matters......................... 32
Table of contents for the statement of
additional information.............. 33

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

Prospectus Summary

This is only a summary. You should review the more detailed information
contained in this Prospectus.

THE FUND

PIMCO California Municipal Income Fund (the "Fund") is a newly organized, non-
diversified, closed-end management investment company. The Fund is designed to
provide tax benefits to investors who are residents of California. See "The
Fund."

THE OFFERING

The Fund is offering 15,200,000 common shares of beneficial interest at $15.00
per share through a group of underwriters (the "Underwriters") led by UBS
Warburg LLC ("UBS Warburg"). The common shares of beneficial interest are
called "Common Shares" in the rest of this Prospectus. You must purchase at
least 100 Common Shares. The Fund has given the Underwriters an option to
purchase up to 2,280,000 additional Common Shares to cover orders in excess of
15,200,000 Common Shares. See "Underwriting." PIMCO Advisors has agreed to pay
the amount by which the aggregate of all of the Fund's organizational expenses
and all offering costs (other than the sales load) exceeds $0.03 per Common
Share.

INVESTMENT OBJECTIVE

The Fund's investment objective is to provide current income exempt from
federal and California income tax. In pursuing this objective, the portfolio
manager also seeks to preserve and enhance the value of the Fund's holdings
relative to the municipal bond market generally, using proprietary analytical
models that test and evaluate the sensitivity of those holdings to changes in
interest rates and yield relationships. Under normal market conditions, the
Fund will invest substantially all (at least 90%) of its total assets in
municipal bonds which pay interest that, in the opinion of bond counsel to the
issuer (or on the basis of other authority believed by the Fund's portfolio
manager to be reliable), is exempt from federal and California income taxes
("California Municipal Bonds"). The Fund will seek to avoid bonds generating
interest potentially subjecting individuals to the alternative minimum tax. The
Fund will invest at least 80% of its net assets in municipal bonds that at the
time of investment are investment grade quality. Investment grade quality bonds
are bonds rated within the four highest grades (Baa or BBB or better by Moody's
Investors Service, Inc. ("Moody's"), Standard & Poor's ("S&P") or Fitch IBCA,
Inc. ("Fitch")), or bonds that are unrated but judged to be of comparable
quality by the Fund's portfolio manager. The Fund may invest up to 20% of its
net assets in municipal bonds that, at the time of investment, are rated Ba/BB
or B by Moody's, S&P or Fitch or that are unrated but judged to be of
comparable quality by the Fund's portfolio manager. Bonds of below investment
grade quality are regarded as having predominantly speculative characteristics
with respect to capacity to pay interest and repay principal, and are commonly
referred to as "junk bonds." Bonds in the lowest investment grade category may
also be considered to possess some speculative characteristics.

The Fund cannot assure you that it will attain its investment objective. See
"The Fund's investments."

PROPOSED OFFERING OF PREFERRED SHARES

Subject to market conditions, approximately one to three months after
completion of this offering, the Fund intends to offer preferred shares of
beneficial interest ("Preferred Shares") representing approximately 35% of the
Fund's capital after their issuance. The issuance of Preferred Shares will
leverage your investment in Common Shares. Leverage involves special risks.
There is no assurance that the Fund will issue Preferred Shares or that, if
issued, the Fund's leveraging strategy will be successful. See "Risks--Leverage
Risk." The net proceeds the Fund obtains from selling the Preferred Shares will
be invested principally in long-term municipal bonds, which generally will pay
fixed rates of interest over the life of the bond. The Preferred Shares will
pay dividends based on shorter-term rates, which will be reset frequently. So
long as the rate of return, net of applicable Fund expenses, on the long-term
bonds and other investments purchased by the Fund exceeds Preferred Share
dividend rates as reset periodically, the investment of the proceeds of the
Preferred Shares will generate more income than will be needed to pay dividends
on the Preferred Shares. If so, the excess will be used to pay higher dividends
to holders of Common Shares ("Common Shareholders"). However, the Fund cannot
assure you that the issuance of Preferred Shares will result in a higher yield
on your Common Shares. Once Preferred Shares are issued, the net asset value
and market price of the Common Shares and the yield to Common Shareholders will
be more volatile. See "Preferred shares and related leverage" and "Description
of shares--Preferred Shares."

INVESTMENT MANAGER

PIMCO Advisors L.P. ("PIMCO Advisors") serves as the investment manager of the
Fund. Subject to the supervision of the Board of Trustees, PIMCO Advisors is
responsible for managing, either directly or through others selected by it, the
investment activities of the Fund and the Fund's business affairs and other
administrative matters. PIMCO Advisors will receive an annual fee, payable
monthly, in a maximum amount equal to 0.65% of the Fund's average daily net
assets (including assets attributable to any Preferred Shares that may be
outstanding). PIMCO Advisors has contractually agreed to waive a portion of the
management fees it is entitled to receive from the Fund at the annual rate of
0.20% of the Fund's average daily net assets from the commencement of
operations through June 30, 2006 (i.e., roughly the first five years of
operations), and for a declining amount for an additional three years of
operations (through June 30, 2009). PIMCO Advisors is located at 1345 Avenue of
the Americas, New York, New York 10105. Organized in 1987, PIMCO Advisors
provides investment management and advisory services to private accounts of
institutional and individual clients and to mutual funds. As of March 31, 2001,
PIMCO Advisors and its subsidiary partnerships had approximately $275 billion
in assets under management.

PIMCO Advisors has retained its affiliate, Pacific Investment Management
Company LLC ("PIMCO"), as a sub-adviser to manage the Fund's portfolio
investments. See "Portfolio Manager" below.

PORTFOLIO MANAGER

PIMCO will serve as the Fund's sub-adviser responsible for managing the Fund's
portfolio investments and is sometimes referred to herein as the "portfolio
manager." Subject to the supervision of PIMCO Advisors, PIMCO has full
investment discretion and makes all determinations with respect to the
investment of the Fund's assets. PIMCO is located at 840 Newport Center Drive,
Newport Beach, California 92660. Organized in 1971, PIMCO provides investment
management and advisory services to private accounts of institutional and
individual clients and to mutual funds. As of March 31, 2001, PIMCO had
approximately $220 billion in assets under management.

PIMCO Advisors (and not the Fund) will pay a portion of the fees it receives to
PIMCO in return for PIMCO's services.

DISTRIBUTIONS

Commencing with the Fund's first dividend, the Fund intends to make regular
monthly cash distributions to you at a level rate based on the projected
performance of the Fund. The Fund's ability to maintain a level 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 Common Shares and the Fund's dividend policy could change.
Over time, the Fund will distribute substantially 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 to you your pro
rata share of any available net capital gain and taxable ordinary income. Your
initial distribution is expected to be declared approximately 45 days, and paid
approximately 60 to 90 days, from the completion of this offering, depending on
market conditions. Unless you elect to receive distributions in cash, all of
your distributions will be automatically reinvested in additional Common Shares
under the Fund's Dividend Reinvestment Plan. See "Distributions" and "Dividend
reinvestment plan."

LISTING

The Common Shares have been approved for listing on the New York Stock
Exchange, subject to notice of issuance. The trading or "ticker" symbol of the
Common Shares is expected to be "PCQ." See "Description of shares--Common
Shares."

CUSTODIAN AND TRANSFER AGENT

State Street Bank and Trust Co. will serve as custodian of the Fund's assets.
PFPC Inc. will serve as the Fund's transfer and dividend disbursement agent.
See "Custodian and transfer agent."

MARKET PRICE OF SHARES

Shares of closed-end investment companies frequently trade at prices lower than
net asset value. Shares of closed-end investment companies like the Fund that
invest predominantly in investment grade municipal bonds have during some
periods traded at prices higher than net asset value and during other periods
traded at prices lower than net asset value. The Fund cannot assure you that
Common Shares will trade at a price higher than net asset value in the future.
Net asset value will be reduced immediately following the offering by the sales
load and the amount of organization and offering expenses paid by the Fund. See
"Use of proceeds." In addition to net asset value, market price may be affected
by such factors relating to the Fund and its portfolio holdings as dividend
levels (which are in turn affected by expenses), call protection, dividend
stability, portfolio credit quality and liquidity and market supply and demand.
See "Preferred shares and related leverage," "Risks," "Description of shares,"
and "Repurchase of Fund shares; conversion to open-end fund" in this
Prospectus, and the Statement of Additional Information under "Repurchase of
Fund Shares; Conversion to Open-End Fund." The Common Shares are designed
primarily for long-term investors, and you should not view the Fund as a
vehicle for trading purposes.

SPECIAL RISK CONSIDERATIONS

No Operating History
The Fund is a newly organized, non-diversified, closed-end management
investment company with no history of operations.

Interest Rate Risk
Generally, when market interest rates fall, bond prices rise, and vice versa.
Interest rate risk is the risk that the municipal bonds in the Fund's portfolio
will decline in value because of increases in market interest rates. The prices
of longer-term bonds generally fluctuate more than prices of shorter-term bonds
as interest rates change. Because the Fund will invest primarily in long-term
bonds, the Common Share net asset value and market price per share will
fluctuate more in response to changes in market interest rates than if the Fund
invested primarily in shorter-term bonds. The Fund may utilize certain
strategies, including investments in "structured" notes, for the purpose of
reducing the interest rate sensitivity of the portfolio and decreasing the
Fund's exposure to interest rate risk, although there is no assurance that it
will do so or that such strategies will be successful. The Fund's use of
leverage, as described below, will tend to increase Common Share interest rate
risk.

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.
The Fund may invest up to 20% (measured at the time of investment) of its net
assets in municipal bonds that are rated Ba/BB or B or that are unrated but
judged to be of comparable quality by PIMCO. The prices of these lower grade
bonds are more sensitive to negative developments, such as a decline in the
issuer's revenues or a general economic downturn, than are the prices of higher
grade securities. Municipal bonds of below investment grade quality (commonly
referred to as "junk bonds") are predominantly speculative with respect to the
issuer's capacity to pay interest and repay principal when due, and therefore
involve a greater risk of default. Municipal bonds in the lowest investment
grade category may also be considered to possess some speculative
characteristics by certain rating agencies.

Concentration Risk
The Fund's policy of investing substantially all of its assets in California
Municipal Bonds makes the Fund more susceptible to adverse economic, political
or regulatory occurrences affecting the issuers of such bonds.

Leverage Risk
The use of leverage through the issuance of Preferred Shares creates an
opportunity for increased Common Share net income, but also creates special
risks for Common Shareholders. There is no assurance that the Fund's leveraging
strategy will be successful. It is anticipated that dividends on Preferred
Shares will be based on shorter-term municipal bond rates of return (which
would be redetermined periodically, pursuant to an auction process), and that
the Fund will invest the net proceeds of the Preferred Shares offering
principally in long-term, typically fixed rate, municipal bonds. So long as the
Fund's municipal bond portfolio provides a higher rate of return (net of Fund
expenses) than the Preferred dividend rate, as reset periodically, the leverage
will allow Common Shareholders to receive a higher current rate of return than
if the Fund were not leveraged. If, however, long- and/or short-term rates
rise, the Preferred dividend rate could exceed the rate of return on long-term
bonds and other investments held by the Fund that were acquired during periods
of generally lower interest rates, reducing return to Common Shareholders.
Investment by the Fund in residual interest municipal bonds ("RIBS") and other
derivative instruments may amplify the effects of leverage and, during

periods of rising interest rates, may adversely affect the Fund's income and
distributions to Common Shareholders. See "The Fund's investments" for a
discussion of these instruments. Preferred Shares are expected to pay
cumulative dividends, which may tend to increase leverage risk. Leverage
creates two major types of risks for Common Shareholders:

.the likelihood of greater volatility of net asset value and market price of
Common Shares, because changes in the value of the Fund's bond portfolio
(including bonds bought with the proceeds of the Preferred Shares offering)
are borne entirely by the Common Shareholders; and

.the possibility either that Common Share income will fall if the Preferred
dividend rate rises, or that Common Share income will fluctuate because the
Preferred dividend rate varies.

Because the fees received by PIMCO Advisors are based on the total net assets
of the Fund (including assets represented by Preferred Shares and any leverage
created thereby), PIMCO Advisors has a financial incentive for the Fund to
issue Preferred Shares, which may create a conflict of interest between PIMCO
Advisors and the holders of the Common Shares.

Municipal Bond Market Risk
The amount of public information available about the municipal bonds in the
Fund's portfolio is generally less than that for corporate equities or bonds,
and the investment performance of the Fund may therefore be more dependent on
the analytical abilities of PIMCO than would be a stock fund or taxable bond
fund. The secondary market for municipal bonds, particularly below investment
grade bonds in which the Fund may invest, also tends to be less well-developed
and less liquid than many other securities markets, which may adversely affect
the Fund's ability to sell its bonds at attractive prices.

Non-Diversification Risk
Because the Fund is classified as "non-diversified" under the Investment
Company Act of 1940, as amended (the "1940 Act"), it can invest a greater
portion of its assets in obligations of a single issuer. As a result, the Fund
will be more susceptible than a more widely diversified fund to any single
corporate, economic, political or regulatory occurrence.

Anti-Takeover Provisions
The Fund's Agreement and Declaration of Trust (the "Declaration") includes
provisions that could limit the ability of other entities or persons to acquire
control of the Fund or convert the Fund to open-end status. See "Certain
provisions in the Declaration of Trust." These provisions in the Declaration
could have the effect of depriving the Common Shareholders of opportunities to
sell their Common Shares at a premium over the then current market price of the
Common Shares.

Tax Considerations
The Fund's distributions of ordinary taxable income (including any net short-
term capital gain) will be taxable to shareholders as ordinary income, and
capital gain dividends will be subject to capital gains taxes. See "Tax
matters."

Summary of Fund expenses

The following table assumes the issuance of Preferred Shares in an amount equal
to 35% of the Fund's capital (after their issuance), and shows Fund expenses as
a percentage of net assets attributable to Common Shares. Footnote 2 to the
table shows Fund expenses as a percentage of total net assets (attributable to
both Common and Preferred Shares).

Shareholder Transaction Expenses
Sales Load Paid by You (as a percentage of offering price)........... 4.50%
Dividend Reinvestment Plan Fees...................................... None(1)

Percentage of Net
Assets Attributable to
Common Shares (2)
--------------------------------------------------------------------------------

Annual Expenses
Management Fees........................................ 1.00%
Other Expenses......................................... 0.26%
Total Annual Expenses.................................. 1.26%
Fee Waiver (Years 1-5)................................. (0.31)%(3)
Net Annual Expenses (Years 1-5)........................ 0.95%(3)

(1) You will pay brokerage charges if you direct the plan agent to sell your
Common Shares held in a dividend reinvestment account.

(2) The table presented in this footnote estimates what the Fund's annual
expenses would be stated as percentages of the Fund's total net assets
(rather than stated as percentages of the Fund's net assets attributable
to Common Shares, as presented above), and again assuming the issuance of
Preferred Shares in an amount equal to 35% of the Fund's capital (after
their issuance). In accordance with these assumptions, the Fund's expenses
would be estimated to be as follows:

Percentage of
Total Net Assets
------------------------------------------------------------------------------

Annual Expenses
Management Fees............................................ 0.65%
Other Expenses............................................. 0.17%
Total Annual Expenses...................................... 0.82%
Fee Waiver (Years 1-5)..................................... (0.20)%(3)
Net Annual Expenses (Years 1-5)............................ 0.62%(3)

(3) PIMCO Advisors has contractually agreed to waive a portion of the
management fees it is entitled to receive from the Fund at the annual rate
of 0.20% of the Fund's average daily net assets from the commencement of
operations through June 30, 2006 (i.e., roughly the first 5 years of Fund
operations), 0.15% of average daily net assets in year 6, 0.10% in year 7,
and 0.05% in year 8. PIMCO Advisors has not agreed to waive any portion of
its fees and expenses beyond June 30, 2009. Without the fee waiver, "Net
Annual Expenses" would be estimated to be 1.26% of average daily net
assets attributable to Common Shares and 0.82% of average total daily net
assets (attributable to both Common and Preferred Shares). PIMCO Advisors
has agreed to pay the amount by which the aggregate of all of the Fund's
organizational expenses and all offering costs (other than the sales load)
exceeds $0.03 per Common Share.

The purpose of the table above is to help you understand all fees and expenses
that you, as a Common Shareholder, would bear directly or indirectly. The Other
Expenses shown in the table and related footnotes are based on estimated
amounts for the Fund's first year of operations and assume that the Fund issues
approximately 15.2 million Common Shares. See "Management of the Fund" and
"Dividend reinvestment plan."

As required by relevant Securities and Exchange Commission regulations, the
following example illustrates the expenses (including the sales load of $45)
that you would pay on a $1,000 investment in Common Shares, assuming (1) total
net annual expenses of 0.95% of net assets attributable to Common Shares in
years 1 through 5, increasing to 1.26% in years 9 and 10, and (2) a 5% annual
return (1):

1 Year 3 Years 5 Years 10 Years (2)
-----------------------------------------------------------------------------------------------------

$54 $74 $95 $170

The example above should not be considered a representation of future expenses.
Actual expenses may be higher or lower than those shown.

(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% annual return shown in the example.

(2) Assumes waiver of management fees at the annual rate of 0.15% of the
Fund's average daily net assets in year 6, 0.10% in year 7, 0.05% in year
8, and no waiver in years 9 and 10. PIMCO Advisors has not agreed to waive
any portion of the management fees it is entitled to receive from the Fund
beyond June 30, 2009. See "Management of the Fund--Investment Management
Agreement."

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

The Fund

The Fund is a recently organized, non-diversified, closed-end management
investment company registered under the Investment Company Act of 1940 and the
rules and regulations thereunder, as amended (the "1940 Act"). The Fund was
organized as a Massachusetts business trust on May 10, 2001 pursuant to the
Declaration, which is governed by the laws of The Commonwealth of
Massachusetts. As a newly organized entity, the Fund has no operating history.
The Fund's principal office is located at 1345 Avenue of the Americas, New
York, New York 10105, and its telephone number is (212) 739-3369. The Fund is
designed to provide tax benefits to investors who are residents of California.

Use of proceeds

The net proceeds of the offering of Common Shares will be approximately
$217,284,000 (or $249,876,600 if the Underwriters exercise the over-allotment
option in full) after payment of the estimated organization and offering costs.
PIMCO Advisors has agreed to pay the amount by which the aggregate of all of
the Fund's organizational expenses and all offering costs (other than the sales
load) exceeds $0.03 per Common Share. The Fund will invest the net proceeds of
the offering in accordance with the Fund's investment objective and policies as
stated below. It is presently anticipated that the Fund will be able to invest
substantially all of the net proceeds in municipal bonds that meet the
investment objective and policies within three months after the completion of
the offering. Pending such investment, it is anticipated that the proceeds will
be invested in short-term, tax-exempt securities.

The Fund's investments

INVESTMENT OBJECTIVE AND POLICIES

The Fund's investment objective is to provide current income exempt from
federal and California income tax. In pursuing this objective, PIMCO also seeks
to preserve and enhance the value of the Fund's holdings relative to the
municipal bond market generally, using proprietary analytical models that test
and evaluate the sensitivity of those holdings to changes in interest rates and
yield relationships.

PIMCO may at times believe that bonds associated with a particular municipal
market sector (for example, electric utilities), issued by a particular
municipal issuer, or having particular structural characteristics, are
undervalued. PIMCO may purchase such a bond for the Fund's portfolio because it
represents a market sector or issuer that PIMCO considers undervalued, even if
the value of the particular bond appears to be consistent with the value of
similar bonds. Municipal bonds of particular types (e.g., hospital bonds,
industrial revenue bonds or bonds issued by a particular municipal issuer) may
be undervalued because there is a temporary excess of supply in that market
sector, or because of a general decline in the market price of municipal bonds
of the market sector for reasons that do not apply to the particular municipal
bonds that are considered undervalued. The Fund's investment in municipal bonds
may be based on PIMCO's belief that their yield and/or total return potential
is higher than that available on bonds bearing similar levels of interest rate
risk, credit risk and other forms of risk, or that their value relative to the
municipal bond market is less sensitive to these risks. The Fund attempts to
increase its portfolio value relative to the municipal bond market by generally
prudent

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

The Fund's investments

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

selection of municipal bonds regardless of the direction the market may move.
Any capital appreciation realized by the Fund will generally result in the
distribution of taxable capital gains to Common Shareholders.

Under normal market conditions, the Fund will invest substantially all (at
least 90%) of its total assets in California Municipal Bonds. The Fund will
seek to avoid bonds generating interest potentially subjecting individuals to
the alternative minimum tax. The Fund will invest at least 80% of its net
assets in investment grade quality municipal bonds. Investment grade quality
means that such bonds are rated, at the time of investment, within the four
highest grades (Baa or BBB or better by Moody's, S&P or Fitch) or are unrated
but judged to be of comparable quality by PIMCO. The Fund may invest up to 20%
of its net assets in municipal bonds that are rated, at the time of investment,
Ba/BB or B by Moody's, S&P or Fitch or that are unrated but judged to be of
comparable quality by PIMCO. Bonds of below investment grade quality (Ba/BB or
below) are commonly referred to as "junk bonds." Bonds of below investment
grade quality are regarded as having predominantly speculative characteristics
with respect to capacity to pay interest and repay principal. Bonds in the
lowest investment grade category may also be considered to possess some
speculative characteristics by certain rating agencies. 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 or
PIMCO downgrades its assessment of the credit characteristics of a particular
issue. In determining whether to retain or sell such a security, PIMCO may
consider such factors as PIMCO'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. A general
description of Moody's, S&P's and Fitch's ratings of municipal bonds is set
forth in Appendix A to the Statement of Additional Information. See "Municipal
Bonds" below for a general description of the economic and credit
characteristics of municipal issuers in California. The Fund may also invest in
securities of other open- or closed-end investment companies that invest
primarily in municipal bonds of the types in which the Fund may invest
directly. As a stockholder in an investment company, the Fund would bear its
ratable share of that investment company's expenses in addition to the Fund's
own expenses. See "--Other Investment Companies" below.

The Fund may purchase municipal bonds that are additionally secured by
insurance, bank credit agreements, or escrow accounts. The credit quality of
companies which provide such credit enhancements will affect the value of those
securities. 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 income. 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 feature does not guarantee the market value of the insured
obligations or the net asset value of the Common Shares.

Upon PIMCO's recommendation, temporarily or for defensive purposes and in order
to keep the Fund's cash fully invested, including the period during which the
net proceeds of this offering are being invested, the Fund may invest up to
100% of its net assets in short-term investments including high quality, short-
term securities that may be either tax-exempt or taxable. The Fund intends to
invest in taxable short-term investments only in the event that suitable tax-
exempt short-term investments are not available at reasonable prices and
yields. Investment in taxable short-term investments would result in a portion
of your dividends being subject to federal and California income taxes. For
more information, see the Statement of Additional Information.

The Fund cannot change its investment objective without the approval of the
holders of a "majority of the outstanding" Common Shares and Preferred Shares
voting together as a single class, and of the holders of a "majority of the
outstanding" Preferred Shares voting as a separate class. A "majority of

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

The Fund's investments

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

the outstanding" shares (whether voting together as a single class or voting as
a separate class) means (i) 67% or more of such shares present at a meeting, if
the holders of more than 50% of those shares are present or represented by
proxy, or (ii) more than 50% of such shares, whichever is less. See
"Description of shares--Preferred Shares--Voting Rights" in this Prospectus and
the Statement of Additional Information under "Description of shares--Preferred
Shares--Voting Rights" for additional information with respect to the voting
rights of holders of Preferred Shares.

The Fund will seek to avoid portfolio investments that pay interest that is
taxable to individuals under the federal alternative minimum tax. Nonetheless,
the Fund may not be successful in this regard and if you are, or as a result of
an investment in the Fund would become, subject to the federal alternative
minimum tax, the Fund may not be a suitable investment for you. Special
alternative minimum tax rules apply to corporate holders. In addition, capital
gain dividends will be subject to capital gains taxes. See "Tax matters."

MUNICIPAL BONDS

Municipal bonds are either general obligation or revenue bonds and typically
are issued to finance public projects (such as roads or public buildings), to
pay general operating expenses, or to refinance outstanding debt. General
obligation bonds are backed by the full faith and credit, or taxing authority,
of the issuer and may be repaid from any revenue source; revenue bonds may be
repaid only from the revenues of a specific facility or source. The Fund also
may purchase municipal bonds that represent lease obligations. These carry
special risks because the issuer of the bonds may not be obligated to
appropriate money annually to make payments under the lease. In order to reduce
this risk, the Fund will only purchase municipal bonds representing lease
obligations where PIMCO believes the issuer has a strong incentive to continue
making appropriations until maturity.

The yields on municipal bonds depend on a variety of factors, including
prevailing interest rates and the condition of the general money market and the
municipal bond market, the size of a particular offering, the maturity of the
obligation and the rating of the issue. The market value of municipal bonds
will vary with changes in interest rate levels and as a result of changing
evaluations of the ability of their issuers to meet interest and principal
payments.

The Fund will invest primarily in municipal bonds with long-term maturities in
order to maintain a weighted average maturity of 15-30 years, but the weighted
average maturity of obligations held by the Fund may be shortened, depending on
market conditions.

WHEN-ISSUED, DELAYED DELIVERY AND FORWARD COMMITMENT TRANSACTIONS

The Fund may buy and sell municipal bonds on a when-issued, delayed delivery or
forward commitment basis, making payment or taking delivery at a later date,
normally within 45 days of the trade date. This type of transaction may involve
an element of risk because no interest accrues on the bonds prior to settlement
and, since bonds are subject to market fluctuations, the value of the bonds at
time of delivery may be less (or more) than cost. When such purchases are
outstanding, the Fund will segregate until the settlement date assets
determined to be liquid by PIMCO in accordance with procedures established by
the Board of Trustees, in an amount sufficient to meet the purchase price.

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

The Fund's investments

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

STRUCTURED NOTES

The Fund may invest in "structured" notes, which are privately negotiated debt
obligations where the principal and/or interest is determined by reference to
the performance of a benchmark asset or market, such as selected securities or
an index of securities, or the differential performance of two assets or
markets, such as indices reflecting taxable and tax-exempt bonds. Depending on
the terms of the note, the Fund may forgo all or part of the interest and
principal that would be payable on a comparable conventional note. The rate of
return on structured notes may be determined by applying a multiplier to the
performance or differential performance of the referenced index(es) or other
asset(s). Application of a multiplier involves leverage which will serve to
magnify the potential for gain and the risk of loss. The Fund currently intends
that any use of structured notes will be for the purpose of reducing the
interest rate sensitivity of the Fund's portfolio (and thereby decreasing the
Fund's exposure to interest rate risk) and, in any event, that the interest
income on the notes will normally be exempt from federal and California income
tax. The Fund will only invest in structured notes if it has received an
opinion of counsel for the issuer (or the advice of another authority believed
by PIMCO to be reliable) that the interest income on the notes will be exempt
from federal income tax. Like other sophisticated strategies, the Fund's use of
structured notes may not work as intended; for example, by reducing the
duration of the Fund's portfolio, structured notes may limit the Fund's return
when having a longer duration would be beneficial (for instance, when interest
rates decline).

VARIABLE AND FLOATING RATE SECURITIES

Variable and floating rate securities provide for a periodic adjustment in the
interest rate paid on the obligations. The Fund may invest in floating rate
debt instruments ("floaters") and engage in credit spread trades. While
floaters provide a certain degree of protection against rises in interest
rates, the Fund will participate in any decline in interest rates as well. A
credit spread trade is an investment position relating to a difference in the
prices or interest rates of two bonds or other securities, where the value of
the investment position is determined by changes in the difference between such
prices or interest rates, as the case may be, of the respective securities.

RESIDUAL INTEREST MUNICIPAL BONDS (RIBS)

The Fund may also invest up to 10% of its assets in RIBS, whose interest rates
bear an inverse relationship to the interest rate on another security or the
value of an index. An investment in RIBS typically will 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 a
RIB, the value of a RIB is generally more volatile than that of a fixed rate
bond. RIBS have interest rate adjustment formulas which generally reduce or, in
the extreme, eliminate the interest paid to the Fund when short-term interest
rates rise, and increase the interest paid to the Fund when short-term interest
rates fall. RIBS have varying degrees of liquidity, and the market for these
securities is volatile. These securities generally will 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 or
remain relatively stable. Although volatile, RIBS typically offer the potential
for yields exceeding the yields available on fixed rate bonds with comparable
credit quality, coupon, call provisions and maturity. The Fund may also invest
in RIBS for the purpose of increasing the Fund's leverage as a more flexible
alternative to the issuance of Preferred Shares. Should short-term interest
rates rise, the combination of the Fund's investment in RIBS and its use of
other forms of leverage (including through the issuance of Preferred Shares or
the use of other derivative instruments) likely will adversely affect the
Fund's net asset value per share and income and distributions to shareholders.
Trusts in which RIBS may be held could be terminated, in which case the
residual bond holder would take possession of the underlying bond on an
unleveraged basis.

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

The Fund's investments

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

OTHER INVESTMENT COMPANIES

The Fund may invest up to 10% of its net assets in securities of other open- or
closed-end investment companies that invest primarily in municipal bonds of the
types in which the Fund may invest directly. The Fund may invest in other
investment companies either during periods when it has large amounts of
uninvested cash, such as the period shortly after the Fund receives the
proceeds of the offering of its Common Shares or Preferred Shares, during
periods when there is a shortage of attractive, high-yielding municipal bonds
available in the market, or when PIMCO believes share prices of other
investment companies offer attractive values. The Fund may invest in investment
companies that are advised by PIMCO or its affiliates to the extent permitted
by applicable law and/or pursuant to exemptive relief from the Securities and
Exchange Commission. As a stockholder in an investment company, the Fund will
bear its ratable share of that investment company's expenses, and would remain
subject to payment of the Fund's management fees and other expenses with
respect to assets so invested. Common Shareholders would therefore be subject
to duplicative expenses to the extent the Fund invests in other investment
companies. PIMCO will take expenses into account when evaluating the investment
merits of an investment in an investment company relative to available
municipal bond investments. In addition, the securities of other investment
companies may also be leveraged and will therefore be subject to the same
leverage risks described herein. As described in the section entitled "Risks,"
the net asset value and market value of leveraged shares will be more volatile
and the yield to shareholders will tend to fluctuate more than the yield
generated by unleveraged shares.

Preferred shares and related leverage

Subject to market conditions, approximately one to three months after the
completion of the offering of the Common Shares, the Fund intends to offer
Preferred Shares representing approximately 35% of the Fund's capital
immediately after the issuance of the Preferred Shares. The Preferred Shares
have complete priority upon distribution of assets over the Common Shares. The
issuance of Preferred Shares will leverage the Common Shares. Leverage involves
special risks. There is no assurance that the Fund's leveraging strategy will
be successful. Although the timing and other terms of the offering of the
Preferred Shares will be determined by the Fund's Board of Trustees, the Fund
expects to invest the net proceeds of the Preferred Shares offering principally
in long-term municipal bonds. The Preferred Shares will pay dividends based on
shorter-term rates (which would be redetermined periodically by an auction
process). So long as the Fund's portfolio is invested in securities that
provide a higher rate of return than the dividend rate of the Preferred Shares
(after taking expenses into consideration), the leverage will allow you to
receive a higher current rate of return than if the Fund were not leveraged.

Changes in the value of the Fund's bond portfolio (including bonds bought with
the proceeds of the Preferred Shares offering) will be borne entirely by the
Common Shareholders. If there is a net decrease (or increase) in the value of
the Fund's investment portfolio, the leverage will decrease (or increase) the
net asset value per Common Share to a greater extent than if the Fund were not
leveraged. During periods in which the Fund is using leverage, the fees paid to
PIMCO Advisors 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 total net assets,
including the proceeds from the issuance of Preferred Shares.

For tax purposes, the Fund is currently required to allocate net capital gain
and other taxable income, if any, between the Common Shares and Preferred
Shares in proportion to total distributions paid to each class for the year in
which the net capital gain or other taxable income is realized. If net capital

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

Preferred shares and related leverage

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

gain or other taxable income is allocated to Preferred Shares (instead of
solely tax-exempt income), the Fund will have to pay higher total dividends to
Preferred Shareholders or make dividend payments intended to compensate
Preferred Shareholders for the unanticipated characterization of a portion of
their dividends as taxable ("Gross-up Dividends"). This would reduce any
advantage of the Fund's leveraged structure to Common Shareholders.

Under the 1940 Act, the Fund is not permitted to issue Preferred Shares unless
immediately after such issuance the value of the Fund's total net assets 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 net assets). In
addition, the Fund is not permitted to declare any cash dividend or other
distribution on its Common Shares unless, at the time of such declaration, the
value of the Fund's total net assets 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 the
extent necessary in order to maintain coverage of any Preferred Shares of at
least 200%. If the Fund has Preferred Shares outstanding, two of the Fund's
trustees will be elected by the holders of Preferred Shares, voting separately
as a class. The remaining trustees of the Fund will be elected by holders of
Common Shares and Preferred Shares voting together as a single class. In the
event the Fund failed to pay dividends on Preferred Shares for two years,
Preferred Shareholders would be entitled to elect a majority of the trustees of
the Fund.

The Fund may be subject to certain restrictions imposed by guidelines of one or
more rating agencies which may issue ratings for Preferred Shares issued by the
Fund. These guidelines may impose asset coverage or portfolio 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 PIMCO
from managing the Fund's portfolio in accordance with the Fund's investment
objective and policies.

The Fund may also borrow money for repurchase of its shares or 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.

Assuming that the Preferred Shares will represent approximately 35% of the
Fund's capital and pay dividends at an annual average rate of 3.00%, the income
generated by the Fund's portfolio (net of expenses) would have to exceed 1.05%
in order to cover such dividend payments. Of course, these numbers are merely
estimates, used for illustration. Actual Preferred Share dividend rates will
vary frequently and may be significantly higher or lower than the rate
identified above.

The following table is furnished in response to requirements of the Securities
and Exchange Commission. It is designed to illustrate the effect of leverage on
Common Share total return, assuming investment portfolio total returns
(consisting of income and changes in the value of bonds held in the Fund's
portfolio) of -10%, -5%, 0%, 5% and 10%. These assumed investment portfolio
returns are hypothetical figures and are not necessarily indicative of the
investment portfolio returns expected to be experienced by the Fund. The table
further assumes the issuance of Preferred Shares representing 35% of the Fund's
total capital, a 5.25% yield on the Fund's investment portfolio, net of
expenses, and the Fund's currently projected annual Preferred Share dividend
rate of 3.00%. See "Risks" and "Preferred shares and related leverage."

Assumed Portfolio Total Return............ (10.00)% (5.00)% 0.00% 5.00% 10.00%
Common Share Total Return................. (17.00)% (9.31)% (1.62)% 6.08% 13.77%

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

Preferred shares and related leverage

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

Common Share total return is composed of two elements--the Common Share
dividends paid by the Fund (the amount of which is largely determined by the
net investment income of the Fund after paying dividends on Preferred Shares)
and gains or losses on the value of the securities the Fund owns. As required
by Securities and Exchange Commission rules, the table assumes that the Fund is
more likely to suffer capital losses than to enjoy capital appreciation. For
example, to assume a total return of 0%, the Fund must assume that the tax-
exempt interest it receives on its municipal bond investments is entirely
offset by losses in the value of those bonds.

Unless and until Preferred Shares are issued, the Common Shares would only be
leveraged, if at all, through the use of RIBS, and other derivatives and short-
term borrowings.

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

Risks

The net asset value of the Common Shares will fluctuate with and be affected
by, among other things, interest rate risk, credit risk, concentration risk,
reinvestment risk and leverage risk, and an investment in Common Shares will be
subject to market discount risk, inflation risk and municipal bond market risk,
each of which is more fully described below.

NEWLY ORGANIZED

The Fund is a newly organized, non-diversified, closed-end management
investment company and has no operating history.

MARKET DISCOUNT RISK

Shares of closed-end management investment companies frequently trade at a
discount from their net asset value.

INTEREST RATE RISK

Interest rate risk is the risk that bonds (and the Fund's net assets) will
decline in value because of changes in interest rates. Generally, municipal
bonds will decrease in value when interest rates rise and increase in value
when interest rates decline. This means that the net asset value of the Common
Shares will fluctuate with interest rate changes and the corresponding changes
in the value of the Fund's municipal bond holdings. The value of the longer-
term bonds in which the Fund generally invests normally fluctuates more in
response to changes in interest rates than does the value of shorter-term
bonds. Because the Fund will invest primarily in long-term bonds, the Common
Share net asset value and market price per share will fluctuate more in
response to changes in market interest rates than if the Fund invested
primarily in shorter-term bonds. The Fund's use of leverage, as described
below, will tend to increase Common Share interest rate risk. The Fund may
invest up to 10% of its assets in RIBS. Compared to similar fixed rate
municipal obligations, the value of RIBS will fluctuate to a greater extent in
response to changes in prevailing long-term interest rates. Moreover, the
income earned on RIBS will fluctuate in response to changes in prevailing
short-term interest rates. Thus, when RIBS are held by the Fund, an increase in
short- or long-term market interest rates will adversely affect the income
received from such bonds or the net asset value of the Fund's shares. The Fund
may utilize certain strategies, including investments in structured notes, for
the purpose of reducing the interest rate sensitivity of the portfolio and
decreasing the Fund's exposure to interest rate risk, although there is no
assurance that it will do so or that such strategies will be successful. See
"How the Fund manages risk--Hedging and Related Strategies."

CREDIT RISK

Credit risk is the risk that an issuer of a municipal bond will become unable
to meet its obligation to make interest and principal payments. 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. The Fund may invest
up to 20% of its net assets in municipal bonds that are rated Ba/BB or B by
Moody's, S&P or Fitch or that are unrated but judged to be of comparable
quality by PIMCO. Bonds rated Ba/BB or B are regarded as having predominantly
speculative characteristics with respect to capacity to pay interest and repay
principal, and these bonds are commonly referred to as "junk bonds." The prices
of these lower grade bonds are

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

Risks

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

more sensitive to negative developments, such as a decline in the issuer's
revenues or a general economic downturn, than are the prices of higher grade
securities. Bonds in the lowest investment grade category may also be
considered to possess some speculative characteristics by certain rating
agencies.

CONCENTRATION RISK

As described above, except to the extent the Fund invests in temporary
investments, the Fund will invest substantially all of its net assets in
California Municipal Bonds. The Fund is therefore susceptible to political,
economic, regulatory and other factors affecting issuers of California
Municipal Bonds, their ability to meet their obligations and the economic
condition of the facility or specific revenue source from whose revenues
payments of obligations may be made. The ability of state, county, or local
governments or other issuers of California Municipal Bonds to meet their
obligations will depend primarily on the availability of tax and other revenues
to those entities. The amounts of tax and other revenues available to issuers
of California Municipal Bonds may be affected from time to time by economic,
political and demographic conditions that specifically impact California. In
addition, there are constitutional and statutory restrictions that limit the
power of certain issuers to raise revenues or increase taxes. The availability
of federal, state and local aid to issuers of California Municipal Bonds may
also affect their ability to meet their obligations. The creditworthiness of
obligations issued by local California issuers may be unrelated to the
creditworthiness of obligations issued by the State of California and there is
no obligation on the part of the State to make payment on such local
obligations in the event of default. Any reduction in the actual or perceived
ability of an issuer of California Municipal Bonds to meet its obligations
(including a reduction in the rating of its outstanding securities) would
likely affect adversely the market value and marketability of its obligations
and could adversely affect the values of other California Municipal Bonds as
well. Moreover, in such circumstances, the value of the Fund's shares may
fluctuate more widely than the value of shares of a more diversified fund which
invests in a number of different states.

The foregoing information constitutes only a brief summary of some of the
general factors which may impact certain issuers of California Municipal Bonds
and does not purport to be a complete or exhaustive description of all adverse
conditions to which the issuers of such bonds held by the Fund are subject.
Additionally, many factors including national economic, social and
environmental policies and conditions, which are not within the control of the
issuers of California Municipal Bonds, 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 California Municipal Bonds, the market value or the marketability of such
bonds or the ability of the respective issuers of the bonds acquired by the
Fund to pay interest on or principal of such bonds. This information has not
been independently verified.

For a more detailed description of these and other risks affecting investment
in California Municipal Bonds, see "Appendix B--Factors pertaining to
California" in the Statement of Additional Information.

MUNICIPAL BOND MARKET RISK

Investing in the municipal bond market involves certain risks. The amount of
public information available about the municipal bonds in the Fund's portfolio
is generally less than that for corporate equities or bonds, and the investment
performance of the Fund may therefore be more dependent on the analytical
abilities of PIMCO than would be a stock fund or taxable bond fund. The
secondary market for municipal bonds, particularly the below investment grade
bonds in which the Fund may invest, also tends to be less well-developed or
liquid than many other securities markets, which may adversely affect the
Fund's ability to sell its bonds at attractive prices.

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

Risks

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

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 municipal issuers 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 and the Fund may not, in all circumstances, be able to collect all
principal and interest to which it is entitled. 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 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.

REINVESTMENT RISK

Reinvestment risk is the risk that income from the Fund's bond portfolio will
decline if and when the Fund invests the proceeds from matured, traded or
called bonds at market interest rates that are below the portfolio's current
earnings rate. A decline in income could affect the Common Shares' market price
or their overall returns.

LEVERAGE RISK

Leverage risk includes the risk associated with the issuance of the Preferred
Shares to leverage the Common Shares. There can be no assurance that the Fund's
leveraging strategy involving Preferred Shares will be successful. Once the
Preferred Shares are issued, the net asset value and market value of Common
Shares will be more volatile, and the yield to Common Shareholders will tend to
fluctuate with changes in the shorter-term dividend rates on the Preferred
Shares. The Fund anticipates that the Preferred Shares, at least initially,
would likely pay cumulative dividends at rates determined over relatively
shorter-term periods (such as 7 days), by providing for the periodic
redetermination of the dividend rate through an auction or remarketing
procedures. See "Description of shares--Preferred Shares." Long-term municipal
bond rates of return are typically, although not always, higher than shorter-
term municipal bond rates of return. If the dividend rate on the Preferred
Shares approaches the net rate of return on the Fund's investment portfolio,
the benefit of leverage to Common Shareholders would be reduced. If the
dividend rate on the Preferred Shares exceeds the net rate of return on the
Fund's portfolio, the leverage will result in a lower rate of return to Common
Shareholders than if the Fund were not leveraged. Because the long-term bonds
included in the Fund's portfolio will typically pay fixed rates of interest
while the dividend rate on the Preferred Shares will be adjusted periodically,
this could occur even when both long-term and short-term municipal rates rise.
In addition, the Fund will pay (and Common Shareholders will bear) any costs
and expenses relating to the issuance and ongoing maintenance of the Preferred
Shares. Furthermore, if the Fund has net capital gain or other taxable income
that is allocated to Preferred Shares (instead of solely tax-exempt income),
the Fund may have to pay higher total dividends or Gross-up Dividends to
Preferred Shareholders, which would reduce any advantage of the Fund's leverage
structure to Common Shareholders without reducing the associated risk. See
"Preferred shares and related leverage." Accordingly, the Fund cannot assure
you that the issuance of Preferred Shares will result in a higher yield or
return to Common Shareholders.

Similarly, any decline in the net asset value of the Fund's investments will be
borne entirely by Common Shareholders. Therefore, if the market value of the
Fund's portfolio declines, the leverage will result in a greater decrease in
net asset value to Common Shareholders than if the Fund were not leveraged.
Such greater net asset value decrease will also tend to cause a greater decline
in the market price for the Common Shares. The Fund might be in danger of
failing to maintain the required 200% asset coverage or of losing its expected
AAA/aaa ratings on the Preferred Shares or, in an extreme case, the Fund's
current investment income might not be sufficient to meet the dividend
requirements on the

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

Risks

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

Preferred Shares. In order to counteract such an event, the Fund might need to
liquidate investments in order to fund a redemption of some or all of the
Preferred Shares. Liquidation at times of low municipal bond prices may result
in capital loss and may reduce returns to Common Shareholders.

While the Fund may from time to time consider reducing leverage in response to
actual or anticipated changes in interest rates in an effort to mitigate the
increased volatility of current income and net asset value associated with
leverage, there can be no assurance that the Fund will actually reduce leverage
in the future or that any reduction, if undertaken, will benefit the Common
Shareholders. Changes in the future direction of interest rates are very
difficult to predict accurately. If the Fund were to reduce leverage based on a
prediction about future changes to interest rates, and that prediction turned
out to be incorrect, the reduction in leverage would likely operate to reduce
the income and/or total returns to Common Shareholders relative to the
circumstance where the Fund had not reduced leverage. The Fund may decide that
this risk outweighs the likelihood of achieving the desired reduction to
volatility in income and share price if the prediction were to turn out to be
correct, and determine not to reduce leverage as described above.

The Fund may invest in the securities of other investment companies. Such
securities may also be leveraged and will therefore be subject to the leverage
risks described above. Such additional leverage may in certain market
conditions serve to reduce the net asset value of the Fund's Common Shares and
the returns to Common Shareholders.

The Fund may also invest up to 10% of its assets in RIBS and invest in other
derivative instruments, which may amplify the effects of leverage and, during
periods of rising short-term interest rates, may adversely affect the Fund's
net asset value per share and income and distributions to Common Shareholders.
See "Residual Interest Municipal Bonds (RIBS)" under "The Fund's investments"
and the Statement of Additional Information under "Investment objective and
policies -- Derivative Instruments."

INFLATION RISK

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

NON-DIVERSIFICATION RISK

Because the Fund is classified as "non-diversified" under the 1940 Act, it can
invest a greater portion of its assets in obligations of a single issuer. As a
result, to the extent the Fund invests in 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 fund to any single corporate,
economic, political or regulatory occurrence. See "The Fund's investments." The
Fund must satisfy certain asset diversification rules in order to qualify as a
regulated investment company for federal income tax purposes.

CERTAIN AFFILIATIONS

Certain broker-dealers may be considered to be affiliated persons of the Fund,
PIMCO Advisors and/or PIMCO due to their possible affiliations with Allianz AG,
the ultimate parent of PIMCO Advisors and PIMCO. Absent an exemption from the
Securities and Exchange Commission or other regulatory relief, the Fund is
generally precluded from effecting certain principal transactions with
affiliated brokers, and its ability to purchase securities being underwritten
by an affiliated broker or a syndicate including an affiliated broker or to
utilize affiliated brokers for agency transactions is subject to restrictions.
This could limit the Fund's ability to engage in securities transactions and
take advantage of market opportunities.

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

How the Fund manages risk

INVESTMENT LIMITATIONS

The Fund has adopted certain investment limitations designed to limit
investment risk. These limitations (one of which is described below) are
fundamental and may not be changed without the approval of the holders of a
majority of the outstanding Common Shares and, if issued, Preferred Shares
voting together as a single class, and the approval of the holders of a
majority of the Preferred Shares voting as a separate class. Among other
restrictions, the Fund may not concentrate its investments in a particular
industry, as that term is used in the 1940 Act and as interpreted, modified, or
otherwise permitted by regulatory authority having jurisdiction, from time to
time.

The Fund's industry concentration policy does not preclude it from focusing
investments in issuers in a group of related industries (such as different
types of utilities).

The Fund may become subject to guidelines which are more limiting than the
investment restrictions set forth above or in the Statement of Additional
Information in order to obtain and maintain ratings from Moody's or S&P on the
Preferred Shares that it intends to issue. The Fund does not anticipate that
such guidelines would have a material adverse effect on the Fund's Common
Shareholders or the Fund's ability to achieve its investment objective. See
"Investment objective and policies" and "Investment restrictions" in the
Statement of Additional Information for information about these guidelines and
a complete list of the fundamental investment policies of the Fund.

QUALITY OF INVESTMENTS

The Fund will invest at least 80% of its net assets in bonds of investment
grade quality at the time of investment. Investment grade quality means that
such bonds are rated by national rating agencies within the four highest grades
(Baa or BBB or better by Moody's, S&P or Fitch) or are unrated but judged to be
of comparable quality by PIMCO.

LIMITED ISSUANCE OF PREFERRED SHARES

Under the 1940 Act, the Fund could issue Preferred Shares having a total
liquidation value (original purchase price of the shares being liquidated plus
any accrued and unpaid dividends) of up to one-half of the value of the total
net assets of the Fund. If the total liquidation value of the Preferred Shares
were ever more than one-half of the value of the Fund's total net assets, the
Fund would not be able to declare dividends on the Common Shares until the
liquidation value, as a percentage of the Fund's assets, were reduced. The Fund
intends to issue Preferred Shares representing about 35% of the Fund's total
capital approximately one to three months after the completion of the offering
of the Common Shares, if the Fund sells all the Common Shares discussed in this
Prospectus. This higher than required margin of net asset value provides a
cushion against later fluctuations in the value of the Fund's portfolio and
will subject Common Shareholders to less income and net asset value volatility
than if the Fund were more highly leveraged. The Fund intends to purchase or
redeem Preferred Shares, if necessary, to keep the liquidation value of the
Preferred Shares below one-half of the value of the Fund's total net assets.

MANAGEMENT OF INVESTMENT PORTFOLIO AND CAPITAL STRUCTURE TOLIMIT LEVERAGE RISK

The Fund may take certain actions if short-term interest rates increase or
market conditions otherwise change (or the Fund anticipates such an increase or
change) and the Fund's leverage begins (or is expected) to adversely affect
Common Shareholders. In order to attempt to offset such a negative

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

How the Fund manages risk

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

impact of leverage on Common Shareholders, the Fund may shorten the average
maturity or duration of its investment portfolio (by investing in shorter-term,
high quality securities) or may extend the maturity of outstanding Preferred
Shares. The Fund may also attempt to reduce leverage by redeeming or otherwise
purchasing Preferred Shares or by reducing any holdings in RIBS or other
instruments that create leverage. As explained above under "Risks--Leverage
Risk," the success of any such attempt to limit leverage risk depends on
PIMCO's ability to accurately predict interest rate or other market changes.
Because of the difficulty of making such predictions, the Fund may not be
successful in managing its interest rate exposure in the manner described
above.

If market conditions suggest that additional leverage would be beneficial, the
Fund may sell previously unissued Preferred Shares or Preferred Shares that the
Fund previously issued but later repurchased, or utilize other forms of
leverage, such as RIBS or other derivative instruments.

HEDGING AND RELATED STRATEGIES

The Fund may use various investment strategies designed to limit the risk of
bond price fluctuations and to preserve capital. For instance, the Fund may
invest in structured notes for the purpose of reducing the interest rate
sensitivity of the Fund's portfolio and, thereby, decreasing the Fund's
exposure to interest rate risk. The Fund currently intends that the income on
these notes will normally be exempt from federal and California income tax.
Other hedging strategies that the Fund may use include financial futures
contracts; short sales; swap agreements or options thereon; options on
financial futures; and options based on either an index of municipal securities
or on taxable debt securities whose prices, PIMCO believes, correlate with the
prices of the Fund's investments. Income earned by the Fund from many hedging
activities will be treated as capital gain and, if not offset by net realized
capital loss, will be distributed to shareholders in taxable distributions. If
effectively used, hedging strategies will offset in varying percentages losses
incurred on the Fund's investments due to adverse interest rate changes. There
is no assurance that these hedging strategies will be available at any time or
that PIMCO will determine to use them for the Fund.

Management of the Fund

TRUSTEES AND OFFICERS

The Board of Trustees is responsible for the management of the Fund, including
supervision of the duties performed by PIMCO Advisors and PIMCO. There are
currently three Trustees of the Fund, one of whom is an "interested person" (as
defined in the 1940 Act) and two of whom are not "interested persons." The
names and business addresses of the Trustees and officers of the Fund and their
principal occupations and other affiliations during the past five years are set
forth under "Management of the Fund" in the Statement of Additional
Information.

INVESTMENT MANAGER

PIMCO Advisors serves as the investment manager of the Fund. Subject to the
supervision of the Board of Trustees, PIMCO Advisors is responsible for
managing, either directly or through others selected by it, the investment
activities of the Fund and the Fund's business affairs and other administrative
matters. PIMCO Advisors is located at 1345 Avenue of the Americas, New York,
New York 10105. Organized in 1987, PIMCO Advisors provides investment
management and advisory services to private accounts of institutional and
individual clients and to mutual funds. As of March 31, 2001, PIMCO Advisors
and its subsidiary partnerships had approximately $275 billion in assets under
management.

PIMCO Advisors has retained its affiliate, PIMCO, to manage the Fund's
investments. See "Portfolio Manager" below. PIMCO Advisors and PIMCO are each
majority-owned indirect subsidiaries of Allianz AG, a publicly traded German
insurance and financial services company.

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

Management of the Fund

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

PORTFOLIO MANAGER

PIMCO serves as the portfolio manager for the Fund. Subject to the supervision
of PIMCO Advisors, PIMCO has full investment discretion and makes all
determinations with respect to the investment of the Fund's assets.

PIMCO is located at 840 Newport Center Drive, Newport Beach, California 92660.
Organized in 1971, PIMCO provides investment management and advisory services
to private accounts of institutional and individual clients and to mutual
funds. As of March 31, 2001, PIMCO had approximately $220 billion in assets
under management.

PIMCO Advisors (and not the Fund) pays a portion of the fees it receives to
PIMCO in return for its services, at the maximum annual rate of 0.37% of the
Fund's average daily net assets (including assets attributable to any Preferred
Shares that may be outstanding). PIMCO has contractually agreed to waive a
portion of the advisory fee it is entitled to receive from PIMCO Advisors such
that PIMCO will receive 0.25% of the Fund's average daily net assets from the
commencement of Fund operations through June 30, 2006 (i.e., roughly the first
5 years of Fund operations), 0.28% of average daily net assets in year 6, 0.31%
in year 7, and 0.34% in year 8.

The following individual at PIMCO has primary responsibility for the day-to-day
portfolio management of the Fund.

Since Recent Professional Experience
-------------------------------------------------------------------------------

Mark V. McCray 2001 (Inception) Executive Vice President, PIMCO. He joined
PIMCO as a Portfolio Manager in 2000. Prior to
that, he was a bond trader from 1992-1999 at
Goldman Sachs & Co. where he was appointed
Vice President in 1996 and named co-head of
municipal bond trading in 1997 with
responsibility for the firm's proprietary
account and supervised municipal bond traders.

Chris Dialynas, a Managing Director and senior member of PIMCO's investment
strategy group, oversees Mr. McCray regarding the management of the Fund.

INVESTMENT MANAGEMENT AGREEMENT

Pursuant to an investment management agreement between PIMCO Advisors and the
Fund, the Fund has agreed to pay PIMCO Advisors an annual management fee
payable on a monthly basis at the annual rate of 0.65% of the Fund's average
daily net assets (including net assets attributable to Preferred Shares) for
the services and facilities it provides.

In addition to the fees of PIMCO Advisors, the Fund pays all other costs and
expenses of its operations, including compensation of its trustees (other than
those affiliated with PIMCO Advisors), custodial expenses, shareholder
servicing expenses, transfer agency and dividend disbursing expenses, legal
fees, expenses of independent auditors, expenses of repurchasing shares,
expenses of issuing any Preferred Shares, expenses of preparing, printing and
distributing prospectuses, shareholder reports, notices, proxy statements and
reports to governmental agencies, and taxes, if any.

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

Management of the Fund

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

PIMCO Advisors has contractually agreed to waive a portion of the management
fees it is entitled to receive from the Fund in the amounts, and for the time
periods, set forth below (covering commencement of Fund operations through
June 30, 2009):

Percentage Waived
(annual rate as a percentage
Period Ending June 30, of average daily net assets) (1)
--------------------------------------------------------------------------------

2002 (2)....................................... 0.20%
2003........................................... 0.20%
2004........................................... 0.20%
2005........................................... 0.20%
2006........................................... 0.20%
2007........................................... 0.15%
2008........................................... 0.10%
2009........................................... 0.05%

--------
(1) Including net assets attributable to Preferred Shares.
(2) From the commencement of the Fund's operations.

PIMCO Advisors has not agreed to waive any portion of its fees beyond June 30,
2009.

Net asset value

The net asset value ("NAV") of the Fund equals the total value of the Fund's
portfolio investments and other assets, less any liabilities. For purposes of
calculating NAV, portfolio securities and other assets for which market quotes
are available are stated at market value. Market value is generally determined
on the basis of the last reported sales price, or if no sales are reported,
based on quotes obtained from a quotation reporting system, established market
makers, or pricing services. Certain securities or investments for which market
quotations are not readily available (which is usually the case for municipal
bonds) may be valued, pursuant to guidelines established by the Board of
Trustees, with reference to other securities or indices. For instance, a
pricing service may recommend a fair market value based on prices of comparable
municipal bonds. Short-term investments having a maturity of 60 days or less
are generally valued at amortized cost. Exchange traded options, futures and
options on futures are valued at the settlement price determined by the
exchange. Other securities for which market quotes are not readily available
are valued at fair value as determined in good faith by the Board of Trustees
or persons acting at their direction.

The NAV of the Fund will be determined as of the close of regular trading
(normally 4:00 p.m., Eastern time) (the "NYSE Close") on each day the New York
Stock Exchange is open.

Domestic fixed income securities are normally priced using data reflecting the
earlier closing of the principal markets for those securities. Information that
becomes known to the Fund or its agent after the NAV has been calculated on a
particular day will not generally be used to retroactively adjust the price of
a security or the NAV determined earlier that day.

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

Net asset value

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

In unusual circumstances, instead of valuing securities in the usual manner,
the Fund may value securities at fair value or estimate their value as
determined in good faith by the Board of Trustees, generally based upon
recommendations provided by PIMCO. Fair valuation may also be used if
extraordinary events occur after the close of the relevant market but prior to
the NYSE Close.

Distributions

Commencing with the first dividend, the Fund intends to make regular monthly
cash distributions to Common Shareholders at a level rate based upon the
projected performance of the Fund. Distributions can only be made from net
investment income after paying any accrued dividends to Preferred Shareholders.
The Fund's ability to maintain a level dividend rate will depend on a number of
factors, including dividends payable on the Preferred Shares. The net income of
the Fund consists of all interest income accrued on portfolio assets less all
expenses of the Fund. Expenses of the Fund are accrued each day. Over time,
substantially all the net investment income of the Fund will be distributed. At
least annually, the Fund also intends to distribute to you your pro rata share
of any available net capital gain and ordinary taxable income. Initial
distributions to Common Shareholders are expected to be declared approximately
45 days, and paid approximately 60 to 90 days, from the completion of this
offering, depending on market conditions. Although it does not now intend to do
so, the Board of Trustees may change the Fund's dividend policy and the amount
or timing of the distributions, based on a number of factors, including the
amount of the Fund's undistributed net investment income and historical and
projected investment income and the amount of the expenses and dividend rates
on any outstanding Preferred Shares.

To permit the Fund to maintain a more stable monthly distribution, the Fund
will initially distribute less than the entire amount of net investment income
earned in a particular period. The undistributed net investment income would be
available to supplement future distributions. As a result, the distributions
paid by the Fund for any particular monthly period may be more or less than the
amount of net investment income actually earned by the Fund during the period.
Undistributed net investment income will be added to the Fund's net asset value
and, correspondingly, distributions from undistributed net investment income
will be deducted from the Fund's net asset value.

Dividend reinvestment plan

Pursuant to the Fund's Dividend Reinvestment Plan (the "Plan"), all Common
Shareholders whose shares are registered in their own names will have all
dividends, including any capital gain dividends, reinvested automatically in
additional Common Shares by PFPC Inc., as agent for the Common Shareholders
(the "Plan Agent"), unless the shareholder elects to receive cash. An election
to receive cash may be revoked or reinstated at the option of the shareholder.
In the case of record shareholders such as banks, brokers or other nominees
that hold Common Shares for others who are the beneficial owners, the Plan
Agent will administer the Plan on the basis of the number of Common Shares
certified from time to time by the record shareholder as representing the total
amount registered in such shareholder's name and held for the account of
beneficial owners who are to participate in the Plan. Shareholders whose shares
are held in the name of a bank, broker or nominee should contact the bank,
broker or nominee for details. All distributions to investors who elect not to
participate in the Plan (or whose broker or nominee elects not to participate
on the investor's behalf), will be paid in cash by check mailed, in the case of
direct shareholders, to the record holder by PFPC Inc., as the Fund's dividend
disbursment agent.

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

Dividend reinvestment plan

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

Unless you (or your broker or nominee) elects not to participate in the Plan,
the number of Common Shares you will receive will be determined as follows:

(1) If Common Shares are trading at or above net asset value on the payment
date, the Fund will issue new shares at the greater of (i) the net asset
value per Common Share on the payment date or (ii) 95% of the market price
per Common Share on the payment date; or

(2) If Common Shares are trading below net asset value (minus estimated
brokerage commissions that would be incurred upon the purchase of Common
Shares on the open market) on the payment date, the Plan Agent will
receive the dividend or distribution in cash and will purchase Common
Shares in the open market, on the New York Stock Exchange or elsewhere,
for the participants' accounts. It is possible that the market price for
the Common Shares may increase before the Plan Agent has completed its
purchases. Therefore, the average purchase price per share paid by the
Plan Agent may exceed the market price on the payment date, resulting in
the purchase of fewer shares than if the dividend or distribution had been
paid in Common Shares issued by the Fund. The Plan Agent will use all
dividends and distributions received in cash to purchase Common Shares in
the open market within on or shortly after the payment date, but in no
event later than the ex-dividend date for the next distribution. Interest
will not be paid on any uninvested cash payments.

You may withdraw from the Plan at any time by giving notice to the Plan Agent.
If you withdraw or the Plan is terminated, you will receive a certificate for
each whole share in your account under the Plan and you will receive a cash
payment for any fraction of a share in your account. If you wish, the Plan
Agent will sell your shares and send you the proceeds, minus brokerage
commissions.

The Plan Agent maintains all shareholders' accounts in the Plan and gives
written confirmation of all transactions in the accounts, including information
you may need for tax records. The Plan Agent will also furnish each person who
buys Common Shares with written instructions detailing the procedures for
electing not to participate in the Plan and to instead receive distributions in
cash. Common Shares in your account will be held by the Plan Agent in non-
certificated form. Any proxy you receive will include all Common Shares you
have received under the Plan.

There is no brokerage charge for reinvestment of your dividends or
distributions in Common Shares. However, all participants will pay a pro rata
share of brokerage commissions incurred by the Plan Agent when it makes open
market purchases.

Automatically reinvested dividends and distributions are taxed in the same
manner as cash dividends and distributions.

The Fund and the Plan Agent reserve the right to amend or terminate the Plan.
There is no direct service charge to participants in the Plan; however, the
Fund reserves the right to amend the Plan to include a service charge payable
by the participants. Additional information about the Plan may be obtained from
PFPC Inc., 400 Bellevue Parkway, Wilmington, DE 19809, telephone number 1-800-
331-1710.

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

Description of shares

COMMON SHARES

The Declaration authorizes the issuance of an unlimited number of Common
Shares. The Common Shares will be issued without par value. All Common Shares
have equal rights to the payment of dividends and the distribution of assets
upon liquidation. Common Shares will, when issued, be fully paid and, subject
to matters discussed in "Certain provisions in the Declaration of Trust," non-
assessable, and will have no pre-emptive or conversion rights or rights to
cumulative voting. Whenever Preferred Shares are outstanding, Common
Shareholders will not be entitled to receive any distributions from the Fund
unless all accrued dividends on Preferred Shares have been paid, and unless
asset coverage (as defined in the 1940 Act) with respect to Preferred Shares
would be at least 200% after giving effect to the distributions. See "Preferred
Shares" below.

The Common Shares have been approved for listing on the New York Stock
Exchange, subject to notice of issuance. The Fund intends to hold annual
meetings of shareholders so long as the Common Shares are listed on a national
securities exchange and such meetings are required as a condition to such
listing.

The Fund's net asset value per share generally increases when interest rates
decline, and decreases when interest rates rise, and these changes are likely
to be greater because the Fund intends to have a leveraged capital structure.
Net asset value will be reduced immediately following the offering by the
amount of the sales load and organization and offering expenses paid by the
Fund. PIMCO Advisors has agreed to pay the amount by which the aggregate of all
of the Fund's organizational expenses and all offering costs (other than the
sales load) exceeds $0.03 per Common Share.

Unlike open-end funds, closed-end funds like the Fund do not continuously offer
shares and do not provide daily redemptions. Rather, if a shareholder
determines to buy additional Common Shares or sell shares already held, the
shareholder may do so by trading on the exchange through a broker or otherwise.
Shares of closed-end investment companies may frequently trade on an exchange
at prices lower than net asset value. Shares of closed-end investment companies
like the Fund that invest predominantly in investment grade municipal bonds
have during some periods traded at prices higher than net asset value and
during other periods have traded at prices lower than net asset value. The
Fund's Declaration limits the ability of the Fund to convert to open-end
status. See "Certain provisions in the Declaration of Trust."

Because the market value of the Common Shares may be influenced by such factors
as dividend levels (which are in turn affected by expenses), call protection,
dividend stability, portfolio credit quality, net asset value, relative demand
for and supply of such shares in the market, general market and economic
conditions, and other factors beyond the control of the Fund, the Fund cannot
assure you that the Common Shares will trade at a price equal to or higher than
net asset value in the future. The Common Shares are designed primarily for
long-term investors, and investors in the Common Shares should not view the
Fund as a vehicle for trading purposes. See "Preferred shares and related
leverage" and the Statement of Additional Information under "Repurchase of Fund
shares; conversion to open-end fund."

PREFERRED SHARES

The Declaration authorizes the issuance of an unlimited number of Preferred
Shares. The Preferred Shares will be issued in one or more classes or series,
with such par value and rights as determined by the Board of Trustees, by
action of the Board of Trustees without the approval of the Common
Shareholders.

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

Description of shares

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

The Fund's Board of Trustees has indicated its intention to authorize an
offering of Preferred Shares (representing approximately 35% of the Fund's
capital immediately after the time the Preferred Shares are issued)
approximately one to three months after completion of the offering of Common
Shares. Any such decision is subject to market conditions and to the Board's
continuing belief that leveraging the Fund's capital structure through the
issuance of Preferred Shares is likely to achieve the benefits to the Common
Shareholders described in this Prospectus. Although the terms of the Preferred
Shares will be determined by the Board of Trustees (subject to applicable law
and the Fund's Declaration) if and when it authorizes a Preferred Shares
offering, the Board has determined that the Preferred Shares, at least
initially, would likely pay cumulative dividends at rates determined over
relatively shorter-term periods (such as 7 days), by providing for the periodic
redetermination of the dividend rate through an auction or remarketing
procedure. The Board of Trustees has indicated that the preference on
distribution, liquidation preference, voting rights and redemption provisions
of the Preferred Shares will likely be as stated below.

Limited Issuance of Preferred Shares
Under the 1940 Act, the Fund could issue Preferred Shares with an aggregate
liquidation value of up to one-half of the value of the Fund's total net
assets, measured immediately after issuance of the Preferred Shares.
"Liquidation value" means the original purchase price of the shares being
liquidated plus any accrued and unpaid dividends. In addition, the Fund is not
permitted to declare any cash dividend or other distribution on its Common
Shares unless the liquidation value of the Preferred Shares is less than one-
half of the value of the Fund's total net assets (determined after deducting
the amount of such dividend or distribution) immediately after the
distribution. If the Fund sells all the Common Shares and Preferred Shares
discussed in this Prospectus, the liquidation value of the Preferred Shares is
expected to be approximately 35% of the value of the Fund's total net assets.
The Fund intends to purchase or redeem Preferred Shares, if necessary, to keep
that fraction below one-half.

Distribution Preference
The Preferred Shares have complete priority over the Common Shares as to
distribution of assets.

Liquidation Preference
In the event of any voluntary or involuntary liquidation, dissolution or
winding up of the affairs of the Fund, holders of Preferred Shares will be
entitled to receive a preferential liquidating distribution (expected to equal
the original purchase price per share plus accumulated and unpaid dividends
thereon, whether or not earned or declared) before any distribution of assets
is made to holders of Common Shares.

Voting Rights
Preferred Shares are required to be voting shares. Except as otherwise provided
in the Declaration or the Fund's By-Laws or otherwise required by applicable
law, holders of Preferred Shares will vote together with Common Shareholders as
a single class.

Holders of Preferred Shares, voting as a separate class, will also be entitled
to elect two of the Fund's trustees. The remaining trustees will be elected by
Common Shareholders and holders of Preferred Shares, voting together as a
single class. In the unlikely event that two full years of accrued dividends
are unpaid on the Preferred Shares, the holders of all outstanding Preferred
Shares, voting as a separate class, will be entitled to elect a majority of the
Fund's trustees until all dividends in arrears have been paid or declared and
set apart for payment.

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

Descripition of shares

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

Redemption, Purchase and Sale of Preferred Shares
The terms of the Preferred Shares may provide that they are redeemable at
certain times, in whole or in part, at the original purchase price per share
plus accumulated dividends. The terms may also state that the Fund may tender
for or purchase Preferred Shares and resell any shares so tendered. Any
redemption or purchase of Preferred Shares by the Fund will reduce the leverage
applicable to Common Shares, while any resale of shares by the Fund will
increase such leverage. See "Preferred shares and related leverage."

The discussion above describes the Board of Trustees' present intention with
respect to a possible offering of Preferred Shares. If the Board of Trustees
determines to authorize such an offering, the terms of the Preferred Shares may
be the same as, or different from, the terms described above, subject to
applicable law and the Fund's Declaration and By-Laws.

Certain provisions in the Declaration of Trust

The Declaration includes provisions that could limit the ability of other
entities or persons to acquire control of the Fund or to convert the Fund to
open-end status. Commencing with the first annual meeting of shareholders, the
Board of Trustees will be divided into three classes. At each annual meeting of
shareholders, the term of one class will expire and each Trustee elected to
that class will hold office for a term of three years. The classification of
the Board of Trustees in this manner could delay for an additional year the
replacement of a majority of the Board of Trustees. In addition, the
Declaration provides that a Trustee may be removed only for cause and only (i)
by action of at least seventy-five percent (75%) of the outstanding shares of
the classes or series of shares entitled to vote for the election of such
Trustee, or (ii) by at least seventy-five percent (75%) of the remaining
Trustees.

In addition, the Declaration requires the affirmative vote or consent of at
least seventy-five percent (75%) of the Board of Trustees and holders of at
least seventy-five percent (75%) of the Fund's shares (including Common and
Preferred Shares) to authorize certain Fund transactions not in the ordinary
course of business (including a merger or consolidation, or a sale or transfer
of Fund securities or assets), unless the transaction is authorized by both a
majority of the Trustees and seventy-five percent (75%) of those Trustees or
their successors ("Continuing Trustees") who are not affiliated with the other
party to the transaction (in which case no shareholder authorization would be
required by the Declaration). The Declaration also requires the affirmative
vote or consent of holders of at least seventy-five percent (75%) of each class
of the Fund's shares entitled to vote on the matter to authorize a conversion
of the Fund from a closed-end to an open-end investment company, unless the
conversion is authorized by both a majority of the Trustees and seventy-five
percent (75%) of the Continuing Trustees (in which case shareholders would have
only the minimum voting rights required by the 1940 Act with respect to the
conversion). Also, the Declaration provides that that Fund may be terminated at
any time by vote or consent of at least seventy-five percent (75%) of the
Fund's shares or, alternatively, by vote or consent of both a majority of the
Trustees and seventy-five percent (75%) of the Continuing Trustees. See
"Certain provision in the Declaration of Trust" in the Statement of Additional
Information for a more detailed summary of these provisions. The Trustees may
from time to time grant other voting rights to shareholders with respect to
these and other matters in the Fund's By-Laws.

The overall effect of these provisions is to render more difficult the
accomplishment of a merger or the assumption of control by a third party. They
provide, however, the advantage of potentially requiring persons seeking
control of the Fund to negotiate with its management regarding the price to be
paid and facilitating the continuity of the Fund's investment objective and
policies. The provisions of the Declaration described above could have the
effect of depriving the Common Shareholders of

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

Certain provisions in the Declaration of Trust

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

opportunities to sell their Common Shares at a premium over the then current
market price of the Common Shares by discouraging a third party from seeking
to obtain control of the Fund in a tender offer or similar transaction. The
Board of Trustees of the Fund has considered the foregoing anti-takeover
provisions and concluded that they are in the best interests of the Fund and
its Common Shareholders.

The foregoing is intended only as a summary and is qualified in its entirety
by reference to the full text of the Declaration and the Fund's By-Laws, both
of which are on file with the Securities and Exchange Commission.

Under Massachusetts law, shareholders could, in certain circumstances, be held
personally liable for the obligations of the Fund. However, the Declaration
contains an express disclaimer of shareholder liability for debts or
obligations of the Fund and requires that notice of such limited liability be
given in each agreement, obligation or instrument entered into or executed by
the Fund or the Trustees. The Declaration further provides for indemnification
out of the assets and property of the Fund for all loss and expense of any
shareholder held personally liable for the obligations of the Fund. Thus, the
risk of a shareholder incurring financial loss on account of shareholder
liability is limited to circumstances in which the Fund would be unable to
meet its obligations. The Fund believes that the likelihood of such
circumstances is remote.

Repurchase of Fund shares; conversion to open-end fund

The Fund is a closed-end investment company and as such its shareholders will
not have the right to cause the Fund to redeem their shares. Instead, the
Common Shares will trade in the open market at a price that will be a function
of several factors, including dividend levels (which are in turn affected by
expenses), net asset value, call protection, dividend stability, portfolio
credit quality, relative demand for and supply of such shares in the market,
general market and economic conditions and other factors. Shares of a closed-
end investment company may frequently trade at prices lower than net asset
value. The Fund's Board of Trustees regularly monitors the relationship
between the market price and net asset value of the Common Shares. If the
Common Shares were to trade at a substantial discount to net asset value for
an extended period of time, the Board may consider the repurchase of its
Common Shares on the open market or in private transactions, the making of a
tender offer for such shares, or the conversion of the Fund to an open-end
investment company. The Fund cannot assure you that its Board of Trustees will
decide to take or propose any of these actions, or that share repurchases or
tender offers will actually reduce market discount.

Before deciding whether to take any action if the Common Shares trade below
net asset value, the Board would consider all relevant factors, including the
extent and duration of the discount, the liquidity of the Fund's portfolio,
the impact of any action that might be taken on the Fund or its shareholders,
and market considerations. Based on these considerations, even if the Fund's
shares should trade at a discount, the Board of Trustees may determine that,
in the interest of the Fund and its shareholders, no action should be taken.
See the Statement of Additional Information under "Repurchase of Fund shares;
conversion to open-end fund" for a further discussion of possible action to
reduce or eliminate such discount to net asset value.

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

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

Tax matters

FEDERAL INCOME TAX MATTERS

The following federal income tax discussion is based on the advice of Ropes &
Gray, counsel to the Fund, and reflects provisions of the Internal Revenue Code
of 1986, as amended (the "Code"), existing treasury regulations, rulings
published by the Internal Revenue Service (the "Service"), and other applicable
authority, as of the date of this Prospectus. These authorities are subject to
change by legislative or administrative action. The following discussion is
only a summary of some of the important tax considerations generally applicable
to investments in the Fund. For more detailed information regarding tax
considerations, see the Statement of Additional Information. There may be other
tax considerations applicable to particular investors. In addition, income
earned through an investment in the Fund may be subject to state and local
taxes.

The Fund intends to qualify each year for taxation as a regulated investment
company eligible for treatment under the provisions of Subchapter M of the
Code. If the Fund so qualifies and satisfies certain distribution requirements,
the Fund will not be subject to federal income tax on income distributed in a
timely manner to its shareholders in the form of dividends or capital gain
distributions.

To satisfy the distribution requirement applicable to regulated investment
companies, amounts paid as dividends by the Fund to its shareholders, including
holders of its Preferred Shares, must qualify for the dividends-paid deduction.
In certain circumstances, the Service could take the position that dividends
paid on the Preferred Shares constitute preferential dividends under Section
562(c) of the Code, and thus do not qualify for the dividends-paid deduction.

If at any time when Preferred Shares are outstanding the Fund does not meet
applicable asset coverage requirements, it will be required to suspend
distributions to Common Shareholders until the requisite asset coverage is
restored. Any such suspension may cause the Fund to pay a 4% federal excise tax
(imposed on regulated investment companies that fail to distribute for a given
calendar year, generally, at least 98% of their net investment income and
capital gain net income) and income tax on undistributed income or gains, and
may, in certain circumstances, prevent the Fund from qualifying for treatment
as a regulated investment company. The Fund may redeem Preferred Shares in an
effort to comply with the distribution requirement applicable to regulated
investment companies and to avoid income and excise taxes.

The California Municipal Bonds in which the Fund will invest are generally
issued by the State of California, a city in California, or a political
subdivision, agency, authority or instrumentality of such state or city. Thus,
substantially all of the Fund's dividends to you will qualify as "exempt-
interest dividends," which are not generally subject to federal income tax. An
investment in the Fund may result in liability for federal alternative minimum
tax for corporate shareholders. The Fund will seek to avoid portfolio
investments that pay interest that is taxable to individuals under the federal
alternative minimum tax. Nonetheless, the Fund may not be successful in this
regard and if you are, or as a result of an investment in the Fund would
become, subject to the federal alternative minimum tax, the Fund may not be a
suitable investment for you.

As described above in the section entitled "Preferred shares and related
leverage," the terms of the Preferred Shares require, in certain circumstances,
that the Fund distribute Gross-up Dividends to holders of the Preferred Shares.
It is anticipated that the allocation rules described in the noted section will
in a number of circumstances require the Fund to distribute such Gross-up
Dividends. Such Gross-up Dividends would reduce the amount available for
distribution to Common Shareholders.

The Fund may at times buy tax-exempt investments at a discount from the price
at which they were originally issued, especially during periods of rising
interest rates. For federal income tax purposes,

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

Tax matters

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

some or all of this market discount will be included in the Fund's ordinary
income and will be taxable to shareholders as such when it is distributed.

The Fund's investments in certain debt obligations may cause the Fund to
recognize taxable income in excess of the cash generated by such obligations.
Thus, the Fund could be required at times to liquidate other investments in
order to satisfy its distribution requirements.

For federal income tax purposes, distributions of investment income other than
exempt interest dividends are taxable as ordinary income. Generally, gains
realized by the Fund on the sale or exchange of investments will be taxable to
its shareholders, even though the income from such investments generally will
be tax-exempt. Whether distributions of capital gains are taxed as ordinary
income or capital gains is determined by how long the Fund owned the
investments that generated such capital gains, rather than how long a
shareholder has owned his or her shares. Distributions are taxable to
shareholders even if they are paid from income or gains earned by the Fund
before a shareholder's investment (and thus were included in the price the
shareholder paid). Distributions of gains from the sale of investments that the
Fund owned for more than one year will be taxable as capital gains.
Distributions of gains from the sale of investments that the Fund owned for one
year or less will be taxable as ordinary income. Distributions are taxable
whether shareholders receive them in cash or reinvest them in additional shares
through the Dividend Reinvestment Plan.

Any gain resulting from the sale or exchange of Fund shares will generally also
be subject to tax.

CALIFORNIA TAX MATTERS

The Fund's regular monthly dividends will not be subject to California personal
income taxes to the extent they are paid out of income earned on obligations
that, when held by individuals, pay interest that is exempt from taxation by
California under California law (e.g., obligations of California and its
political subdivisions) or federal law, so long as at the close of each quarter
of the Fund's taxable year at least 50 percent of the value of the Fund's total
assets consist of such obligations. The portion of the Fund's monthly dividends
that is attributable to income other than as described in the preceding
sentence will be subject to the California income tax. The Fund expects to earn
no or only a minimal amount of such non-exempt income. You will be subject to
California personal income taxes to the extent the Fund distributes any taxable
income or realized capital gains, or if you sell or exchange Common Shares and
realize a capital gain on the transaction. Please refer to the Statement of
Additional Information for more detailed information. You are urged to consult
your tax advisor.

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

Underwriting

The underwriters named below (the "Underwriters"), acting through UBS Warburg
LLC, 299 Park Avenue, New York, New York, as lead manager, and CIBC World
Markets Corp. and A. G. Edwards & Sons, Inc. as their representatives (the
"Representatives"), have severally agreed, subject to the terms and conditions
of the Underwriting Agreement with the Fund and PIMCO Advisors, to purchase
from the Fund the number of Common Shares set forth opposite their respective
names. The Underwriters are committed to purchase and pay for all of such
Common Shares (other than those covered by the over-allotment option described
below) if any are purchased.

Number of
Underwriters Common Shares
--------------------------------------------------------------------------------

UBS Warburg LLC................................................... 3,900,000
CIBC World Markets Corp........................................... 3,900,000
A.G. Edwards & Sons, Inc.......................................... 3,900,000
Bear, Stearns & Co. Inc........................................... 400,000
Deutsche Banc Alex. Brown......................................... 400,000
U.S. Bancorp Piper Jaffray Inc.................................... 400,000
Crowell, Weedon & Co. ............................................ 200,000
Fahnestock & Co. Inc. ............................................ 200,000
First Union Securities, Inc. ..................................... 200,000
Gruntal & Co., L.L.C. ............................................ 200,000
Quick & Reilly, Inc. ............................................. 200,000
M.L. Stern & Co., Inc. ........................................... 200,000
Tucker Anthony Incorporated....................................... 200,000
TD Waterhouse Investor Services, Inc. ............................ 200,000
Wedbush Morgan Securities Inc. ................................... 200,000
Wells Fargo Investments, LLC...................................... 200,000
Santa Barbara Securities, Inc. ................................... 150,000
The Seidler Companies Incorporated................................ 150,000
----------
Total........................................................... 15,200,000
==========

The Fund has granted to the Underwriters an option, exercisable for 45 days
from the date of this Prospectus, to purchase up to an additional 2,280,000
Common Shares to cover over-allotments, if any, at the initial offering price.
The Underwriters may exercise such option solely for the purpose of covering
over-allotments incurred in the sale of the Common Shares offered hereby. To
the extent that the Underwriters exercise this option, each of the Underwriters
will have a firm commitment, subject to certain conditions, to purchase an
additional number of Common Shares proportionate to such Underwriter's initial
commitment.

The Fund has agreed to pay a commission to the Underwriters in the amount of up
to $0.675 per Common Share (4.5% of the public offering price per Common
Share). The Representatives have advised the Fund that the Underwriters may pay
up to $0.45 per Common Share from such commission to selected dealers who sell
the Common Shares and that such dealers may reallow a concession of up to $0.10
per Common Share to certain other dealers who sell shares. Investors must pay
for any Common Shares purchased on or before June 29, 2001.

Prior to this offering, there has been no public or private market for the
Common Shares or any other securities of the Fund. Consequently, the offering
price for the Common Shares was determined by negotiation among the Fund, PIMCO
Advisors and the Representatives. There can be no assurance,

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

Underwriting

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

however, that the price at which Common Shares sell 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 Common Shares will develop and continue after
this offering. The minimum investment requirement is 100 Common Shares.

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

The Fund has agreed not to offer, sell or register with the Securities and
Exchange Commission any equity securities of the Fund, other than issuances of
Common Shares, including pursuant to the Fund's Dividend Reinvestment Plan, and
issuances in connection with any offering of Preferred Shares, each as
contemplated in this Prospectus, for a period of 180 days after the date of the
Underwriting Agreement without the prior written consent of the
Representatives.

The Representatives have informed the Fund that the Underwriters do not intend
to confirm any sales to any accounts over which they exercise discretionary
authority.

In connection with this offering, the Underwriters may purchase and sell Common
Shares in the open market. These transactions may include over-allotment and
stabilizing transactions and purchases to cover syndicate short positions
created in connection with this offering. Stabilizing transactions consist of
certain bids or purchases for the purpose of preventing or retarding a decline
in the market price of the Common Shares and syndicate short positions involve
the sale by the Underwriters of a greater number of Common Shares than they are
required to purchase from the Fund in this offering. The Underwriters also may
impose a penalty bid, whereby selling concessions allowed to syndicate members
or other broker-dealers in respect of the Common Shares sold in this offering
for their account, may be reclaimed by the syndicate if such Common Shares are
repurchased by the syndicate in stabilizing or covering transactions. These
activities may stabilize, maintain or otherwise affect the market price of the
Common Shares, which may be higher than the price that might otherwise prevail
in the open market; and these activities, if commenced, may be discontinued at
any time without notice. These transactions may be effected on the New York
Stock Exchange or otherwise.

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

PIMCO Advisors or an affiliate (and not the Fund) will pay to UBS Warburg LLC
from its own resources additional compensation in connection with the offering
of the Common Shares in the form of a structuring fee in an amount equal to
$500,000.

Custodian and transfer agent

The custodian of the assets of the Fund is State Street Bank and Trust Co., 225
Franklin Street, Boston, MA 02110. The Custodian performs custodial and fund
accounting services.

PFPC Inc., 400 Belleview Parkway, Wilmington, DE 19809, serves as the Fund's
transfer agent, registrar, dividend disbursement agent and shareholder
servicing agent, as well as agent for the Fund's Dividend Reinvestment Plan.

Legal matters

Certain legal matters in connection with the Common Shares will be passed upon
for the Fund by Ropes & Gray, Boston, Massachusetts, and for the Underwriters
by Skadden, Arps, Slate, Meagher & Flom (Illinois), Chicago, Illinois, and its
affiliated entities.

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

Table of contents for the
statement of additional information

Use of proceeds............................................................ 3
Investment objective and policies.......................................... 3
Investment restrictions.................................................... 27
Management of the Fund..................................................... 29
Investment manager and portfolio manager................................... 33
Portfolio transactions..................................................... 37
Distributions.............................................................. 39
Description of shares...................................................... 40
Certain provisions in the Declaration of Trust............................. 43
Repurchase of Fund shares; conversion to open-end fund..................... 45
Tax matters................................................................ 47
Performance related and comparative information............................ 53
Custodian, transfer agent and dividend disbursement agent.................. 54
Independent accountants.................................................... 54
Counsel.................................................................... 54
Registration statement..................................................... 54
Report of independent accountants.......................................... 55
Financial statements....................................................... 56
Appendix A--Ratings of investments......................................... A-1
Appendix B--Factors pertaining to California............................... B-1
Appendix C--Performance related and comparative and other information...... C-1

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

[This page intentionally left blank]

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

[This page intentionally left blank]

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

[PIMCO FUNDS LOGO]

PIMCO CALIFORNIA
MUNICIPAL INCOME FUND

STATEMENT OF ADDITIONAL INFORMATION

June 26, 2001

PIMCO California Municipal Income Fund (the "Fund") is a newly organized,
non-diversified, closed-end management investment company.

This Statement of Additional Information relating to common shares of the
Fund ("Common Shares") does not constitute a prospectus, but should be read in
conjunction with the Fund's prospectus relating thereto dated June 26, 2001
(the "Prospectus"). This Statement of Additional Information does not include
all information that a prospective investor should consider before purchasing
Common Shares, and investors should obtain and read the Prospectus prior to
purchasing such shares. A copy of the Prospectus may be obtained without charge
by calling (877) 819-2224. You may also obtain a copy of the Prospectus on the
Securities and Exchange Commission's ("SEC") web site (http://www.sec.gov).
Capitalized terms used but not defined in this Statement of Additional
Information have the meanings ascribed to them in the Prospectus.

TABLE OF CONTENTS

USE OF PROCEEDS........................................................................ 3
INVESTMENT OBJECTIVE AND POLICIES...................................................... 3
INVESTMENT RESTRICTIONS................................................................ 27
MANAGEMENT OF THE FUND................................................................. 29
INVESTMENT MANAGER AND PORTFOLIO MANAGER............................................... 33
PORTFOLIO TRANSACTIONS................................................................. 37
DISTRIBUTIONS.......................................................................... 39
DESCRIPTION OF SHARES.................................................................. 40
CERTAIN PROVISIONS IN THE DECLARATION OF TRUST......................................... 43
REPURCHASE OF FUND SHARES; CONVERSION TO OPEN-END FUND................................. 45
TAX MATTERS............................................................................ 47
PERFORMANCE RELATED AND COMPARATIVE INFORMATION........................................ 53
CUSTODIAN, TRANSFER AGENT AND DIVIDEND DISBURSING AGENT................................ 54
INDEPENDENT ACCOUNTANTS................................................................ 54
COUNSEL................................................................................ 54
REGISTRATION STATEMENT................................................................. 54
REPORT OF INDEPENDENT ACCOUNTANTS...................................................... 55
FINANCIAL STATEMENTS................................................................... 56
APPENDIX A - Ratings of Investments.................................................... A-1
APPENDIX B - Factors Pertaining to California.......................................... B-1
APPENDIX C - Performance Related and Comparative and Other Information................. C-1

This Statement of Additional Information is dated June 26, 2001.

USE OF PROCEEDS

The net proceeds of the offering of Common Shares of the Fund will be
approximately $217,740,000 (or $250,401,000 if the Underwriters exercise the
over-allotment option in full) after payment of organization and offering costs.

PIMCO Advisors L.P. ("PIMCO Advisors") has agreed to pay the amount by
which the aggregate of all organizational expenses and offering costs (other
than the sales load) exceeds $0.03 per Common Share.

Pending investment in Municipal Bonds (as hereinafter defined) that meet
the Fund's investment objective and policies, the net proceeds of the offering
will be invested in high quality, short-term tax-exempt money market securities
or in high quality Municipal Bonds with relatively low volatility (such as pre-
refunded and intermediate-term bonds), to the extent such securities are
available. If necessary to invest fully the net proceeds of the offering
immediately, the Fund may also purchase, as temporary investments, short-term
taxable investments of the type described under "Investment Objective and
Policies--Short-Term Investments/Temporary Defensive Strategies," the income on
which is subject to regular federal and California income tax, and securities of
other open- or closed-end investment companies that invest primarily in
Municipal Bonds of the type in which the Fund may invest directly.

INVESTMENT OBJECTIVE AND POLICIES

The investment objective and general investment policies of the Fund are
described in the Prospectus. Additional information concerning the
characteristics of certain of the Fund's investments is set forth below.

Municipal Bonds

Municipal Bonds share the attributes of debt/fixed income securities in
general, but are generally issued by states, municipalities and other political
subdivisions, agencies, authorities and instrumentalities of states and multi-
state agencies or authorities. The Municipal Bonds which the Fund may purchase
include general obligation bonds and limited obligation bonds (or revenue
bonds), including industrial development bonds issued pursuant to former federal
tax law. General obligation bonds are obligations involving the credit of an
issuer possessing taxing power and are payable from such issuer's general
revenues and not from any particular source. Limited obligation bonds are
payable only from the revenues derived from a particular facility or

class of facilities or, in some cases, from the proceeds of a special excise or
other specific revenue source. Tax-exempt private activity bonds and industrial
development bonds generally are also revenue bonds and thus are not payable from
the issuer's general revenues. The credit and quality of private activity bonds
and industrial development bonds are usually related to the credit of the
corporate user of the facilities. Payment of interest on and repayment of
principal of such bonds is the responsibility of the corporate user (and/or any
guarantor).

The Fund will invest at least 80% of its net assets in Municipal Bonds that
at the time of investment are investment grade quality. Investment grade quality
bonds are bonds rated within the four highest grades (Baa or BBB or better by
Moody's Investors Service, Inc. ("Moody's"), Standard & Poor's ("S&P") or Fitch
IBCA, Inc. ("Fitch")) or bonds that are unrated but judged to be of comparable
quality by the Fund"s portfolio manager, Pacific Investment Management Company
LLC ("PIMCO"). The Fund may invest up to 20% of its net assets in Municipal
Bonds that, at the time of investment, are rated Ba/BB or B by Moody's, S&P or
Fitch or unrated but judged to be of comparable quality by PIMCO. Bonds of below
investment grade quality (Ba/BB or below) are commonly referred to as "junk
bonds." For a description of the risks associated with lower quality securities,
see "High Yield Securities ("Junk Bonds")" below.

The Fund will primarily invest in Municipal Bonds with long-term maturities
in order to maintain a weighted average maturity of 15-30 years, but the average
weighted maturity of obligations held by the Fund may be shortened, depending on
market conditions. As a result, the Fund's portfolio at any given time may
include both long-term and intermediate-term Municipal Bonds. Moreover, during
temporary or defensive periods (e.g., times when PIMCO believes that temporary
imbalances of supply and demand or other temporary dislocations in the tax-
exempt bond market adversely affect the price at which long-term or
intermediate-term Municipal Bonds are available), and in order to keep the
Fund's cash fully invested, including the period during which the net proceeds
of the offering are being invested, the Fund may invest any percentage of its
net assets in short-term investments including high quality, short-term
securities that may be either tax-exempt or taxable and up to 10% of its net
assets in securities of other open- or closed-end investment companies that
invest primarily in Municipal Bonds of the type in which the Fund may invest
directly. The Fund intends to invest in taxable short-term investments only in
the event that suitable tax-exempt short-term investments are not available at
reasonable prices and yields. See "Tax Matters" for information relating to the
allocation of taxable income between Common Shares and the Fund's preferred
shares (called "Preferred Shares" herein), if any. Tax-exempt short-term
investments include various obligations issued by state and local governmental
issuers, such as tax-exempt notes (bond anticipation notes, tax anticipation
notes and revenue anticipation notes or other such Municipal Bonds maturing in
three years or less from the date of issuance) and municipal commercial paper.
The Fund will invest only in taxable short-term investments which are U.S.
Government securities or securities rated within the highest grade by Moody's,
S&P or Fitch, and which mature within one year from the date of purchase or
carry a variable or floating rate of interest. See Appendix A for a general
description of Moody's, S&P's and Fitch's ratings of securities in such
categories. Taxable short-term investments of the Fund may include certificates
of deposit issued by U.S. banks with assets of at least $1 billion, or
commercial paper or corporate notes, bonds or debentures with a remaining
maturity of one year or less, or repurchase agreements. See "Short-Term
Investments/Temporary

Defensive Strategies." To the extent the Fund invests in taxable investments,
the Fund will not at such times be in a position to achieve its investment
objective.

Also included within the general category of Municipal Bonds in which the
Fund may invest are participations in lease obligations or installment purchase
contract obligations of municipal authorities or entities ("Municipal Lease
Obligations"). Although a Municipal Lease Obligation does not constitute a
general obligation of the municipality for which the municipality's taxing power
is pledged, a Municipal Lease Obligation is ordinarily backed by the
municipality's covenant to budget for, appropriate and make the payments due
under the Municipal Lease Obligation. However, certain Municipal Lease
Obligations contain "non-appropriation" clauses which provide that the
municipality has no obligation to make lease or installment purchase payments in
future years unless money is appropriated for such purpose on a yearly basis. In
the case of a "non-appropriation" lease, the Fund's ability to recover under the
lease in the event of non-appropriation or default will be limited solely to the
repossession of the leased property, without recourse to the general credit of
the lessee, and disposition or releasing of the property might prove difficult.
There have been challenges to the legality of lease financing in numerous
states, and, from time to time, certain municipalities have considered not
appropriating money for lease payments. In deciding whether to purchase a
Municipal Lease Obligation, PIMCO will assess the financial condition of the
borrower, the merits of the project, the level of public support for the
project, and the legislative history of lease financing in the state. These
securities may be less readily marketable than other Municipal Bonds. The Fund
may also purchase unrated lease obligations if determined by PIMCO to be of
comparable quality to rated securities in which the Fund is permitted to invest.

The Fund may seek to enhance its yield through the purchase of private
placements. These securities are sold through private negotiations, usually to
institutions or mutual funds, and may have resale restrictions. Their yields are
usually higher than comparable public securities to compensate the investor for
their limited marketability. The Fund may not invest more than 15% of its net
assets in illiquid securities, including unmarketable private placements.

Some longer-term Municipal Bonds give the investor the right to "put" or
sell the security at par (face value) within a specified number of days
following the investor's request"usually one to seven days. This demand feature
enhances a security's liquidity by shortening its effective maturity and enables
it to trade at a price equal to or very close to par. If a demand feature
terminates prior to being exercised, the Fund would hold the longer-term
security, which could experience substantially more volatility.

The Fund may invest in Municipal Bonds with credit enhancements such as
letters of credit, municipal bond insurance and Standby Bond Purchase Agreements
("SBPAs"). Letters of credit are issued by a third party, usually a bank, to
enhance liquidity and ensure repayment of principal and any accrued interest if
the underlying Municipal Bond should default. Municipal bond insurance, which is
usually purchased by the bond issuer from a private, nongovernmental insurance
company, provides an unconditional and irrevocable guarantee that the insured
bond's principal and interest will be paid when due. Insurance does not
guarantee the price of the bond or the share price of the Fund. The credit
rating of an insured bond reflects the credit rating of the insurer, based on
its claims-paying ability. The obligation of a municipal bond insurance company
to pay a claim extends over the life of each insured bond. Although defaults

on insured Municipal Bonds have been low to date and municipal bond insurers
have met their claims, there is no assurance this will continue. A higher-than-
expected default rate could strain the insurer's loss reserves and adversely
affect its ability to pay claims to bondholders. The number of municipal bond
insurers is relatively small, and not all of them have the highest rating. An
SBPA is a liquidity facility provided to pay the purchase price of bonds that
cannot be re-marketed. The obligation of the liquidity provider (usually a bank)
is only to advance funds to purchase tendered bonds that cannot be remarketed
and does not cover principal or interest under any other circumstances. The
liquidity provider's obligations under the SBPA are usually subject to numerous
conditions, including the continued creditworthiness of the underlying borrower.

The Fund also may invest in participation interests. Participation
interests are various types of securities created by converting fixed rate bonds
into short-term, variable rate certificates. These securities have been
developed in the secondary market to meet the demand for short-term, tax-exempt
securities. The Fund will invest only in securities deemed tax-exempt by a
nationally recognized bond counsel, but there is no guarantee the interest will
be exempt.

The Fund may also invest up to 10% of its assets in residual interest
Municipal Bonds, which may involve leverage and related risks. See "Residual
Interest Municipal Bonds (RIBS)" below.

The Fund may purchase custodial receipts representing the right to receive
either the principal amount or the periodic interest payments or both with
respect to specific underlying Municipal Bonds. In a typical custodial receipt
arrangement, an issuer or third party owner of Municipal Bonds deposits the
bonds with a custodian in exchange for two classes of custodial receipts. The
two classes have different characteristics, but, in each case, payments on the
two classes are based on payments received on the underlying Municipal Bonds. In
no event will the aggregate interest paid with respect to the two classes exceed
the interest paid by the underlying Municipal Bond. Custodial receipts are sold
in private placements. The value of a custodial receipt may fluctuate more than
the value of a Municipal Bond of comparable quality and maturity.

Municipal Bonds are subject to credit and market risk. Generally, prices of
higher quality issues tend to fluctuate less with changes in market interest
rates than prices of lower quality issues and prices of longer maturity issues
tend to fluctuate more than prices of shorter maturity issues.

The Fund may purchase and sell portfolio investments to take advantage of
changes or anticipated changes in yield relationships, markets or economic
conditions. The Fund may also sell Municipal Bonds due to changes in PIMCO's
evaluation of the issuer. The secondary market for Municipal Bonds typically has
been less liquid than that for taxable debt/fixed income securities, and this
may affect the Fund's ability to sell particular Municipal Bonds at then-current
market prices, especially in periods when other investors are attempting to sell
the same securities.

Prices and yields on Municipal Bonds are dependent on a variety of factors,
including general money-market conditions, the financial condition of the
issuer, general conditions of the

Municipal Bond market, the size of a particular offering, the maturity of the
obligation and the rating of the issue. A number of these factors, including the
ratings of particular issues, are subject to change from time to time.
Information about the financial condition of an issuer of Municipal Bonds may
not be as extensive as that which is made available by corporations whose
securities are publicly traded.

Obligations of issuers of Municipal Bonds are subject to the provisions of
bankruptcy, insolvency and other laws, such as the Federal Bankruptcy Reform Act
of 1978, affecting the rights and remedies of creditors. Congress or state
legislatures may seek to extend the time for payment of principal or interest,
or both, or to impose 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 issuers to meet their obligations for the
payment of interest and principal on their Municipal Bonds may be materially
affected or their obligations may be found to be invalid or unenforceable. Such
litigation or conditions may from time to time have the effect of introducing
uncertainties in the market for Municipal Bonds or certain segments thereof, or
of materially affecting the credit risk with respect to particular bonds.
Adverse economic, business, legal or political developments might affect all or
a substantial portion of the Fund's Municipal Bonds in the same manner. The Fund
will be particularly subject to these risks because it focuses its investments
in a particular state.

Factors Pertaining to California

Factors pertaining to California are set forth in Appendix B.

Residual Interest Municipal Bonds (RIBS)

The Fund may also invest up to 10% of its assets in residual interest
Municipal Bonds ("RIBS") whose interest rates bear an inverse relationship to
the interest rate on another security or the value of an index. RIBS are created
by dividing the income stream provided by an underlying bond to create two
securities, one short-term and one long-term. The interest rate on the short-
term component is reset by an index or auction process normally every seven to
35 days. After income is paid on the short-term securities at current rates, the
residual income goes to the long-term securities. Therefore, rising short-term
interest rates result in lower income for the longer-term portion, and vice
versa. The longer-term bonds can be very volatile and may be less liquid than
other Municipal Bonds of comparable maturity. An investment in RIBS typically
will 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 a RIB, the value of a RIB is generally more volatile
than that of a fixed rate bond. RIBS have interest rate adjustment formulas
which generally reduce or, in the extreme, eliminate the interest paid to the
Fund when short-term interest rates rise, and increase the interest paid to the
Fund when short-term interest rates fall. RIBS have varying degrees of
liquidity, and the market for these securities is volatile. These securities
generally will 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 or remain relatively stable. Although volatile, RIBS
typically offer the potential for yields exceeding the yields available on fixed
rate bonds with comparable credit quality, coupon, call provisions and maturity.

The Fund may also invest in RIBS for the purpose of increasing the Fund's
leverage as a more flexible alternative to the issuance of Preferred Shares.
Should short-term interest rates rise, the combination of the Fund's investment
in RIBS and its use of other forms of leverage (including through the issuance
of Preferred Shares or the use of other derivative instruments) likely will
adversely affect the Fund's net asset value per share and income and
distributions to shareholders. Trusts in which RIBS may be held could be
terminated, in which case the residual bond holder would take possession of the
underlying bond on an unleveraged basis.

Short-Term Investments / Temporary Defensive Strategies

Upon PIMCO's recommendation, temporarily or for defensive purposes and in
order to keep the Fund"s cash fully invested, including the period during which
the net proceeds of the offering are being invested, the Fund may invest up to
100% of its net assets in short-term investments including high quality, short-
term securities that may be either tax-exempt or taxable. The Fund intends to
invest in taxable short-term investments only in the event that suitable tax-
exempt short-term investments are not available at reasonable prices and yields.
To the extent the Fund invests in taxable short-term investments, the Fund will
not at such times be in a position to achieve its investment objective of
providing current income exempt from federal income tax.

Short-Term Taxable Fixed Income Securities
------------------------------------------

Short-term taxable fixed income investments are defined to include, without
limitation, the following:

(1) U.S. government securities, including bills, notes and bonds
differing as to maturity and rates of interest that are either issued or
guaranteed by the U.S. Treasury or by U.S. government agencies or
instrumentalities. U.S. government agency securities include securities
issued by (a) the Federal Housing Administration, Farmers Home
Administration, Export-Import Bank of the United States, Small Business
Administration, and the Government National Mortgage Association, whose
securities are supported by the full faith and credit of the United States;
(b) the Federal Home Loan Banks, Federal Intermediate Credit Banks, and the
Tennessee Valley Authority, whose securities are supported by the right of
the agency to borrow from the U.S. Treasury; (c) the Federal National
Mortgage Association, whose securities are supported by the discretionary
authority of the U.S. government to purchase certain obligations of the
agency or instrumentality; and (d) the Student Loan Marketing Association,
whose securities are supported only by its credit. While the U.S.
government provides financial support to such U.S. government-sponsored
agencies or instrumentalities, no assurance can be given that it always
will do so since it is not so obligated by law. The U.S. government, its
agencies, and instrumentalities do not guarantee the market value of their
securities. Consequently, the value of such securities may fluctuate.

(2) Certificates of deposit issued against funds deposited in a bank
or a savings and loan association. Such certificates are for a definite
period of time, earn a specified rate of return, and are normally
negotiable. The issuer of a certificate of deposit agrees to pay the amount
deposited plus interest to the bearer of the certificate on the date
specified

thereon. Under current FDIC regulations, the maximum insurance payable as
to any one certificate of deposit is $100,000; therefore, certificates of
deposit purchased by the Fund may not be fully insured.

(3) Repurchase agreements, which involve purchases of debt securities.
A repurchase agreement is a contractual agreement whereby the seller of
securities (U.S. Government securities or Municipal Bonds) agrees to
repurchase the same security at a specified price on a future date agreed
upon by the parties. The agreed-upon repurchase price determines the yield
during the Fund's holding period. Repurchase agreements are considered to
be loans collateralized by the underlying security that is the subject of
the repurchase contract. Income generated from transactions in repurchase
agreements will be taxable. The Fund will only enter into repurchase
agreements with registered securities dealers or domestic banks that PIMCO
believes present minimal credit risk. The risk to the Fund is limited to
the ability of the issuer to pay the agreed-upon repurchase price on the
delivery date; however, although the value of the underlying collateral at
the time the transaction is entered into always equals or exceeds the
agreed-upon repurchase price, if the value of the collateral declines there
is a risk of loss of both principal and interest. In the event of default,
the collateral may be sold but the Fund might incur a loss if the value of
the collateral declines, and might incur disposition costs or experience
delays in connection with liquidating the collateral. In addition, if
bankruptcy proceedings are commenced with respect to the seller of the
security, realization upon the collateral by the Fund may be delayed or
limited. PIMCO will monitor the value of the collateral at the time the
transaction is entered into and at all times subsequent during the term of
the repurchase agreement in an effort to determine that such value always
equals or exceeds the agreed-upon repurchase price. In the event the value
of the collateral declines below the repurchase price, PIMCO will demand
additional collateral from the issuer to increase the value of the
collateral to at least that of the repurchase price, including interest.

(4) Commercial paper, which consists of short-term unsecured
promissory notes, including variable rate master demand notes issued by
corporations to finance their current operations. Master demand notes are
direct lending arrangements between the Fund and a corporation. There is no
secondary market for such notes. However, they are redeemable by the Fund
at any time. PIMCO will consider the financial condition of the corporation
(e.g., earning power, cash flow, and other liquidity ratios) and will
continuously monitor the corporation's ability to meet all of its financial
obligations, because the Fund's liquidity might be impaired if the
corporation were unable to pay principal and interest on demand.
Investments in commercial paper will be limited to commercial paper rated
in the highest categories by a major rating agency and which mature within
one year of the date of purchase or carry a variable or floating rate of
interest.

Short-Term Tax-Exempt Fixed Income Securities
---------------------------------------------

Short-term tax-exempt fixed-income securities are securities that are
exempt from regular federal income tax and mature within three years or less
from the date of issuance. Short-term tax-exempt fixed income securities are
defined to include, without limitation, the following:

Bond Anticipation Notes ("BANs") are usually general obligations of
state and local governmental issuers which are sold to obtain interim financing
for projects that will eventually be funded through the sale of long-term debt
obligations or bonds. The ability of an issuer to meet its obligations on its
BANs is primarily dependent on the issuer's access to the long-term Municipal
Bond market and the likelihood that the proceeds of such bond sales will be used
to pay the principal and interest on the BANs.

Tax Anticipation Notes ("TANs") are issued by state and local
governments to finance the current operations of such governments. Repayment is
generally to be derived from specific future tax revenues. TANs are usually
general obligations of the issuer. A weakness in an issuer's capacity to raise
taxes due to, among other things, a decline in its tax base or a rise in
delinquencies, could adversely affect the issuer's ability to meet its
obligations on outstanding TANs.

Revenue Anticipation Notes ("RANs") are issued by governments or
governmental bodies with the expectation that future revenues from a designated
source will be used to repay the notes. In general, they also constitute general
obligations of the issuer. A decline in the receipt of projected revenues, such
as anticipated revenues from another level of government, could adversely affect
an issuer's ability to meet its obligations on outstanding RANs. In addition,
the possibility that the revenues would, when received, be used to meet other
obligations could affect the ability of the issuer to pay the principal and
interest on RANs.

Construction Loan Notes are issued to provide construction financing
for specific projects. Frequently, these notes are redeemed with funds obtained
from the Federal Housing Administration.

Bank Notes are notes issued by local government bodies and agencies,
such as those described above to commercial banks as evidence of borrowings. The
purposes for which the notes are issued are varied but they are frequently
issued to meet short-term working capital or capital-project needs. These notes
may have risks similar to the risks associated with TANs and RANs.

Tax-Exempt Commercial Paper ("Municipal Paper") represents very
short-term unsecured, negotiable promissory notes issued by states,
municipalities and their agencies. Payment of principal and interest on issues
of Municipal Paper may be made from various sources, to the extent the funds are
available therefrom. Maturities of Municipal Paper generally will be shorter
than the maturities of TANs, BANs or RANs. There is a limited secondary market
for issues of Municipal Paper.

Certain Municipal Bonds may carry variable or floating rates of
interest whereby the rate of interest is not fixed but varies with changes in
specified market rates or indices, such as a bank prime rate or a tax-exempt
money market index.

While the various types of notes described above as a group represent
the major portion of the tax-exempt note market, other types of notes are
available in the marketplace and the Fund may invest in such other types of
notes to the extent permitted under its investment objective, policies and
limitations. Such notes may be issued for different purposes and may be secured
differently from those mentioned above.

High Yield Securities ("Junk Bonds")

The Fund may invest up to 20% of its net assets in Municipal Bonds
that, at the time of investment, are rated Ba/BB or B by Moody's, S&P or Fitch
or unrated but judged to be of comparable quality by PIMCO. Bonds of below
investment grade quality (Ba/BB or below) are commonly referred to as "high
yield securities" or "junk bonds." Issuers of bonds rated Ba/BB or B are
regarded as having current capacity to make principal and interest payments but
are subject to business, financial or economic conditions which could adversely
affect such payment capacity. Municipal bonds rated Baa or BBB are considered
"investment grade" securities, although such bonds may be considered to possess
some speculative characteristics. Municipal Bonds rated AAA in which the Fund
may invest may have been so rated on the basis of the existence of insurance
guaranteeing the timely payment, when due, of all principal and interest.

High yield securities are regarded as predominantly speculative with
respect to the issuer's continuing ability to meet principal and interest
payments and, therefore, carry greater price volatility and principal and income
risk, including the possibility of issuer default and bankruptcy and increased
market price volatility.

High yield securities may be more susceptible to real or perceived
adverse economic and competitive industry conditions than investment grade
securities. A projection of an economic downturn or of a period of rising
interest rates, for example, could cause a decline in high yield security prices
because the advent of a recession could lessen the ability of an issuer to make
principal and interest payments on its debt securities. If an issuer of high
yield securities defaults, in addition to risking payment of all or a portion of
interest and principal, the Fund may incur additional expenses to seek recovery.
In the case of high yield securities structured as zero-coupon or pay-in-kind
securities, their market prices are affected to a greater extent by interest
rate changes, and therefore tend to be more volatile than securities which pay
interest periodically and in cash. PIMCO seeks to reduce these risks through
diversification, credit analysis and attention to current developments and
trends in both the economy and financial markets.

The secondary market on which high yield securities are traded may be
less liquid than the market for higher grade securities. Less liquidity in the
secondary trading market could adversely affect the price at which the Fund
could sell a high yield security, and could adversely affect the daily net asset
value of the shares. Adverse publicity and investor perceptions, whether or not
based on fundamental analysis, may decrease the values and liquidity of high
yield securities, especially in a thinly traded market. When secondary markets
for high yield securities

are less liquid than the market for higher grade securities, it may be more
difficult to value the securities because such valuation may require more
research, and elements of judgment may play a greater role in the valuation
because there is less reliable, objective data available. During periods of thin
trading in these markets, the spread between bid and asked prices is likely to
increase significantly and the Fund may have greater difficulty selling its
portfolio securities. The Fund will be more dependent on PIMCO's research and
analysis when investing in high yield securities. PIMCO seeks to minimize the
risks of investing in all securities through diversification, in-depth credit
analysis and attention to current developments in interest rates and market
conditions.

A general description of Moody's, S&P's and Fitch's ratings of
Municipal Bonds is set forth in Appendix A hereto. The ratings of Moody's, S&P
and Fitch represent their opinions as to the quality of the Municipal Bonds they
rate. It should be emphasized, however, that ratings are general and are not
absolute standards of quality. Consequently, Municipal Bonds with the same
maturity, coupon and rating may have different yields while obligations with the
same maturity and coupon with different ratings may have the same yield. For
these reasons, the use of credit ratings as the sole method of evaluating high
yield securities can involve certain risks. For example, credit ratings evaluate
the safety of principal and interest payments, not the market value risk of high
yield securities. Also, credit rating agencies may fail to change credit ratings
in a timely fashion to reflect events since the security was last rated. PIMCO
does not rely solely on credit ratings when selecting securities for the Fund,
and develops its own independent analysis of issuer credit quality.

The Fund's 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 or PIMCO downgrades its assessment of the credit
characteristics of a particular issue. In determining whether to retain or sell
such a security, PIMCO may consider such factors as PIMCO'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. However, analysis of the creditworthiness of issuers of high yield
securities may be more complex than for issuers of higher quality debt
securities.

Municipal Warrants

The Fund may invest in municipal warrants, which are essentially call
options on Municipal Bonds. In exchange for a premium, they give the purchaser
the right, but not the obligation, to purchase a Municipal Bond in the future.
The Fund might purchase a warrant to lock in forward supply in an environment
where the current issuance of bonds is sharply reduced. Like options, warrants
may expire worthless and they may have reduced liquidity.

Variable and Floating Rate Securities

Variable and floating rate securities provide for a periodic adjustment
in the interest rate paid on the obligations. The terms of such obligations must
provide that interest rates are adjusted periodically based upon an interest
rate adjustment index as provided in the respective

obligations. The adjustment intervals may be regular, and range from daily up to
annually, or may be event based, such as based on a change in the prime rate.

The Fund may invest in floating rate debt instruments ("floaters") and
engage in credit spread trades. The interest rate on a floater is a variable
rate which is tied to another interest rate, such as a municipal bond index or
Treasury bill rate. The interest rate on a floater resets periodically,
typically every six months. While, because of the interest rate reset feature,
floaters provide the Fund with a certain degree of protection against rises in
interest rates, the Fund will participate in any declines in interest rates as
well. A credit spread trade is an investment position relating to a difference
in the prices or interest rates of two bonds or other securities, where the
value of the investment position is determined by movements in the difference
between the prices or interest rates, as the case may be, of the respective
securities or currencies.

Structured Notes and Other Hybrid Instruments

The Fund may invest in "structured" notes, which are privately
negotiated debt obligations where the principal and/or interest is determined by
reference to the performance of a benchmark asset or market, such as selected
securities or an index of securities, or the differential performance of two
assets or markets, such as indices reflecting taxable and tax-exempt bonds.
Depending on the terms of the note, the Fund may forgo all or part of the
interest and principal that would be payable on a comparable conventional note.
The rate of return on structured notes may be determined by applying a
multiplier to the performance or differential performance of the referenced
index(es) or other asset(s). Application of a multiplier involves leverage which
will serve to magnify the potential for gain and the risk of loss. The Fund
currently intends that any use of structured notes will be for the purpose of
reducing the interest rate sensitivity of the Fund's portfolio (and thereby
decreasing the Fund's exposure to interest rate risk) and, in any event, that
the interest income on the notes will be exempt from federal and California
income tax. Like other sophisticated strategies, the Fund's use of structured
notes may not work as intended; for example, by reducing the duration of the
Fund's portfolio, structured notes may limit the Fund's return when having a
longer duration would be beneficial (for instance, when interest rates
decline).

The Fund may also invest in other "hybrid" instruments which combine
the characteristics of securities, futures, and options. Hybrids can be used as
an efficient means of pursuing a variety of investment goals, including duration
management and increased total return. Hybrids may not bear interest or pay
dividends. The value of a hybrid or its interest rate may be a multiple of a
benchmark and, as a result, may be leveraged and move (up or down) more steeply
and rapidly than the benchmark. These benchmarks may be sensitive to economic
and political events that cannot be readily foreseen by the purchaser of a
hybrid. Under certain conditions, the redemption value of a hybrid could be
zero. Thus, an investment in a hybrid may entail significant market risks that
are not associated with a similar investment in a traditional, U.S.
dollar-denominated bond that has a fixed principal amount and pays a fixed rate
or floating rate of interest. The purchase of hybrids also exposes the Fund to
the credit risk of the issuer of the hybrids. These risks may cause significant
fluctuations in the net asset value of the Fund.

Certain issuers of structured products such as hybrid instruments may
be deemed to be investment companies as defined in the Investment Company Act of
1940 and the rules and

regulations thereunder, as amended from time to time (the "1940 Act"). As a
result, the Fund's investments in these products will be subject to limits
applicable to investments in investment companies and may be subject to
restrictions contained in the 1940 Act.

Borrowing

The Fund may borrow money to the extent permitted under the 1940 Act as
interpreted, modified or otherwise permitted by regulatory authority having
jurisdiction, from time to time. This means that, in general, the Fund may
borrow money from banks for any purpose on a secured basis in an amount up to
one-third of the Fund's total assets. The Fund may also borrow money for
temporary administrative purposes on an unsecured basis to the extent permitted
by law.

Specifically, provisions of the 1940 Act require the Fund to maintain
continuous asset coverage (that is, total assets including borrowings, less
liabilities exclusive of borrowings) of 300% of the amount borrowed, with an
exception for borrowings not in excess of 5% of the Fund's total assets made for
temporary administrative purposes. Any borrowings for temporary administrative
purposes in excess of 5% of the Fund's total assets must maintain continuous
asset coverage. If the 300% asset coverage should decline as a result of market
fluctuations or other reasons, the Fund may be required to sell some of its
portfolio holdings within three days to reduce the debt and restore the 300%
asset coverage, even though it may be disadvantageous from an investment
standpoint to sell securities at that time.

As noted below, the Fund also may enter into certain transactions,
including reverse repurchase agreements, that can be viewed as constituting a
form of borrowing or financing transaction by the Fund. To the extent the Fund
covers its commitment under a reverse repurchase agreement (or economically
similar transaction) by the segregation of assets determined to be liquid by
PIMCO in accordance with procedures adopted by the Trustees, equal in value to
the amount of the Fund's commitment to repurchase, such an agreement will not be
considered a "senior security" by the Fund and therefore will not be subject to
the 300% asset coverage requirement otherwise applicable to borrowings by the
Fund. Borrowing will tend to exaggerate the effect on net asset value of any
increase or decrease in the market value of the Fund's portfolio. Money borrowed
will be subject to interest costs which may or may not be recovered by
appreciation of the securities purchased. The Fund also may be required to
maintain minimum average balances in connection with such borrowing or to pay a
commitment or other fee to maintain a line of credit; either of these
requirements would increase the cost of borrowing over the stated interest rate.

The Fund may enter into reverse repurchase agreements and economically
similar transactions. A reverse repurchase agreement involves the sale of a
portfolio-eligible security by the Fund, coupled with its agreement to
repurchase the instrument at a specified time and price. Under a reverse
repurchase agreement, the Fund continues to receive any principal and interest
payments on the underlying security during the term of the agreement. The Fund
typically will segregate assets determined to be liquid by PIMCO in accordance
with procedures established by the Board of Trustees, equal (on a daily
mark-to-market basis) to its obligations under reverse repurchase agreements.
However, reverse repurchase agreements involve the risk that the market value of
securities retained by the Fund may decline below the repurchase price of the
securities

sold by the Fund which it is obligated to repurchase. To the extent that
positions in reverse repurchase agreements are not covered through the
segregation of liquid assets at least equal to the amount of any forward
purchase commitment, such transactions would be subject to the Fund's
limitations on borrowings, which would, among other things, restrict the
aggregate of such transactions (plus any other borrowings) to one-third of the
Fund's total assets.

The Fund also may effect simultaneous purchase and sale transactions
that are known as "sale-buybacks." A sale-buyback is similar to a reverse
repurchase agreement, except that in a sale-buyback, the counterparty who
purchases the security is entitled to receive any principal or interest payments
made on the underlying security pending settlement of the Fund's repurchase of
the underlying security. The Fund's obligations under a sale-buyback typically
would be offset by liquid assets equal in value to the amount of the Fund's
forward commitment to repurchase the subject security.

Derivative Instruments

In pursuing its investment objective, the Fund may purchase and sell
(write) both put options and call options on securities, swap agreements, and
securities indexes, and enter into interest rate and index futures contracts and
purchase and sell options on such futures contracts ("futures options") for
hedging purposes or as part of their overall investment strategies. The Fund
also may enter into swap agreements with respect to interest rates and indexes
of securities. If other types of financial instruments, including other types of
options, futures contracts, or futures options are traded in the future, the
Fund may also use those instruments, provided that the Trustees determine that
their use is consistent with the Fund's investment objective.

The value of some derivative instruments in which the Fund may invest
may be particularly sensitive to changes in prevailing interest rates, and, like
the other investments of the Fund, the ability of the Fund to successfully
utilize these instruments may depend in part upon the ability of PIMCO to
forecast interest rates and other economic factors correctly. If PIMCO
incorrectly forecasts such factors and has taken positions in derivative
instruments contrary to prevailing market trends, the Fund could be exposed to
the risk of loss.

The Fund might not employ any of the strategies described below, and no
assurance can be given that any strategy used will succeed. If PIMCO incorrectly
forecasts interest rates, market values or other economic factors in utilizing a
derivatives strategy for the Fund, the Fund might have been in a better position
if it had not entered into the transaction at all. Also, suitable derivative
transactions may not be available in all circumstances. The use of these
strategies involves certain special risks, including a possible imperfect
correlation, or even no correlation, between price movements of derivative
instruments and price movements of related investments. While some strategies
involving derivative instruments can reduce the risk of loss, they can also
reduce the opportunity for gain or even result in losses by offsetting favorable
price movements in related investments or otherwise, due to the possible
inability of the Fund to purchase or sell a portfolio security at a time that
otherwise would be favorable or the possible need to sell a portfolio security
at a disadvantageous time because the Fund is required to maintain asset
coverage or offsetting positions in connection with transactions in derivative
instruments, and the possible inability of the Fund to close out or to liquidate
its derivatives positions. Income earned

by the Fund from many derivative strategies will be treated as capital gain and,
if not offset by net realized capital loss, will be distributed to shareholders
in taxable distributions.

Options on Securities, Swap Agreements and Indexes. The Fund may
purchase and sell both put and call options on Municipal Bonds or other
securities, swap agreements or indexes in standardized contracts traded on
domestic or other securities exchanges, boards of trade, or similar entities, or
quoted on NASDAQ or on an over-the-counter market, and agreements, sometimes
called cash puts, which may accompany the purchase of a new issue of bonds from
a dealer.

An option on a security (or index) is a contract that gives the holder
of the option, in return for a premium, the right to buy from (in the case of a
call) or sell to (in the case of a put) the writer of the option the security
underlying the option (or the cash value of the index) at a specified exercise
price at any time during the term of the option. The writer of an option on a
security has the obligation upon exercise of the option to deliver the
underlying security upon payment of the exercise price or to pay the exercise
price upon delivery of the underlying security. Upon exercise, the writer of an
option on an index is obligated to pay the difference between the cash value of
the index and the exercise price multiplied by the specified multiplier for the
index option. (An index is designed to reflect features of a particular
Municipal Bond or other market, a specific group of financial instruments or
securities, or certain economic indicators.)

The Fund will write call options and put options only if they are
"covered." In the case of a call option on a Municipal Bond or other security,
the option is "covered" if the Fund owns the security underlying the call or has
an absolute and immediate right to acquire that security without additional cash
consideration (or, if additional cash consideration is required, cash or other
assets determined to be liquid by PIMCO in accordance with procedures
established by the Board of Trustees, in such amount are segregated by its
custodian) upon conversion or exchange of other securities held by the Fund. For
a call option on an index, the option is covered if the Fund maintains with its
custodian assets determined to be liquid by PIMCO in accordance with procedures
established by the Board of Trustees, in an amount equal to the contract value
of the index. A call option is also covered if the Fund holds a call on the same
security or index as the call written where the exercise price of the call held
is (i) equal to or less than the exercise price of the call written, or (ii)
greater than the exercise price of the call written, provided the difference is
maintained by the Fund in segregated assets determined to be liquid by PIMCO in
accordance with procedures established by the Board of Trustees. A put option on
a security or an index is "covered" if the Fund segregates assets determined to
be liquid by PIMCO in accordance with procedures established by the Board of
Trustees equal to the exercise price. A put option is also covered if the Fund
holds a put on the same security or index as the put written where the exercise
price of the put held is (i) equal to or greater than the exercise price of the
put written, or (ii) less than the exercise price of the put written, provided
the difference is maintained by the Fund in segregated assets determined to be
liquid by PIMCO in accordance with procedures established by the Board of
Trustees.

If an option written by the Fund expires unexercised, the Fund realizes
a capital gain equal to the premium received at the time the option was written.
If an option purchased by the Fund expires unexercised, the Fund realizes a
capital loss equal to the premium paid. Prior to the

earlier of exercise or expiration, an exchange traded option may be closed out
by an offsetting purchase or sale of an option of the same series (type,
exchange, underlying security or index, exercise price, and expiration). There
can be no assurance, however, that a closing purchase or sale transaction can be
effected when the Fund desires.

The Fund may sell put or call options it has previously purchased,
which could result in a net gain or loss depending on whether the amount
realized on the sale is more or less than the premium and other transaction
costs paid on the put or call option which is sold. Prior to exercise or
expiration, an option may be closed out by an offsetting purchase or sale of an
option of the same series. The Fund will realize a capital gain from a closing
purchase transaction if the cost of the closing option is less than the premium
received from writing the option, or, if it is more, the Fund will realize a
capital loss. If the premium received from a closing sale transaction is more
than the premium paid to purchase the option, the Fund will realize a capital
gain or, if it is less, the Fund will realize a capital loss. The principal
factors affecting the market value of a put or a call option include supply and
demand, interest rates, the current market price of the underlying security or
index in relation to the exercise price of the option, the volatility of the
underlying security or index, and the time remaining until the expiration date.

The premium paid for a put or call option purchased by the Fund is an
asset of the Fund. The premium received for an option written by the Fund is
recorded as a deferred credit. The value of an option purchased or written is
marked to market daily and is valued at the closing price on the exchange on
which it is traded or, if not traded on an exchange or no closing price is
available, at the mean between the last bid and asked prices.

The Fund may write covered straddles consisting of a combination of a
call and a put written on the same underlying security. A straddle will be
covered when sufficient assets are deposited to meet the Fund's immediate
obligations. The Fund may use the same liquid assets to cover both the call and
put options where the exercise price of the call and put are the same, or the
exercise price of the call is higher than that of the put. In such cases, the
Fund will also segregate liquid assets equivalent to the amount, if any, by
which the put is "in the money."

Risks Associated with Options on Securities and Indexes. There are
several risks associated with transactions in options on securities and on
indexes. For example, there are significant differences between the securities
and options markets that could result in an imperfect correlation between these
markets, causing a given transaction not to achieve its objectives. A decision
as to whether, when and how to use options involves the exercise of skill and
judgment, and even a well-conceived transaction may be unsuccessful to some
degree because of market behavior or unexpected events.

During the option period, the covered call writer has, in return for
the premium on the option, given up the opportunity to profit from a price
increase in the underlying security above the exercise price, but, as long as
its obligation as a writer continues, has retained the risk of loss should the
price of the underlying security decline. The writer of an option has no control
over the time when it may be required to fulfill its obligation as a writer of
the option. Once an option writer has received an exercise notice, it cannot
effect a closing purchase transaction in order to terminate its obligation under
the option and must deliver the underlying security at the exercise

price. If a put or call option purchased by the Fund is not sold when it has
remaining value, and if the market price of the underlying security remains
equal to or greater than the exercise price (in the case of a put), or remains
less than or equal to the exercise price (in the case of a call), the Fund will
lose its entire investment in the option. Also, where a put or call option on a
particular security is purchased to hedge against price movements in a related
security, the price of the put or call option may move more or less than the
price of the related security.

There can be no assurance that a liquid market will exist when the Fund
seeks to close out an option position. If the Fund were unable to close out an
option that it had purchased on a security, it would have to exercise the option
in order to realize any profit or the option may expire worthless. If the Fund
were unable to close out a covered call option that it had written on a
security, it would not be able to sell the underlying security unless the option
expired without exercise. As the writer of a covered call option, the Fund
forgoes, during the option's life, the opportunity to profit from increases in
the market value of the security covering the call option above the sum of the
premium and the exercise price of the call.

If trading were suspended in an option purchased by the Fund, the Fund
would not be able to close out the option. If restrictions on exercise were
imposed, the Fund might be unable to exercise an option it has purchased. Except
to the extent that a call option on an index written by the Fund is covered by
an option on the same index purchased by the Fund, movements in the index may
result in a loss to the Fund; however, such losses may be mitigated by changes
in the value of the Fund's securities during the period the option was
outstanding.

Futures Contracts and Options on Futures Contracts. The Fund may invest
in interest rate futures contracts and options thereon ("futures options"). The
Fund may also purchase and sell futures contracts on Municipal Bonds and U.S.
government securities, as well as purchase put and call options on such futures
contracts.

An interest rate or index futures contract provides for the future sale
by one party and purchase by another party of a specified quantity of a
Municipal Bond or other financial instrument or the cash value of an index at a
specified price and time. A futures contract on a Municipal Bond or other index
is an agreement pursuant to which two parties agree to take or make delivery of
an amount of cash equal to the difference between the value of the index at the
close of the last trading day of the contract and the price at which the index
contract was originally written. Although the value of an index might be a
function of the value of certain specified securities, no physical delivery of
these securities is made. A public market exists in futures contracts covering a
number of indexes as well as financial instruments, including: certain Municipal
Bonds; U.S. Treasury bonds; U.S. Treasury notes; three-month U.S. Treasury
bills; 90-day commercial paper; and bank certificates of deposit. It is expected
that other futures contracts will be developed and traded in the future.

The Fund may purchase and write call and put futures options. Futures
options possess many of the same characteristics as options on securities and
indexes (discussed above). A futures option gives the holder the right, in
return for the premium paid, to assume a long position (call) or short position
(put) in a futures contract at a specified exercise price at any time during the
period of the option. Upon exercise of a call option, the holder acquires a long

position in the futures contract and the writer is assigned the opposite short
position. In the case of a put option, the opposite is true.

To comply with applicable rules of the Commodity Futures Trading
Commission ("CFTC") under which the Fund avoids being deemed a "commodity pool"
or a "commodity pool operator," the Fund intends generally to limit its use of
futures contracts and futures options to "bona fide hedging" transactions, as
such term is defined in applicable regulations, interpretations and practice.
For example, the Fund might use futures contracts to hedge against anticipated
changes in interest rates that might adversely affect either the value of the
Fund's Municipal Bonds or the price of the bonds which the Fund intends to
purchase. The Fund's hedging activities may include sales of futures contracts
as an offset against the effect of expected increases in interest rates, and
purchases of futures contracts as an offset against the effect of expected
declines in interest rates. Although other techniques could be used to reduce
the Fund's exposure to interest rate fluctuations, the Fund may be able to hedge
its exposure more effectively and perhaps at a lower cost by using futures
contracts and futures options.

The Fund will only enter into futures contracts and futures options
which are standardized and traded on a U.S. or other exchange, board of trade,
or similar entity, or quoted on an automated quotation system.

When a purchase or sale of a futures contract is made by the Fund, the
Fund is required to deposit with its custodian (or broker, if legally permitted)
a specified amount of assets determined to be liquid by PIMCO in accordance with
procedures established by the Board of Trustees ("initial margin"). The margin
required for a futures contract is set by the exchange on which the contract is
traded and may be modified during the term of the contract. The initial margin
is in the nature of a performance bond or good faith deposit on the futures
contract which is returned to the Fund upon termination of the contract,
assuming all contractual obligations have been satisfied. The Fund expects to
earn taxable interest income on its initial margin deposits. A futures contract
held by the Fund is valued daily at the official settlement price of the
exchange on which it is traded. Each day the Fund pays or receives cash, called
"variation margin," equal to the daily change in value of the futures contract.
This process is known as "marking to market." Variation margin does not
represent a borrowing or loan by the Fund but is instead a settlement between
the Fund and the broker of the amount one would owe the other if the futures
contract expired. In computing daily net asset value, each Fund will mark to
market its open futures positions.

The Fund is also required to deposit and maintain margin with respect
to put and call options on futures contracts written by it. Such margin deposits
will vary depending on the nature of the underlying futures contract (and the
related initial margin requirements), the current market value of the option,
and other futures positions held by the Fund.

Although some futures contracts call for making or taking delivery of
the underlying securities, generally these obligations are closed out prior to
delivery by offsetting purchases or sales of matching futures contracts
(involving the same exchange, underlying security or index, and delivery month).
If an offsetting purchase price is less than the original sale price, the Fund
realizes a capital gain, or if it is more, the Fund realizes a capital loss.
Conversely, if an

offsetting sale price is more than the original purchase price, the Fund
realizes a capital gain, or if it is less, the Fund realizes a capital loss. The
transaction costs must also be included in these calculations.

The Fund may write covered straddles consisting of a call and a put
written on the same underlying futures contract. A straddle will be covered when
sufficient assets are deposited to meet the Fund's immediate obligations. The
Fund may use the same liquid assets to cover both the call and put options where
the exercise price of the call and put are the same, or the exercise price of
the call is higher than that of the put. In such cases, the Fund will also
segregate liquid assets equivalent to the amount, if any, by which the put is
"in the money."

Limitations on Use of Futures and Futures Options. As noted above, the
Fund generally intends to enter into positions in futures contracts and related
options only for "bona fide hedging" purposes. With respect to positions in
futures and related options that do not constitute bona fide hedging positions,
the Fund will not enter into a futures contract or futures option contract if,
immediately thereafter, the aggregate initial margin deposits relating to such
positions plus premiums paid by it for open futures option positions, less the
amount by which any such options are "in-the-money," would exceed 5% of the
Fund's net assets. A call option is "in-the-money" if the value of the futures
contract that is the subject of the option exceeds the exercise price. A put
option is "in-the-money" if the exercise price exceeds the value of the futures
contract that is the subject of the option.

When purchasing a futures contract, the Fund will maintain with its
custodian (and mark-to-market on a daily basis) assets determined to be liquid
by PIMCO in accordance with procedures established by the Board of Trustees,
that, when added to the amounts deposited with a futures commission merchant as
margin, are equal to the market value of the futures contract. Alternatively,
the Fund may "cover" its position by purchasing a put option on the same futures
contract with a strike price as high or higher than the price of the contract
held by the Fund.

When selling a futures contract, the Fund will maintain with its
custodian (and mark-to-market on a daily basis) assets determined to be liquid
by PIMCO in accordance with procedures established by the Board of Trustees,
that are equal to the market value of the instruments underlying the contract.
Alternatively, the Fund may "cover" its position by owning the instruments
underlying the contract (or, in the case of an index futures contract, a
portfolio with a volatility substantially similar to that of the index on which
the futures contract is based), or by holding a call option permitting the Fund
to purchase the same futures contract at a price no higher than the price of the
contract written by the Fund (or at a higher price if the difference is
maintained in liquid assets with the Trust's custodian).

When selling a call option on a futures contract, the Fund will
maintain with its custodian (and mark-to-market on a daily basis) assets
determined to be liquid by PIMCO in accordance with procedures established by
the Board of Trustees, that, when added to the amounts deposited with a futures
commission merchant as margin, equal the total market value of the futures
contract underlying the call option. Alternatively, the Fund may cover its
position by entering into a long position in the same futures contract at a
price no higher than the strike price of the call option, by owning the
instruments underlying the futures contract, or by holding a separate

call option permitting the Fund to purchase the same futures contract at a price
not higher than the strike price of the call option sold by the Fund.

When selling a put option on a futures contract, the Fund will maintain
with its custodian (and mark-to-market on a daily basis) assets determined to be
liquid by PIMCO in accordance with procedures established by the Board of
Trustees, that equal the purchase price of the futures contract, less any margin
on deposit. Alternatively, the Fund may cover the position either by entering
into a short position in the same futures contract, or by owning a separate put
option permitting it to sell the same futures contract so long as the strike
price of the purchased put option is the same or higher than the strike price of
the put option sold by the Fund.

To the extent that securities with maturities greater than one year are
used to segregate assets to cover the Fund's obligations under futures contracts
and related options, such use will not eliminate the risk of a form of leverage,
which may tend to exaggerate the effect on net asset value of any increase or
decrease in the market value of the Fund's portfolio, and may require
liquidation of portfolio positions when it is not advantageous to do so.

Risks Associated with Futures and Futures Options. There are several
risks associated with the use of futures contracts and futures options as
hedging techniques. A purchase or sale of a futures contract may result in
losses in excess of the amount invested in the futures contract. There can be no
guarantee that there will be a correlation between price movements in the
hedging vehicle and in the Fund securities being hedged. In addition, there are
significant differences between the securities and futures markets that could
result in an imperfect correlation between the markets, causing a given hedge
not to achieve its objectives. The degree of imperfection of correlation depends
on circumstances such as variations in speculative market demand for futures and
futures options on securities, including technical influences in futures trading
and futures options, and differences between the financial instruments being
hedged and the instruments underlying the standard contracts available for
trading in such respects as interest rate levels, maturities, and
creditworthiness of issuers. A decision as to whether, when and how to hedge
involves the exercise of skill and judgment, and even a well-conceived hedge may
be unsuccessful to some degree because of market behavior or unexpected interest
rate trends.

Futures contracts on U.S. Government securities historically have
reacted to an increase or decrease in interest rates in a manner similar to that
in which the underlying U.S. Government securities reacted. To the extent,
however, that the Fund enters into such futures contracts, the value of such
futures will not vary in direct proportion to the value of the Fund's holdings
of Municipal Bonds. Thus, the anticipated spread between the price of the
futures contract and the hedged security may be distorted due to differences in
the nature of the markets. The spread also may be distorted by differences in
initial and variation margin requirements, the liquidity of such markets and the
participation of speculators in such markets.

Futures exchanges may limit the amount of fluctuation permitted in
certain futures contract prices during a single trading day. The daily limit
establishes the maximum amount that the price of a futures contract may vary
either up or down from the previous day's settlement price at the end of the
current trading session. Once the daily limit has been reached in a futures
contract subject to the limit, no more trades may be made on that day at a price
beyond that limit.

The daily limit governs only price movements during a particular trading day and
therefore does not limit potential losses because the limit may work to prevent
the liquidation of unfavorable positions. For example, futures prices have
occasionally moved to the daily limit for several consecutive trading days with
little or no trading, thereby preventing prompt liquidation of positions and
subjecting some holders of futures contracts to substantial losses.

There can be no assurance that a liquid market will exist at a time when
the Fund seeks to close out a futures or a futures option position, and the Fund
would remain obligated to meet margin requirements until the position is closed.
In addition, many of the contracts discussed above are relatively new
instruments without a significant trading history. As a result, there can be no
assurance that an active secondary market will develop or continue to exist.

Swap Agreements. The Fund may enter into interest rate, index, and credit
swap agreements. The Fund may also enter into options on swap agreements ("swap
options"). These transactions are entered into in an attempt to obtain a
particular return when it is considered desirable to do so, possibly at a lower
cost to the Fund than if the Fund had invested directly in an instrument that
yielded that desired return. Swap agreements are two-party contracts entered
into primarily by institutional investors for periods ranging from a few weeks
to more than one year. In a standard "swap" transaction, two parties agree to
exchange the returns (or differentials in rates of return) earned or realized on
particular predetermined investments or instruments, which may be adjusted for
an interest factor. The gross returns to be exchanged or "swapped" between the
parties are generally calculated with respect to a "notional amount," i.e., the
return on or increase in value of a particular dollar amount invested at a
particular interest rate or in a "basket" of securities representing a
particular index. Forms of swap agreements include interest rate caps, under
which, in return for a premium, one party agrees to make payments to the other
to the extent that interest rates exceed a specified rate, or "cap"; interest
rate floors, under which, in return for a premium, one party agrees to make
payments to the other to the extent that interest rates fall below a specified
rate, or "floor"; and interest rate collars, under which a party sells a cap and
purchases a floor or vice versa in an attempt to protect itself against interest
rate movements exceeding given minimum or maximum levels. A swap option is a
contract that gives a counterparty the right (but not the obligation) to enter
into a new swap agreement or to shorten, extend, cancel or otherwise modify an
existing swap agreement, at some designated future time on specified terms. The
Fund may write (sell) and purchase put and call swap options.

Most swap agreements entered into by the Fund would calculate the
obligations of the parties to the agreement on a "net basis." Consequently, the
Fund's current obligations (or rights) under a swap agreement will generally be
equal only to the net amount to be paid or received under the agreement based on
the relative values of the positions held by each party to the agreement (the
"net amount"). The Fund's current obligations under a swap agreement will be
accrued daily (offset against any amounts owed to the Fund) and any accrued but
unpaid net amounts owed to a swap counterparty will be covered by the
segregation of assets determined to be liquid by PIMCO in accordance with
procedures established by the Board of Trustees, to avoid any potential
leveraging of the Fund's portfolio. Obligations under swap agreements so covered
will not be construed to be "senior securities" for purposes of the Fund's
investment restriction concerning senior securities. The Fund will not enter
into a swap agreement with any

single party if the net amount owed or to be received under existing contracts
with that party would exceed 5% of the Fund's assets.

Whether the Fund's use of swap agreements or swap options will be
successful in furthering its investment objective will depend on PIMCO's ability
to predict correctly whether certain types of investments are likely to produce
greater returns than other investments. Because they are two-party contracts and
because they may have terms of greater than seven days, swap agreements may be
considered to be illiquid. Moreover, the Fund bears the risk of loss of the
amount expected to be received under a swap agreement in the event of the
default or bankruptcy of a swap agreement counterparty. The Fund will enter into
swap agreements only with counterparties that meet certain standards of
creditworthiness (generally, such counterparties would have to be eligible
counterparties under the terms of the Fund's repurchase agreement guidelines).
The swaps market is a relatively new market and is largely unregulated. It is
possible that developments in the swaps market, including potential government
regulation, could adversely affect the Fund's ability to terminate existing swap
agreements or to realize amounts to be received under such agreements.

Depending on the terms of the particular option agreement, the Fund will
generally incur a greater degree of risk when it writes a swap option than it
will incur when it purchases a swap option. When the Fund purchases a swap
option, it risks losing only the amount of the premium it has paid should it
decide to let the option expire unexercised. However, when the Fund writes a
swap option, upon exercise of the option the Fund will become obligated
according to the terms of the underlying agreement.

Certain swap agreements are exempt from most provisions of the Commodity
Exchange Act ("CEA") and, therefore, are not regulated as futures or commodity
option transactions under the CEA, pursuant to regulations approved by the CFTC
effective February 22, 1993. To qualify for this exemption, a swap agreement
must be entered into by "eligible participants," which includes the following,
provided the participants' total assets exceed established levels: a bank or
trust company, savings association or credit union, insurance company,
investment company subject to regulation under the 1940 Act, commodity pool,
corporation, partnership, proprietorship, organization, trust or other entity,
employee benefit plan, governmental entity, broker-dealer, futures commission
merchant, natural person, or regulated foreign person. To be eligible, natural
persons and most other entities must have total assets exceeding $10 million;
commodity pools and employee benefit plans must have assets exceeding $5
million. In addition, an eligible swap transaction must meet three conditions.
First, the swap agreement may not be part of a fungible class of agreements that
are standardized as to their material economic terms. Second, the
creditworthiness of parties with actual or potential obligations under the swap
agreement must be a material consideration in entering into or determining the
terms of the swap agreement, including pricing, cost or credit enhancement
terms. Third, swap agreements may not be entered into and traded on or through a
multilateral transaction execution facility. Swap agreements are likely to
generate capital gains income which would in turn be distributed to
shareholders.

This exemption is not exclusive, and participants may continue to rely on
existing exclusions for swaps, such as the Policy Statement issued in July 1989
which recognized a safe

harbor for swap transactions from regulation as futures or commodity option
transactions under the CEA or its regulations. The Policy Statement applies to
swap transactions settled in cash that (1) have individually tailored terms, (2)
lack exchange-style offset and the use of a clearing organization or margin
system, (3) are undertaken in conjunction with a line of business, and (4)
are not marketed to the public.

Short Sales

The Fund may make short sales of securities as part of its overall
portfolio management strategy involving the use of derivative instruments and to
offset potential declines in long positions in securities in the Fund's
portfolio. A short sale is a transaction in which the Fund sells a security it
does not own in anticipation that the market price of that security will
decline. Although short sale transactions are not currently available with
respect to Municipal Bonds, the Fund may engage in short sales on taxable bonds
and on futures contracts with respect to Municipal Bonds and taxable bonds.

When the Fund makes a short sale on a security, it must borrow the security
sold short and deliver it to the broker-dealer through which it made the short
sale as collateral for its obligation to deliver the security upon conclusion of
the sale. The Fund may have to pay a fee to borrow particular securities and is
often obligated to pay over any accrued interest and dividends on such borrowed
securities.

If the price of the security sold short increases between the time of the
short sale and the time the Fund replaces the borrowed security, the Fund will
incur a loss; conversely, if the price declines, the Fund will realize a capital
gain. Any gain will be decreased, and any loss increased, by the transaction
costs described above. The successful use of short selling may be adversely
affected by imperfect correlation between movements in the price of the security
sold short and the securities being hedged.

To the extent that the Fund engages in short sales, it will provide
collateral to the broker-dealer and (except in the case of short sales "against
the box") will maintain additional asset coverage in the form of segregated
assets determined to be liquid by PIMCO in accordance with procedures
established by the Board of Trustees. The Fund does not intend to enter into
short sales (other than those "against the box") if immediately after such sale
the aggregate of the value of all collateral plus the amount of the segregated
assets exceeds one-third of the value of the Fund's net assets. This percentage
may be varied by action of the Trustees. A short sale is "against the box" to
the extent that the Fund contemporaneously owns, or has the right to obtain at
no added cost, securities identical to those sold short. The Fund will engage in
short selling to the extent permitted by the 1940 Act and rules and
interpretations thereunder.

Illiquid Securities

The Fund may invest up to 15% of its net assets in illiquid securities. The
term "illiquid securities" for this purpose means securities that cannot be
disposed of within seven days in the ordinary course of business at
approximately the amount at which the Fund has valued the securities. Illiquid
securities are considered to include, among other things, written over-the-
counter options, securities or other liquid assets being used as cover for such
options, repurchase

agreements with maturities in excess of seven days, certain loan participation
interests, fixed time deposits which are not subject to prepayment or provide
for withdrawal penalties upon prepayment (other than overnight deposits), and
other securities whose disposition is restricted under the federal securities
laws (other than securities issued pursuant to Rule 144A under the 1933 Act and
certain commercial paper that PIMCO has determined to be liquid under procedures
approved by the Board of Trustees).

Illiquid securities may include privately placed securities, which are sold
directly to a small number of investors, usually institutions. Unlike public
offerings, such securities are not registered under the federal securities laws.
Although certain of these securities may be readily sold, others may be
illiquid, and their sale may involve substantial delays and additional costs.

Portfolio Trading and Turnover Rate

Portfolio trading may be undertaken to accomplish the investment objective
of the Fund in relation to actual and anticipated movements in interest rates.
In addition, a security may be sold and another of comparable quality purchased
at approximately the same time to take advantage of what PIMCO believes to be a
temporary price disparity between the two securities. Temporary price
disparities between two comparable securities may result from supply and demand
imbalances where, for example, a temporary oversupply of certain bonds may cause
a temporarily low price for such bonds, as compared with other bonds of like
quality and characteristics. The Fund may also engage to a limited extent in
short-term trading consistent with its investment objective. Securities may be
sold in anticipation of a market decline (a rise in interest rates) or purchased
in anticipation of a market rise (a decline in interest rates) and later sold,
or to recognize a gain.

A change in the securities held by the Fund is known as "portfolio
turnover." PIMCO manages the Fund without regard generally to restrictions on
portfolio turnover. The use of certain derivative instruments with relatively
short maturities may tend to exaggerate the portfolio turnover rate for the
Fund. Trading in fixed income securities does not generally involve the payment
of brokerage commissions, but does involve indirect transaction costs. The use
of futures contracts may involve the payment of commissions to futures
commission merchants. High portfolio turnover (e.g., greater than 100%) involves
correspondingly greater expenses to the Fund, including brokerage commissions or
dealer mark-ups and other transaction costs on the sale of securities and
reinvestments in other securities. The higher the rate of portfolio turnover of
the Fund, the higher these transaction costs borne by the Fund generally will
be. Transactions in the Fund's portfolio securities may result in realization of
taxable capital gains (including short-term capital gains which are generally
taxed to shareholders at ordinary income tax rates). The trading costs and tax
effects associated with portfolio turnover may adversely affect the Fund's
performance.

The portfolio turnover rate of the Fund is calculated by dividing (a) the
lesser of purchases or sales of portfolio securities for the particular fiscal
year by (b) the monthly average of the value of the portfolio securities owned
by the Fund during the particular fiscal year. In calculating the rate of
portfolio turnover, there is excluded from both (a) and (b) all securities,

including options, whose maturities or expiration dates at the time of
acquisition were one year or less.

Other Investment Companies

The Fund may invest in securities of other open- or closed-end investment
companies that invest primarily in Municipal Bonds of the types in which the
Fund may invest directly. The Fund may invest in other investment companies
either during periods when it has large amounts of uninvested cash, such as the
period shortly after the Fund receives the proceeds of the offering of its
Common Shares or Preferred Shares, during periods when there is a shortage of
attractive, high-yielding Municipal Bonds available in the market, or when PIMCO
believes share prices of other investment companies offer attractive values. The
Fund may invest in investment companies that are advised by PIMCO or its
affiliates to the extent permitted by applicable law and/or pursuant to
exemptive relief from the SEC. As a stockholder in an investment company, the
Fund will bear its ratable share of that investment company's expenses and would
remain subject to payment of the Fund's management fees with respect to assets
so invested. Holders of Common Shares ("Common Shareholders") would therefore be
subject to duplicative expenses to the extent the Fund invests in other
investment companies. PIMCO will take expenses into account when evaluating the
investment merits of an investment in an investment company relative to
available Municipal Bond investments. In addition, the securities of other
investment companies may also be leveraged and will therefore be subject to the
same leverage risks described herein. As described in the Fund's Prospectus in
the section entitled "Risks," the net asset value and market value of leveraged
shares will be more volatile and the yield to shareholders will tend to
fluctuate more than the yield generated by unleveraged shares.

When-Issued, Delayed Delivery and Forward Commitment Transactions

The Fund may purchase or sell securities on a when-issued, delayed
delivery, or forward commitment basis. When such purchases are outstanding, the
Fund will segregate until the settlement date assets determined to be liquid by
PIMCO in accordance with procedures established by the Board of Trustees, in an
amount sufficient to meet the purchase price. Typically, no income accrues on
securities the Fund has committed to purchase prior to the time delivery of the
securities is made, although the Fund may earn income on securities it has
segregated.

When purchasing a security on a when-issued, delayed delivery, or forward
commitment basis, the Fund assumes the rights and risks of ownership of the
security, including the risk of price and yield fluctuations, and takes such
fluctuations into account when determining its net asset value. Because the Fund
is not required to pay for the security until the delivery date, these risks are
in addition to the risks associated with the Fund's other investments. If the
Fund remains substantially fully invested at a time when when-issued, delayed
delivery, or forward commitment purchases are outstanding, the purchases may
result in a form of leverage.

When the Fund has sold a security on a when-issued, delayed delivery, or
forward commitment basis, the Fund does not participate in future gains or
losses with respect to the security. If the other party to a transaction fails
to deliver or pay for the securities, the Fund

could miss a favorable price or yield opportunity or could suffer a loss. The
Fund may dispose of or renegotiate a transaction after it is entered into, and
may sell when-issued, delayed delivery or forward commitment securities before
they are delivered, which may result in a capital gain or loss. There is no
percentage limitation on the extent to which the Fund may purchase or sell
securities on a when-issued, delayed delivery, or forward commitment basis.

Zero Coupon Bonds

The Fund may invest in zero coupon bonds. A zero coupon bond is a bond that
does not pay interest for its entire life. The market prices of zero coupon
bonds are affected to a greater extent by changes in prevailing levels of
interest rates and thereby tend to be more volatile in price than securities
that pay interest periodically. In addition, because the Fund accrues income
with respect to these securities prior to the receipt of such interest, it may
have to dispose of portfolio securities under disadvantageous circumstances in
order to obtain cash needed to pay income dividends in amounts necessary to
avoid unfavorable tax consequences.

INVESTMENT RESTRICTIONS

Fundamental Investment Restrictions

Except as described below, the Fund, as a fundamental policy, may not,
without the approval of the holders of a majority of the outstanding Common
Shares and, if issued, Preferred Shares voting together as a single class, and
of the holders of a majority of the outstanding Preferred Shares voting as a
separate class:

(1) Concentrate its investments in a particular industry, as that term
is used in the Investment Company Act of 1940, as amended, and as
interpreted, modified, or otherwise permitted by regulatory authority
having jurisdiction, from time to time.

(2) Purchase or sell real estate, although it may purchase securities
(including Municipal Bonds) secured by real estate or interests therein, or
securities issued by companies which invest in real estate, or interests
therein.

(3) Purchase or sell commodities or commodities contracts or oil, gas
or mineral programs. This restriction shall not prohibit the Fund, subject
to restrictions described in the Prospectus and elsewhere in this Statement
of Additional Information, from purchasing, selling or entering into
futures contracts, options on futures contracts, forward contracts, or any
interest rate, securities-related or other hedging instrument, including
swap agreements and other derivative instruments, subject to compliance
with any applicable provisions of the federal securities or commodities
laws.

(4) Borrow money or issue any senior security, except to the extent
permitted under the Investment Company Act of 1940, as amended, and as
interpreted, modified, or otherwise permitted by regulatory authority
having jurisdiction, from time to time.

(5) Make loans, except to the extent permitted under the Investment
Company

Act of 1940, as amended, and as interpreted, modified, or otherwise
permitted by regulatory authority having jurisdiction, from time to time.

(6) Act as an underwriter of securities of other issuers, except to
the extent that in connection with the disposition of portfolio securities,
it may be deemed to be an underwriter under the federal securities laws.

For purposes of the foregoing and "Description of Shares--Preferred
Shares--Voting Rights" below, "majority of the outstanding," when used with
respect to particular shares of the Fund (whether voting together as a single
class or voting as a separate class), means (i) 67% or more of such shares
present at a meeting, if the holders of more than 50% of such shares are present
or represented by proxy, or (ii) more than 50% of such shares, whichever is
less.

Unless otherwise indicated, all limitations applicable to the Fund's
investments (as stated above and elsewhere in this Statement of Additional
Information) apply only at the time a transaction is entered into. Any
subsequent change in a rating assigned by any rating service to a security (or,
if unrated, deemed by PIMCO to be of comparable quality), or change in the
percentage of the Fund's assets invested in certain securities or other
instruments, or change in the average maturity or duration of the Fund's
investment portfolio, resulting from market fluctuations or other changes in the
Fund's total assets, will not require the Fund to dispose of an investment until
PIMCO determines that it is practicable to sell or close out the investment
without undue market or tax consequences to the Fund. In the event that ratings
services assign different ratings to the same security, PIMCO will determine
which rating it believes best reflects the security's quality and risk at that
time, which may be the higher of the several assigned ratings.

The Fund's industry concentration policy does not preclude it from focusing
investments in issuers in a group of related industries (such as different types
of utilities).

Under the 1940 Act, a "senior security" does not include any promissory
note or evidence of indebtedness where such loan is for temporary purposes only
and in an amount not exceeding 5% of the value of the total assets of the issuer
at the time the loan is made. A loan is presumed to be for temporary purposes if
it is repaid within sixty days and is not extended or renewed.

To the extent the Fund covers its commitment under a reverse repurchase
agreement (or economically similar transaction) by the segregation of assets
determined by PIMCO to be liquid in accordance with procedures adopted by the
Trustees, equal in value to the amount of the Fund's commitment to repurchase,
such an agreement will not be considered a "senior security" by the Fund and
therefore will not be subject to the 300% asset coverage requirement otherwise
applicable to borrowings by the Fund.

The staff of the SEC has taken the position that purchased over-the-counter
("OTC") options and the assets used as cover for written OTC options are
illiquid securities. Therefore, the Fund has adopted an investment policy
pursuant to which it will not purchase or sell OTC options if, as a result of
such transactions, the sum of: 1) the market value of OTC options currently
outstanding which are held by the Fund, 2) the market value of the underlying
securities covered by OTC call options currently outstanding which were sold by
the Fund and 3) margin deposits on the Fund's existing OTC options on futures
contracts, exceeds 15% of the net assets of the Fund, taken at market value,
together with all other assets of the Fund which are illiquid or are otherwise
not readily marketable. However, if an OTC option is sold by the Fund

to a primary U.S. Government securities dealer recognized by the Federal Reserve
Bank of New York and if the Fund has the unconditional contractual right to
repurchase such OTC option from the dealer at a predetermined price, then the
Fund will treat as illiquid such amount of the underlying securities equal to
the repurchase price less the amount by which the option is "in-the-money"
(i.e., current market value of the underlying securities minus the option's
strike price). The repurchase price with the primary dealers is typically a
formula price which is generally based on a multiple of the premium received for
the option, plus the amount by which the option is "in-the-money." This policy
is not a fundamental policy of the Fund and may be amended by the Trustees
without the approval of shareholders. However, the Fund will not change or
modify this policy prior to the change or modification by the SEC staff of its
position.

The Fund interprets its policies with respect to borrowing and lending to
permit such activities as may be lawful for the Fund, to the full extent
permitted by the 1940 Act or by exemption from the provisions therefrom pursuant
to exemptive order of the SEC.

The Fund intends to apply for ratings for its Preferred Shares from Moody's
and/or S&P. In order to obtain and maintain the required ratings, the Fund may
be required to comply with investment quality, diversification and other
guidelines established by Moody's or S&P. Such guidelines will likely be more
restrictive than the restrictions set forth above. The Fund does not anticipate
that such guidelines would have a material adverse effect on its Common
Shareholders or its ability to achieve its investment objective. The Fund
presently anticipates that any Preferred Shares that it intends to issue would
be initially given the highest ratings by Moody's ("Aaa") or by S&P ("AAA"), but
no assurance can be given that such ratings will be obtained. No minimum rating
is required for the issuance of Preferred Shares by the Fund. Moody's and S&P
receive fees in connection with their ratings issuances.

MANAGEMENT OF THE FUND

Trustees and Officers

The business of the Fund is managed under the direction of the Fund's Board
of Trustees. Subject to the provisions of the Fund's Agreement and Declaration
of Trust (the "Declaration"), its By-Laws and Massachusetts law, the Trustees
have all powers necessary and convenient to carry out this responsibility,
including the election and removal of the Fund's officers.

The Trustees and officers of the Fund, their ages, and a description of
their principal occupations during the past five years are listed below. Except
as shown, each Trustee's and officer's principal occupation and business
experience for the last five years have been with the employer(s) indicated,
although in some cases the Trustee or officer may have held different positions
with such employer(s). Unless otherwise indicated, the business address of the
persons listed below is c/o PIMCO Advisory Services, 1345 Avenue of the
Americas, New York, New York 10105.

Name, Address and Age Position(s) With the Fund Principal Occupation(s) During the Past Five Years

Stephen J. Treadway* Chairman, President, Executive Vice President, PIMCO Advisors; Chairman and Chief Executive
2187 Atlantic Street Trustee Officer, PIMCO Funds Distributors LLC ("PFD"); Trustee, President and
Stamford, CT 06902 Chief Executive Officer, PIMCO Funds: Multi-Manager Series; Chairman,
Age 52 Fixed Income Shares; Trustee, Chairman and President, OCC Cash
Reserves, Inc., OCC Accumulation Trust, PIMCO Municipal Income Fund and
PIMCO New York Municipal Income Fund; Executive Vice President, Value
Advisors LLC; Chairman, Municipal Advantage Fund, Inc; President, The
Emerging Markets Income Fund, Inc., The Emerging Markets Income Fund
II, Inc., The Emerging Markets Floating Rate Fund, Inc., Global
Partners Income Fund, Inc., Municipal Partners Fund, Inc. and Municipal
Partners Fund II, Inc. Formerly, Trustee, President and Chief Executive
Officer of Cash Accumulation Trust; Chairman, The Central European
Value Fund, Inc.; Executive Vice President, Smith Barney Inc.

Paul Belica Trustee Trustee, Fixed Income Shares, PIMCO Municipal Income Fund and PIMCO New
Age 79 York Municipal Income Fund; Manager, Stratigos Fund, L.L.C., Whistler
Fund, L.L.C., Xanthus Fund, L.L.C. and Wynstone Fund, L.L.C.; Director,
Student Loan Finance Corporation, Education Loans, Inc., Goal Funding,
Inc. and Surety Loan Funding Company; Former Advisor, Salomon Smith
Barney Inc.; Former Director, Central European Value Fund, Inc., Deck
House, Inc., a manufacturing company, The Czech Republic Fund, Inc.;
Director, Senior Vice President and Managing Director, Smith Barney,
Harris Upham and Co.; Director and Treasurer, Isabela Home Inc.,
Isabela Housing Company Inc., and Isabela Nursing Home Inc.; Director,
Dreyfus Tax Exempt Bond Fund, Inc., Dreyfus New York State Tax Exempt
Bond Fund, Inc., and Union Dime Savings Bank; Executive Director, New
York State Housing Finance Agency, New York State Medical Care
Facilities Finance Agency, New York State Municipal Bond Bank Agency,
New York State Project Finance Agency and Chairman, State of New York
Mortgage Agency; President, Paul Belica and Company, Inc., a financial
advisory business; Project Manager, Walsh Construction Company; Member,
Ministry of Foreign Affairs of Czechoslovakia in Prague and
Czechoslovak Embassy in Vienna.

Robert E. Connor Vice President, Trustee Trustee, Fixed Income Shares, PIMCO Municipal Income Fund and PIMCO New
Age 66 York Municipal Income Fund; Director, Municipal Advantage Fund, Inc.;
Corporate Affairs Consultant; Formerly, Senior Vice President,
Corporate Office, Salomon Smith Barney Inc.

Newton B. Schott, Jr. Vice President and Executive Vice President, Chief Administrative Officer, Secretary and
2187 Atlantic Street Secretary General Counsel, PFD; Senior Vice President -- Mutual Fund Division,
Stamford, CT 06902 PIMCO Advisors; Vice President and Secretary, PIMCO Funds: Multi-
Age 57

Manager Series; Executive Vice President and Secretary, The Emerging
Markets Income Fund, Inc., The Emerging Markets Income Fund II, Inc.,
The Emerging Markets Floating Rate Fund, Inc., Global Partners Income
Fund, Inc., Municipal Advantage Fund, Inc., Municipal Partners Fund,
Inc. and Municipal Partners Fund II, Inc.; Secretary, Fixed Income
Shares. Formerly, Vice President and Clerk, PIMCO Advisors Funds and
Cash Accumulation Trust.

Brian S. Shlissel Treasurer; Principal Vice President, PIMCO Advisors; Executive Vice President and Treasurer,
Age 36 Financial and Accounting OCC Cash Reserves, Inc. and OCC Accumulation Trust; President, Chief
Officer Executive Officer and Treasurer, Fixed Income Shares; Treasurer,
Municipal Advantage Fund Inc. Formerly, Vice President, Mitchell
Hutchins Asset Management Inc.

Mark V. McCray Vice President Executive Vice President, PIMCO. Formerly, Vice President and co-head
840 Newport Center Drive of municipal bond trading, Goldman Sachs & Co.
Newport Beach, CA 92660
Age 34

Michael B. Zuckerman Assistant Secretary Vice President, PIMCO Advisors L.P.; Secretary, OCC Accumulation Trust
Age 36 and OCC Cash Reserves, Inc. Formerly, Associate, Dechert Price and
Rhoads; Associate Counsel, Metropolitan Life Insurance Company.

* Denotes those Trustees who are "interested persons" (as defined in Section
2(a)(19) of the 1940 Act) of the Fund, PIMCO Advisors, PIMCO or one or more of
the Underwriters. Mr. Treadway is an "interested person" because of his
affiliation with PIMCO Advisors.

As of June 20, 2001, the Fund's officers and Trustees as a group owned
less than 1% of the outstanding Common Shares.

As of June 20, 2001, PIMCO Advisors owned of record 6,667 Common Shares,
representing 100% of the Fund's outstanding shares.

Messrs. Belica, Connor and Treadway also serve as Trustees of
PIMCO Municipal Income Fund and PIMCO New York Municipal Income Fund (together
with the Fund, the "Municipal Funds"), two closed-end funds for which PIMCO
Advisors serves as Investment Manager and PIMCO serves as Portfolio Manager. In
addition, Mr. Belica is a director or Trustee, as the case may be, of one open-
end investment company (with two series) advised by PIMCO Advisors. Mr. Connor
is a director or Trustee, as the case may be, of one open-end investment company
(with two series) and one closed-end investment company advised by PIMCO
Advisors. Mr. Treadway is a director or Trustee, as the case may be, of two
open-end investment companies (which have multiple series) and seven closed-end
investment companies advised by PIMCO Advisors or its affiliates. None of the
independent Trustees has ever been a director, officer, or employee of, or a
consultant to, PIMCO Advisors, PIMCO, any one or more of the Underwriters or any
one or more affiliates of any of the foregoing. As indicated above, certain of
the officers and Trustees of the Fund are affiliated with PIMCO Advisors and/or
PIMCO.

The Common Shareholders of the Fund will elect Trustees at the next annual
meeting of Common Shareholders, unless any Preferred Shares are outstanding at
that time, in which event holders of Preferred Shares, voting as a separate
class, will elect two Trustees and the remaining Trustees shall be elected by
Common Shareholders and holders of Preferred Shares, voting together as a single
class. Holders of Preferred Shares will be entitled to elect a majority of the
Fund's Trustees under certain circumstances. See "Description of
Shares"Preferred Shares"Voting Rights." See "Certain Provisions in the
Declaration of Trust" for a description of the various classes of Trustees and
their terms in office.

Each Municipal Fund has the same Board of Trustees. The Municipal Funds are
expected to hold joint meetings of their Boards of Trustees whenever possible.
Each Trustee, other than those affiliated with PIMCO Advisors or its affiliates,
receives $6,000 for each joint meeting ($2,000 for each Municipal Fund) for the
first four joint meetings in each year and $3,000 for each additional joint
meeting ($1,000 for each Municipal Fund) in such year if the meetings are
attended in person. Trustees receive $1,500 per joint meeting ($500 for each
Municipal Fund) if the meetings are attended telephonically. Members of the
Audit Oversight Committee will receive $1,500 per joint meeting ($500 for each
Municipal Fund) of the Municipal Funds' Audit Oversight Committees if the
meeting takes place on a day other than the day of a regularly scheduled Board
meeting. Trustees will also be reimbursed for meeting-related expenses.

The Municipal Funds will allocate the costs of their joint meetings to the
Municipal Funds pro rata based on the Funds' net assets, including assets
attributable to any Preferred Shares that may be outstanding.

It is estimated that the Trustees will receive the amounts set forth below
for the fiscal year ending April 30, 2002. For the calendar year ended December
31, 2000, the Trustees received the compensation set forth below for serving as
trustees of other funds in the "Fund Complex." The officers and Trustees
affiliated with PIMCO Advisors serve without any compensation from the Fund.

Total Compensation
Estimated Compensation from the from the Fund Complex Paid to the
Fund for the Fiscal Year Ended Trustees for the Calendar Year
Name of Trustee April 30, 2002* Ended December 31, 2000**
--------------- --------------- -----------------------

Paul Belica $ 7,980 $ 2,000

Robert E. Connor $ 7,980 $ 8,550

____________________

* Since the Fund has not completed its first full fiscal year, compensation
is estimated based upon future payments to be made and upon estimated relative
Fund net assets.

** During the year ended December 31, 2000, Mr. Belica served as a
Trustee of one open-end investment company (comprising two separate investment
portfolios) advised by PIMCO Advisors, and Mr. Connor served as a director or
Trustee of one open-end investment company (comprising two separate investment
portfolios) and one closed-end investment company advised by PIMCO Advisors.
These investment companies are considered to be in the same "Fund Complex" as
the Fund.

The Fund has no employees. Its officers are compensated by PIMCO
Advisors and/or PIMCO.

INVESTMENT MANAGER AND PORTFOLIO MANAGER

Investment Manager

PIMCO Advisors serves as investment manager to the Fund pursuant to an
investment management agreement (the "Investment Management Agreement") between
it and the Fund. PIMCO Advisors was organized as a limited partnership under
Delaware law in 1987. Its sole general partner is Pacific-Allianz Partners
LLC. Pacific-Allianz Partners LLC is a Delaware limited liability company with
two members, Allianz GP Sub LLC, a Delaware limited liability company, and
Pacific Asset Management LLC, a Delaware limited liability company. Allianz GP
Sub LLC is a wholly-owned subsidiary of Allianz of America, Inc., which is a
wholly-owned subsidiary of Allianz AG. Pacific Asset Management LLC is a
wholly-owned subsidiary of Pacific Life Insurance Company, which is a
wholly-owned subsidiary of Pacific Mutual Holding Company. Allianz AG is a
German based insurer. Pacific Mutual Holding Company is a Newport Beach,
California based insurance holding company.

The general partner of PIMCO Advisors has substantially delegated its
management and control of PIMCO Advisors to an Executive Committee. The
Executive Committee is comprised of Joachim Faber, Udo Frank, Kenneth M. Poovey,
William S. Thompson, Jr. and Marcus Riess.

PIMCO Advisors is located at 1345 Avenue of the Americas, New York, New
York 10105. PIMCO Advisors and its subsidiary partnerships and limited liability
companies had approximately $275 billion of assets under management as of March
31, 2001.

Agreement with Allianz AG
-------------------------

On May 5, 2000, the general partners of PIMCO Advisors closed the
transactions contemplated by the Implementation and Merger Agreement dated as of
October 31, 1999 ("Implementation Agreement"), as amended March 3, 2000, with
Allianz of America, Inc. ("Allianz of America"), Pacific Asset Management LLC,
PIMCO Partners, LLC, PIMCO Holding LLC, PIMCO Partners, G.P., and other parties
to the Implementation Agreement. As a result of completing these transactions,
PIMCO Advisors is now majority-owned indirectly by Allianz AG, with subsidiaries
of Pacific Life Insurance Company ("Pacific Life") retaining a significant
minority interest. Allianz AG is a German-based insurer. Pacific Life is a
Newport Beach, California-based insurer.

In connection with the closing, Allianz of America entered into a
put/call arrangement for the possible disposition of Pacific Life's indirect
interest in PIMCO Advisors. The put option held by Pacific Life will allow it to
require Allianz of America, on the last business day of each calendar quarter
following the closing, to purchase at a formula-based price all of the PIMCO
Advisors' units owned directly or indirectly by Pacific Life. The call option
held by Allianz of
33

America will allow it, beginning January 31, 2003 or upon a change in control of
Pacific Life, to require Pacific Life to sell or cause to be sold to Allianz of
America, at the same formula-based price, all of the PIMCO Advisors' units owned
directly or indirectly by Pacific Life. Allianz AG's address is Koniginstrasse
28, D-80802, Munich, Germany. Pacific Life's address is 700 Newport Center
Drive, Newport Beach, CA 92660.

Allianz AG, the parent of Allianz of America, is a publicly traded
German company which, together with its subsidiaries, comprises the world's
second largest insurance company as measured by premium income. Allianz AG is a
leading provider of financial services, particularly in Europe, and is
represented in 68 countries world-wide through subsidiaries, branch and
representative offices, and other affiliated entities. As of June 30, 2000, the
Allianz Group (including PIMCO Advisors and PIMCO) had assets under management
of more than $650 billion, and in its last fiscal year wrote approximately $50
billion in gross insurance premiums.

As of the date of this Statement of Additional Information, significant
institutional shareholders of Allianz AG currently include Dresdner Bank AG,
Munich Reinsurance and HypoVereinsbank. Credit Lyonnais, Munich Reinsurance,
HypoVereinsbank and Dresdner Bank AG as well as certain broker-dealers that
might be controlled by or affiliated with these entities, such as DB Alex. Brown
LLC and Dresdner Klienwort Benson North America LLC (collectively, the
"Affiliated Brokers"), may be considered to be affiliated persons of PIMCO
Advisors and PIMCO. Absent an SEC exemption or other relief, the Fund generally
is precluded from effecting principal transactions with the Affiliated Brokers,
and its ability to purchase securities being underwritten by an Affiliated
Broker or a syndicate including an Affiliated Broker or to utilize the
Affiliated Brokers for agency transactions is subject to restrictions. PIMCO
does not believe that the restrictions on transactions with the Affiliated
Brokers described above materially adversely affect its ability to provide
services to the Fund, the Fund's ability to take advantage of market
opportunities, or the Fund's overall performance.

PIMCO Advisors, subject to the supervision of the Board of Trustees, is
responsible for managing, either directly or through others selected by PIMCO
Advisers, the investments of the Fund. PIMCO Advisors also furnishes to the
Board of Trustees periodic reports on the investment performance of the Fund. As
more fully discussed below, PIMCO Advisors has retained PIMCO, its affiliate, to
serve as the Fund's portfolio manager.

Under the terms of the Investment Management Agreement, subject to such
policies as the Trustees of the Trust may determine, PIMCO Advisors, at its
expense, will furnish continuously an investment program for the Fund and will
make investment decisions on behalf of the Fund and place all orders for the
purchase and sale of portfolio securities subject always to the Fund's
investment objective, policies and restrictions; provided that, so long as PIMCO
serves as the portfolio manager for the Fund, PIMCO Advisors' obligation under
the Investment Management Agreement with respect to the Fund is, subject always
to the control of the Trustees, to determine and review with PIMCO the
investment policies of the Fund.

Subject to the control of the Trustees, PIMCO Advisors also manages,
supervises and conducts the other affairs and business of the Fund, furnishes
office space and equipment,

provides bookkeeping and certain clerical services (excluding determination of
the net asset value of the Fund, shareholder accounting services and the
accounting services for the Fund) and pays all salaries, fees and expenses of
officers and Trustees of the Fund who are affiliated with PIMCO Advisors. As
indicated under "Portfolio Transactions--Brokerage and Research Services," the
Fund's portfolio transactions may be placed with broker-dealers which furnish
PIMCO Advisors and PIMCO, without cost, certain research, statistical and
quotation services of value to them or their respective affiliates in advising
the Fund or their other clients. In so doing, the Fund may incur greater
brokerage commissions and other transactions costs than it might otherwise pay.

Pursuant to the Investment Management Agreement, the Fund has agreed to
pay PIMCO Advisors an annual management fee, payable on a monthly basis, at the
annual rate of 0.65% of the Fund's average daily net assets (including net
assets attributable to Preferred Shares) for the services and facilities it
provides. All fees and expenses are accrued daily and deducted before payment of
dividends to investors.

From the commencement of the Fund's operations through June 30, 2009,
PIMCO Advisors has contractually agreed to waive a portion of the management
fees it is entitled to receive from the Fund in the amounts, and for the time
periods, set forth below:

Period Ending Percentage Waived (annual rate Period Ending Percentage Waived (annual rate
June 30 as a percentage of average June 30 as a percentage of average
-------------- daily net assets)/1/ ------------------ daily net assets)/1/
----------------------------------- -------------------------------------

2002/2/ 0.20% 2006 0.20%
2003 0.20% 2007 0.15%
2004 0.20% 2008 0.10%
2005 0.20% 2009 0.05%

__________________________
/1/ Including net assets attributable to Preferred Shares.
/2/ From the commencement of the Fund's operations.

PIMCO Advisors has not agreed to waive any portion of its fees beyond
June 30, 2009.

Except as otherwise described in the Prospectus, the Fund pays, in
addition to the investment management fee described above, all expenses not
assumed by PIMCO Advisors, including, without limitation, fees and expenses of
Trustees who are not "interested persons" of PIMCO Advisors or the Fund,
interest charges, taxes, brokerage commissions, expenses of issue of shares,
fees and expenses of registering and qualifying the Fund and its classes of
shares for distribution under federal and state laws and regulations, charges of
custodians, auditing and legal expenses, expenses of determining net asset value
of the Fund, reports to shareholders, expenses of meetings of shareholders,
expenses of printing and mailing prospectuses, proxy statements and proxies to
existing shareholders, and its proportionate share of insurance premiums and
professional association dues or assessments. The Fund is also responsible for

such nonrecurring expenses as may arise, including litigation in which the Fund
may be a party, and other expenses as determined by the Trustees. The Fund may
have an obligation to indemnify its officers and Trustees with respect to such
litigation.

Portfolio Manager

PIMCO serves as portfolio manager for the Fund pursuant to a portfolio
management agreement (the "Portfolio Management Agreement") between PIMCO and
PIMCO Advisors. Under the Portfolio Management Agreement, subject always to the
control of the Trustees and the supervision of PIMCO Advisors, PIMCO's
obligation is to furnish continuously an investment program for the Fund, to
make investment decisions on behalf of the Fund and to place all orders for the
purchase and sale of portfolio securities and all other investments for the
Fund.

Under the Portfolio Management Agreement, PIMCO Advisors pays a portion
of the fees it receives from the Fund to PIMCO in return for PIMCO's services,
at the maximum annual rate of 0.37% of the Fund's average daily net assets
(including assets attributable to any Preferred Shares that may be outstanding).
PIMCO has contractually agreed to waive a portion of the fee it is entitled to
receive from PIMCO Advisors such that PIMCO will receive 0.25% of the Fund's
average daily net assets from the commencement of Fund operations through June
30, 2006 (i.e., roughly the first 5 years of Fund operations), 0.28% of average
daily net assets in year 6, 0.31% in year 7, and 0.34% in year 8.

Originally organized in 1971, reorganized as a Delaware general
partnership in 1994 and reorganized as a Delaware limited liability company in
2000, PIMCO provides investment management and advisory services to private
accounts of institutional and individual clients and to mutual funds. The
membership interests of PIMCO as of January 1, 2001, were held 94% by PIMCO
Advisors and 6% by the managing directors of PIMCO. As of March 31, 2001, PIMCO
had approximately $220 billion in assets under management. PIMCO is located at
840 Newport Center Drive, Newport Beach, California 92660.

Certain Terms of the Investment Management Agreement and Portfolio
Management Agreement. The Investment Management Agreement and the Portfolio
Management Agreement were each approved by the Trustees of the Fund (including
all of the Trustees who are not "interested persons" of PIMCO Advisors or
PIMCO). The Investment Management Agreement and Portfolio Management Agreement
will each continue in force with respect to the Fund for two years from their
respective dates, and from year to year thereafter, but only so long as their
continuance is approved at least annually by (i) vote, cast in person at a
meeting called for that purpose, of a majority of those Trustees who are not
"interested persons" of PIMCO Advisors, PIMCO or the Fund, and by (ii) the
majority vote of either the full Board of Trustees or the vote of a majority of
the outstanding shares of all classes of the Fund. Each of the Investment
Management Agreement and Portfolio Management Agreement automatically terminates
on assignment. The Investment Management Agreement may be terminated on not less
than 60 days' notice by PIMCO Advisors to the Fund or by the Fund to PIMCO
Advisors. The Portfolio Management Agreement may be terminated on not less than
60 days' notice by PIMCO Advisors

to PIMCO or by PIMCO to PIMCO Advisors, or by the Fund at any time by notice to
PIMCO Advisors and PIMCO.

The Investment Management Agreement and the Portfolio Management
Agreement each provide that PIMCO Advisors or PIMCO, as applicable, shall not be
subject to any liability in connection with the performance of its services
thereunder in the absence of willful misfeasance, bad faith, gross negligence or
reckless disregard of its obligations and duties.

Codes of Ethics

The Fund, PIMCO Advisors and PIMCO have each adopted a separate code of
ethics governing personal trading activities of, as applicable, all Trustees and
officers of the Fund, and directors, officers and employees of PIMCO Advisors
and PIMCO, who, in connection with their regular functions, play a role in the
recommendation of any purchase or sale of a security by the Fund or obtain
information pertaining to such purchase or sale or who have the power to
influence the management or policies of the Fund, PIMCO Advisors or PIMCO, as
applicable. Such persons are prohibited from effecting certain transactions,
allowed to effect certain exempt transactions (including with respect to
securities that may be purchased or held by the Fund), required to preclear
certain security transactions with the applicable compliance officer or his
designee and to report certain transactions on a regular basis. The Fund, PIMCO
Advisors and PIMCO have each developed procedures for administration of their
respective codes. Text-only versions of the codes of ethics can be viewed online
or downloaded from the EDGAR Database on the SEC's internet web site at
www.sec.gov. You may also review and copy those documents by visiting the SEC's
Public Reference Room in Washington, DC. Information on the operation of the
Public Reference Room may be obtained by calling the SEC at 202-942-8090. In
addition, copies of the codes of ethics may be obtained, after mailing the
appropriate duplicating fee, by writing to the SEC's Public Reference Section,
450 5th Street, N.W., Washington, DC 20549-0102 or by e-mail request at
publicinfo@sec.gov.

PORTFOLIO TRANSACTIONS

Investment Decisions and Portfolio Transactions

Investment decisions for the Fund and for the other investment advisory
clients of PIMCO Advisors and PIMCO are made with a view to achieving their
respective investment objectives. Investment decisions are the product of many
factors in addition to basic suitability for the particular client involved
(including the Fund). Some securities considered for investments by the Fund may
also be appropriate for other clients served by PIMCO Advisors and PIMCO. Thus,
a particular security may be bought or sold for certain clients even though it
could have been bought or sold for other clients at the same time. If a purchase
or sale of securities consistent with the investment policies of the Fund and
one or more of these clients served by PIMCO Advisors or PIMCO is considered at
or about the same time, transactions in such securities will be allocated among
the Fund and clients in a manner deemed fair and reasonable by PIMCO Advisors or
PIMCO, as applicable. PIMCO Advisors or PIMCO may aggregate orders for the Fund
with simultaneous transactions entered into on behalf of its other clients so
long as price and transaction expenses are averaged either for that transaction
or for the

day. Likewise, a particular security may be bought for one or more clients when
one or more clients are selling the security. In some instances, one client may
sell a particular security to another client. It also sometimes happens that two
or more clients simultaneously purchase or sell the same security, in which
event each day's transactions in such security are, insofar as possible,
averaged as to price and allocated between such clients in a manner which PIMCO
Advisors or PIMCO believes is equitable to each and in accordance with the
amount being purchased or sold by each. There may be circumstances when
purchases or sales of portfolio securities for one or more clients will have an
adverse effect on other clients.

Brokerage and Research Services

There is generally no stated commission in the case of fixed income
securities, which are traded in the over-the-counter markets, but the price paid
by the Fund usually includes an undisclosed dealer commission or mark-up. In
underwritten offerings, the price paid by the Fund includes a disclosed, fixed
commission or discount retained by the underwriter or dealer. Transactions on
U.S. stock exchanges and other agency transactions involve the payment by the
Fund of negotiated brokerage commissions. Such commissions vary among different
brokers. Also, a particular broker may charge different commissions according to
such factors as the difficulty and size of the transaction.

Subject to the supervision of PIMCO Advisors, PIMCO places all orders
for the purchase and sale of portfolio securities, options, futures contracts
and other instruments for the Fund and buys and sells such securities, options,
futures and other instruments for the Fund through a substantial number of
brokers and dealers. In so doing, PIMCO uses its best efforts to obtain for the
Fund the most favorable price and execution available, except to the extent it
may be permitted to pay higher brokerage commissions as described below. In
seeking the most favorable price and execution, PIMCO, having in mind the Fund's
best interests, considers all factors it deems relevant, including, by way of
illustration, price, the size of the transaction, the nature of the market for
the security, the amount of the commission, the timing of the transaction taking
into account market prices and trends, the reputation, experience and financial
stability of the broker-dealer involved and the quality of service rendered by
the broker-dealer in other transactions.

Subject to the supervision of PIMCO Advisors, PIMCO places orders for
the purchase and sale of portfolio investments for the Fund's account with
brokers or dealers selected by it in its discretion. In effecting purchases and
sales of portfolio securities for the account of the Fund, PIMCO will seek the
best price and execution of the Fund's orders. In doing so, the Fund may pay
higher commission rates than the lowest available when PIMCO believes it is
reasonable to do so in light of the value of the brokerage and research services
provided by the broker effecting the transaction, as discussed below.

It has for many years been a common practice in the investment advisory
business for advisers of investment companies and other institutional investors
to receive research services from broker-dealers which execute portfolio
transactions for the clients of such advisers. Consistent with this practice,
PIMCO may receive research services from many broker-dealers with which PIMCO
places the Fund's portfolio transactions. PIMCO may also receive research or
research credits from brokers which are generated from underwriting commissions
when
38

purchasing new issues of fixed income securities or other assets for the Fund.
These services, which in some cases may also be purchased for cash, include such
matters as general economic and security market reviews, industry and company
reviews, evaluations of securities and recommendations as to the purchase and
sale of securities. Some of these services are of value to PIMCO in advising
various of its clients (including the Fund), although not all of these services
are necessarily useful and of value in managing the Fund. Neither the management
fee paid by the Fund to PIMCO Advisors nor the portfolio management fee paid by
PIMCO Advisors to PIMCO is reduced because PIMCO and its affiliates receive such
services.

As permitted by Section 28(e) of the Securities Exchange Act of 1934,
PIMCO may cause the Fund to pay a broker-dealer which provides "brokerage and
research services" (as defined in such Act) to PIMCO an amount of disclosed
commission for effecting a securities transaction for the Fund in excess of the
commission which another broker-dealer would have charged for effecting that
transaction.

The Fund may use broker-dealers that are affiliates (or affiliates of
affiliates) of the Fund, PIMCO Advisors and/or PIMCO, subject to certain
restrictions discussed above under "Investment Manager and Portfolio
Manager--Investment Adviser--Agreement with Allianz AG."

References to PIMCO in this section would apply equally to PIMCO
Advisors if PIMCO Advisors were to assume portfolio management responsibilities
for the Fund and place orders for the purchase and sale of the Fund's portfolio
investments.

DISTRIBUTIONS

As described in the Fund's Prospectus, initial distributions to Common
Shareholders are expected to be declared approximately 45 days, and paid
approximately 60 to 90 days, from the completion of the offering of the Common
Shares, depending on market conditions. To permit the Fund to maintain a more
stable monthly distribution, the Fund will initially (prior to its first
distribution), and may from time to time thereafter, distribute less than the
entire amount of net investment income earned in a particular period. Such
undistributed net investment income would be available to supplement future
distributions, including distributions which might otherwise have been reduced
by a decrease in the Fund's monthly net income due to fluctuations in investment
income or expenses, or due to an increase in the dividend rate on the Fund's
outstanding Preferred Shares. As a result, the distributions paid by the Fund
for any particular period may be more or less than the amount of net investment
income actually earned by the Fund during such period. Undistributed net
investment income will be added to the Fund's net asset value and,
correspondingly, distributions from undistributed net investment income will be
deducted from the Fund's net asset value.

For tax purposes, the Fund is currently required to allocate net
capital gain and other taxable income, if any, between Common Shares and any
Preferred Shares in proportion to total distributions paid to each class for the
year in which such net capital gain or other taxable income is realized. For
information relating to the impact of the issuance of Preferred Shares on the

distributions made by the Fund to Common Shareholders, see the Fund's Prospectus
under "Preferred Shares and Related Leverage."

While any Preferred Shares are outstanding, the Fund may not declare
any cash dividend or other distribution on its Common Shares unless at the time
of such declaration (1) all accumulated dividends on the Preferred Shares have
been paid and (2) 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
the liquidation value of any outstanding Preferred Shares. This latter
limitation on the Fund's ability to make distributions on its Common Shares
could cause the Fund to incur income and excise tax and, under certain
circumstances, impair the ability of the Fund to maintain its qualification for
taxation as a regulated investment company. See "Tax Matters."

DESCRIPTION OF SHARES

Common Shares

The Fund's Declaration of Trust (the "Declaration") authorizes the
issuance of an unlimited number of Common Shares. The Common Shares will be
issued without par value. All Common Shares of the Fund have equal rights as to
the payment of dividends and the distribution of assets upon liquidation of the
Fund. Common Shares will, when issued, be fully paid and, subject to matters
discussed in "Certain Provisions in the Declaration of Trust - Shareholder
Liability" below, non-assessable, and will have no pre-emptive or conversion
rights or rights to cumulative voting. At any time when the Fund's Preferred
Shares are outstanding, Common Shareholders will not be entitled to receive any
distributions from the Fund unless all accrued dividends on Preferred Shares
have been paid, and unless asset coverage (as defined in the 1940 Act) with
respect to Preferred Shares would be at least 200% after giving effect to such
distributions. See "Preferred Shares" below.

Shares of closed-end investment companies may frequently trade at
prices lower than net asset value. Shares of closed-end investment companies
like the Fund that invest predominantly in investment grade Municipal Bonds have
during some periods traded at prices higher than net asset value and during
other periods traded at prices lower than net asset value. There can be no
assurance that Common Shares or shares of other municipal funds will trade at a
price higher than net asset value in the future. Net asset value will be reduced
immediately following the offering of Common Shares after payment of the sales
load and organization and offering expenses. Net asset value generally increases
when interest rates decline, and decreases when interest rates rise, and these
changes are likely to be greater in the case of a fund having a leveraged
capital structure. Whether investors will realize gains or losses upon the sale
of Common Shares will not depend upon the Fund's net asset value but will depend
entirely upon whether the market price of the Common Shares at the time of sale
is above or below the original

purchase price for the shares. Since the market price of the Fund's Common
Shares will be determined by factors beyond the control of the Fund, the Fund
cannot predict whether the Common Shares will trade at, below, or above net
asset value or at, below or above the initial public offering price.
Accordingly, the Common Shares are designed primarily for long-term investors,
and investors in the Common Shares should not view the Fund as a vehicle for
trading purposes. See "Repurchase of Fund Shares; Conversion to Open-End Fund"
and the Fund's Prospectus under "Preferred Shares and Related Leverage" and "The
Fund's Investments--Municipal Bonds."

Preferred Shares

The Declaration authorizes the issuance of an unlimited number of
Preferred Shares. The Preferred Shares will be issued in one or more classes or
series, with such par value and rights as determined by the Board of Trustees of
the Fund, by action of the Board of Trustees without the approval of the Common
Shareholders.

The Fund's Board of Trustees has indicated its intention to authorize
an offering of Preferred Shares (representing approximately 35% of the Fund's
capital immediately after the time the Preferred Shares are issued) within
approximately one to three months after completion of the offering of Common
Shares, subject to market conditions and to the Board's continuing belief that
leveraging the Fund's capital structure through the issuance of Preferred Shares
is likely to achieve the benefits to the Common Shareholders described in the
Prospectus and this Statement of Additional Information. Although the terms of
the Preferred Shares, including their dividend rate, voting rights, liquidation
preference and redemption provisions, will be determined by the Board of
Trustees (subject to applicable law and the Declaration) if and when it
authorizes a Preferred Shares offering, the Board has stated that the initial
series of Preferred Shares would likely pay cumulative dividends at relatively
shorter-term periods (such as 7 days); by providing for the periodic
redetermination of the dividend rate through an auction or remarketing
procedure. The liquidation preference, preference on distribution, voting rights
and redemption provisions of the Preferred Shares are expected to be as stated
below.

Limited Issuance of Preferred Shares. Under the 1940 Act, the Fund
could issue Preferred Shares with an aggregate liquidation value of up to
one-half of the value of the Fund's total net assets, measured immediately after
issuance of the Preferred Shares. "Liquidation value" means the original
purchase price of the shares being liquidated plus any accrued and unpaid
dividends. In addition, the Fund is not permitted to declare any cash dividend
or other distribution on its Common Shares unless the liquidation value of the
Preferred Shares is less than one-half of the value of the Fund's total net
assets (determined after deducting the amount of such dividend or distribution)
immediately after the distribution. If the Fund sells all the Common Shares and
Preferred Shares discussed in this Prospectus, the liquidation value of the
Preferred Shares is expected to be approximately 35% of the value of the Fund's
total net assets. The Fund intends to purchase or redeem Preferred Shares, if
necessary, to keep that fraction below one-half.

Distribution Preference. The Preferred Shares have complete priority
over the Common Shares as to distribution of assets.

Liquidation Preference. In the event of any voluntary or involuntary
liquidation, dissolution or winding up of the affairs of the Fund, holders of
Preferred Shares will be entitled to receive a preferential liquidating
distribution (expected to equal the original purchase price per share plus
accumulated and unpaid dividends thereon, whether or not earned or declared)
before any distribution of assets is made to holders of Common Shares. After
payment of the full amount of the liquidating distribution to which they are
entitled, holders of Preferred Shares will not be entitled to any further
participation in any distribution of assets by the Fund. A consolidation or
merger of the Fund with or into any Massachusetts business trust or corporation
or a sale of all or substantially all of the assets of the Fund shall not be
deemed to be a liquidation, dissolution or winding up of the Fund.

Voting Rights. In connection with any issuance of Preferred Shares, the
Fund must comply with Section 18(i) of the 1940 Act which requires, among other
things, that Preferred Shares be voting shares. Except as otherwise provided in
the Declaration or the Fund's By-Laws or otherwise required by applicable law,
holders of Preferred Shares will vote together with Common Shareholders as a
single class.

In connection with the election of the Fund's Trustees, holders of
Preferred Shares, voting as a separate class, will also be entitled to elect two
of the Fund's Trustees, and the remaining Trustees shall be elected by Common
Shareholders and holders of Preferred Shares, voting together as a single class.
In addition, if at any time dividends on the Fund's outstanding Preferred Shares
shall be unpaid in an amount equal to two full years' dividends thereon, the
holders of all outstanding Preferred Shares, voting as a separate class, will be
entitled to elect a majority of the Fund's Trustees until all dividends in
arrears have been paid or declared and set apart for payment.

The affirmative vote of the holders of a majority of the outstanding
Preferred Shares, voting as a separate class, shall be required to approve any
action requiring a vote of security holders under Section 13(a) of the 1940 Act
including, among other things, changes in the Fund's investment objective, the
conversion of the Fund from a closed-end to an open-end company, or changes in
the investment restrictions described as fundamental policies under "Investment
Restrictions." The class or series vote of holders of Preferred Shares described
above shall in each case be in addition to any separate vote of the requisite
percentage of Common Shares and Preferred Shares necessary to authorize the
action in question.

The foregoing voting provisions will not apply with respect to the
Fund's Preferred Shares if, at or prior to the time when a vote is required,
such shares shall have been (1) redeemed or (2) called for redemption and
sufficient funds shall have been deposited in trust to effect such redemption.

Redemption, Purchase and Sale of Preferred Shares by the Fund. The
terms of the Preferred Shares may provide that they are redeemable at certain
times, in whole or in part, at the original purchase price per share plus
accumulated dividends, that the Fund may tender for or

purchase Preferred Shares and that the Fund may subsequently resell any shares
so tendered for or purchased. Any redemption or purchase of Preferred Shares by
the Fund will reduce the leverage applicable to Common Shares, while any resale
of shares by the Fund will increase such leverage.

The discussion above describes the Fund's Board of Trustees' present
intention with respect to a possible offering of Preferred Shares. If the Board
of Trustees determines to authorize such an offering, the terms of the Preferred
Shares may be the same as, or different from, the terms described above, subject
to applicable law and the Declaration.

CERTAIN PROVISIONS IN THE DECLARATION OF TRUST

Shareholder Liability

Under Massachusetts law, shareholders could, under certain
circumstances, be held personally liable for the obligations of the Fund.
However, the Declaration contains an express disclaimer of shareholder liability
for acts or obligations of the Fund and requires that notice of such disclaimer
be given in each agreement, obligation or instrument entered into or executed by
the Fund or the Trustees. The Declaration also provides for indemnification out
of the Fund's property for all loss and expense of any shareholder held
personally liable on account 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 such disclaimer is inoperative or
the Fund is unable to meet its obligations, and thus should be considered
remote.

Anti-Takeover Provisions

As described below, the Declaration 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 of Trustees, and
could have the effect of depriving Common Shareholders of opportunities to sell
their Common Shares at a premium over prevailing market prices by discouraging a
third party from seeking to obtain control of the Fund.

Commencing with the first annual meeting of shareholders, the Board of
Trustees will be divided into three classes (Class I, Class II and Class III).
At each annual meeting of shareholders, the term of one class will expire and
each Trustee elected to that class will hold office for a term of three years.
The classification of the Board of Trustees in this manner could delay for an
additional year the replacement of a majority of the Board of Trustees. In
addition, the Declaration provides that a Trustee may be removed only for cause
and only (i) by action of at least seventy-five percent (75%) of the outstanding
shares of the classes or series of shares entitled to vote for the election of
such Trustee, or (ii) by at least seventy-five percent (75%) of the remaining
Trustees.

Except as provided in the next paragraph, the affirmative vote or
consent of at least seventy-five percent (75%) of the Board of Trustees and at
least seventy-five percent (75%) of the shares of the Fund outstanding and
entitled to vote thereon are required to authorize any of the following
transactions (each a "Material Transaction"): (1) a merger, consolidation or
share exchange of the Fund or any series or class of shares of the Fund with or
into any other person or company, or of any such person or company with or into
the Fund or any such series or class of shares; (2) the issuance or transfer by
the Fund or any series or class of shares (in one or a series of transactions in
any twelve-month period) of any securities of the Fund or such series or class
to any other person or entity for cash, securities or other property (or
combination thereof) having an aggregate fair market value of $1,000,000 or
more, excluding sales of securities of the Fund or such series or class in
connection with a public offering, issuances of securities of the Fund or such
series or class pursuant to a dividend reinvestment plan adopted by the Fund and
issuances of securities of the Fund or such series or class upon the exercise of
any stock

subscription rights distributed by the Fund; or (3) a sale, lease,
exchange, mortgage, pledge, transfer or other disposition by the Fund or any
series or class of shares (in one or a series of transactions in any
twelve-month period) to or with any person of any assets of the Fund or such
series or class having an aggregate fair market value of $1,000,000 or more,
except for transactions in securities effected by the Fund or such series or
class in the ordinary course of its business. The same affirmative votes are
required with respect to and any shareholder proposal as to specific investment
decisions made or to be made with respect to the Fund's assets.

Notwithstanding the approval requirements specified in the preceding
paragraph, the Declaration provides that no vote or consent of the Fund's
shareholders will be required to authorize a Material Transaction if the
transaction is approved by a vote of both a majority of the Board of Trustees
and seventy-five percent (75%) of the Continuing Trustees (as defined below), so
long as all other conditions and requirements, if any, provided for in the
Fund's By-Laws and applicable law have been satisfied.

In addition, the Declaration provides that that Fund may be terminated
at any time by vote or consent of at least seventy-five percent (75%) of the
Fund's shares or, alternatively, by vote or consent of both a majority of the
Board of Trustees and seventy-five percent (75%) of the Continuing Trustees (as
defined below).

In certain circumstances, the Declaration also imposes shareholder
voting requirements that are more demanding that those required under the 1940
Act in order to authorize a conversion of the Fund from a closed-end to an
open-end investment company. See "Repurchase of Fund Shares; Conversion to
Open-End Fund" below.

As noted, the voting provisions described above could have the effect
of depriving Common Shareholders of an opportunity to sell their Common Shares
at a premium over prevailing market prices by discouraging a third party from
seeking to obtain control of the Fund in a tender offer or similar transaction.
In the view of the Fund's Board of Trustees, however, these provisions offer
several possible advantages, including: (1) requiring persons seeking control of
the Fund to negotiate with its management regarding the price to be paid for the
amount of Common Shares required to obtain control; (2) promoting continuity and
stability; and (3) enhancing the Fund's ability to pursue long-term strategies

that are consistent with its investment objective and management policies. The
Board of Trustees has determined that the voting requirements described above,
which are generally greater than the minimum requirements under the 1940 Act,
are in the best interests of the Fund's Common Shareholders generally.

A "Continuing Trustee," as used in the discussion above, is any member
of the Fund's Board of Trustees (1) who is not a person or affiliate of a person
who enters or proposes to enter into a Material Transaction with the Fund (such
a person or affiliate being referred to individually as an "Interested Party")
and who has been a member of the Board of Trustees for a period of at least
twelve months (or since the commencement of the Fund's operations, if less than
twelve months), or (2) who is a successor of a Continuing Trustee who is
unaffiliated with an Interested Party and is recommended to succeed a Continuing
Trustees by a majority of the Continuing Trustees then members of the Fund's
Board of Trustees.

The foregoing is intended only as a summary and is qualified in its
entirety by reference to the full text of the Declaration and the Fund's
By-Laws, both of which have been filed as exhibits to the Fund's registration
statement on file with the SEC.

Liability of Trustees

The Declaration provides that the obligations of the Fund are not
binding upon the Trustees of the Fund individually, but only upon the assets and
property of the Fund, and that the Trustees shall not be liable for errors of
judgment or mistakes of fact or law. Nothing in the Declaration, however,
protects a Trustee against any liability 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.

REPURCHASE OF FUND SHARES; CONVERSION TO OPEN-END FUND

The Fund is a closed-end investment company and as such its
shareholders will not have the right to cause the Fund to redeem their shares.
Instead, the Fund's Common Shares will trade in the open market at a price that
will be a function of several factors, including dividend levels (which are in
turn affected by expenses), net asset value, call protection, price, dividend
stability, relative demand for and supply of such shares in the market, general
market and economic conditions and other factors. Shares of a closed-end
investment company may frequently trade at prices lower than net asset value.
The Fund's Board of Trustees regularly monitors the relationship between the
market price and net asset value of the Common Shares. If the Common Shares were
to trade at a substantial discount to net asset value for an extended period of
time, the Board may consider the repurchase of its Common Shares on the open
market or in private transactions, or the making of a tender offer for such
shares. There can be no assurance, however, that the Board of Trustees will
decide to take or propose any of these actions, or that share repurchases or
tender offers, if undertaken, will reduce market discount. The Fund has no
present intention to repurchase its Common Shares and would do so only in the
circumstances described in this section.

Notwithstanding the foregoing, at any time when the Fund's Preferred
Shares are outstanding, the Fund may not purchase, redeem or otherwise acquire
any of its Common Shares unless (1) all accrued Preferred Shares dividends have
been paid and (2) at the time of such purchase, redemption or acquisition, the
net asset value of the Fund's portfolio (determined after deducting the
acquisition price of the Common Shares) is at least 200% of the liquidation
value of the outstanding Preferred Shares (expected to equal the original
purchase price per share plus any accrued and unpaid dividends thereon).

Subject to its investment limitations, the Fund may borrow to finance
the repurchase of shares or to make a tender offer. Interest on any borrowings
to finance share repurchase transactions or the accumulation of cash by the Fund
in anticipation of share repurchases or tenders will reduce the Fund's net
income. Any share repurchase, tender offer or borrowing that might be approved
by the Board of Trustees would have to comply with the Securities Exchange Act
of 1934, as amended, and the 1940 Act and the rules and regulations thereunder.

The Fund's Board of Trustees may also from time to time consider
submitting to the holders of the shares of beneficial interest of the Fund a
proposal to convert the Fund to an open-end investment company. In determining
whether to exercise its sole discretion to submit this issue to shareholders,
the Board of Trustees would consider all factors then relevant, including the
relationship of the market price of the Common Shares to net asset value, the
extent to which the Fund's capital structure is leveraged and the possibility of
re-leveraging, the spread, if any, between the yields on securities in the
Fund's portfolio and interest and dividend charges on Preferred Shares issued by
the Fund and general market and economic conditions.

The Declaration requires the affirmative vote or consent of holders of
at least seventy-five percent (75%) of each class of the Fund's shares entitled
to vote on the matter to authorize a conversion of the Fund from a closed-end to
an open-end investment company, unless the conversion is authorized by both a
majority of the Board of Trustees and seventy-five percent (75%) of the
Continuing Trustees (as defined above under "Certain Provisions in the
Declaration of Trust--Anti-Takeover Provisions"). This seventy-five percent
(75%) shareholder approval requirement is higher than is required under the 1940
Act. In the event that a conversion is approved by the Trustees and the
Continuing Trustees as described above, the minimum shareholder vote required
under the 1940 Act would be necessary to authorize the conversion. Currently,
the 1940 Act would require approval of the holders of a "majority of the
outstanding" Common Shares and, if issued, Preferred Shares voting together as a
single class, and the holders of a "majority of the outstanding" Preferred
Shares voting as a separate class, in order to authorize a conversion.

If the Fund converted to an open-end company, it would be required to
redeem all Preferred Shares then outstanding (requiring in turn that it
liquidate a portion of its investment portfolio), and the Fund's Common Shares
likely would no longer be listed on the New York Stock Exchange. Shareholders of
an open-end investment company may require the company to redeem their shares on
any business day (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 redemption. In order to avoid maintaining
large cash positions or liquidating favorable investments to meet redemptions,
open-end companies typically engage in a continuous offering of their shares.
Open-end companies are thus subject to periodic asset in-flows and out-flows
that can complicate portfolio management.

The repurchase by the Fund of its shares at prices below net asset
value will result in an increase in the net asset value of those shares that
remain outstanding. However, there can be no assurance that share repurchases or
tenders at or below net asset value will result in the Fund's shares trading at
a price equal to their net asset value. Nevertheless, the fact that the Fund's
shares may be the subject of repurchase or tender offers at net asset value from
time to time, or that the Fund may be converted to an open-end company, may
reduce any spread between market price and net asset value that might otherwise
exist.

In addition, a purchase by the Fund of its Common Shares will decrease
the Fund's total assets which would likely have the effect of increasing the
Fund's expense ratio. Any purchase by the Fund of its Common Shares at a time
when Preferred Shares are outstanding will increase the leverage applicable to
the outstanding Common Shares then remaining. See the Fund's Prospectus under
"Risks--Leverage Risk."

Before deciding whether to take any action if the Fund's Common Shares
trade below net asset value, the Board of Trustees would consider all relevant
factors, including the extent and duration of the discount, the liquidity of the
Fund's portfolio, the impact of any action that might be taken on the Fund or
its shareholders and market considerations. Based on these considerations, even
if the Fund's shares should trade at a discount, the Board of Trustees may
determine that, in the interest of the Fund and its shareholders, no action
should be taken.

TAX MATTERS

Taxation of the Fund. The Fund intends to qualify each year as a
regulated investment company under Subchapter M of the Internal Revenue Code of
1986, as amended (the "Code"). In order to qualify for the special tax treatment
accorded regulated investment companies and their shareholders, the Fund must,
among other things:

(a) derive at least 90% of its gross income from dividends, interest,
payments with respect to certain securities loans, and gains from the
sale of stock, securities and foreign currencies, or other income
(including but not limited to gains from options, futures, or forward
contracts) derived with respect to its business of investing in such
stock, securities, or currencies;

(b) distribute with respect to each taxable year at least 90% of the
sum of its taxable net investment income, its net tax-exempt income,
and the excess, if any, of net short-term capital gains over net
long-term capital losses for such year; and

(c) diversify its holdings so that, at the end of each fiscal quarter,
(i) at least 50% of the market value of the Fund's assets is
represented by cash and cash items, U.S. government securities,
securities of other regulated investment companies, and other
securities limited in respect of any one issuer to a value not greater
than 5% of the value of the Fund's total assets and not more than 10%
of the outstanding voting securities of such issuer, and (ii) not more
than 25% of the value of the Fund's assets is invested in the
securities (other than those of the U.S. Government or other regulated
investment companies) of any one issuer or of two or more issuers which
the Fund controls and which are engaged in the same, similar, or
related trades or businesses.

If the Fund qualifies as a regulated investment company that is accorded special
tax treatment, the Fund will not be subject to federal income tax on income
distributed in a timely manner to its shareholders in the form of dividends
(including capital gain dividends).

If the Fund failed to qualify as a regulated investment company
accorded special tax treatment in any taxable year, the Fund would be subject to
tax on its taxable income at corporate rates, and all distributions from
earnings and profits, including any distributions of net tax-exempt income and
net long-term capital gains, would be taxable to shareholders as ordinary
income. In addition, the Fund could be required to recognize unrealized gains,
pay substantial taxes and interest and make substantial distributions before
requalifying as a regulated investment company that is accorded special tax
treatment.

The Fund may retain for investment its net capital gain. However, if
the Fund retains any net capital gain or any investment company taxable income,
it will be subject to tax at regular corporate rates on the amount retained. If
the Fund retains any net capital gain, it may designate the retained amount as
undistributed capital gains in a notice to its shareholders who, if subject to
federal income tax on long-term capital gains, (i) will be required to include
in income for federal income tax purposes, as long-term capital gain, their
share of such undistributed amount, and (ii) will be entitled to credit their
proportionate shares of the tax paid by the Fund on such undistributed amount
against their federal income tax liabilities, if any, and to claim refunds to

the extent the credit exceeds such liabilities. For federal income tax purposes,
the tax basis of shares owned by a shareholder of the Fund will be increased by
an amount equal under current law to the difference between the amount of
undistributed capital gains included in the shareholder's gross income and the
tax deemed paid by the shareholder under clause (ii) of the preceding sentence.
The Fund intends to distribute at least annually to its shareholders all or
substantially all of its net tax-exempt interest and any investment company
taxable income and net capital gain.

Treasury regulations permit a regulated investment company, in
determining its investment company taxable income and net capital gain, to elect
to treat all or part of any net capital loss, any net long-term capital loss or
any net foreign currency loss incurred after October 31 as if it had been
incurred in the succeeding year.

If the Fund fails to distribute in a calendar year at least an amount
equal to the sum of 98% of its ordinary income for such year and 98% of its
capital gain net income for the one-year period ending October 31, plus any
retained amount from the prior year, the Fund will be subject to a 4% excise tax
on the undistributed amounts. A dividend paid to shareholders in January of a
year generally is deemed to have been paid by the Fund on December 31 of the
preceding year, if the dividend was declared and payable to shareholders of
record on a date in October, November or December of that preceding year. The
Fund intends generally to make distributions sufficient to avoid imposition of
the 4% excise tax.

Fund Distributions. Distributions from the Fund (other than
exempt-interest dividends, as discussed below) will be taxable to shareholders
as ordinary income to the extent derived from investment income and net
short-term capital gains. Distributions of net capital gains (that is, the
excess of net gains from the sale of capital assets held more than one year over
net losses from the sale of capital assets held for not more than one year) will
be taxable to shareholders as such, regardless of how long a shareholder has
held the shares in the Fund.

The Fund's expenses attributable to earning tax-exempt income do not
reduce its current earnings and profits; therefore, distributions in excess of
the sum of the Fund's net tax-exempt and taxable income may be treated as
taxable dividends to the extent of the Fund's remaining earnings and profits
(which provides the measure of the Fund's dividend-paying capacity for tax
purposes). Distributions in excess of the sum of the Fund's net tax-exempt and
taxable income could occur, for example, if the Fund's book income exceeded the

sum of its net tax-exempt and taxable income. Differences in the Fund's book
income and its net tax-exempt and taxable income may arise from certain of the
Fund's hedging and investment activities. See "Hedging Transactions" below.

Exempt-interest dividends. The Fund will be qualified to pay
exempt-interest dividends to its shareholders only if, at the close of each
quarter of the Fund's taxable year, at least 50% of the total value of the
Fund's assets consists of obligations the interest on which is exempt from
federal income tax under Code Section 103(a). Distributions that the Fund
properly designates as exempt-interest dividends are treated as interest
excludable from shareholders' gross income for federal income tax purposes but
may be taxable for state and local purposes and, in the case of corporate
shareholders, for federal alternative minimum tax ("AMT") purposes. Because the
Fund intends to qualify to pay exempt-interest dividends, the Fund may be
limited in its ability to enter into taxable transactions involving forward
commitments, repurchase agreements, financial futures and options contracts on
financial futures, tax-exempt bond indices and other assets.

The receipt of exempt-interest dividends may affect the portion, if
any, of a person's Social Security and Railroad Retirement benefits that will be
includable in gross income subject to federal income tax. Up to 85% of Social
Security and Railroad Retirement benefits may be included in gross income in
cases where the recipient's combined income, consisting of adjusted gross income
(with certain adjustments), tax-exempt interest income and one-half of any
Social Security and Railroad Retirement benefits, exceeds an adjusted base
amount ($34,000 for a single individual and $44,000 for individuals filing a
joint return). Shareholders receiving Social Security or Railroad Retirement
benefits should consult their tax advisers.

Under the Code, the interest on certain "private activity bonds" issued
after August 7, 1986 is treated as a preference item and is (after reduction by
applicable expenses) included in federal alternative minimum taxable income.
Under normal market conditions, the Fund will not invest in bonds generating
income potentially subjecting individuals to the alternative minimum tax. The
Fund will, however, furnish to noncorporate shareholders annually a report
indicating the percentage of Fund income, if any, treated as a preference item
for AMT purposes. For corporations, alternative minimum taxable income is
increased by a percentage of the excess of an alternative measure of income that
includes interest on all tax-exempt securities over the amount otherwise
determined to be alternative minimum taxable income. Accordingly, the portion of
the Fund's dividends that would otherwise be tax-exempt to corporate
shareholders may cause such an investor to be subject to the AMT or may increase
the tax liability of an investor who is subject to such tax. As described above,
the portfolio manager will normally avoid investments in bonds potentially
subjecting individuals to the AMT, which generally includes private activity
bonds.

Legislation has been introduced in recent years that would reinstate a
deductible tax (the "Environmental Tax") imposed through tax years beginning
before 1996 at a rate of 0.12% on a corporation's alternative minimum taxable
income (computed without regard to the AMT net operating loss deduction) in
excess of $2,000,000. If the Environmental Tax is reinstated, exempt-interest
dividends that are included in a corporate shareholder's alternative minimum
taxable income may subject corporate shareholders of the Fund to the
Environmental Tax.

The Fund designates distributions made to the share classes as
consisting of a portion of each type of income distributed by the Fund. The
portion of each type of income deemed received by each class of shareholders is
equal to the portion of total Fund distributions received by such class. Thus,
the Fund will designate dividends paid as exempt-interest dividends in a manner
that allocates such dividends between the Preferred and Common Shareholders in
proportion to the total dividends paid to each class during or with respect to
the taxable year, or otherwise as required by applicable law. Long-term capital
gain distributions and other income subject to regular federal income tax will
similarly be allocated between the two (or more) classes. No dividend that the
Fund pays will be increased to compensate for the fact that it may be subject to
state and local taxes.

Dividend and capital gains distributions will be taxable as described
above whether received in cash or in shares. A shareholder whose distributions
are reinvested in shares will be treated as having received a dividend equal to
the fair market value of the new shares issued to the shareholder, or the amount
of cash allocated to the shareholder for the purchase of shares on its behalf.

Part or all of the interest on indebtedness, if any, incurred or
continued by a shareholder to purchase or carry shares of the Fund paying
exempt-interest dividends is not deductible. The portion of interest that is not
deductible is equal to the total interest paid or accrued on the indebtedness,
multiplied by the percentage of the Fund's total distributions (not including
distributions from net long-term capital gains) paid to the shareholder that are

exempt-interest dividends. Under rules used by the Internal Revenue Service (the
"Service") to determine when borrowed funds are considered used for the purpose
of purchasing or carrying particular assets, the purchase of shares may be
considered to have been made with borrowed funds even though such funds are not
directly traceable to the purchase of shares.

Under a published position of the Service, a shareholder's interest
deduction generally will not be disallowed if the average adjusted basis of the
shareholder's tax-exempt obligations (including shares of preferred stock) does
not exceed two percent of the average adjusted basis of the shareholder's trade
or business assets (in the case of most corporations) or portfolio investments
(in the case of individuals). Legislation has been introduced in recent years
that would further limit or repeal this two-percent de minimis exception, thus
reducing the total after-tax yield of a shareholder.

In general, exempt-interest dividends, if any, attributable to interest
received on certain private activity obligations and certain industrial
development bonds will not be tax-exempt to any shareholders who are
"substantial users," within the meaning of Section 147(a) of the Code, of the
facilities financed by such obligations or bonds or who are "related persons" of
such substantial users.

The Fund will inform investors within 60 days of the Fund's fiscal
year-end of the percentage of its income distributions designated as tax-exempt.
The percentage is applied uniformly to all distributions made during the year.
The percentage of income designated as tax-exempt for any particular
distribution may be substantially different from the percentage of the Fund's
income that was tax-exempt during the period covered by the distribution.

Hedging Transactions. If the Fund engages in hedging transactions,
including hedging transactions in options, futures contracts, and straddles, or
other similar transactions, it will be subject to special tax rules (including
constructive sale, mark-to-market, straddle, wash sale, and short sale rules),
the effect of which may be to accelerate income to the Fund, defer losses to the
Fund, cause adjustments in the holding periods of the Fund's securities, convert
long-term capital gains into short-term capital gains or convert short-term
capital losses into long-term capital losses. These rules could therefore affect
the amount, timing and character of distributions to shareholders. Income earned
as a result of the Fund's hedging activities will not be eligible to be treated
as exempt-interest dividends when distributed to shareholders. The Fund will
endeavor

to make any available elections pertaining to such transactions in a manner
believed to be in the best interests of the Fund.

Certain of the Fund's hedging activities are likely to produce a
difference between its book income and the sum of its net tax-exempt and taxable
income. If the Fund's book income exceeds its net tax-exempt income, the
distribution (if any) of such excess will be treated as (i) a taxable dividend
to the extent of the Fund's remaining earnings and profits (including earnings
and profits arising from tax-exempt income), (ii) thereafter as a return of
capital to the extent of the recipient's basis in the shares, and (iii)
thereafter as gain from the sale or exchange of a capital asset. If the Fund's
book income is less than its taxable income, the Fund could be required to make
distributions exceeding book income to qualify as a regulated investment company
that is accorded special tax treatment.

Return of Capital Distributions. If the Fund makes a distribution to
you in excess of its current and accumulated earnings and profits in any taxable
year, the excess distribution will be treated as a return of capital to the
extent of your tax basis in your shares, and thereafter as capital gain. A
return of capital is not taxable, but it reduces your tax basis in your shares,
thus reducing any loss or increasing any gain on a subsequent taxable
disposition by you of your shares.

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. Distributions are taxable to a shareholder even if they are paid from
income or gains earned by the Fund prior to the shareholder's investment (and
thus included in the price paid by the shareholders).

Securities Issued or Purchased at a Discount. The Fund's investment in
securities issued at a discount and certain other obligations will (and
investments in securities purchased at a discount may) require the Fund to
accrue and distribute income not yet received. In order to generate sufficient
cash to make the requisite distributions, the Fund may be required to sell
securities in its portfolio that it otherwise would have continued to hold.

Capital Loss Carryover. Distributions from capital gains are generally
made after applying any available capital loss carryovers.

Sale or Redemption of Shares. The sale, exchange or redemption of Fund
shares may give rise to a gain or loss. In general, any gain or loss realized
upon a taxable disposition of shares will be treated as long-term capital gain
or loss if the shares have been held for more than 12 months. Otherwise the gain
or loss on the taxable disposition of Fund shares will be treated as short-term
capital gain or loss. However, if a shareholder sells shares at a loss within
six months of purchase, any loss will be disallowed for federal income tax
purposes to the extent of any exempt-interest dividends received on such shares.
In addition, any loss realized upon a taxable disposition of shares held for six
months or less but not disallowed as provided in the preceding sentence will be
treated as long-term, rather than short-term, to the extent of any long-term
capital gain distributions received by the shareholder with respect to the
shares. All or a portion of any loss realized upon a taxable disposition of Fund
shares will be disallowed if other shares of the Fund are purchased within 30
days before or after the disposition. In such a case, the basis of the newly
purchased shares will be adjusted to reflect the disallowed loss.

From time to time the Fund may make a tender offer for its Common
Shares. It is expected that the terms of any such offer will require a tendering
shareholder to tender all Common Shares and dispose of all Preferred Shares,
held, or considered under certain attribution rules of the Code to be held, by
such shareholder. Shareholders who tender all Common Shares and dispose of all
Preferred Shares held, or considered to be held, by them will be treated as
having sold their shares and generally will realize a capital gain or loss. If a
shareholder tenders fewer than all of its Common Shares, but retains a
substantial portion of its Preferred Shares, such shareholder may be treated as
having received a taxable dividend upon the tender of its Common Shares. In such
a case, there is a remote risk that non-tendering shareholders will be treated
as having received taxable distributions from the Fund. Likewise, if the Fund
redeems some but not all of the Preferred Shares held by a holder of Preferred
Shares ("Preferred Shareholder") and such shareholder is treated as having
received a taxable dividend upon such redemption, there is a remote risk that
Common Shareholders and non-redeeming Preferred Shareholders will be treated as
having received taxable distributions from the Fund. To the extent that the Fund
recognizes net gains on the liquidation of portfolio securities to meet such
tenders of Common Shares, the Fund will be required to make additional
distributions to its shareholders.

Backup Withholding. The Fund generally is required to withhold and
remit to the U.S. Treasury a percentage of the taxable dividends and other
distributions paid to any individual shareholder who fails to properly furnish
the Fund with a correct taxpayer identification number (TIN), who has under-
reported dividend or interest income, or who fails to certify to the Fund that
he or she is not subject to such withholding. Pursuant to recently enacted tax
legislation, the backup withholding tax rate will be (i) 30.5% for amounts paid
after August 6, 2001 through the end of 2001, (ii) 30% for amounts paid during
2002 and 2003, (iii) 29% for amounts paid during 2004 and 2005, and (iv) 28% for
amounts paid during 2006 through 2010. This legislation will expire and the
backup withholding rate will be 31% for amounts paid after December 31, 2010,
unless Congress enacts tax legislation providing otherwise.

The Service recently revised its regulations affecting the application
to foreign investors of the back-up withholding and withholding tax rules
described above. The new regulations are generally effective for payments made
after December 31, 2000. In some circumstances, the new rules increase the
certification and filing requirements imposed on foreign investors in order to
qualify for exemption from the back-up withholding tax rates and for reduced
withholding tax rates under income tax treaties. Foreign investors in the Fund
should consult their tax advisers with respect to the potential application of
these new regulations.

General. The federal income tax discussion set forth above is for
general information only. Prospective investors should consult their tax
advisers regarding the specific federal tax consequences of purchasing, holding,
and disposing of shares of the Fund, as well as the effects of state, local and
foreign tax law and any proposed tax law changes.

State Tax Matters. Tax matters pertaining to California are set forth
in Appendix B.

PERFORMANCE RELATED AND COMPARATIVE INFORMATION

The Fund may be a suitable investment for a shareholder who is a
resident of California and thinking of adding bond investments to his portfolio

to balance the appreciated stocks that the shareholder is holding. The
suitability of an investment in Common Shares will depend upon a comparison of
the after-tax yield likely to be provided from the Fund with that from
comparable tax-exempt investments (including those not subject to the
alternative minimum tax), and from comparable fully taxable investments, in
light of each such investor"s tax position.

The Fund may quote certain performance-related information and may
compare certain aspects of its portfolio and structure to other substantially
similar closed-end funds as categorized by Lipper, Inc. ("Lipper"), Morningstar
Inc. or other independent services. Comparison of the Fund to an alternative
investment should be made with consideration of differences in features and
expected performance. The Fund may obtain data from sources or reporting
services, such as Bloomberg Financial ("Bloomberg") and Lipper, that the Fund
believes to be generally accurate.

The Fund, in its advertisements, may refer to pending legislation from
time to time and the possible impact of such legislation on investors,
investment strategy and related matters. This would include any tax proposals
and their effect on marginal tax rates and tax-equivalent yields. At any time in
the future, yields and total return may be higher or lower than past yields and
there can be no assurance that any historical results will continue.

Past performance is not indicative of future results. At the time
Common Shareholders sell their shares, they may be worth more or less than their
original investment.

See Appendix C for additional performance related and comparative and
other information.

CUSTODIAN, TRANSFER AGENT AND DIVIDEND DISBURSING AGENT

State Street Bank and Trust Company, 225 Franklin Street, Boston,
Massachusetts 02110, serves as custodian for assets of the Fund. The custodian
performs custodial and fund accounting services.

PFPC Inc., 400 Bellevue Parkway, Wilmington, Delaware 19809, serves as
the Fund's transfer agent, registrar, dividend disbursing agent and shareholder
servicing agent, as well as agent for the Fund's dividend reinvestment plan.

INDEPENDENT ACCOUNTANTS

PricewaterhouseCoopers LLP, 1177 Avenue of the Americas, New York, New
York 10036, serves as independent accountants for the Fund.
PricewaterhouseCoopers LLP provides audit services, tax return preparation and
assistance and consultation in connection with review of SEC filings to the
Fund.

COUNSEL

Ropes & Gray, One International Place, Boston, MA 02110, passes upon
certain legal matters in connection with shares offered by the Fund, and also
acts as counsel to the Fund.

REGISTRATION STATEMENT

A Registration Statement on Form N-2, including any amendments thereto,
relating to the shares of the Fund offered hereby, has been filed by the Fund

with the SEC (the "SEC"), Washington, D.C. The Fund's Prospectus and this
Statement of Additional Information do not contain all of the information set
forth in the Registration Statement, including any exhibits and schedules
thereto. For further information with respect to the Fund and the shares offered
or to be offered hereby, reference is made to the Fund's Registration Statement.
Statements contained in the Fund's Prospectus and this Statement of Additional
Information as to the contents of any contract or other document 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, each such statement being qualified in all respects by such
reference. Copies of the Registration Statement may be inspected without charge
at the SEC's principal office in Washington, D.C., and copies of all or any part
thereof may be obtained from the SEC upon the payment of certain fees prescribed
by the SEC.

REPORT OF INDEPENDENT ACCOUNTANTS

To the Shareholder and Board of Trustees of
PIMCO California Municipal Income Fund

In our opinion, the accompanying statement of assets and liabilities and
the related statement of operations present fairly, in all material respects,
the financial position of PIMCO California Municipal Income Fund (the "Fund") at
June 20, 2001 and the results of its operations for the one day then ended in
conformity with accounting principles generally accepted in the United States of
America. These financial statements are the responsibility of the Fund's
management; our responsibility is to express an opinion on these financial
statements based on our audit. We conducted our audit of these financial
statements in accordance with auditing standards generally accepted in the
United States of America, which 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, assessing
the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audit provides a reasonable basis for our opinion.

PricewaterhouseCoopers LLP
New York, New York
June 21, 2001

FINANCIAL STATEMENTS

PIMCO California Municipal Income Fund
STATEMENT OF ASSETS AND LIABILITIES
June 20, 2001

Assets:
Cash $100,005
Receivable from Investment Manager 18,300

Total Assets 118,305

Liabilities:
Accrued Organizational Expense 18,300

Total Liabilities 18,300

Net Assets (6,667 shares of no par value shares of
beneficial interest issued and outstanding;
unlimited shares authorized) $100,005

Net asset value per share $ 15.00

STATEMENT OF OPERATIONS
ONE DAY ENDED JUNE 20, 2001

Investment Income $ 0

Organizational Expenses 18,300
Less: Reimbursement from Investment Manager (18,300)
Net Expenses 0

Net Investment Income $ 0

NOTES:

1. ORGANIZATION

PIMCO California Municipal Income Fund (the "Fund") was organized as a
Massachusetts business trust on May 10, 2001.The Fund has had no operations to
date other than matters relating to its organization and registration as a
diversified, closed-end management investment company under the Investment
Company Act of 1940, as amended, and the sale and issuance to PIMCO Advisors
L.P. (the"Investment Manager"), an indirect wholly-owned subsidiary of Allianz
AG, of 6,667 shares of beneficial interest at an aggregate purchase price of
$100,005. The Investment Manager has agreed to reimburse all organizational
costs if the public offering is not completed and, if the offering is completed,
will pay all organizational and offering expenses (other than the sales load)
that exceed $0.03 per share.

2. ACCOUNTING POLICIES

The preparation of the financial statements in accordance with accounting
principles generally accepted in the United States of America require management
to make estimates and assumptions that affect the reported amounts of assets and
liabilities at the date of the financial statements and the reported amounts of
income and expenses during the reporting period. Actual results could differ
from these estimates.

3. INVESTMENT MANAGER AND RELATED PARTIES

The Fund has entered into an Investment Management Agreement (the "Agreement")
with the Investment Manager to serve as investment manager to the Fund.
Pursuant to the Agreement, the Fund pays the Investment Manager an annual
management fee, payable monthly, at the annual rate of 0.65% of the Fund's
average daily net assets, inclusive of net assets attributable to any preferred
shares that may be issued. The Investment Manager has retained its affiliate,
Pacific Investment Management Co. LLC ("PIMCO"), to manage the Fund's
investments. The Investment Manager (not the Fund) will pay a portion of the
fees it receives as Investment Manager to PIMCO in return for its services, at
the maximum annual rate of 0.37% of the Fund's average daily net assets,
inclusive of any net assets attributable to any preferred shares issued.

In order to reduce Fund expenses, the Investment Manager has contractually
agreed to reimburse the Fund for fees and expenses at the annual rate of 0.20%
of the Fund's average daily net assets from the commencement of operations
through June 30, 2006, and for a declining amount thereafter through June 30,
2009.

4. FEDERAL INCOME TAXES

The Fund intends to comply with the requirements of the Internal Revenue Code
of 1986, as amended, applicable to regulated investment companies. Accordingly,
no provision for U.S. federal income taxes is required. In addition, by
distributing substantially all of its ordinary income and long-term capital
gains, if any, during each calendar year, the Fund intends not to be subject to
U.S. federal excise tax.

5. CONTINGENT RECEIVABLE FROM INVESTMENT MANAGER

In the event that the public offering of the Fund does not occur, the Investment
Manager has agreed to reimburse the Fund for all organizational expenses.

APPENDIX A

Ratings of Investments

Standard & Poor's a division of The McGraw-Hill Companies, Inc.--A brief
description of the applicable Standard & Poor's ("S&P") rating symbols and their
meanings (as published by S&P) follows:

An S&P issue credit rating is a current opinion of the creditworthiness of an
obligor with respect to a specific financial obligation, a specific class of
financial obligations, or a specific financial program. It takes into
consideration the creditworthiness of guarantors, insurers, or other forms of
credit enhancement on the obligation. The issue credit rating is not a
recommendation to purchase, sell, or hold a financial obligation, inasmuch as it
does not comment as to market price or suitability for a particular investor.

Issue credit ratings are based on current information furnished by the obligors
or obtained by S&P from other sources it considers reliable. S&P does not
perform an audit in connection with any credit rating and may, on occasion, rely
on unaudited financial information. Credit ratings may be changed, suspended, or
withdrawn as a result of changes in, or unavailability of, such information, or
based on other circumstances.

Issue credit ratings can be either long term or short term. Short-term ratings
are generally assigned to those obligations considered short term in the
relevant market. In the U.S., for example, that means obligations with an
original maturity of no more than 365 days - including commercial paper.
Short-term ratings are also used to indicate the creditworthiness of an obligor
with respect to put features on long-term obligations. The result is a dual
rating, in which the short-term ratings address the put feature, in addition to
the usual long-term rating. Medium-term notes are assigned long-term ratings.

Long-term Issue Credit Ratings
------------------------------

Issue credit ratings are based in varying degrees, on the following
considerations:

1. Likelihood of payment - capacity and willingness of the obligor to
meet its financial commitment on an obligation in accordance with
the terms of the obligation;

2. Nature of and provisions of the obligation; and

3. Protection afforded by, and relative position of, the obligation
in the event of bankruptcy, reorganization, or other arrangement
under the laws of bankruptcy and other laws affecting creditors"
rights.

The issue ratings definitions are expressed in terms of default risk. As such,
they pertain to senior obligations of an entity. Junior obligations are
typically rated lower than senior obligations, to reflect the lower priority in
bankruptcy, as noted above.

A-1

AAA

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

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

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

BBB

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

BB, B, CCC, CC, and C

Obligations rated "BB", "B", "CCC", "CC", and "C" are regarded as having
significant speculative characteristics. "BB" indicates the least degree of
speculation and "C" the highest. While such obligations will likely have some
quality and protective characteristics, these may be outweighed by large
uncertainties or major exposures to adverse conditions.

An obligation rated "BB" is less vulnerable to nonpayment than other speculative
issues. However, it faces major ongoing uncertainties or exposure to adverse
business, financial, or economic conditions, which could lead to the obligor's
inadequate capacity to meet its financial commitment on the obligation.

An obligation rated "B" is more vulnerable to nonpayment than obligations rated
"BB", but the obligor currently has the capacity to meet its financial
commitment on the obligation. Adverse business, financial, or economic
conditions will likely impair the obligor's capacity or willingness to meet its
financial commitment on the obligation.

CCC

An obligation rated "CCC" is currently vulnerable to nonpayment and is dependent
upon favorable business, financial, and economic conditions for the obligor to
meet its financial commitment on the obligation. In the event of adverse
business, financial, or economic

A-2

conditions, the obligor is not likely to have the capacity to meet its financial
commitment on the obligation.

An obligation rated "CC" is currently highly vulnerable to nonpayment.

The "C" rating may be used to cover a situation where a bankruptcy petition has
been filed or similar action has been taken, but payments on this obligation are
being continued.

An obligation rated "D" is in payment default. The "D" rating category is used
when payments on an obligation 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 or the taking of a similar action if payments on
an obligation 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.

c The "c" subscript is used to provide additional information to
investors that the bank may terminate its obligation to purchase tendered bonds
if the long-term credit rating of the issuer is below an investment-grade level
and/or the issuer"s bonds are deemed taxable.

p The letter "p" indicates that the rating is provisional. A provisional
rating assumes the successful completion of the project financed by the debt
being rated and indicates that payment of debt service requirements is largely
or entirely dependent upon the successful, 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.

* Continuance of the ratings is contingent upon S&P's receipt of an
executed copy of the escrow agreement or closing documentation confirming
investments and cash flows.

r The "r" highlights derivative, hybrid, and certain other obligations
that S&P believes may experience high volatility or high variability in expected
returns as a result of noncredit risks. Examples of such obligations are
securities with principal or interest return indexed to equities, commodities,
or currencies; certain swaps and options; and interest-only and principal-only
mortgage securities. The absence of an `r" symbol should not be taken as an
indication that an obligation will exhibit no volatility or variability in total
return.

N.R. Not rated.

A-3

Debt obligations of issuers outside the United States and its territories are
rated on the same basis as domestic corporate and municipal issues. The ratings
measure the creditworthiness of the obligor but do not take into account
currency exchange and related uncertainties.

Bond Investment Quality Standards Under present commercial bank regulations
issued by the Comptroller of the Currency, bonds rated in the top four
categories ("AAA", "AA", "BBB", commonly known as investment-grade ratings)
generally are regarded as eligible for bank investment. Also, the laws of
various states governing legal investments impose certain rating or other
standards for obligations eligible for investment by savings banks, trust
companies, insurance companies, and fiduciaries in general.

Short-Term Issue Credit Ratings
-------------------------------

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

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

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

Note rating symbols are as follows:

SP-1 Strong capacity to pay principal and interest. An issue determined to
possess a very strong capacity to pay debt service is given a plus (+)
designation.

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

SP-3 Speculative capacity to pay principal and interest.

A note rating is not a recommendation to purchase, sell, or hold a security
inasmuch as it does not comment as to market price or suitability for a
particular investor. The ratings are based on current information furnished to
S&P by the issuer or obtained by S&P from other sources it considers reliable.
S&P does not perform an audit in connection with any rating and may, on
occasion, rely on unaudited financial information. The ratings may be changed,
suspended, or withdrawn as a result of changes in or unavailability of such
information or based on other circumstances.

Commercial Paper

A-4

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

Ratings are graded into several categories, ranging from "A-1" for the highest
quality obligations to `D" for the lowest. These categories are as follows:

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

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

A-3 A short-term obligation rated "A-3" exhibits adequate protection
parameters. However, adverse economic conditions or changing
circumstances are more likely to lead to a weakened capacity of the
obligor to meet its financial commitment on the obligation.

B A short-term obligation rated "B" is regarded as having significant
speculative characteristics. The obligor currently has the capacity to
meet its financial commitment on the obligation; however, it faces
major ongoing uncertainties which could lead to the obligor's
inadequate capacity to meet its financial commitment on the obligation.

C A short-term obligation rated "C" is currently vulnerable to nonpayment
and is dependent upon favorable business, financial, and economic
conditions for the obligor to meet its financial commitment on the
obligation.

D A short-term obligation rated "D" is in payment default. The "D" rating
category is used when payments on an obligation 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 or the taking of a similar action if payments on an obligation
are jeopardized.

A commercial rating is not a recommendation to purchase, sell, or hold a
security inasmuch as it does not comment as to market price or suitability for a
particular investor. The ratings are based on current information furnished to
S&P by the issuer or obtained by S&P from other sources it considers reliable.
S&P does not perform an audit in connection with any rating and may, on
occasion, rely on unaudited financial information. The ratings may be changed,
suspended, or withdrawn as a result of changes in or unavailability of such
information or based on other circumstances.

Moody's Investors Service, Inc.-

A-5

A brief description of the applicable Moody's Investors Service, Inc.
("Moody's") rating symbols and their meanings (as published by Moody's) follows:

A-6

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 risks appear somewhat larger than in "Aaa" securities.

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

Issues that are secured by escrowed funds held in trust, reinvested in direct,
non-callable U.S. government obligations or non-callable obligations
unconditionally guaranteed by the U.S.

A-7

Government or Resolution Funding Corporation are identified with a # (hatchmark)
symbol, e.g., #Aaa.

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

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

Short-Term Loans
----------------

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 may lack
sufficient margins of protection.

Commercial Paper
----------------

Issuers rated Prime-1 (or related supporting institutions) have a superior
ability for repayment of senior short-term debt obligations. Prime-1 repayment
ability will normally be evidenced by the following characteristics:

- Leading market positions in well-established industries.

- High rates of return on funds employed.

- Conservative capitalization structures with moderate reliance on
debt and ample asset protection.

- Broad margins in earnings coverage of fixed financial charges and
high internal cash generation.

A-8

-- Well-established access to a range of financial markets and assured
sources of alternate liquidity.

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

Issuers rated Prime-3 (or related supporting institutions) have an acceptable
ability for repayment of senior short-term debt obligations. The effect of
industry characteristics and market composition may be more pronounced.
Variability in earnings and profitability may result in changes in the level of
debt protection measurements and the requirement for relatively high financial
leverage. Adequate alternate liquidity is maintained.

Issuers rated Not Prime do not fall within any of the Prime rating categories.

Fitch IBCA, Inc.

A brief description of the applicable Fitch IBCA, Inc. ("Fitch") ratings symbols
and meanings (as published by Fitch) follows:

Long-Term Credit Ratings
------------------------

Investment Grade

AAA

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

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

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

A-9

BBB

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

Speculative Grade

Speculative. "BB" ratings indicate that there is a possibility of credit risk
developing, particularly as the result of adverse economic change over time;
however, business or financial alternatives may be available to allow financial
commitments to be met. Securities rated in this category are not investment
grade.

Highly speculative. "B" ratings indicate that significant credit risk is
present, but a limited margin of safety remains. Financial commitments are
currently being met; however, capacity for continued payment is contingent upon
a sustained, favorable business and economic environment.

CCC, CC, C

High default risk. Default is a real possibility. Capacity for meeting financial
commitments is solely reliant upon sustained, favorable business or economic
developments. A "CC" rating indicates that default of some kind appears
probable. "C" ratings signal imminent default.

DDD, DD, D

Default. The ratings of obligations in this category are based on their
prospects for achieving partial or full recovery in a reorganization or
liquidation of the obligor. While expected recovery values are highly
speculative and cannot be estimated with any precision, the following serve as
general guidelines. "DDD" obligations have the highest potential for recovery,
around 90%-100% of outstanding amounts and accrued interest. "DD" indicates
potential recoveries in the range of 50%-90%, and "D" the lowest recovery
potential, i.e., below 50%. Entities rated in this category have defaulted on
some or all of their obligations. Entities rated "DDD" have the highest prospect
for resumption of performance or continued operation with or without a formal
reorganization process. Entities rated "DD" and "D" are generally undergoing a
formal reorganization or liquidation process; those rated "DD" are likely to
satisfy a higher portion of their outstanding obligations, while entities rated
"D" have a poor prospect for repaying all obligations.

A-10

Short-Term Credit Ratings
-------------------------

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

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

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

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

B Speculative. Minimal capacity for timely payment of financial
commitments, plus vulnerability to near-term adverse changes in
financial and economic conditions.

C High default risk. Default is a real possibility. Capacity for meeting
financial commitments is solely reliant upon a sustained, favorable
business and economic environment.

D Default. Denotes actual or imminent payment default.

"+" or "-" may be appended to a rating to denote relative status within major
rating categories. Such suffixes are not added to the "AAA" long-term rating
category, to categories below "CCC", or to short-term ratings other than "F1".

"NR" indicates that Fitch does not rate the issuer or issue in question.

"Withdrawn": A rating is withdrawn when Fitch deems the amount of information
available to be inadequate for rating purposes, or when an obligation matures,
is called, or refinanced.

Rating Watch: Ratings are placed on RatingWatch to notify investors that there
is a reasonable probability of a rating change and the likely direction of such
change. These are designated as "Positive", indicating a potential upgrade,
"Negative", for a potential downgrade, or "Evolving", if ratings may be raised,
lowered or maintained. Rating Watch is typically resolved over a relatively
short period.

A Rating Outlook indicates the direction a rating is likely to move over a one
to two year period. Outlooks may be positive, stable, or negative. A positive or
negative Rating Outlook does not imply a rating change is inevitable. Similarly,
companies whose outlooks are `stable" could be downgraded before an outlook
moves to positive or negative if circumstances warrant such an

A-11

action. Occasionally, Fitch may be unable to identify the fundamental trend. In
these cases, the Rating Outlook may be described as evolving.

A-12

APPENDIX B

FACTORS PERTAINING TO CALIFORNIA

Under normal market conditions, the Fund will invest substantially all
(at least 90%) of its total assets in municipal bonds which pay interest that,
in the opinion of bond counsel to the issuer (or on the basis of other authority
believed by the Fund"s portfolio manager to be reliable), is exempt from federal
and California income taxes ("California Municipal Bonds"). The California
Municipal Bonds in which the Fund will invest are generally issued by the State
of California, a city in California, or a political subdivision, agency,
authority or instrumentality of such state or city. As a result of this
investment focus the Fund, and consequently investments in the Fund, are
particularly susceptible to economic, regulatory, political and other factors
that affect issuers of these bonds. Among other things, these factors may
increase the risk that issuers of these California Municipal Bonds may default
on their obligations or that the value of the bonds will decrease. The
information set forth below constitutes only a brief summary of a number of
complex factors which may impact issuers of California Municipal Bonds. This
information is derived from sources that are generally available to investors,
including information promulgated by the State's Department of Finance and
State's Treasurer's Office which can be found at www.dof.ca.gov and
www.treasurer.ca.gov, but does not purport to be comprehensive. Such information
has not been independently verified by the Fund, and the Fund assumes no
responsibility for the completeness or accuracy of such information. The
information is intended to give recent historical description and is not
intended to indicate future or continuing trends in the financial or other
positions of California. The summary below does not include all of the
information pertaining to the budget, receipts and disbursements of the State
that would ordinarily be included in various public documents issued thereby,
such as an Official Statement prepared in connection with the issuance of
general obligation bonds of the State. Such an Official Statement, together with
any updates or supplements thereto, may generally be obtained upon request to
the Budget Office of the State.

It should be noted that the financial strength of local California
issuers and the creditworthiness of obligations issued by local California
issuers is not directly related to the financial strength of the State or the
creditworthiness of obligations issued by the State, and there is no obligation
on the part of the State to make payment on such local obligations in the event
of default.

Economic Factors

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

While California's economy is broad, it does have major concentrations
in high technology, aerospace and defense related manufacturing, entertainment,
and real estate and financial services, and may be sensitive to economic factors
affecting those industries. One

B-1

example of such potential sensitivity occurred from mid-1990 to late 1993, when
the State suffered a recession. Construction, manufacturing (especially
aerospace), and financial services, among others, were all severely affected,
particularly in Southern California. More recently, reflective of the nationwide
economic slowdown, the high technology sector of the State's economy has entered
a cyclical downturn. Overall, following the strongest growth in a decade in 1999
and 2000, the State's economy is projected to grow more slowly in 2001.

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

State Finances

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

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

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

B-2

turndown and revised revenue and expenditure projections for the 2001-
02 budget year, the State had Cash and Borrowables of approximately $14.9
billion on April 30, 2001.

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

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

Obligations of the State of California

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

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

B-3

Constitutional Limitations on Taxes, Other Charges and Appropriations

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

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

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

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

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

Limitations on Other Taxes, Fees and Charges. Articles XIIIC and XIIID
to the State Constitution, added by Proposition 218 in 1996, contain a number of
provisions affecting the ability of local agencies to levy and collect both
existing and future taxes, assessments, fees and charges.

B-4

Article XIIIC requires that all new or increased local taxes be
submitted to the electorate before they become effective. Taxes for general
governmental purposes require a majority vote and taxes for specific purposes
require a two-thirds vote.

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

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

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

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

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

B-5

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

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

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

Bond Rating

Three major credit rating agencies, Moody's Investors Service, Inc.,
S&P and Fitch IBCA, Inc., assign ratings to California long-term general
obligation bonds. A general description of Moody's, S&P's and Fitch's ratings of
municipal bonds is set forth in Appendix A to this Statement of Additional
Information. The ratings of Moody's, S&P and Fitch represent

B-6

their opinions as to the quality of the municipal bonds they rate. It should be
emphasized, however, that ratings are general and are not absolute standards of
quality. Consequently, municipal bonds with the same maturity, coupon and rating
may have different yields while obligations with the same maturity and coupon
with different ratings may have the same yield.

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

Legal Proceedings

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

Obligations of Other Issuers

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

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

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

To the extent the State should be constrained by its Article XIIIB
appropriations limit, or its obligation to conform to Proposition 98, or other
fiscal considerations, the absolute level, or the rate of growth, of State
assistance to local governments may be reduced. Any such reductions in State aid
could compound the serious fiscal constraints already experienced by many local

B-7

governments, particularly counties. Los Angeles County, the largest in the
State, was forced to make significant cuts in services and personnel,
particularly in the health care system, in order to balance its budget in
FY1995-96 and FY1996-97. Orange County, which emerged from Federal Bankruptcy
Court protection in June 1996, has significantly reduced county services and
personnel, and faces strict financial conditions following large investment fund
losses in 1994 which resulted in bankruptcy. The ultimate financial impact on
the County and the State cannot be predicted with any certainty.

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

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

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

B-8

Other Considerations

Recent Development Regarding Energy

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

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

The State is intensifying programs for energy conservation, load
management and improved energy efficiency in government, businesses and homes.
Approval for construction of new power generating facilities, especially smaller
and "peaking" power facilities, has been accelerated. A number of new larger
power plants are under construction and in permitting phase, and will come on
line in 2001-2003. In addition, the State is seeking longer term power

B-9

supply contracts at lower costs. The combination of these elements is expected
to lower wholesale electricity costs in the future and promote the financial
recovery of the IOUs.

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

A number of additional plans are under consideration by the State
Legislature, including the authorization of State agencies to own, build or
purchase power generation or transmission facilities and assist energy
conservation efforts. Plans are also being considered to assist the IOUs repay
their debts incurred in purchasing power; these may include a State purchase of
their transmission facilities, potentially funded with revenue bonds. A number
of lawsuits are pending dealing with many aspects of the energy situation in
California, including disputes over the rates which the California Public
Utilities Commission ("PUC") may charge retail customers, financial
responsibility for purchases of power by the IOUs, and various antitrust and
fraud claims against energy suppliers. In May 2001 PUC approved a $5.7 billion
energy rate increase that will impact approximately nine million residential,
industrial and agricultural customers. PUC further acknowledged that more rate
increases may be necessary unless federal regulators find a way to control the
wholesale electricity market.

A number of lawsuits have been filed concerning various aspects of the
current energy situation. These include disputes over rates set by the PUC,
responsibility for electricity and natural gas purchases made by the utilities
and the California Independent System Operator, continuing contractual
obligations of certain small power generators, and antitrust and fraud claims
against various parties.

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

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

B-10

revenues because of damaged facilities or income tax deductions for casualty
losses or property tax assessment reductions.

California Tax Matters

The following summary of certain California tax considerations
applicable to resident individual and corporate Common Shareholders of the Fund
is based upon the advice of Latham & Watkins, special California counsel to the
fund, and the provisions of the applicable California tax law as presently in
effect. These provisions are subject to change by legislative or administrative
action, and any such change may be retroactive with respect to transactions of
the Fund. This summary does not address the taxation of shareholders who are not
residents of California nor does it discuss any local taxes that may be
applicable.

The following is based on the assumptions that the Fund will qualify
under Subchapter M of the Code as a regulated investment company, that it will
satisfy the conditions which will enable it to pay exempt-interest dividends to
shareholders, and that it will distribute all interest it receives and capital
gains it realizes to the shareholders.

The Fund will be subject to the California corporate franchise tax only
if it has a sufficient nexus with California. If it is subject to the California
corporate franchise tax, the Fund does not expect to pay a material amount of
such tax.

If at the close of each quarter of the Fund's taxable year at least 50%
of the value of its total assets consists of obligations that, when held by
individuals, pay interest that is exempt from tax by California under California
or federal law, then distributions by the Fund that are attributable to interest
on any such obligation will not be subject to the California personal income
tax. All other distributions, including distributions attributable to capital
gains, will be includable in gross income for purposes of the California
personal income tax.

Interest on "private activity bonds" is not included in an individual's
income for purposes of the California alternative minimum tax. In addition,
California does not impose personal income tax on Social Security or Railroad
Retirement benefits.

Interest on indebtedness incurred or continued for the purpose of
acquiring or maintaining an investment in the Common Shares will not be
deductible for purposes of the California personal income tax.

All distributions of the Fund, regardless of source, to corporate
Common Shareholders that are subject to the California corporate franchise tax
will be included in gross income for purposes of such tax.

Gain on the sale, exchange, or other disposition of Common Shares will
be subject to the California personal income and corporate franchise tax. In
addition, any loss realized by a holder of Common Shares upon the sale of shares
held for six months or less may be disallowed to the extent of any exempt
interest dividends received with respect to such shares. Moreover, any loss
realized upon the sale of Common Shares within thirty days before or after the
acquisition of other Common Shares may be disallowed under the "wash sale"
rules.

B-11

Common Shares may be subject to the California estate tax if held by a
California decedent at the time of death.

Common Shareholders are advised to consult with their own tax advisers
for more detailed information concerning California tax matters.

B-12

APPENDIX C

PERFORMANCE RELATED AND COMPARATIVE AND OTHER INFORMATION

From time to time, the Fund, PIMCO Advisors and/or PIMCO may report to
shareholders or to the public in advertisements concerning the performance of
PIMCO Advisors and/or PIMCO as adviser to clients other than the Fund, or on the
comparative performance or standing of PIMCO Advisors and/or PIMCO in relation
to other money managers. PIMCO Advisors and/or PIMCO also may provide current or
prospective private account clients, in connection with standardized performance
information for the Fund, performance information for the Fund gross of fees and
expenses for the purpose of assisting such clients in evaluating similar
performance information provided by other investment managers or institutions.
Comparative information may be complied or provided by independent ratings
services or by news organizations. Any performance information, whether related
to the Fund, PIMCO Advisors or PIMCO, should be considered in light of the
Fund's investment objective and policies, characteristics and quality of the
Fund, and the market conditions during the time period indicated, and should not
be considered to be representative of what may be achieved in the future.
Performance information for the Fund may be compared to various unmanaged
indexes.

Organized in 1971, PIMCO is one of the nation's leading bond managers,
providing investment management and advisory services to private accounts of
institutional and individual clients and to mutual funds. As of the date of this
Statement of Additional Information, PIMCO is one of America's largest active
bond managers, with over $220 billion in assets under management and a client
list with over 1,600 institutional clients, including 63 of the largest 100
corporations in America. PIMCO's bond team of 129 bond professionals is headed
by PIMCO founder and Chief Investment Officer Bill Gross, Morningstar's Fixed
Income Manager of the Year for 1998 and 2000.

PIMCO uses a distinctive total return approach, which focuses on income
and uses proprietary analyses to preserve and enhance value. PIMCO has employed
its distinctive total return approach to bond investing since the firm's
inception in 1971, and has applied it to municipal bond investments since 1991.
A fundamental aspect of this approach is the use of multiple strategies to
enhance value and reduce portfolio risk, rather than relying on a limited set of
strategies for success. The Fund is positioned to draw on PIMCO's broad-ranging
fixed-income expertise and extensive resources.

PIMCO's approach begins with the formulation of the firm's long-term
('secular") outlook at its annual firm-wide Secular Forum - a three-day event
bringing PIMCO's team of bond experts together with some of the country's top
thinkers in economics, demographics and other key disciplines. Quarterly
meetings are then held to discuss how this outlook applies to the short term (3
to 12 months) and to forecast global interest rates, economic growth and
inflation. Taken together, PIMCO's long-term outlook and short-term forecast
help set the basic portfolio parameters. A variety of security-specific
strategies, including risk-adjusted yield and credit analyses, are then applied
by the portfolio manager to create value on an after-tax basis. The portfolio
manager will seek to preserve and enhance the value of the Fund's holdings
relative to the municipal bond market generally using in-house analytical models
that test and evaluate the sensitivity of those holdings to changes in interest
rates and yield relationships. PIMCO also

C-1

conducts its own independent credit analysis, rather than relying exclusively on
the findings of rating agencies. The firm focuses its research on individual
issues and sectors it expects to exhibit improving credit profiles that are not
fully reflected in the current credit premiums or where it estimates the credit
spreads more than compensate for the estimated credit and liquidity risks.

Working closely with Mark McCray, the individual at PIMCO who has
primary responsibility for the day-to-day portfolio management of the Fund, will
be PIMCO's credit research group, consisting of 10 credit analysts and three
portfolio managers who have a combined 152 years of professional experience.

The Benefits of Investing in a Closed-End, Exchange-Traded Fund

Investing in a closed-end municipal bond fund offers the potential for
higher tax-exempt yield, and the stock exchange listing is designed to provide
flexibility and potential liquidity. And, since closed-end portfolios are not
subject to the daily cash flow swings of open-end funds, their structure may
present a more favorable platform for the manager to achieve greater tax-exempt
income and enhanced portfolio value.

An Opportune Time to Invest in Municipal Bonds

Municipal Bond Yields at High Levels. As of April 30, 2001, tax-exempt
------------------------------------
municipal bonds were yielding approximately 108% of 10-year Treasury taxable
yields. Since the end of 1989, municipal bonds have, on average, yielded
approximately 94% of yields on 10-year U.S. Treasury bonds.

Relationship between the General Obligation Municipal Bond Buyer Index
and 10-year Treasury Bonds.

10 Year BB40/
Date BB40 Treasury 10 Year

12/29/89 7.25 7.91 91.7
1/31/90 7.45 8.41 88.6
2/28/90 7.4 8.51 87.0
3/30/90 7.52 8.63 87.1
4/30/90 7.74 9.02 85.8
5/31/90 7.53 8.59 87.7
6/29/90 7.5 8.41 89.2
7/31/90 7.35 8.34 88.1
8/31/90 7.64 8.84 86.4
9/28/90 7.79 8.80 88.5
10/31/90 7.71 8.63 89.3
11/30/90 7.47 8.24 90.7
12/31/90 7.47 8.05 92.8
1/31/91 7.39 8.01 92.3
2/28/91 7.36 8.02 91.8
3/28/91 7.34 8.05 91.2
4/30/91 7.26 8.00 90.8
5/31/91 7.21 8.05 89.6
6/28/91 7.21 8.22 87.7
7/31/91 7.11 8.13 87.5
8/30/91 6.97 7.81 89.2
9/30/91 6.89 7.44 92.6
10/31/91 6.85 7.45 91.9
11/29/91 6.9 7.37 93.6
12/31/91 6.66 6.69 99.6
1/31/92 6.72 7.36 91.3
2/28/92 6.76 7.29 92.7
3/31/92 6.76 7.54 89.7
4/30/92 6.74 7.56 89.2
5/29/92 6.63 7.32 90.6
6/30/92 6.49 7.12 91.2
7/31/92 6.19 6.69 92.5
8/31/92 6.35 6.61 96.1
9/30/92 6.39 6.35 100.6
10/30/92 6.68 6.88 97.1
11/30/92 6.42 6.99 91.8
12/31/92 6.39 6.74 94.8
1/29/93 6.31 6.45 97.8
2/26/93 6.01 6.11 98.4
3/31/93 6.04 6.12 98.7
4/30/93 5.96 6.11 97.5
5/28/93 5.89 6.19 95.2
6/30/93 5.76 5.80 99.3
7/30/93 5.78 5.83 99.1
8/31/93 5.6 5.52 101.4
9/30/93 5.47 5.44 100.6
10/29/93 5.48 5.47 100.2
11/30/93 5.65 5.83 96.9
12/31/93 5.52 5.83 94.7
1/31/94 5.45 5.64 96.6
2/28/94 5.77 6.14 94.0
3/31/94 6.36 6.75 94.2
4/29/94 6.37 7.08 90.0
5/31/94 6.4 7.20 88.9
6/30/94 6.47 7.38 87.7
7/29/94 6.33 7.16 88.4
8/31/94 6.36 7.22 88.1
9/30/94 6.58 7.64 86.1
10/31/94 6.85 7.83 87.5
11/30/94 7.16 7.95 90.1
12/30/94 6.92 7.88 87.8
1/31/95 6.66 7.65 87.1
2/28/95 6.42 7.21 89.0
3/31/95 6.37 7.19 88.6
4/28/95 6.35 7.19 88.3
5/31/95 6.1 6.32 96.5
6/30/95 6.28 6.17 101.8
7/31/95 6.19 6.53 94.8
8/31/95 6.11 6.39 95.6
9/29/95 6.07 6.28 96.7
10/31/95 5.91 6.09 97.0
11/30/95 5.74 5.75 99.8
12/29/95 5.56 5.57 99.8
1/31/96 5.57 5.60 99.5
2/29/96 5.71 6.12 93.3
3/29/96 5.96 6.32 94.3
4/30/96 6.05 6.64 91.1
5/31/96 6.09 6.84 89.0
6/28/96 6.01 6.71 89.6
7/31/96 5.98 6.79 88.1
8/30/96 6.02 6.94 86.7
9/30/96 5.89 6.70 87.9
10/31/96 5.83 6.35 91.8
11/29/96 5.66 6.04 93.7
12/31/96 5.72 6.46 88.5
1/31/97 5.82 6.54 89.0
2/28/97 5.76 6.54 88.1
3/31/97 5.95 6.91 86.1
4/30/97 5.89 6.71 87.8
5/30/97 5.74 6.66 86.2
6/30/97 5.69 6.50 87.5
7/31/97 5.4 6.01 89.9
8/29/97 5.55 6.33 87.7
9/30/97 5.47 5.97 91.6
10/31/97 5.4 5.71 94.6
11/28/97 5.36 5.80 92.4
12/31/97 5.26 5.68 92.6
1/30/98 5.19 5.44 95.3
2/27/98 5.24 5.62 93.2
3/31/98 5.27 5.66 93.1
4/30/98 5.39 5.67 95.1
5/29/98 5.22 5.55 94.1
6/30/98 5.22 5.43 96.1
7/31/98 5.26 5.54 95.0
8/31/98 5.11 5.15 99.3
9/30/98 5.04 4.46 112.9
10/30/98 5.13 4.61 111.2
11/30/98 5.1 4.72 108.0
12/31/98 5.16 4.64 111.2
1/29/99 5.09 4.65 109.4
2/26/99 5.17 5.52 93.7
3/31/99 5.23 5.51 94.9
4/30/99 5.28 5.51 95.9
5/28/99 5.37 5.63 95.4
6/30/99 5.55 5.81 95.6
7/30/99 5.59 5.90 94.7
8/31/99 5.78 5.97 96.8
9/30/99 5.89 5.89 100.1
10/29/99 6.08 6.29 96.6
11/30/99 6.11 6.40 95.5
12/31/99 6.22 6.67 93.3
1/31/00 6.31 6.82 92.5
2/29/00 6.17 6.41 96.2
3/31/00 5.97 6.56 91.0
4/28/00 6 6.71 89.4
5/31/00 6.13 6.74 90.9
6/30/00 5.91 6.47 91.4
7/31/00 5.79 6.43 90.0
8/31/00 5.72 5.73 99.8
9/29/00 5.82 5.80 100.4
10/31/00 5.74 6.00 95.7
11/30/00 5.72 5.68 100.7
12/29/00 5.47 5.33 102.6
1/31/01 5.44 5.12 106.2
2/28/01 5.4 4.90 110.2
3/30/01 5.3 4.92 107.7
4/30/01 5.49 5.05 108.6
Average 93.9

Chart Source: FactSet. The General Obligation Municipal Bond Buyer
Index is an unmanaged index and contains 20 general obligation municipal bonds
with 10-year maturities. The yield quoted above is a simple unweighted average
of the estimated yields of bonds in the index if those bonds were sold at par
value. Unlike the Funds, the Index carries no management fees, account charges
or other expenses. It is not possible to invest directly in an index. 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
levels. Municipal bonds are

C-2

not guaranteed by the U.S. Government. In addition to general obligation bonds,
municipal obligations can include revenue and insured bonds. The historical
yield information shown in the chart does not predict how municipal bonds or 10-
year U.S. Treasury bonds will perform in the future or how the Funds would have
performed under similar market conditions. For example, recent political
developments, including proposed federal tax legislation, could adversely effect
the yield of municipal bonds relative to U.S. Treasury bonds and other fixed
income investments in future periods.

Steep Yield Curve Creates Positive Environment for Leveraged Funds. As
------------------------------------------------------------------
of the date of this Statement of Additional Information, Federal Reserve
interest rate cuts have recently created a steeper yield curve. Lower short-term
interest rates mean that leveraged funds will likely pay lower dividends to
preferred shareholder, leaving more tax-exempt income to pay common shareholder
dividends. PIMCO anticipates that still more Federal Reserve rate cuts are
ahead, although there can be no guarantee.

What Tax-Free Income Could Mean to You

The chart below will assist you in more easily comparing municipal
investments, such as the Fund, with taxable investments. It is designed to show
you how much income you would have to receive from a taxable investment to earn
as much as you would by investing in a tax-free municipal bond fund.

Funds investing in bonds issued by a single state attempt to provide
income that is free from both federal and state income taxes for residents in
that state. This may be especially attractive for residents of high income tax
states like California and New York. For example, to equal a California
investor's tax-free yield of 6.00%, a person in the 37.4% combined federal and
state tax bracket would need to find a taxable investment yielding 9.58% to
provide the same amount of after-tax income.

---------------------------------------------------------------------------------------------------------------------------
A tax-exempt yield of
5.00% 5.50% 6.00% 6.50% 7.00%
---------------------------------------------------------------------------------------------------------------------------
Combined Tax Brackets Equals a taxable investment yield of
---------------------------------------------------------------------------------------------------------------------------
Federal Only
---------------------------------------------------------------------------------------------------------------------------

30.50% 7.19% 7.91% 8.63% 9.35% 10.07%
---------------------------------------------------------------------------------------------------------------------------
35.50% 7.75% 8.53% 9.30% 10.08% 10.85%
---------------------------------------------------------------------------------------------------------------------------
39.10% 8.21% 9.03% 9.85% 10.67% 11.49%
---------------------------------------------------------------------------------------------------------------------------

Federal & California Double Tax-Free
---------------------------------------------------------------------------------------------------------------------------
36.96% 7.93% 8.72% 9.52% 10.31% 11.10%
---------------------------------------------------------------------------------------------------------------------------
41.50% 8.55% 9.40% 10.26% 11.11% 11.97%
---------------------------------------------------------------------------------------------------------------------------
44.76% 9.05% 9.96% 10.86% 11.77% 12.67%
---------------------------------------------------------------------------------------------------------------------------

Federal & New York (State) Double Tax-Free
---------------------------------------------------------------------------------------------------------------------------
35.26% 7.72% 8.50% 9.27% 10.04% 10.81%
---------------------------------------------------------------------------------------------------------------------------
39.92% 8.32% 9.15% 9.99% 10.82% 11.65%
---------------------------------------------------------------------------------------------------------------------------
43.27% 8.81% 9.70% 10.58% 11.46% 12.34%
---------------------------------------------------------------------------------------------------------------------------

New York City Triple Tax-Free
---------------------------------------------------------------------------------------------------------------------------
37.80% 8.04% 8.84% 9.65% 10.45% 11.25%
---------------------------------------------------------------------------------------------------------------------------
42.27% 8.66% 9.53% 10.39% 11.26% 12.13%
---------------------------------------------------------------------------------------------------------------------------
45.49% 9.17% 10.09% 11.01% 11.92% 12.84%
---------------------------------------------------------------------------------------------------------------------------

C-3

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

45.49% 9.17% 10.09% 11.01% 11.93% 12.84%
---------------------------------------------------------------------------------------------------------------------------

The tax-free yields used in this table are for illustration only, and
do not represent or predict the tax-free yield of the Fund. The table reflects
marginal federal and state tax rates effective after June 30, 2001, except
California which reflects 2000 marginal CA and federal tax rates effective after
June 30, 2001. Under the Economic Growth and Tax Relief Reconciliation Act of
2001, the current 30.5%, 35.5% and 39.1% federal income tax rates are phased
down over six years to 28%, 33% and 35%, respectively. Each of the current rates
will be reduced by one-half percentage point for the 2002 tax year, and an
additional one percentage point in 2004. The remainder of the reduction will
occur in 2006. This reduction in federal income tax rates will reduce the
advantage you gain from investing in tax-free investment vehicles. The combined
federal and state tax rates shown here are among the highest possible for each
state. There are lower combined rates. Residents of states other than California
and New York pay taxes to their states at different rates than those shown
above. The lower your combined federal and state tax rate, the less advantage
you gain from investing in tax-free investment vehicles. A federal tax benefit
is provided for the state and city income tax paid. The tables do not take into
account, among other things, the effects of the federal alternative minimum tax
or capital gains taxes. In addition, the Fund may invest in securities that are
not exempt from federal or state income taxes, although they do not intend to do
so under normal circumstances. Consult your financial advisor for more
information.

C-4