-----BEGIN PRIVACY-ENHANCED MESSAGE-----
Proc-Type: 2001,MIC-CLEAR
Originator-Name: webmaster@www.sec.gov
Originator-Key-Asymmetric:
 MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen
 TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB
MIC-Info: RSA-MD5,RSA,
 KBbAvWTYdgNLFF/W5FZnAzeYZ9UEmruJDrFzWEK1T7OHPJ7iYq+8ZWbNKF73FYox
 ssxB0g6Y5jW82sNGunAJtw==

<SEC-DOCUMENT>/in/edgar/work/20000727/0000929638-00-000138/0000929638-00-000138.txt : 20000921
<SEC-HEADER>0000929638-00-000138.hdr.sgml : 20000921
ACCESSION NUMBER:		0000929638-00-000138
CONFORMED SUBMISSION TYPE:	N-2
PUBLIC DOCUMENT COUNT:		6
FILED AS OF DATE:		20000727

FILER:

	COMPANY DATA:	
		COMPANY CONFORMED NAME:			MFS MUNICIPAL INCOME TRUST
		CENTRAL INDEX KEY:			0000801961
		STANDARD INDUSTRIAL CLASSIFICATION:	 [
]		IRS NUMBER:				046554822
		STATE OF INCORPORATION:			MA
		FISCAL YEAR END:			1031
</COMPANY-DATA>

		FILING VALUES:
			FORM TYPE:		N-2
			SEC ACT:		
			SEC FILE NUMBER:	333-42364
			FILM NUMBER:		680243
</FILING-VALUES>

			FILING VALUES:
				FORM TYPE:		N-2
				SEC ACT:		
				SEC FILE NUMBER:	811-04841
				FILM NUMBER:		680244
</FILING-VALUES>

				BUSINESS ADDRESS:	
					STREET 1:		500 BOYLSTON ST
					STREET 2:		15TH FLOOR
					CITY:			BOSTON
					STATE:			MA
					ZIP:			02116
					BUSINESS PHONE:		6179545268
</BUSINESS-ADDRESS>

					MAIL ADDRESS:	
						STREET 1:		500 BOYLSTON STREET
						STREET 2:		15TH FLOOR
						CITY:			BOSTON
						STATE:			MA
						ZIP:			02116
</MAIL-ADDRESS>
</FILER>
</SEC-HEADER>
<DOCUMENT>
<TYPE>N-2
<SEQUENCE>1
<FILENAME>0001.txt
<DESCRIPTION>MFS MUNICIPAL INCOME TRUST N-2
<TEXT>

   AS FILED WITH THE U.S. SECURITIES AND EXCHANGE COMMISSION ON JULY 27, 2000

                       SECURITIES ACT FILE NO. 333-_____
                    INVESTMENT COMPANY ACT FILE NO. 811-4841
                    U.S. SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                                    FORM N-2

                        (Check appropriate box or boxes)

          REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 [X]

                        Pre-Effective Amendment No.                   [ ]
                                  -----------

                        Post-Effective Amendment No.                  [ ]
                                  -----------

                                     and/or

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

                              Amendment No. 10                        [X]

                           MFS MUNICIPAL INCOME TRUST
               (Exact Name of Registrant as Specified in Charter)
                              500 Boylston Street
                          Boston, Massachusetts 02116
                    (Address of Principal Executive Offices)

                                 (617) 954-5000
              (Registrant's Telephone Number, including Area Code)
<TABLE>
<CAPTION>
<S>                                 <C>                                <C>

- ----------------------------------- ---------------------------------- ----------------------------------
Name and Address of
- ----------------------------------- ---------------------------------- ----------------------------------
Agent for Service                   Copies to                          Copies to
- ----------------------------------- ---------------------------------- ----------------------------------
Stephen E. Cavan                    Jeremiah J. Bresnahan, Jr.         Cynthia G. Cobden, Esq.
- ----------------------------------- ---------------------------------- ----------------------------------
c/o Massachusetts Financial         Bingham Dana LLP                   Simpson Thacher & Bartlett
Services Company                    150 Federal Street                 425 Lexington Avenue
- ----------------------------------- ---------------------------------- ----------------------------------
500 Boylston Street                 Boston, Massachusetts  02110       New York, New York  10017
- ----------------------------------- ---------------------------------- ----------------------------------
Boston, Massachusetts  02116
- ----------------------------------- ---------------------------------- ----------------------------------
</TABLE>


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

    If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, as amended (the "Securities Act"), other than securities offered only in
connection with dividend or interest reinvestment plans, check the following
box. [ ]

<PAGE>


<TABLE>
<CAPTION>

        CALCULATION OF REGISTRATION FEE UNDER THE SECURITIES ACT OF 1933
<S>                      <C>                <C>                     <C>                    <C>

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

Municipal Auction        40 Shares          $25,000                 $1,000,000             $264
Rate Cumulative
Preferred Shares
No Par Value
Per Share

- ---------------------------
(1) Estimated solely for purposes of calculating the registration fee.
(2) Transmitted to the designated lockbox at Mellon Bank in Pittsburgh, Pennsylvania.
</TABLE>

    THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.


<PAGE>


THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY
NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN
OFFER TO SELL THESE SECURITIES AND IS NOT SOLICITING AN OFFER TO BUY THESE
SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.


                 SUBJECT TO COMPLETION, DATED ________ __, 2000

PROSPECTUS

                                    $------

                           MFS MUNICIPAL INCOME TRUST

   MUNICIPAL AUCTION RATE CUMULATIVE PREFERRED ("MUNICIPAL PREFERRED") SHARES
                            ______ SHARES, SERIES W
                            ______ SHARES, SERIES F
                    LIQUIDATION PREFERENCE $25,000 PER SHARE

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

    MFS Municipal Income Trust (the "Trust") is selling ______ Series W and
______ Series F Municipal Auction Rate Cumulative Preferred Shares ("Municipal
Preferred"). The Trust is a non-diversified, closed-end management investment
company that, as its investment objective, seeks to provide high current income
exempt from federal income taxes. The Trust seeks to achieve its investment
objective by investing primarily (i.e., at least 80% of its assets under normal
circumstances) in debt securities issued by or on behalf of states, territories
and possessions of the United States, and the District of Columbia and their
political subdivisions, agencies or instrumentalities, the interest on which is
exempt from federal income tax and, normally, at least 65% of its assets in
tax-exempt securities which offer a current yield above that generally
available on tax-exempt securities in the three highest rating categories of
the recognized rating agencies (commonly known as "junk bonds" if rated below
the four highest categories of recognized agencies).

    Investors in Municipal Preferred shares will be entitled to receive cash
dividends at an annual rate that may vary for the successive dividend periods
for such shares. The dividend rate on the Series W Municipal Preferred shares
for the period from and including the date of issue to but excluding ________
__, 2000 will be ____% per year. The dividend rate on the Series F Municipal
Preferred shares for the period from and including the date of issue to but
excluding ________ __, 2000 will be ____% per year. For each subsequent period
for a series, the auction agent will determine the dividend rate for a
particular period by an auction conducted on the business day prior to that
period. Investors in shares of Municipal Preferred may participate in auctions
through their broker-dealers in accordance with the procedures specified
herein. The Trust may redeem shares of Municipal Preferred as described under
"Description of Municipal Preferred -- Redemption."

    This Prospectus sets forth concisely the information about the Trust that a
prospective investor should know before investing, including information about
risks. You should read this Prospectus before you invest and keep it for future
reference. The Trust's Statement of Additional Information, dated ________ __,
2000, has been filed with the Securities and Exchange Commission and contains
additional information about the Trust and is incorporated by reference into
(which means it is considered to be a part of) this Prospectus. You may obtain
a free copy by calling Massachusetts Financial Services Company at
1-800-637-2304. See page __ of this Prospectus for a table of contents of the
Statement of Additional Information.

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


<PAGE>

    INVESTING IN THE SHARES OF MUNICIPAL PREFERRED INVOLVES CERTAIN RISKS. SEE
THE "RISK FACTORS AND SPECIAL CONSIDERATIONS" SECTION BEGINNING ON PAGE __ OF
THIS PROSPECTUS.

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



                                                       PER SHARE       TOTAL

Public Price......................................       $25,000     $________
Sales Load........................................     $________     $________
Proceeds to Trust (before expenses)*..............     $________     $________

*Offering Expenses to be paid by the Trust are estimated to be $___________.

    The public offering price per share will be increased by the amount of
dividends, if any, that have accumulated from the date the shares of Municipal
Preferred are first issued.

    The underwriter is offering the shares of Municipal Preferred subject to
various conditions. The underwriter expects to deliver the shares to
purchasers, in book-entry form through The Depository Trust Company, on or
about ________ __, 2000.

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

                              SALOMON SMITH BARNEY
________ __, 2000


<PAGE>



    YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN OR INCORPORATED BY
REFERENCE IN THIS PROSPECTUS. THE TRUST HAS NOT, AND THE UNDERWRITER HAS NOT,
AUTHORIZED ANY OTHER PERSON TO PROVIDE YOU WITH DIFFERENT INFORMATION. IF
ANYONE PROVIDES YOU WITH DIFFERENT OR INCONSISTENT INFORMATION, YOU SHOULD NOT
RELY ON IT. THE TRUST IS NOT, AND THE UNDERWRITER IS NOT, MAKING AN OFFER TO
SELL THESE SECURITIES IN ANY JURISDICTION WHERE THE OFFER OR SALE IS NOT
PERMITTED. YOU SHOULD ASSUME THAT THE INFORMATION APPEARING IN THIS PROSPECTUS
IS ACCURATE AS OF THE DATE ON THE FRONT COVER OF THIS PROSPECTUS ONLY. THE
TRUST'S BUSINESS, FINANCIAL CONDITION, RESULTS OF OPERATIONS AND PROSPECTS MAY
HAVE CHANGED SINCE THAT DATE.

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

<TABLE>
<CAPTION>
                               TABLE OF CONTENTS


<S>                                                                                        <C>

                                                                                            PAGE

PROSPECTUS SUMMARY.....................................................................     __
RISK FACTORS AND SPECIAL CONSIDERATIONS................................................     __
FINANCIAL HIGHLIGHTS...................................................................     __
THE TRUST..............................................................................     __
USE OF PROCEEDS........................................................................     __
CAPITALIZATION AT APRIL 30, 2000.......................................................     __
PORTFOLIO COMPOSITION..................................................................     __
INVESTMENT OBJECTIVE AND POLICIES......................................................     __
MANAGEMENT OF THE TRUST................................................................     __
THE AUCTION............................................................................     __
DETERMINATION OF NET ASSET VALUE.......................................................     __
DESCRIPTION OF MUNICIPAL PREFERRED.....................................................     __
RATING AGENCY GUIDELINES...............................................................     __
DESCRIPTION OF COMMON SHARES...........................................................     __
CERTAIN PROVISIONS IN THE DECLARATION OF TRUST.........................................     __
REPURCHASE OF COMMON SHARES; CONVERSION TO OPEN-END FUND...............................     __
TAX MATTERS............................................................................     __
CUSTODIAN, AUCTION AGENT, TRANSFER AGENT, DIVIDEND DISBURSING
   AGENT AND REGISTRAR.................................................................     __
UNDERWRITING...........................................................................     __
LEGAL OPINIONS.........................................................................     __
REPORTS TO SHAREHOLDERS................................................................     __
EXPERTS................................................................................     __
FURTHER INFORMATION....................................................................     __
GLOSSARY...............................................................................     __
APPENDIX A - INVESTMENT TECHNIQUES AND PRACTICES.......................................    A-1
TABLE OF CONTENTS OF STATEMENT OF ADDITIONAL INFORMATION...............................     __
</TABLE>



<PAGE>


                               PROSPECTUS SUMMARY

    This summary highlights some information from this Prospectus. It may not
contain all of the information that is important to you. To understand the
offering of the Municipal Preferred shares fully, you should read the entire
Prospectus carefully, including the risk factors. You should also refer to the
Glossary, which defines certain terms used in this Prospectus. This summary is
qualified in its entirety by reference to the detailed information included in
this Prospectus and the Statement of Additional Information.

THE OFFERING                      MFS Municipal Income Trust (the "Trust") is
                                  offering a total of ______ shares of Series W
                                  and ______ shares of Series F Municipal
                                  Preferred at a purchase price of $25,000 per
                                  share plus dividends, if any, that have
                                  accumulated from the date the Trust first
                                  issues the shares. Except as described in
                                  this Prospectus, the two series have the same
                                  rights and preferences and are offered on the
                                  same terms. The two offerings, however, are
                                  independent of each other, and one offering
                                  is not contingent upon the closing of the
                                  other offering. Certain information presented
                                  in this Prospectus assumes that each offering
                                  is made and effected as contemplated, but
                                  there can be no assurance that this will be
                                  the case. Salomon Smith Barney Inc. is
                                  offering the shares as underwriter.

                                  The Municipal Preferred shares of each series
                                  will be preferred shares of the Trust that
                                  entitle their holders to receive cash
                                  dividends at an annual rate that may vary for
                                  the successive dividend periods for that
                                  series. Except as described under "--
                                  Dividends and Dividend Periods" and
                                  "Description of the Municipal Preferred --
                                  Dividends and Dividend Periods," each
                                  dividend period for each series will be seven
                                  days. An auction agent will determine the
                                  dividend rate for each series for a
                                  particular period by an auction conducted on
                                  the business day immediately prior to the
                                  start of that dividend period for that
                                  series.

                                  Investors and potential investors in the
                                  Municipal Preferred shares of each series may
                                  participate in auctions for the Municipal
                                  Preferred shares through their
                                  broker-dealers.

                                  Generally, investors in Municipal Preferred
                                  shares will not receive certificates
                                  representing ownership of their shares. The
                                  securities depository (The Depository Trust
                                  Company or any successor) or its nominee for
                                  the account of the investor's agent member
                                  (generally the investor's broker-dealer) will
                                  maintain record ownership of the Municipal
                                  Preferred shares of each series in book-entry
                                  form. An investor's agent member, in turn,
                                  will maintain records of that investor's
                                  beneficial ownership of Municipal Preferred
                                  shares.

THE TRUST                         The Trust is a closed-end, non-diversified
                                  management investment company. See "The
                                  Trust." The Trust was organized as a
                                  Massachusetts business trust on September 18,
                                  1986 and has registered under the Investment
                                  Company Act of 1940, as amended. The Trust's

<PAGE>

                                  common shares of beneficial interest are
                                  traded on the New York Stock Exchange under
                                  the symbol "MFM."

RISK                              FACTORS SUMMARY Risk is inherent in all
                                  investing. Therefore, before investing you
                                  should consider certain risks carefully when
                                  you invest in the Fund.

                                  The primary risks of investing in Municipal
                                  Preferred shares are the following:

                                       -  if an auction of a series fails you
                                          may not be able to sell some or all
                                          of your shares of that series;

                                       -  because of the nature of the market
                                          for Municipal Preferred shares, you
                                          may receive less than the price you
                                          paid for your shares if you sell them
                                          outside of the auction, especially
                                          when market interest rates are
                                          rising;

                                       -  a rating agency could downgrade
                                          Municipal Preferred shares, which
                                          could affect liquidity;

                                       -  the Fund may be forced to redeem your
                                          shares to meet regulatory or rating
                                          agency requirements or may
                                          voluntarily redeem your shares in
                                          certain circumstances;

                                       -  in extraordinary circumstances the
                                          Fund may not earn sufficient income
                                          from its investments to pay
                                          dividends;

                                       -  if long-term rates rise, the value of
                                          the Fund's investment portfolio may
                                          decline, reducing the asset coverage
                                          for the Municipal Preferred shares;
                                          and

                                       -  if an issuer of a municipal bond in
                                          which the Fund invests defaults,
                                          there may be a negative impact on the
                                          income and asset value of the Fund's
                                          portfolio (the effects of this risk
                                          may, however, be mitigated by the
                                          Fund's investment in municipal bonds
                                          covered by insurance).

                                  For additional risks of investing in the
                                  Municipal Preferred shares of the Fund, see
                                  "Risk Factors and Special Considerations"
                                  below.

DIVIDENDS AND DIVIDEND
PERIODS                           Dividends on each series of Municipal
                                  Preferred shares are cumulative from the date
                                  the shares are first issued. The Trust will
                                  pay dividends on the shares of Municipal
                                  Preferred, out of legally available funds and
                                  when declared by the Board of Trustees,
                                  beginning on ________ __, 2000 for Series W
                                  and ________ __, 2000 for Series F.

                                  After the initial dividend period, each
                                  dividend period for each series of the
                                  Municipal Preferred shares will generally
                                  consist of seven days; provided, however,

<PAGE>

                                  that before any auction for a series, the
                                  Trust may decide, subject to certain
                                  limitations and only if it gives certain
                                  notices, to declare a special dividend period
                                  of up to five years. Accordingly, in the case
                                  of dividend periods that are not special
                                  dividend periods, dividends generally will be
                                  payable on each succeeding Wednesday for
                                  Series W and Friday for Series F Municipal
                                  Preferred shares. The Trust may specify
                                  different dividend payment dates for certain
                                  special dividend periods.

                                  The Trust will pay dividends through the
                                  securities depository (The Depository Trust
                                  Company) on each dividend payment date for
                                  each series.

                                  The dividend rate on the Series W Municipal
                                  Preferred for the period from and including
                                  the date of issue to but excluding ________
                                  __, 2000 will be ____% per year. The dividend
                                  rate on the Series F Municipal Preferred for
                                  the period from and including the date of
                                  issue to but excluding ________ __, 2000 will
                                  be ____% per year. For each subsequent
                                  dividend period for a series, the auction
                                  agent (______) will determine the dividend
                                  rate on the shares of Municipal Preferred
                                  through an auction for that series.

MAXIMUM DIVIDEND RATE             Generally, the rate at which the Trust pays
                                  dividends on shares of a series of Municipal
                                  Preferred may not exceed the maximum dividend
                                  rate. The maximum dividend rate may vary for
                                  different dividend periods. It is determined
                                  by the current credit rating assigned to the
                                  shares of Municipal Preferred and an
                                  independent reference rate that may vary over
                                  time.

                                  If the number of shares of a series of
                                  Municipal Preferred available during an
                                  auction exceeds the total number of shares of
                                  such series subject to bids for that auction
                                  at less than or equal to the maximum dividend
                                  rate for such series, then the dividend rate
                                  for the subsequent dividend period for that
                                  series will be the maximum dividend rate. In
                                  addition, if the Trust fails to pay a
                                  dividend on shares of a series of Municipal
                                  Preferred, or if the Trust fails to pay the
                                  full redemption price for shares of a series
                                  of Municipal Preferred when due, then the
                                  dividend rate for the subsequent dividend
                                  period for that series will be the maximum
                                  dividend rate. If, however, the Trust cures
                                  its failure to pay a dividend or to pay the
                                  full redemption price, then the maximum
                                  dividend rate will not apply.

ASSET MAINTENANCE                 Under the Statement creating the Municipal
                                  Preferred shares of the Trust, which
                                  establishes and fixes the rights and
                                  preferences of the shares of Municipal
                                  Preferred, the Trust must maintain:

                                       -  asset coverage of the Municipal
                                          Preferred shares as required by the
                                          rating agency or agencies rating the
                                          Municipal Preferred shares, and

                                       -  asset coverage of the Municipal
                                          Preferred shares of at least 200% as

<PAGE>

                                          required by the Investment Company
                                          Act of 1940.

                                  Based on the composition of the Trust's
                                  portfolio and market conditions as of
                                  ________ __, 2000, the asset coverage of the
                                  Municipal Preferred shares as measured
                                  pursuant to the Investment Company Act of
                                  1940 would be approximately ____% if the
                                  Trust were to issue all Municipal Preferred
                                  shares of both series offered in this
                                  Prospectus, representing approximately ____%
                                  of the Trust's capital.

MANDATORY REDEMPTION              If the Trust does not maintain its required
                                  asset coverage, it must redeem shares of each
                                  series of Municipal Preferred at $25,000 per
                                  share plus any dividends that accumulate and
                                  remain unpaid up to the date fixed for
                                  redemption. The Trust will limit redemption
                                  to the number of Municipal Preferred shares,
                                  together with all other preferred shares of
                                  the Trust (if any), necessary to restore the
                                  required asset coverage. As of the date of
                                  this offering, there are no other preferred
                                  shares outstanding. The Trust may avoid
                                  mandatory redemption by restoring its
                                  required asset coverage pursuant to rating
                                  agency guidelines. The provisions of the
                                  Investment Company Act of 1940 may restrict
                                  the Trust's ability to make a mandatory
                                  redemption in connection with a failure to
                                  comply with the rating agencies' asset
                                  coverage requirements.

OPTIONAL REDEMPTION               The Trust, at its option and subject to
                                  certain conditions, may choose to redeem all
                                  or a portion of the shares of Municipal
                                  Preferred of each series generally on the
                                  second business day preceding any dividend
                                  payment date at the price of $25,000 per
                                  share plus accumulated but unpaid dividends,
                                  if any, whether or not earned or declared to
                                  (but not including) the date fixed for
                                  redemption, and, during certain special
                                  dividend rate periods, any applicable
                                  premium.

LIQUIDATION PREFERENCE            The liquidation preference (that is, the
                                  amount the Trust must pay to Municipal
                                  Preferred shareholders if the Trust is
                                  liquidated) for shares of each series of
                                  Municipal Preferred will be $25,000 per share
                                  plus accumulated but unpaid dividends, if
                                  any, whether or not earned or declared.

VOTING RIGHTS                     The Investment Company Act of 1940 requires
                                  that the holders of both series of Municipal
                                  Preferred shares, and the holders of any
                                  other preferred shares of the Trust, voting
                                  as a separate class, have the right to:

                                       -  elect at least two trustees at all
                                          times, and

                                       -  elect a majority of the trustees at
                                          any time when dividends on the
                                          Municipal Preferred shares, or any
                                          other preferred shares of the Trust,
                                          are unpaid for two full years.

                                  In each case, the holders of common shares,
                                  both series of Municipal Preferred shares,

<PAGE>

                                  and any other preferred shares of the Trust,
                                  voting together as a single class, will elect
                                  the remaining trustees. The holders of each
                                  series of Municipal Preferred shares, and the
                                  holders of any other preferred shares of the
                                  Trust, will vote as a separate class or
                                  classes on certain other matters as required
                                  under the Trust's Declaration of Trust, the
                                  Investment Company Act of 1940, and
                                  Massachusetts law. Each common share, each
                                  Municipal Preferred share, and each share of
                                  any other class of preferred shares of the
                                  Trust is entitled to one vote per share.

TAXATION                          Dividends on shares of Municipal Preferred
                                  will be exempt from regular federal income
                                  tax in the hands of owners of such shares to
                                  the extent such dividends are paid from
                                  tax-exempt income earned on the Trust's
                                  investments. All or a portion of the Trust's
                                  dividends may increase a shareholder's
                                  alternative minimum tax liability. The Trust
                                  is currently required to allocate net capital
                                  gain, net tax-exempt income and other income
                                  taxable for federal income tax purposes, if
                                  any, proportionately between common shares of
                                  beneficial interest and shares of Municipal
                                  Preferred. The Trust may, in the case of a
                                  seven-day dividend period or a special
                                  dividend period of 28 days or fewer for the
                                  shares of Municipal Preferred, and may, in
                                  the case of any other special dividend period
                                  for such shares, give notice of the amount of
                                  any income taxable for federal income tax
                                  purposes to be included in a dividend on
                                  shares of Municipal Preferred in advance of
                                  the related auction. Alternatively, if the
                                  Trust does not give such advance notice, it
                                  generally will be required to pay such
                                  dividend, increased by a Gross-Up Payment, to
                                  holders of shares of Municipal Preferred. The
                                  amount of taxable income allocable to shares
                                  of Municipal Preferred will depend upon the
                                  amount of such income realized by the Trust,
                                  but is not generally expected to be
                                  significant.

INVESTMENT OBJECTIVE              The Trust's investment objective is to
                                  provide high current income exempt from
                                  federal income taxes. There can be no
                                  assurance that the Trust will achieve its
                                  investment objective.

INVESTMENT STRATEGIES             The interest on the instruments in which the
                                  Trust primarily invests is exempt from
                                  federal income tax (other than the possible
                                  incidence of any alternative minimum tax).

                                  The Trust is a non-diversified mutual fund.
                                  This means that the Trust may invest a
                                  relatively high percentage of its assets in a
                                  small number of issuers. The Trust also may
                                  invest a high percentage of its assets in
                                  securities of issuers located in the same
                                  state, that derive income from similar type
                                  projects and that are otherwise related.

                                  The Trust invests, under normal market
                                  conditions, at least 80% of its total assets
                                  in municipal securities and participation
                                  interests in municipal securities issued by
                                  banks, the interest on which is exempt from

<PAGE>

                                  federal income tax. Municipal securities are
                                  bonds or other debt obligations of a U.S.
                                  state or political subdivision, such as a
                                  county, city, town, village, or authority.
                                  Participation interests in municipal
                                  securities are interests in holdings of
                                  municipal obligations backed by a letter of
                                  credit or guarantee from the issuing bank.
                                  The Trust seeks to invest in municipal
                                  securities whose income is exempt from
                                  federal income taxes. However, the interest
                                  income on certain of these municipal
                                  securities may be subject to an alternative
                                  minimum tax. Under normal circumstances, the
                                  Trust will invest at least 65% of its total
                                  assets in municipal securities that offer a
                                  current yield above that generally available
                                  on municipal securities in the three highest
                                  categories of recognized rating agencies.
                                  Tax-exempt securities offering the high
                                  current income sought by the Trust are
                                  ordinarily in the medium and lower rating
                                  categories of recognized rating agencies or
                                  are unrated and considered by MFS to be of
                                  comparable quality. Securities rated below
                                  investment grade are commonly known as junk
                                  bonds and the Trust may invest up to 100% of
                                  its net assets in these junk bonds.

                                  The Trust may temporarily invest either in
                                  tax-exempt securities in the higher rating
                                  categories of recognized rating agencies or
                                  in cash or cash equivalent short-term
                                  obligations of similar quality, including,
                                  but not limited to, short-term municipal
                                  obligations, certificates of deposit,
                                  commercial paper, short-term notes,
                                  obligations issued or guaranteed by the U.S.
                                  Government, its agencies, authorities or
                                  instrumentalities and repurchase agreements.
                                  Interest on certain of these short-term
                                  obligations will be subject to federal income
                                  tax.

INVESTMENT ADVISER                Massachusetts Financial Services Company
                                  ("MFS" or the "Adviser"), an investment
                                  adviser registered under the Investment
                                  Advisers Act of 1940, as amended, has served
                                  as the Trust's investment adviser since the
                                  Trust's inception.

RATINGS                           The Trust will not issue shares of Municipal
                                  Preferred unless such shares have a rating of
                                  Aaa from Moody's Investors Service, Inc.
                                  ("Moody's") and AAA from Standard & Poor's
                                  Ratings Group ("Standard & Poor's").

SECONDARY MARKET TRADING          Broker-dealers may, but are not obligated to,
                                  maintain a secondary market in shares of each
                                  series of Municipal Preferred outside of
                                  auctions. There can be no assurance that a
                                  secondary market will develop or, if it does
                                  develop, that it will provide owners with
                                  liquidity of investment. Shares of each
                                  series of Municipal Preferred may be
                                  transferred outside of auctions only to a
                                  broker-dealer or such other persons who may
                                  be permitted by the Trust.

                    RISK FACTORS AND SPECIAL CONSIDERATIONS

    You should consider the following risk factors and other special
considerations in deciding whether to invest in shares of Municipal Preferred.

<PAGE>

Please note that there are many circumstances which could cause the value of
your investment in the Municipal Preferred to decline, and which could prevent
the Trust from achieving its objective, that are not described here.

    MUNICIPAL SECURITIES RISK.

    -  INTEREST RATE RISK. As with any fixed income security, the prices of
       municipal securities in the Trust's portfolio will generally fall when
       interest rates rise. Conversely, when interest rates fall, the prices of
       municipal securities in the Trust's portfolio will generally rise.

    -  MATURITY RISK. Interest rate risk will generally affect the price of a
       municipal security more if the security has a longer maturity. Municipal
       securities with longer maturities will therefore be more volatile than
       other fixed income securities with shorter maturities. Conversely,
       municipal securities with shorter maturities will be less volatile but
       generally provide lower returns than municipal securities with longer
       maturities. The average maturity of the Trust's municipal security
       investments may affect the volatility of the Trust's share price.

    -  CREDIT RISK. Credit risk is the risk that the issuer of a municipal
       security will not be able to pay principal and interest when due. Rating
       agencies assign credit ratings to certain municipal securities to
       indicate their credit risk. The price of a municipal security will
       generally fall if the issuer defaults on its obligation to pay principal
       or interest, the rating agencies downgrade the issuer's credit rating or
       other news affects the market's perception of the issuer's credit risk.
       A participation interest is also subject to the risk of default by the
       issuing bank.

    -  GENERAL OBLIGATIONS AND REVENUE OBLIGATIONS RISK. The Trust may invest
       in municipal bonds that are general obligations backed by the full faith
       and credit of the municipal issuer. The Trust may also invest in
       municipal bonds called revenue obligations which are subject to a higher
       degree of credit risk than general obligations. Revenue obligations
       finance specific projects, such as building a hospital, and are not
       backed by the full faith and credit of the municipal issuer. Because
       revenue obligations are repaid from the revenues from a facility, they
       are subject to a risk of default in payments of principal and interest
       if the facility does not generate enough income.

    LIQUIDITY RISK. The fixed income securities purchased by the Trust may be
traded in the over-the-counter market rather than on an organized exchange and
are subject to liquidity risk. This means that they may be harder to purchase
or sell at a fair price. The inability to purchase or sell these fixed income
securities at a fair price could have a negative impact on the Trust's
performance.

    LOWER RATED MUNICIPAL SECURITIES RISK.

    -  HIGHER CREDIT RISK. Junk bonds are subject to a substantially higher
       degree of credit risk than higher rated bonds. During recessions, a high
       percentage of issuers of junk bonds may default on payments of principal
       and interest. The price of a junk bond may therefore fluctuate
       drastically due to bad news about the issuer or the economy in general.

    -  HIGHER LIQUIDITY RISK. During recessions and periods of broad market
       declines, junk bonds could become less liquid, meaning that they will be
       harder to value or sell at a fair price.

    NON-DIVERSIFIED STATUS RISK. Because the Trust may invest a higher
percentage of its assets in a small number of issuers, the Trust is more
susceptible to any single economic, political or regulatory event affecting
those issuers than is a diversified fund.


<PAGE>

    AUCTION RISK. Shareholders may not be able to sell a series of Municipal
Preferred shares at an auction if the auction fails; that is, if there are more
Municipal Preferred shares of that series offered for sale than there are
buyers for those shares. The Fund believes this event is unlikely. Also, if a
shareholder places hold orders (orders to retain Municipal Preferred shares) at
an auction only at a specified rate, and that bid rate exceeds the rate set at
the auction, such shareholder will not retain his or her Municipal Preferred
shares. Finally, if a shareholder buys shares or elect to retain shares without
specifying a rate below which he or she would not wish to continue to hold
those shares, and the auction sets a below-market rate, such shareholder may
receive a lower rate of return on his or her shares than the market rate. See
"Description of Municipal Preferred" and "The Auction -- Summary of Auction
Procedures."

    ANTITAKEOVER PROVISIONS. The Trust's Declaration of Trust includes
provisions that could limit the ability of other entities or persons to acquire
control of the Trust or to change the composition of its Board of Trustees.
Such provisions could discourage a third party from seeking to obtain control
of the Trust.

    INVESTMENT CONSIDERATIONS. Investors in the shares of Municipal Preferred
should consider the following factors:

    -  The credit ratings of the shares of Municipal Preferred could be reduced
       while an investor holds such shares.

    -  Neither broker-dealers nor the Trust are obligated to purchase shares of
       the Municipal Preferred in an auction or otherwise nor is the Trust
       required to redeem shares of the Municipal Preferred in the event of a
       failed auction.

    -  If sufficient bids do not exist in an auction, the applicable dividend
       rate will be the maximum applicable dividend rate, and in such event,
       owners of the shares of Municipal Preferred wishing to sell will not be
       able to sell all, and may not be able to sell any, of such shares in the
       auction. As a result, investors may not have liquidity of investment.

    SECONDARY MARKET. The broker-dealers intend to maintain a secondary trading
market in the shares of each series of Municipal Preferred outside of auctions;
however, they have no obligation to do so and there can be no assurance that a
secondary market for either series of the shares of the Municipal Preferred
will develop or, if it does develop, that it will provide holders with a liquid
trading market. The shares of each series of Municipal Preferred will not be
registered on any stock exchange or on any automated quotation system. An
increase in the level of interest rates likely will have an adverse effect on
the secondary market price of the shares of Municipal Preferred, and a selling
shareholder may have to sell Municipal Preferred between auctions at a price
per share of less than $25,000. You may transfer shares outside of auctions
only to broker-dealers or such other persons as may be permitted by the Trust.

                              FINANCIAL HIGHLIGHTS

    The tables below set forth certain specified information for a common share
of beneficial interest of the Trust outstanding throughout each period
presented. The financial highlights for the period ended October 31, 1999 have
been audited by Deloitte & Touche LLP, the Trust's independent accountants,
whose unqualified report on the period ended October 31, 1999 is included in
the Trust's October 31, 1999 Annual Report and in "Report of Independent
Accountants" in the "Financial Statements" section of the Statement of
Additional Information. The financial highlights for the six month period ended
April 30, 2000 are unaudited. The financial highlights should be read in
conjunction with the financial statements and notes thereto included in
"Financial Statements" in the Statement of Additional Information.


<PAGE>
<TABLE>
<CAPTION>
<S>                                           <C>               <C>        <C>        <C>         <C>          <C>

                                                            Year Ended
                                              --------------------------------------

Per share data (for a share outstanding       Six Month Ended
throughout each period):                       April 30, 2000     1999        1998       1997         1996        1995
                                                 (Unaudited)    --------    --------   --------    ---------    --------

Net asset value - beginning of period.......        $7.96       $  8.55     $  8.51    $  8.58     $  8.84      $  8.73
                                                   --------     --------    --------   ---------   --------
Income from investment operations # -
   Net investment income....................        $0.26       $  0.54     $  0.57    $  0.61     $  0.66      $  0.68

    Net realized and unrealized gain (loss) on
    investments.............................        (0.23)      $ (0.60)    $  0.05    $ (0.03)    $ (0.26)     $  0.13
                                                  --------      --------   --------    ---------    --------    --------

       Total from investment operations.....        $0.03        $ (0.06)   $  0.62    $  0.58     $  0.40      $  0.81

Less distributions declared to shareholders
   from net investment income...............       $(0.26)       $ (0.53)   $ (0.58)   $ (0.65)    $ (0.66)     $ (0.70)

Net asset value - end of period.............       $ 7.73        $  7.96    $  8.55    $  8.51     $  8.58      $  8.84
                                                  ========      ========   ========   ========     ========     ========
Per share market value - end of period......       $ 6.94        $  7.13    $  9.19    $  9.06     $  9.38      $  9.50
                                                  ========      ========   ========   ========     ========     ========
                                                     0.84%++       (0.59)%     8.37%      3.90%       4.50%       12.57%
Total return..................

Ratios (to average net assets)/Supplemental data:
                                                     1.08+          1.06%      1.10%      1.19%       1.24%        1.33%
   Expenses##.................
                                                     6.79+          6.49%      6.62%      7.26%       7.47%        7.66%
   Net investment income......
                                                      10%            15%        12%        21%          13%          14%
Portfolio Turnover............

Net assets at end of period                      $303,230       $312,195   $333,544   $329,282    $328,630     $334,985
(000 omitted).................

+       Annualized
++      Not annualized
#       Per share data are based on average shares outstanding.
##      Ratios do not reflect expense reductions from certain expense offset arrangements.
</TABLE>

                                   THE TRUST

        The Trust is a closed-end, non-diversified management investment
company. The Trust's investment objective is to provide high current income
exempt from federal income taxes. The bonds and notes purchased by the Trust
generally are issued by or on behalf of states, territories and possessions of
the United States, and the District of Columbia and their political
subdivisions, agencies or instrumentalities, the interest on which is exempt
from federal income tax ("Municipal Bonds" or "tax-exempt securities"). See
"Investment Objective and Policies." No assurance can be given that the Trust's
investment objective will be achieved. All or a portion of the Trust's
dividends may be subject to the Federal alternative minimum tax. The Trust was
organized as a Massachusetts business trust under the laws of the Commonwealth
of Massachusetts on September 18, 1986, and is registered under the Investment
Company Act of 1940, as amended (the "1940 Act"). In ________, the Trust issued
________ shares of beneficial interest, no par value (the "Common Shares"),
pursuant to the initial public offering thereof and commenced operations. The
Trust's Common Shares are traded on the New York Stock Exchange under the
symbol "MFM." The Trust's principal office is located at 500 Boylston Street,
Boston, MA 02116, and its telephone number is (617) 954-5000.

                                USE OF PROCEEDS

    The net proceeds of this offering will be approximately $________, after
payment of the sales load to Salomon Smith Barney Inc. (the "Underwriter") and
estimated offering costs.

    The net proceeds of the offering will be invested in accordance with the
Trust's investment objective and policies. It is presently anticipated that the
Trust will be able to invest substantially all of the net proceeds in Municipal

<PAGE>

Obligations that meet the Trust's investment objective at or shortly (within
six to eight weeks) after the completion of the offering. To the extent that
all of the proceeds cannot be so invested, pending such investment, the Trust
will invest such proceeds initially in high-quality, short-term tax-exempt
securities, the income on which will be exempt from federal income taxes (other
than the possible incidence of any alternative minimum tax), or in high-quality
Municipal Obligations with relatively low volatility (such as pre-refunded and
intermediate-term securities), to the extent such securities are available. If
necessary to invest fully the net proceeds of the offerings immediately, the
Trust may also purchase, as temporary investments, short-term taxable
investments of the type described under "Investment Objective and Policies,"
the income on which is subject to federal income taxes.

                        CAPITALIZATION AT APRIL 30, 2000

    The following table sets forth the unaudited capitalization of the Trust at
April 30, 2000 and as adjusted to give effect to the issuance of the shares of
Series W and Series F Municipal Preferred offered hereby (including estimated
offering expenses and sales loads of $______).

<TABLE>
<CAPTION>
<S>                                                           <C>               <C>
                                                                 ACTUAL          AS ADJUSTED

Shareholders' Equity:
  Preferred Shares, no par value per share; unlimited shares
     authorized (no shares issued; _____ shares of Municipal
     Auction Rate Cumulative Preferred Shares issued, as
     adjusted, at $25,000 per share liquidation
     preference).............................................  $                 $ ______
  Common Shares, no par value per share; unlimited shares
     authorized; 39,297,340 less 55,500 treasury shares......   355,603,287
  Accumulated undistributed net investment income.....            1,038,188        ______
  Accumulated net realized loss on investments.....              (6,919,649)       ______
  Unrealized depreciation on investments................        (46,491,950)       ______
                                                              ==============    ===============
Net Assets.............................................        $303,229,876      $ ______
                                                              ==============    ===============
</TABLE>

                             PORTFOLIO COMPOSITION

    As of April 30, 2000, approximately ____% of the market value of the
Trust's portfolio was invested in long and intermediate-term Municipal
Obligations and approximately ____% of the market value of the Trust's
portfolio was invested in short-term securities. For purposes of the foregoing
sentence, futures contracts in which the Trust has invested are not included in
the market value of the Trust's portfolio. The following table sets forth
certain information with respect to the composition of the Trust's investment
portfolio (excluding short-term securities) as of April 30, 2000.


<PAGE>
<TABLE>
<CAPTION>
<S>            <C>            <C>         <C>      <C>         <C>         <C>        <C>

 STANDARD &    NUMBER OF      MARKET               NUMBER OF   MARKET
  POOR'S*       ISSUES        VALUE       PERCENT   MOODY'S*   ISSUES      VALUE      PERCENT

    AAA          ____           $______    ______%    Aaa       ____       $______    ______%
     AA          ____            ______    ______      Aa       ____        ______    ______
     A           ____            ______    ______      A        ____        ______    ______
    BBB          ____            ______    ______     Baa       ____        ______    ______
     BB          ____            ______    ______      Ba       ____        ______    ______
     B           ____            ______    ______      B        ____        ______    ______
    NR**         ____            ______    ______     NR**      ____        ______    ______
                 ----
   Total                        $______    100.00%   Total      ____       $______    100.00%
                 ====                      =======                                    =======
</TABLE>

- ---------------------------
 * Standard & Poor's rating categories may be modified further by a plus (+) or
minus (-) in AA, A, BBB, BB and B ratings. Moody's rating categories may be
modified further by a 1, 2 or 3 in Aa, A, Baa, Ba and B ratings.

** Many bonds are rated by only one rating agency, which results in a higher
percentage of bonds in this category. The total market value of bonds that do
not carry a rating from any rating service is $________, which represents ____%
of the market value of the Trust's portfolio (excluding short-term securities
and futures) as of ________ __, 2000.

                       INVESTMENT OBJECTIVE AND POLICIES

    The Trust's investment objective is to provide high current income exempt
from federal income taxes.

    The Trust is a non-diversified mutual fund and invests, under normal market
conditions, at least 80% of its total assets in municipal securities and
participation interests in municipal securities issued by banks, the interest
on which is exempt from federal income tax. Municipal securities are bonds or
other debt obligations of a U.S. state or political subdivision, such as a
county, city, town, village, or authority. Participation interests in municipal
securities are interests in holdings of municipal obligations backed by a
letter of credit or guarantee from the issuing bank. The Trust seeks to invest
in municipal securities whose income is exempt from federal income taxes.
However, the interest income on certain of these municipal securities may be
subject to an alternative minimum tax. Under normal circumstances, the Trust
will invest at least 65% of its total assets in municipal securities that offer
a current yield above that generally available on municipal securities in the
three highest categories of recognized rating agencies. Tax-exempt securities
offering the high current income sought by the Trust are ordinarily in the
medium and lower rating categories of recognized rating agencies or are unrated
and considered by MFS to be of comparable quality. Securities rated below
investment grade are commonly known as junk bonds and the Trust may invest up
to 100% of its net assets in these junk bonds.

    In selecting fixed income investments for the Trust, MFS considers the
views of its large group of fixed income portfolio managers and research
analysts. This group periodically assesses the three-month total return outlook
for various segments of the fixed income markets. This three-month "horizon"
outlook is used by the portfolio manager(s) of MFS' fixed income oriented funds
(including the Trust) as a tool in making or adjusting a fund's asset
allocations to various segments of the fixed income markets. In assessing the
credit quality of fixed income securities, MFS does not rely solely on the
credit ratings assigned by credit rating agencies, but rather performs its own
independent credit analysis.

    The Trust may temporarily invest either in tax-exempt securities in the
higher rating categories of recognized rating agencies or in cash or cash
equivalent short-term obligations of similar quality, including, but not
limited to, short-term municipal obligations, certificates of deposit,
commercial paper, short-term notes, obligations issued or guaranteed by the
U.S. Government, its agencies, authorities or instrumentalities and repurchase
agreements. Interest on certain of these short-term obligations will be subject
to federal income tax.

    The Trust may invest in various types of securities and engage in various
investment techniques and practices which are not the principal focus of the

<PAGE>

Trust and therefore are not described in this Prospectus. The types of
securities and investment techniques and practices in which the Trust may
engage, including the principal investment techniques and practices described
above, are identified in Appendix A to this Prospectus, and are discussed,
together with their risks, in the Trust's Statement of Additional Information.

    The Trust may engage in active and frequent trading to achieve its
principal investment strategies. This may result in the realization and
distribution to shareholders of higher capital gains as compared to a Trust
with less active trading policies, which would increase your tax liability.
Frequent trading also increases transaction costs, which could detract from the
Trust's performance.

                            MANAGEMENT OF THE TRUST

TRUSTEES AND OFFICERS

    The Board of Trustees is responsible for the general supervision of the
Trust, including general supervision of the duties performed by the Adviser
under its Advisory Agreement (as defined below) with the Trust. There are 8
trustees of the Trust, 2 of whom are "interested persons" (as defined in the
1940 Act) of the Trust or the Adviser. The names and addresses of the trustees
and officers of the Trust and their principal occupations and other
affiliations during the past five years are set forth under "Management of the
Trust" in the Statement of Additional Information.

THE ADVISER

    MFS. MFS, a Delaware corporation, is the Trust's Adviser. MFS and its
predecessor organizations have a history of money management dating from 1924,
thus making MFS America's oldest mutual fund organization. MFS is a subsidiary
of Sun Life of Canada (U.S.) Financial Services Holdings, Inc. ("Sun Life of
Canada (U.S.)") which in turn is an indirect wholly owned subsidiary of Sun
Life of Canada ("Sun Life"). Sun Life, is one of the largest international life
insurance companies and has been operating in the United States since 1895. The
executive officers of MFS report to the Chairman of Sun Life. The principal
business address of MFS is 500 Boylston Street, Boston, Massachusetts 02116.

    Portfolio Manager. Michael Roberge is a Senior Vice President of MFS. Mr.
Roberge has been the portfolio manager of the Fund since December, 1997 and has
been employed in the investment area of MFS since 1996. From 1994 to 1996, Mr.
Roberge worked as a municipal credit analyst and portfolio manager with
Colonial Investment Management.

    Advisory Agreement. The Investment Advisory Agreement between MFS and the
Trust (the "Advisory Agreement") provides that, subject to the direction of the
Board of Trustees of the Trust, MFS is responsible for the actual management of
the Trust's portfolio. The responsibility for making decisions to buy, sell or
hold a particular security rests with the Adviser, subject to review by the
Board of Trustees. The Adviser also provides certain administrative services
and general office facilities.

    Advisory Fee. For the services provided by MFS under the Advisory
Agreement, the Trust pays it a fee computed and paid monthly in an amount equal
to the sum of 0.4% of the average daily net assets of the Trust and 6.32% of
the gross income (i.e., income other than gains from the sale of securities or
gains received from futures contracts) of the Trust, in each case on an
annualized basis, for the Trust's then-current fiscal year. This advisory fee
may be greater than that paid by funds with similar investment objectives.


<PAGE>

                                  THE AUCTION

GENERAL

    The provisions of the Statement creating the Municipal Preferred shares of
the Trust (the "Statement") provide that, except as otherwise described herein,
the Applicable Rate with respect to shares of Municipal Preferred for each Rate
Period after the Initial Rate Period thereof shall be equal to the rate per
annum that the Auction Agent advises has resulted on the Business Day preceding
the first day of such Subsequent Rate Period (an "Auction Date") from
implementation of the auction procedures (the "Auction Procedures") set forth
in the Statement and summarized below, in which persons determine to hold or
offer to sell or, based on dividend rates bid by them, offer to purchase or
sell such shares. Each periodic implementation of the Auction Procedures is
referred to herein as an "Auction."

    Certain defined terms used in this section and under "Description of
Municipal Preferred" are defined in the Glossary.

AUCTION PROCEDURES

    Prior to the Submission Deadline on each Auction Date for e shares of each
series of Municipal Preferred, each customer of a Broker-Dealer who is listed
on the records of that Broker-Dealer (or, if applicable, the Auction Agent) as
a holder of shares of Municipal Preferred (a "Beneficial Owner") may submit
orders ("Orders") to that Broker-Dealer as follows:

    -  Hold Order -- indicating its desire to hold shares of Municipal
       Preferred without regard to the Applicable Rate for the next Rate
       Period.

    -  Bid -- indicating its desire to sell shares of Municipal Preferred at
       $25,000 per share if the Applicable Rate for the next Rate Period is
       less than the rate specified in such Bid (also known as a hold-at-a rate
       order).

    -  Sell Order -- indicating its desire to sell shares of Municipal
       Preferred at $25,000 per share without regard to the Applicable Rate for
       the next Rate Period.

    A Beneficial Owner may submit different types of Orders to its
Broker-Dealer with respect to shares of Municipal Preferred then held by such
Beneficial Owner. A Beneficial Owner that submits a Bid to its Broker-Dealer
having a rate higher than the Maximum Rate on the Auction Date will be treated
as having submitted a Sell Order to its Broker-Dealer. A Beneficial Owner that
fails to submit an Order to its Broker-Dealer will ordinarily be deemed to have
submitted a Hold Order to its Broker-Dealer; provided, however, that if a
Beneficial Owner fails to submit an Order to its Broker-Dealer for an Auction
relating to a Rate Period for Municipal Preferred of more than 28 Rate Period
Days, such Beneficial Owner will be deemed to have submitted a Sell Order to
its Broker-Dealer. A Sell Order shall constitute an irrevocable offer to sell
the shares of Municipal Preferred subject thereto. A Beneficial Owner that
offers to become the Beneficial Owner of additional shares of Municipal
Preferred is, for purposes of such offer, a Potential Beneficial Owner of
additional shares of Municipal Preferred as discussed below.

    A customer of a Broker-Dealer that is not a Beneficial Owner of shares of
Municipal Preferred but that wishes to purchase shares, or that is a Beneficial
Owner that wishes to purchase additional shares (in each case, a "Potential
Beneficial Owner"), may submit Bids to its Broker-Dealer in which it offers to
purchase shares of Municipal Preferred at $25,000 per share if the Applicable
Rate for the next Rate Period is not less than the rate specified in such Bid.
A Bid placed by a Potential Beneficial Owner specifying a rate higher than the
Maximum Rate on the Auction Date will not be accepted.


<PAGE>

    The Broker-Dealers in turn will submit the Orders of their respective
customers who are Beneficial Owners and Potential Beneficial Owners to the
Auction Agent, designating themselves (unless otherwise permitted by the Trust)
as Existing Holders in respect of shares subject to Orders submitted or deemed
submitted to them by Beneficial Owners and as Potential Holders in respect of
shares subject to Orders submitted to them by Potential Beneficial Owners.
However, neither the Trust nor the Auction Agent will be responsible for a
Broker-Dealer's failure to comply with the foregoing. Any Order placed with the
Auction Agent by a Broker-Dealer as or on behalf of an Existing Holder or a
Potential Holder will be treated in the same manner as an Order placed with a
Broker-Dealer by a Beneficial Owner or Potential Beneficial Owner. Similarly,
any failure by a Broker-Dealer to submit to the Auction Agent an Order in
respect of any shares of Municipal Preferred held by it or customers who are
Beneficial Owners will be treated in the same manner as a Beneficial Owner's
failure to submit to its Broker-Dealer an Order in respect of shares of
Municipal Preferred held by it. A Broker-Dealer may also submit Orders to the
Auction Agent for its own account as an Existing Holder or Potential Holder,
provided it is not an affiliate of the Trust. The Auction Agent after each
Auction for shares of Municipal Preferred will pay to each Broker-Dealer, from
funds provided by the Trust, a service charge at the annual rate of 1/4 of 1%
in the case of any Auction immediately preceding a Rate Period of less than one
year, or a percentage agreed to by the Trust and the Broker-Dealers in the case
of any Auction immediately preceding a Rate Period of one year or longer, of
the purchase price of shares of Municipal Preferred placed by such
Broker-Dealer at such Auction. See "The Auction -- Broker-Dealers" in the
Statement of Additional Information.

    If Sufficient Clearing Bids exist (that is, the number of shares of
Municipal Preferred subject to Bids submitted or deemed submitted to the
Auction Agent by Broker-Dealers as or on behalf of Potential Holders with rates
equal to or lower than the Maximum Rate is at least equal to the number of
shares of Municipal Preferred subject to Sell Orders submitted or deemed
submitted to the Auction Agent by Broker-Dealers as or on behalf of Existing
Holders), the Applicable Rate for the next succeeding Rate Period will be the
lowest rate specified in the Submitted Bids which, taking into account such
rate and all lower rates bid by Broker-Dealers as or on behalf of Existing
Holders and Potential Holders, would result in Existing Holders and Potential
Holders owning all the shares of Municipal Preferred available for purchase in
the Auction. If Sufficient Clearing Bids do not exist, the Applicable Rate for
the next succeeding Rate Period will be the Maximum Rate on the Auction Date.
In such event, Beneficial Owners that have submitted or are deemed to have
submitted Sell Orders may not be able to sell in such Auction all shares of
Municipal Preferred subject to such Sell Orders. If Broker-Dealers submit or
are deemed to have submitted to the Auction Agent Hold Orders with respect to
all Existing Holders, the Applicable Rate for the next succeeding Rate Period
will be the All Hold Order Rate.

    The Auction Procedures include a pro rata allocation of shares for purchase
and sale, which may result in an Existing Holder continuing to hold or selling,
or a Potential Holder purchasing, a number of shares of Municipal Preferred
that is fewer than the number of shares of Municipal Preferred specified in its
Order. To the extent the allocation procedures have that result, Broker-Dealers
that have designated themselves as Existing Holders or Potential Holders in
respect of customer Orders will be required to make appropriate pro rata
allocations among their respective customers.

    Settlement of purchases and sales with respect to shares of each series of
Municipal Preferred will be made on the next Business Day (also a Dividend
Payment Date) after the Auction Date through the Securities Depository.
Purchasers will make payment through their Agent Members in same-day funds to
the Securities Depository against delivery to their respective Agent Member.
The Securities Depository will make payment to the Sellers' Agent Members in
accordance with the Securities Depository's normal procedures, which now
provide for payment against delivery by their Agent Members in same-day funds.
The settlement procedures to be used with respect to Auctions for shares of
Municipal Preferred are set forth in Appendix D to the Statement of Additional
Information.

    The first Auction for shares of Municipal Preferred will be held on
________, ________ __, 2000 for Series W and ________, ________ __, 2000 for

<PAGE>

Series F, the Business Day preceding the Dividend Payment Date for the Initial
Rate Period of each respective series. Thereafter, except during Special Rate
Periods, Auctions will normally be held every Tuesday for Series W and Thursday
for Series F, and each Subsequent Rate Period will normally begin on the
following Wednesday for Series W and Friday for Series F.

    Except as noted below, whenever the Trust intends to include any net
capital gain or other income taxable for federal income tax purposes in any
dividend on shares of Municipal Preferred, the Trust shall, in the case of
Minimum Rate Periods or Special Rate Periods of 28 Rate Period Days or fewer,
and may, in the case of any other Special Rate Period, notify the Auction Agent
of the amount to be so included not later than the Dividend Payment Date next
preceding the Auction Date on which the Applicable Rate for such dividend is to
be established. Whenever the Auction Agent receives such notice from the Trust,
it will be required in turn to notify each Broker-Dealer, who, on or prior to
such Auction Date, in accordance with its Broker-Dealer Agreement, will be
required to notify its customers who are Beneficial Owners and Potential
Beneficial Owners believed by it to be interested in submitting an Order in the
Auction to be held on such Auction Date. The Trust may also include such net
capital gain or other income taxable for federal income tax purposes in a
dividend on shares of Municipal Preferred without giving advance notice if the
dividend is increased by a Gross-Up Payment. The Trust must notify the Auction
Agent of the amount not later than the Dividend Payment Date next preceding the
next Auction Date.

SECONDARY MARKET TRADING AND TRANSFER OF MUNICIPAL PREFERRED

    The Broker-Dealers (including the Underwriter) expect, but are not
obligated, to maintain a secondary trading market in shares of Municipal
Preferred outside of Auctions. The Broker-Dealers may discontinue such activity
at any time. There can be no assurance that a secondary trading market for
shares of Municipal Preferred will develop or, if it does develop, that it will
provide owners with liquidity of investment. The shares of Municipal Preferred
will not be registered on any stock exchange or on the National Association of
Securities Dealers Automated Quotations System. Investors who purchase shares
of Municipal Preferred in an Auction for a Special Rate Period should note that
because the dividend rate on such shares will be fixed for the length of such
Rate Period, the secondary market value of such shares may fluctuate in
response to the changes in interest rates, and may be more or less than their
original cost if sold on the open market in advance of the next Auction
thereof, depending on market conditions.

    A Beneficial Owner or an Existing Holder may sell, transfer, or otherwise
dispose of shares of Municipal Preferred only in whole shares and only (1)
pursuant to a Bid or Sell Order placed with the Auction Agent in accordance
with the Auction Procedures, (2) to a Broker-Dealer or (3) to such other
persons as may be permitted by the Trust; provided, however, that (a) a sale,
transfer or other disposition of shares of Municipal Preferred from a customer
of a Broker-Dealer who is listed on the records of that Broker-Dealer as the
holder of such shares to that Broker-Dealer or another customer of that
Broker-Dealer shall not be deemed to be a sale, transfer or other disposition
for purposes of the foregoing if such Broker-Dealer remains the Existing Holder
of the shares so sold, transferred or disposed of immediately after such sale,
transfer or disposition and (b) in the case of all transfers other than
pursuant to Auctions, the Broker-Dealer (or other person, if permitted by the
Trust) to whom such transfer is made shall advise the Auction Agent of such
transfer.

                        DETERMINATION OF NET ASSET VALUE

    Net asset value of the Trust will be determined no less frequently than as
of the close of regular trading on the New York Stock Exchange (the "Exchange")
(generally 4:00 p.m. New York City time) on the last Business Day of each week
(generally Friday), and at such other times as the Trust may authorize. The net
asset value of the Trust equals the value of the Trust's assets less the
Trust's liabilities. Debt securities (other than short-term obligations which
mature in 60 days or less), including listed issues, are valued on the basis of
valuations furnished by dealers or by a pricing service with consideration to

<PAGE>

factors such as institutional-size trading in similar groups of securities,
yield, quality, coupon rate, maturity, type of issue, trading characteristics,
and other market data, without exclusive reliance upon exchange or
over-the-counter prices. Short-term obligations, which mature in 60 days or
less, are valued at amortized cost, which approximates market value. Securities
for which there are no such quotations are valued at fair value as determined
in good faith by or at the direction of the Trustees.

                       DESCRIPTION OF MUNICIPAL PREFERRED

GENERAL

    The Declaration of Trust of the Trust (the "Declaration") provides that the
Trust may authorize separate classes of shares of beneficial interest. The
Statement authorizes the issuance of _____ preferred shares of beneficial
interest, no par value per share, which may be issued from time to time in such
series and with such designations, preferences and other rights,
qualifications, limitations and restrictions as are determined in a resolution
of the Board of Trustees ("Preferred Shares"). The Statement authorizes the
issuance of up to ______ shares of Series W and ______ shares of Series F
Municipal Preferred. Shares of Municipal Preferred carry one vote per share.
Shares of Municipal Preferred will, when issued, be fully paid and, subject to
matters discussed in "Shareholder Liability" in the Statement of Additional
Information, nonassessable, and will have no pre-emptive or conversion rights
or rights to cumulative voting.

DIVIDENDS AND DIVIDEND PERIODS

    GENERAL. The Initial Rate Period for Series W Municipal Preferred shares is
a period consisting of ____ days. The Initial Rate Period for Series F
Municipal Preferred shares is a period consisting of ____ days. Any Subsequent
Rate Period will be a Minimum Rate Period (7 Rate Period Days) unless the
Trust, subject to certain conditions, designates such Subsequent Rate Period as
a Special Rate Period. See "Designation of Special Rate Periods" below.

    Dividends on the shares of Municipal Preferred will be payable, when, as
and if declared by the Board of Trustees out of funds legally available
therefor in accordance with the Declaration, the Statement and applicable law
on Wednesday, ________ __, 2000 for Series W and Friday, ________ __, 2000 for
Series F, and thereafter on each Wednesday for Series W and Friday for Series
F; provided, however, that (1) if the day on which dividends would otherwise be
payable is not a Business Day, then dividends shall be payable instead on the
first Business Day that falls after such regular dividend payment day and (2)
the Trust may specify different Dividend Payment Dates in respect of any
Special Rate Period of such shares of more than 28 Rate Period Days.

    The amount of dividends per share payable on shares of Municipal Preferred
on any date on which dividends shall be payable on such shares shall be
computed by multiplying the Applicable Rate in effect for such Dividend Period
or Dividend Periods or part thereof for which dividends have not been paid by a
fraction, the numerator of which shall be the number of days in such Dividend
Period or Dividend Periods or part thereof and the denominator of which shall
be 365 if such Dividend Period consists of 7 Rate Period Days and 360 for all
other Dividend Periods, and applying the rate obtained against $25,000.

    Dividends will be paid through the Securities Depository on each Dividend
Payment Date in accordance with its normal procedures, which now provide for it
to distribute dividends in next-day funds to Agent Members, who in turn are
expected to distribute such dividend payments to the persons for whom they are
acting as agents. Each of the initial Broker-Dealers, however, has indicated to
the Trust that such Broker-Dealer or the Agent Member designated by such
Broker-Dealer will make such dividend payments available in same-day funds on
each Dividend Payment Date to customers that use such Broker-Dealer or its
designee as Agent Member.

    Dividends on shares of Municipal Preferred shall accumulate from the Date
of Original Issue. The dividend rate for Series W Municipal Preferred shares
for the Initial Rate Period will be ____% per annum. The dividend rate for

<PAGE>

Series F Municipal Preferred shares for the Initial Rate Period will be ____%
per annum. For each Subsequent Rate Period, the dividend rate will be the
Applicable Rate that the Auction Agent advises the Trust results from an
Auction, except as provided below.

        The Applicable Rate that results from an Auction will not be greater
than the Maximum Rate for shares of a series of Municipal Preferred which is:

               (i) in the case of any Auction Date which is not the Auction
        Date immediately prior to the first day of any proposed Special Rate
        Period, the product of (1) the Reference Rate on such Auction Date for
        the next Rate Period of shares of such series and (2) the Rate Multiple
        on such Auction Date, unless such shares of such series have or had a
        Special Rate Period (other than a Special Rate Period of 28 Rate Period
        Days or fewer) and an Auction at which Sufficient Clearing Bids existed
        has not yet occurred for a Minimum Rate Period after such Special Rate
        Period, in which case the higher of:

                      (A) the dividend rate on such shares of such series of
               the then-ending Rate Period; and

                      (B) the product of (x) the higher of (I) the Reference
               Rate on such Auction Date for a Rate Period equal in length to
               the then-ending Rate Period, if such then-ending Rate Period was
               364 Rate Period Days or fewer, or the Treasury Note Rate on such
               Auction Date for a Rate Period equal in length to the
               then-ending Rate Period of shares of such series, if such
               then-ending Rate Period was more than 364 Rate Period Days, and
               (II) the Reference Rate on such Auction Date for a Rate Period
               equal in length to such Special Rate Period of shares of such
               series, if such Special Rate Period was 364 Rate Period Days or
               fewer, or the Treasury Note Rate on such Auction Date for a Rate
               Period equal in length to such Special Rate Period, if such
               Special Rate Period was more than 364 Rate Period Days and (y)
               the Rate Multiple on such Auction Date; or

               (ii) in the case of any Auction Date which is the Auction Date
        immediately prior to the first day of any proposed Special Rate Period,
        the product of (1) the highest of (x) the Reference Rate on such
        Auction Date for a Rate Period equal in length to the then-ending Rate
        Period of shares of such series, if such then-ending Rate Period was
        364 Rate Period Days or fewer, or the Treasury Note Rate on such
        Auction Date for a Rate Period equal in length to the then-ending Rate
        Period of such series, if such then-ending Rate Period was more than
        364 Rate Period Days, (y) the Reference Rate on such Auction Date for
        the Special Rate Period for which the Auction is being held if such
        Special Rate Period is 364 Rate Period Days or fewer or the Treasury
        Note Rate on such Auction Date for the Special Rate Period for which
        the Auction is being held if such Special Rate Period is more than 364
        Rate Period Days, and (z) the Reference Rate on such Auction Date for
        Minimum Rate Periods and (2) the Rate Multiple on such Auction Date.

        If any Auction for any Subsequent Rate Period is not held for any
reason other than as described below, the dividend rate on shares of such
series for such Subsequent Rate Period will be the Maximum Rate on the Auction
Date for such Subsequent Rate Period.

        If the Trust fails to pay in a timely manner to the Auction Agent the
full amount of any dividend on, or the redemption price of, shares of Municipal
Preferred during any Rate Period thereof (other than any Special Rate Period of
more than 364 Rate Period Days or any Rate Period succeeding any Special Rate
Period of more than 364 Rate Period Days during which such a failure occurred
that has not been cured), and, prior to 12:00 Noon on the third Business Day
next succeeding the date such failure occurred, such failure shall have been
cured and the Trust shall have paid a late charge, each as described more fully
in the Statement of Additional Information, no Auction will be held in respect
of shares of such series for the Subsequent Rate Period thereof and the
dividend rate for shares of Municipal Preferred for such Subsequent Rate Period
will be the Maximum Rate on the Auction Date for such Subsequent Rate Period.


<PAGE>

        If the Trust fails to pay in a timely manner to the Auction Agent the
full amount of any dividend on, or the redemption price of, any shares of
Municipal Preferred during any Rate Period (other than any Special Rate Period
of more than 364 Rate Period Days or any Rate Period succeeding any Special
Rate Period of more than 364 Rate Period Days during which such a failure
occurred that has not been cured), and, prior to 12:00 Noon on the third
Business Day next succeeding the date on which such failure occurred, such
failure shall not have been cured or the Trust shall not have paid a late
charge, each as described more fully in the Statement of Additional
Information, no Auction will be held in respect of such shares of such series
for the first Subsequent Rate Period thereof thereafter (or for any Rate Period
thereof thereafter to and including the Rate Period during which such failure
is so cured and such late charge so paid (such late charge to be paid only in
the event Moody's is rating such shares at the time the Trust cures such
failure)), and the dividend rate for such shares for each such Subsequent Rate
Period shall be a rate per annum equal to the Maximum Rate on the Auction Date
for each such Subsequent Rate Period (but with the prevailing rating for such
shares, for purposes of determining such Maximum Rate, being deemed to be
"Below 'ba3'/BB-").

        If the Trust fails to pay in a timely manner to the Auction Agent the
full amount of any dividend on, or the redemption price of, any shares of
Municipal Preferred during a Special Rate Period of more than 364 Rate Period
Days, or during any Rate Period succeeding any Special Rate Period of more than
364 Rate Period Days during which such a failure occurred that has not been
cured, and such failure shall not have been cured or, in the event Moody's is
then rating such shares, the Trust shall not have paid a late charge, in each
case prior to 12:00 Noon, New York City time, on the fourth Business Day
preceding the Auction Date for the Rate Period subsequent to such Rate Period
and as more fully described in the Statement of Additional Information, no
Auction will be held in respect of shares of such series for such Subsequent
Rate Period thereof (or for any Rate Period thereof thereafter to and including
the Rate Period during which such failure is so cured and such late charge is
so paid (such late charge to be paid only in the event that Moody's is rating
the shares at the time and the Trust cures such failure)), and the dividend
rate for each such Subsequent Rate Period shall be a rate per annum equal to
the Maximum Rate on the Auction Date for each such Subsequent Rate Period (but
with the prevailing rating for such shares of such series, for purposes of
determining such Maximum Rate, being deemed to be "Below 'ba3'/BB-").

        A failure to pay dividends on or the redemption price of shares of
Municipal Preferred shall have been cured with respect to any Rate Period if,
within the respective time periods described above, the Trust shall have paid
to the Auction Agent (i) all accumulated and unpaid dividends on the shares of
Municipal Preferred of such series and (ii) without duplication, the redemption
price for the shares of Municipal Preferred of such series, if any, for which
notice of redemption has been mailed by the Trust; provided, however, that the
foregoing clause (ii) shall not apply to the Trust's failure to pay the
redemption price in respect of shares of Municipal Preferred when the related
notice of redemption provides that redemption of such shares is subject to one
or more conditions precedent and any such condition precedent shall not have
been satisfied at the time or times and in the manner specified in such notice
of redemption.

        GROSS-UP PAYMENTS. Holders of shares of Municipal Preferred shall be
entitled to receive, when, as and if declared by the Board of Trustees, out of
funds legally available therefor in accordance with the Declaration, the
Statement and applicable law, dividends in an amount equal to the aggregate
Gross-up Payments in accordance with the following:

        If, in the case of any Minimum Rate Period or any Special Rate Period
of 28 Rate Period Days or fewer, or, in the case of any other Special Rate
Period, the Trust allocates any net capital gain or other income taxable for
federal income tax purposes to a dividend paid on shares of Municipal Preferred
without having given advance notice thereof to the Auction Agent as described
above under "The Auction -- Auction Procedures" (a "Taxable Allocation") by
reason of the fact that such allocation is made retroactively as a result of
the redemption of all or a portion of the outstanding shares of Municipal

<PAGE>

Preferred or the liquidation of the Trust or any other reason, the Trust will,
prior to the end of the calendar year in which such dividend was paid, provide
notice thereof to the Auction Agent and direct the Trust's dividend disbursing
agent to send such notice with a Gross-up Payment to each holder of shares
(initially Cede & Co., as nominee of the Securities Depository) that was
entitled to such dividend payment with respect to shares of Municipal Preferred
during such calendar year at such holder's address as the same appears or last
appeared on the record books of the Trust.

        If, in the case of any Special Rate Period of more than 28 Rate Period
Days, the Trust makes a Taxable Allocation to a dividend paid on shares of
Municipal Preferred, the Trust shall, prior to the end of the calendar year in
which such dividend was paid, provide notice thereof to the Auction Agent and
direct the Trust's dividend disbursing agent to send such notice with a
Gross-up Payment to each holder of such shares that was entitled to such
dividend payment during such calendar year at such holder's address as the same
appears or last appeared on the record books of the Trust.

        The Trust shall not be required to make Gross-up Payments with respect
to any net capital gain or other taxable income determined by the Internal
Revenue Service to be allocable in a manner different from that allocated by
the Trust.

        A "Gross-up Payment" in respect of any dividend means payment to a
holder of shares of Municipal Preferred of an amount which, giving effect to
the Taxable Allocations made with respect to such dividend, would cause such
holder's after-tax returns (taking into account both the Taxable Allocations
and the Gross-up Payment) to be equal to the after-tax return the holder would
have received if no such Taxable Allocations had occurred. Such Gross-up
Payment shall be calculated: (i) without consideration being given to the time
value of money; (ii) assuming that no holder of shares of Municipal Preferred
is subject to the Federal alternative minimum tax with respect to dividends
received from the Trust; and (iii) assuming that each holder of shares of
Municipal Preferred is taxable at the maximum marginal regular Federal
individual income tax rate applicable to ordinary income or net capital gain,
as applicable, or the maximum marginal regular Federal corporate income tax
rate applicable to ordinary income or net capital gain, as applicable,
whichever is greater, in effect at the time such Gross-up Payment is made.

        RESTRICTIONS ON DIVIDENDS AND OTHER DISTRIBUTIONS. For so long as any
shares of Municipal Preferred are outstanding, the Trust may not declare, pay
or set apart for payment any dividend or other distribution (other than a
dividend or distribution paid in shares of, or in options, warrants or rights
to subscribe for or purchase, Common Shares) in respect of Common Shares or
call for redemption, redeem, purchase or otherwise acquire for consideration
any Common Shares (except by conversion into or exchange for shares of the
Trust ranking junior to the shares of Municipal Preferred as to the payment of
dividends and the distribution of assets upon liquidation), unless (1) full
cumulative dividends on shares of Municipal Preferred through their most
recently ended Dividend Period shall have been paid or shall have been declared
and sufficient funds for the payment thereof deposited with the Auction Agent;
(2) the Trust has redeemed the full number of shares of Municipal Preferred
required to be redeemed by any provision for mandatory redemption pertaining
thereto; and (3) immediately after such transaction the Discounted Value of the
Trust's portfolio would at least equal the Municipal Preferred Basic
Maintenance Amount in accordance with guidelines of the rating agency or
agencies then rating the shares of Municipal Preferred.

        Except as set forth in the next sentence, no dividends shall be
declared or paid or set apart for payment on any class or series of shares of
beneficial interest of the Trust ranking, as to the payment of dividends, on a
parity with shares of Municipal Preferred for any period unless full cumulative
dividends have been or contemporaneously are declared and paid on the shares of
Municipal Preferred through their most recent Dividend Payment Date. When
dividends are not paid in full upon the shares of Municipal Preferred through
their most recent Dividend Payment Date or upon any other class or series of
shares ranking on a parity as to the payment of dividends with shares of
Municipal Preferred through their most recent respective dividend payment

<PAGE>

dates, all dividends declared upon shares of Municipal Preferred and any other
such class or series of shares ranking on a parity as to the payment of
dividends with shares of Municipal Preferred shall be declared pro rata so that
the amount of dividends declared per share on shares of Municipal Preferred and
such other class or series of shares shall in all cases bear to each other the
same ratio that accumulated dividends per share on the shares of Municipal
Preferred and such other class or series of shares bear to each other.

DESIGNATION OF SPECIAL RATE PERIODS

        The Trust, at its option, may designate any succeeding Subsequent Rate
Period as a Special Rate Period consisting of a specified number of Rate Period
Days evenly divisible by seven and not more than 1,820 (approximately 5 years),
subject to certain adjustments. A designation of a Special Rate Period shall be
effective only if, among other things, (i) the Trust shall give certain notices
to the Auction Agent, (ii) an Auction for such shares shall have been held on
the Auction Date immediately preceding the first day of such proposed Special
Rate Period and Sufficient Clearing Bids for such shares shall have existed in
such Auction and (iii) if the Trust shall have mailed a notice of redemption
with respect to any shares of Municipal Preferred, the redemption price with
respect to such shares shall have been deposited with the Auction Agent.

VOTING RIGHTS

        In addition to voting rights described below under "Certain Provisions
in the Declaration of Trust" and in the Statement of Additional Information
under "Investment Objective and Policies -- Fundamental Investment Policies,"
holders of shares of Municipal Preferred, voting as a separate class, are
entitled to elect (1) two trustees of the Trust at all times and (2) a majority
of the trustees if at any time dividends on shares of Municipal Preferred shall
be unpaid in an amount equal to two years dividends thereon, and to continue to
be so represented until all dividends in arrears shall have been paid or
otherwise provided for. In all other cases, trustees shall be elected by
holders of Common Shares and Preferred Shares (including Municipal Preferred),
voting together as a single class.

        Subject to the voting rights described above and except as otherwise
specified under "Certain Provisions in the Declaration of Trust," the Trust may
not, among other things, without the approval of the holders of a "majority of
the outstanding" shares of Municipal Preferred, voting as a separate class,
approve any plan of reorganization adversely affecting shares of Municipal
Preferred. In addition, the Trust may not, without the affirmative vote of the
holders of at least a majority of the shares of Municipal Preferred outstanding
at the time, voting as a separate class: (a) authorize, create or issue
additional shares of Municipal Preferred or classes or series of Preferred
Shares ranking prior to or on a parity with shares of Municipal Preferred with
respect to the payment of dividends or the distribution of assets upon
liquidation or (b) amend, alter or repeal the provisions of the Declaration or
the By-Laws, whether by merger, consolidation or otherwise, so as to materially
affect any preference, right or power of such shares of Municipal Preferred or
the holders thereof; provided, however, that a division of a share of Municipal
Preferred shall be deemed to materially affect any such preference, right or
power only if the terms of such division adversely affect the holders of shares
of Municipal Preferred. The Trust may not, without the affirmative vote of the
holders of at least 66 2/3% of the shares of Municipal Preferred outstanding at
the time, voting as a separate class, file a voluntary application for relief
under Federal bankruptcy law or any similar application under state law for so
long as the Trust is solvent and does not foresee becoming insolvent.
Notwithstanding the second sentence of this paragraph, the Trust may, without
the vote of the holders of shares of Municipal Preferred, authorize, create or
issue additional shares of Municipal Preferred or classes or series of
Preferred Shares ranking on a parity with shares of Municipal Preferred with
respect to the payment of dividends and the distribution of assets upon
liquidation if the Trust obtains written confirmation from Moody's (if Moody's

<PAGE>

is then rating the shares of Municipal Preferred) and Standard & Poor's (if
Standard & Poor's is then rating the shares of Municipal Preferred) that the
issuance of any such additional shares or class or series of shares would not
impair the rating then assigned by such rating agency to shares of Municipal
Preferred; provided, however, that if Moody's or Standard & Poor's is not then
rating the shares of Municipal Preferred, the aggregate liquidation preference
of all Preferred Shares of the Trust outstanding after any such issuance,
exclusive of accumulated and unpaid dividends, may not exceed $___________. If
any action set forth in this paragraph would adversely affect the rights of one
or more series (the "Affected Series") of Municipal Preferred in a manner
different from any other series of Municipal Preferred, the Trust will not
approve any such action without the affirmative vote of the holders of at least
a majority of the shares of each such Affected Series outstanding at the time
(each such Affected Series voting as a separate class).

REDEMPTION

        MANDATORY REDEMPTION. In the event the Trust does not timely cure a
failure to maintain (1) a Discounted Value of its portfolio equal to the
Municipal Preferred Basic Maintenance Amount or (2) the 1940 Act Municipal
Preferred Asset Coverage, in each case in accordance with the requirements of
the rating agency or agencies then rating the shares of Municipal Preferred,
shares of Municipal Preferred will be subject to mandatory redemption on a date
specified by the Board of Trustees, out of funds legally available therefor in
accordance with the Declaration, the Statement and applicable law, at the
redemption price of $25,000 per share plus an amount equal to accumulated but
unpaid dividends thereon (whether or not earned or declared) to (but not
including) the date fixed for redemption. Any such redemption will be limited
to the number of shares of Municipal Preferred necessary to restore the
required Discounted Value or the 1940 Act Municipal Preferred Asset Coverage,
as the case may be.

        In determining the number of shares of Municipal Preferred required to
be redeemed in accordance with the foregoing, the Trust will allocate the
number of shares required to be redeemed to satisfy the Municipal Preferred
Basic Maintenance Amount or the 1940 Act Municipal Preferred Asset Coverage, as
the case may be, pro rata among shares of Municipal Preferred and other
Preferred Shares of the Trust, subject to redemption or retirement.

        OPTIONAL REDEMPTION. Shares of Municipal Preferred are redeemable, at
the option of the Trust:

               (i) in whole or in part, on the second Business Day preceding
        any Dividend Payment Date for such shares, out of funds legally
        available therefor in accordance with the Declaration, the Statement
        and applicable law, at the redemption price of $25,000 per share plus
        an amount equal to accumulated but unpaid dividends thereon (whether or
        not earned or declared) to (but not including) the date fixed for
        redemption; provided, however, that (1) shares of Municipal Preferred
        may not be redeemed in part if after such partial redemption fewer than
        500 shares remain outstanding and (2) the notice establishing a Special
        Rate Period of shares of Municipal Preferred, as delivered to the
        Auction Agent and filed with the Secretary of the Trust, may provide
        that such shares shall not be redeemable during the whole or any part
        of such Special Rate Period (except as provided in (ii) below) or shall
        be redeemable during the whole or any part of such Special Rate Period
        only upon payment of such redemption premium or premiums as shall be
        specified therein; and

               (ii) as a whole but not in part, out of funds legally available
        therefor in accordance with the Declaration, the Statement and
        applicable law, on the first day following any Dividend Period included
        in a Rate Period of more than 364 Rate Period Days if, on the date of
        determination of the Applicable Rate for such Rate Period, such
        Applicable Rate equaled or exceeded on such date of determination the
        Treasury Note Rate for such Rate Period, at a redemption price of
        $25,000 per share plus an amount equal to accumulated but unpaid
        dividends thereon (whether or not earned or declared) to (but not
        including) the date fixed for redemption.

        Notwithstanding the foregoing, if any dividends on shares of Municipal
Preferred (whether or not earned or declared) are in arrears, no shares of a
series of Municipal Preferred shall be redeemed unless all outstanding shares
of such series Municipal Preferred are simultaneously redeemed, and the Trust
shall not purchase or otherwise acquire any shares of such series of Municipal
Preferred; provided, however, that the foregoing shall not prevent the purchase
or acquisition of all outstanding shares of such series of Municipal Preferred
pursuant to the successful completion of an otherwise lawful purchase or
exchange offer made on the same terms to, and accepted by, holders of all
outstanding shares of such series of Municipal Preferred.


<PAGE>

LIQUIDATION

        Upon a liquidation of the Trust, whether voluntary or involuntary, the
holders of shares of Municipal Preferred then outstanding will be entitled to
receive and to be paid out of the assets of the Trust available for
distribution to its shareholders, an amount equal to the aggregate of (i) the
liquidation preference with respect to such shares ($25,000 per share), (ii) an
amount equal to all dividends thereon (whether or not earned or declared)
accumulated but unpaid to (but not including) the date of final distribution in
same-day funds, and (iii) any applicable Gross-up Payments in connection with
the liquidation of the Trust. The holders of shares of Municipal Preferred will
receive this amount before any payment or distribution shall be made on the
Common Shares. The right to such amount, upon liquidation, is subject to the
rights of holders of any series or class or classes of shares ranking on a
parity with shares of Municipal Preferred with respect to the distribution of
assets upon liquidation of the Trust. After the payment to the holders of the
shares of Municipal Preferred of the full preferential amounts provided for as
described herein, the holders of Municipal Preferred as such shall have no
right or claim to any of the remaining assets of the Trust.

        Neither the sale of all or substantially all the property or business
of the Trust, nor the merger or consolidation of the Trust into or with any
Massachusetts business trust or corporation nor the merger or consolidation of
any Massachusetts business trust or corporation into or with the Trust shall be
a liquidation, whether voluntary or involuntary, for the purposes of the
foregoing paragraph.

                            RATING AGENCY GUIDELINES

        The Trust is required under Moody's and Standard & Poor's guidelines to
maintain assets having in the aggregate a Discounted Value at least equal to
the Municipal Preferred Basic Maintenance Amount. Moody's and Standard & Poor's
have each established separate guidelines for determining Discounted Value. To
the extent any particular portfolio holding does not satisfy the applicable
rating agency's guidelines, all or a portion of such holding's value will not
be included in the calculation of Discounted Value (as defined by such rating
agency). The Moody's and Standard & Poor's guidelines do not impose any
limitations on the percentage of Trust assets that may be invested in holdings
not eligible for inclusion in the calculation of the Discounted Value of the
Trust's portfolio. The amount of such assets included in the portfolio at any
time may vary depending upon the rating, diversification and other
characteristics of the eligible assets included in the portfolio. The Municipal
Preferred Basic Maintenance Amount includes the sum of (i) the aggregate
liquidation preference of shares of Municipal Preferred then outstanding and
(ii) certain accrued and projected payment obligations of the Trust.

        The Trust is also required under rating agency guidelines to maintain,
with respect to the shares of Municipal Preferred, as of the last Business Day
of each month in which any shares of Municipal Preferred are outstanding, asset
coverage of at least 200% with respect to senior securities which are shares,
including shares of Municipal Preferred (or such other asset coverage as may in
the future be specified in or under the 1940 Act as the minimum asset coverage
for senior securities which are shares of a closed-end investment company as a
condition of declaring dividends on its common shares) ("1940 Act Municipal
Preferred Asset Coverage"). Based on the composition of the Trust's portfolio
and market conditions as of ________ __, 2000, the 1940 Act Municipal Preferred
Asset Coverage with respect to shares of Municipal Preferred, assuming the
issuance on the date hereof of all shares of Municipal Preferred offered hereby
and after giving effect to the deduction of the sales load and offering costs
relating thereto estimated at $______, would be computed as follows:


Value of Trust assets less liabilities not
constituting senior securities                         $______
- --------------------------------------------
                                               =                      =    ___%
Senior securities representing indebtedness
  plus                                                 $______
liquidation value of the shares of
Municipal Preferred


<PAGE>

        In the event the Trust does not timely cure a failure to maintain (1) a
Discounted Value of its portfolio equal to the Municipal Preferred Basic
Maintenance Amount or (2) the 1940 Act Municipal Preferred Asset Coverage, in
each case in accordance with the requirements of the rating agency or agencies
then rating the shares of Municipal Preferred, the Trust will be required to
redeem shares of Municipal Preferred as described above under "Description of
Municipal Preferred -- Redemption."

        The Trust may, but is not required to, adopt any modifications to the
guidelines that may hereafter be established by Moody's or Standard & Poor's.
Failure to adopt any such modifications, however, may result in a change in the
ratings described above or a withdrawal of ratings altogether. In addition, any
rating agency providing a rating for the shares of Municipal Preferred may, at
any time, change or withdraw any such rating. The Board of Trustees may,
without shareholder approval, amend, alter or repeal any or all of the
definitions and related provisions which have been adopted by the Trust
pursuant to the rating agency guidelines in the event the Trust receives
written confirmation from Moody's or Standard & Poor's, or both, as
appropriate, that any such change would not impair the ratings then assigned by
Moody's and Standard & Poor's to shares of Municipal Preferred.

        As described by Moody's and Standard & Poor's, a preferred share rating
is an assessment of the capacity and willingness of an issuer to pay preferred
share obligations. The ratings on the Municipal Preferred are not
recommendations to purchase, hold or sell shares of Municipal Preferred,
inasmuch as the ratings do not comment as to market price or suitability for a
particular investor. The rating agency guidelines described above also do not
address the likelihood that an owner of shares of Municipal Preferred will be
able to sell such shares in an Auction or otherwise. The ratings are based on
current information furnished to Moody's and Standard & Poor's by the Trust and
the Adviser, and information obtained from other sources. The ratings may be
changed, suspended or withdrawn as a result of changes in, or the
unavailability of, such information.

        A rating agency's guidelines will apply to shares of Municipal
Preferred only so long as such rating agency is rating such shares. The Trust
will pay certain fees to Moody's or Standard & Poor's, or both, for rating
shares of Municipal Preferred.

                          DESCRIPTION OF COMMON SHARES

        In addition to the shares of Municipal Preferred, the Declaration
authorizes the issuance of an unlimited number of Common Shares, no par value.
As of April 30, 2000, the Trust had 39,241,840 Common Shares outstanding and
net assets of $303,229,876. See "Financial Highlights," above.

        All Common Shares have equal noncumulative voting rights and equal
rights with respect to dividends, assets and liquidation. Common Shares are
fully paid and nonassessable when issued and have no preemptive, conversion or
exchange rights. So long as any shares of Municipal Preferred are outstanding,
the Trust is not permitted to declare dividends on, make any distributions with
respect to, or purchase its Common Shares unless, at the time of such
declaration, distribution or purchase, as applicable (and after giving effect
thereto), all accumulated dividends on any preferred shares of the Trust have
been paid.

        In the past, the Trust's Common Shares have traded on the New York
Stock Exchange at various times at either a premium or a discount in relation
to net asset value. Shares of other closed-end investment companies frequently
trade on a stock exchange at a discount from net asset value.


<PAGE>

                 CERTAIN PROVISIONS IN THE DECLARATION OF TRUST

        The Board of Trustees is divided into three classes, each having a term
of three years. Each year the term of one class expires. This may make it more
difficult to change the Trust's management and could have the effect of
depriving 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 Trust in a tender offer or similar
transaction. Also, the Declaration provides that the affirmative vote or
consent of two-thirds of the outstanding Common Shares and any Preferred Shares
of the Trust (including shares of Municipal Preferred), voting together as a
single class, and of the Preferred Shares (including shares of Municipal
Preferred) voting as a separate class, would be required to authorize the
conversion of the Trust from a closed-end to an open-end investment company.
This two-thirds vote requirement is higher than the vote required under the
1940 Act. In addition, the affirmative vote or consent of the holders of
two-thirds of the outstanding shares of the Trust is required to authorize any
of the following transactions:

        (i)    merger or consolidation of the Trust with or into any other
               corporation;

        (ii)   sale, lease or exchange of all or any substantial part of the
               assets of the Trust to any entity or person (except assets
               having an aggregate fair market value of less than $1,000,000);
               or

        (iii)  sale, lease or exchange to the Trust, in exchange for securities
               of the Trust, of any assets of any entity or person (except
               assets having an aggregate fair market value of less than
               $1,000,000) if such corporation, person or entity is directly,
               or indirectly through affiliates, the beneficial owner of five
               percent or more of the outstanding shares of the Trust.

However, such vote or consent will not be required with respect to the
foregoing transactions where the Board of Trustees under certain conditions
approves the transaction.

        The foregoing provisions will make more difficult a change in the
Trust's management, or consummation of the foregoing transactions without the
Trustees' approval, and could have the effect of depriving shareholders of an
opportunity to sell their shares at a premium over prevailing market prices by
discouraging a third party from seeking to obtain control of the Trust in a
tender offer or similar transaction. However, they provide the advantage of
potentially requiring persons seeking control of the Trust to negotiate with
its management regarding the price to be paid and facilitating the continuity
of the Trust's management.

        Reference is made to the Declaration of Trust of the Trust, on file
with SEC, for the full text of these provisions.

            REPURCHASE OF COMMON SHARES; CONVERSION TO OPEN-END FUND

REPURCHASE OF SHARES

        Shares of closed-end investment companies frequently trade at a
discount from net asset value. The Board of Trustees regularly monitors the
relationship between the Trust's market price and net asset value. If shares of
the Trust 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 the making of tender offers for such shares. Since
commencement of the Trust's operations, no such open market purchases or tender
offers have been made, and no assurances can be given that such actions will be
taken in the future. Subject to its investment restrictions, the Trust may

<PAGE>

borrow money to finance the repurchase of shares, subject to compliance with
the 1940 Act Municipal Preferred Asset Coverage, Section 18 of the 1940 Act and
the other limitations described under "Rating Agency Guidelines." Shares may
not be repurchased, however, (i) if applicable asset coverage requirements
under the 1940 Act (i.e., 200% with respect to any preferred shares of the
Trust, including shares of Municipal Preferred) are not met or would not be met
following such repurchase or (ii) if otherwise prohibited by applicable law.

        There can be no assurance that repurchases or tenders, if they were to
occur, would result in the shares trading at a price which is equal to their
net asset value. The Trust anticipates that the market price of the shares will
usually vary from net asset value. The market price of the shares will be
determined, among other things, by the relative demand for and supply of the
shares in the market, the Trust's investment performance, the Trust's dividends
and yield and investor perception of the Trust's overall attractiveness as an
investment as compared with other investment alternatives. It should be
recognized that any such acquisitions of shares would decrease the total assets
of the Trust and therefore have the effect of increasing the Trust's expense
ratio. Furthermore, any interest on borrowings to finance share repurchase
transactions would reduce the Trust's net income.

CONVERSION TO OPEN-END STATUS

        The Trust's Board of Trustees may from time to time consider submitting
to the holders of the shares of beneficial interest of the Trust at any time a
proposal to convert the Trust to an open-end investment company. In determining
whether to exercise its 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 Trust's capital structure is leveraged and the possibility
of re-leveraging, the spread, if any, between yields on lower rated securities
in the Trust's portfolio and interest and dividend charges on senior securities
and general market and economic conditions. In addition to any vote required by
Massachusetts law, conversion of the Trust to an open-end investment company
would require the affirmative vote of two-thirds of the Common Shares and any
Preferred Shares of the Trust (including shares of Municipal Preferred)
entitled to be voted on the matter, voting together as a single class, and of
the Preferred Shares (including shares of Municipal Preferred) entitled to be
voted on the matter, voting as a single class. This two-thirds vote requirement
is higher than the vote required under the 1940 Act. Shareholders of an
open-end investment company may require the company to redeem their shares at
any time (except in certain circumstances as authorized by or under the 1940
Act) at their net asset value, less such redemption charges, if any, as might
be in effect at the time of redemption. If the Trust converted to an open-end
investment company, it would be required to redeem all shares of Municipal
Preferred then outstanding at the redemption price specified under "Description
of Municipal Preferred -- Redemption -- Optional Redemption." In addition, the
Trust could be required to liquidate portfolio securities to meet required and
requested redemptions, and its Common Shares would no longer be listed on the
Exchange. No assurance can be given that the Board will, at any time in the
future, decide to submit a proposal to convert to open-end status to the
shareholders of the Trust.

                                  TAX MATTERS

        The following discussion briefly summarizes some of the federal and
state income tax considerations generally applicable to investments in the
Trust. A more detailed summary is available under the heading "Tax Matters" in
the Statement of Additional Information. However, because each investor's tax
situation is different (especially with regard to state, local and foreign tax
considerations) investors are urged to consult their own tax advisers regarding
the tax considerations that may be applicable in their particular situations.

        The Trust intends to qualify each year as a "regulated investment
company" under Subchapter M of the Code. Because the Trust intends to
distribute all of its net tax-exempt income, net investment income and net
realized capital gains to shareholders in accordance with the timing
requirements imposed by the Code, it is not expected that the Trust will be
required to pay an entity-level federal income or excise tax.

        The Trust intends to satisfy applicable requirements of the Code so as
to be able to designate dividends that the Trust pays from interest on
Municipal Bonds as "exempt-interest dividends." Exempt-interest dividends are

<PAGE>

excludable from a shareholder's gross income for federal income tax purposes.
Distributions of income, if any, from capital gains, from investments in
taxable securities, and from certain other transactions, including futures
transactions, will be taxable to shareholders. The Trust will designate
dividends paid as exempt-interest dividends in a manner that allocates such
dividends between the holders of the Common Shares and the holders of shares of
Municipal Preferred in proportion to the total dividends paid to each of those
classes for a given taxable year.

        The Trust does not expect any of its dividends to qualify for the
dividends-received deduction for corporations. Shareholders may not have to pay
state or local taxes on the portion of dividends that the Trust pays from
interest on U.S. government obligations; investors should consult with their
tax advisers in this regard.

        Interest on indebtedness incurred or continued by shareholders to
purchase or carry shares of the Trust will not be deductible for federal income
tax purposes. Exempt-interest dividends are taken into account in calculating
the amount of social security and railroad retirement benefits that may be
subject to federal income tax, and a portion of the Trust's exempt-interest
dividends may be treated as a tax preference item for purposes of the federal
individual and corporate alternative minimum tax. All exempt-interest dividends
may affect a corporate shareholder's alternative minimum tax liability. All or
a portion of exempt-interest dividends may be subject to state and local income
taxes. Entities or persons who are "substantial users" (or who are related to
"substantial users") of facilities financed by private activity bonds should
consult their tax advisers before purchasing shares of the Trust.

        As described under the heading "Description of Municipal Preferred,"
above, the Trust may be required to make Gross-up Payments to holders of
Municipal Preferred shares. Gross-up Payments are generally intended to put
holders in the same federal income tax position they would have been in had all
of the dividends paid to them consisted of exempt-interest dividends. However,
Gross-up Payments will not compensate for any foreign, state or local taxes on
distributions paid by the Trust, including foreign, state or local taxes on the
Gross-up Payments themselves. Gross-up Payments also will not compensate
holders in the event that the Internal Revenue Service recharacterizes as a
taxable distribution any payment that the Trust has designated as an
exempt-interest dividend (including a Gross-up Payment so designated).

        The Trust intends to withhold U.S. federal income tax at the rate of
30% (or any lower rate permitted by an applicable treaty) on any taxable
dividends and other payments that are subject to such withholding and that are
made to persons who are neither citizens nor residents of the U.S. The Trust is
also required under certain circumstances to apply backup withholding at the
rate of 31% on taxable dividends paid to any shareholder (including a
shareholder who is not a citizen or resident of the U.S.) who does not furnish
certain required information and certifications to the Trust, or who is
otherwise subject to backup withholding. Backup withholding will not, however,
be applied to payments that have been subject to 30% withholding. The Trust
will send written notices to shareholders regarding the federal income tax
status of all dividends and distributions for each calendar year, including the
portion constituting exempt-interest dividends, the portion, if any, taxable as
ordinary income, the portion, if any, taxable as long-term capital gain (as
well as the rate category or categories under which such gain is taxable), the
portion, if any, representing a return of capital (which is generally free of
current taxes, but which results in a basis reduction), and the amount, if any,
of federal income tax withheld.

        A shareholder's sale or disposition of Trust shares will ordinarily be
a taxable event for federal income tax purposes. A taxable disposition will
result in a capital gain or loss if the shares are held as a capital asset,
which will generally be a long-term capital gain or loss if the shares were
held for more than twelve months, and otherwise a short-term capital gain or
loss. A loss realized on a sale of shares held for six months or less will be
disallowed to the extent of exempt-interest dividends received on the shares,

<PAGE>

and any portion allowed will be treated as a long-term capital loss to the
extent of capital gain dividends received on the shares. Losses may also be
disallowed under rules relating to wash sales. If shares are sold after
tax-exempt income is accrued but before it is paid as a dividend, the sales
price generally will reflect that accrued income, which will increase the
taxable gain (or reduce the loss) on the sale, even though the income would
have been exempt from tax if distributed as a dividend prior to the sale.

                   CUSTODIAN, AUCTION AGENT, TRANSFER AGENT,
                    DIVIDEND DISBURSING AGENT AND REGISTRAR

        The Trust's securities and cash are held by State Street Bank and Trust
Company, 225 Franklin Street, Boston, Massachusetts 02110, as custodian (the
"Custodian") under a custodian contract.

        ______, serves as auction agent for the Trust in connection with the
shares of Municipal Preferred. ______ also serves as the transfer agent,
registrar, dividend disbursing agent and redemption agent for shares of
Municipal Preferred.

        MFS Service Center, Inc., 2 Avenue de Lafayette, Boston, Massachusetts
02111-1738, is the shareholder servicing agent, registrar and transfer agent
for the Common Shares of the Trust.

                                  UNDERWRITING

        Subject to the terms and conditions of the Underwriting Agreement
between Salomon Smith Barney Inc. (the "Underwriter") and the Trust (the
"Underwriting Agreement") dated the date hereof, the Underwriter has agreed to
purchase, and the Trust has agreed to sell, ______ shares of Series W and
______ shares of Series F Municipal Preferred offered hereby.

        The Underwriting Agreement provides that the obligations of the
Underwriter are subject to the approval of certain legal matters by counsel and
to certain conditions precedent, and that the Underwriter is obligated to
purchase all of the shares of Municipal Preferred if any are purchased.

        The Trust has been advised by the Underwriter that it proposes
initially to offer the shares of each series of Municipal Preferred offered
hereby to the public at the price set forth on the cover page of this
Prospectus and to selected dealers at such price less a concession not to
exceed $________ per share. The underwriting commission to be paid by the Trust
of $________ per share is equal to ____% of the initial offering price. The
Underwriter may allow, and such dealers may re-allow, a concession not in
excess of $________ per share on sales to certain other dealers. After the
initial public offering, the public offering price and the concession may be
changed by the Underwriter.

        The Trust anticipates that the Underwriter may from time to time act as
a broker or dealer in connection with the execution of its portfolio
transactions after it has ceased to be an Underwriter. The Trust anticipates
that the Underwriter or one of its affiliates may, from time to time, act in
Auctions as Broker-Dealers as set forth under "The Auction -- General" and will
receive the fees described under "The Auction -- Broker-Dealers" in the
Statement of Additional Information in exchange for so acting. The Underwriter
is an active underwriter of, and dealer in, securities and acts as a market
maker in a number of such securities and therefore can be expected to engage in
portfolio transactions with the Trust.

        The principal business address of Salomon Smith Barney Inc. is 388
Greenwich Street, New York, New York 10010.

                                 LEGAL OPINIONS

        Certain legal matters in connection with the Series W and F Municipal
Preferred offered hereby will be passed upon for the Trust by Bingham Dana LLP,

<PAGE>

Boston, Massachusetts, and for the Underwriters by Simpson Thacher & Bartlett,
New York, New York. Simpson Thacher & Bartlett will rely, as to certain matters
of Massachusetts law in its opinion, on the opinion of Bingham Dana LLP.

                            REPORTS TO SHAREHOLDERS

        The Trust will send unaudited semiannual and audited annual reports to
its shareholders based on Generally Accepted Accounting Principals in the
United States of America, including, as currently required by regulations of
the Securities and Exchange Commission, a list of investments held.

                                    EXPERTS

        The Financial Statements included in the Statement of Additional
Information have been so included in the reliance on the report of Deloitte &
Touche LLP, independent accountants, given on the authority of said firm as
experts in accounting and auditing. The address of Deloitte & Touche LLP is 200
Berkeley Street, Boston, Massachusetts 02116.

                              FURTHER INFORMATION

        The Trust has filed with the Securities and Exchange Commission (the
"Commission"), Washington, DC 20549, a Registration Statement under the
Securities Act with respect to the shares of Municipal Preferred offered
hereby. Further information concerning these securities and the Trust may be
found in the Registration Statement, of which this Prospectus constitutes a
part, on file with the Commission. The Registration Statement may be inspected
without charge at the Commission's office in Washington, DC, and copies of all
or any part thereof may be obtained from such office after payment of the fees
prescribed by the Commission.

        The Trust is subject to the informational requirements of the
Securities Exchange Act of 1934, as amended, and the 1940 Act, and in
accordance therewith files reports and other information with the Commission.
Such reports, proxy and information statements and other information can be
inspected and copied at the public reference facilities maintained by the
Commission at 450 Fifth Street, N.W., Washington, DC 20549 and the Commission's
regional offices, including offices at Seven World Trade Center, New York, New
York 10048. Call 1-202-942-8090 for information about the public reference
facilities. Copies of such material can be obtained from the Public Reference
Section of the Commission at 450 Fifth Street, N.W., Washington, DC 20549 at
prescribed rates. Such reports and other information concerning the Trust may
also be inspected at the offices of the Exchange. The Statement of Additional
Information, material incorporated by reference into this Prospectus and the
Statement of Additional Information, and reports, proxy and information
statements and other information regarding registrants that file electronically
with the Commission is also available on the EDGAR Database on the SEC Internet
site at http://www.sec.gov. In addition, reports, proxy and information
statements and other information concerning the Trust can be inspected at the
offices of the Exchange, 20 Broad Street, New York, New York 10005.

                                    GLOSSARY

        " 'AA' Composite Commercial Paper Rate," on any date for any Rate
Period of shares of a series of Municipal Preferred, means: (i)(A) in the case
of any Minimum Rate Period or any Special Rate Period of fewer than 49 Rate
Period Days, the interest equivalent of the 30-day rate; provided, however,
that if such Rate Period is a Minimum Rate Period and the "AA" Composite
Commercial Paper Rate is being used to determine the Applicable Rate for shares
of such series when all of the outstanding shares of such series of Municipal
Preferred are subject to Submitted Hold Orders, then the interest equivalent of
the seven-day rate, and (B) in the case of any Special Rate Period of (1) 49 or
more but fewer than 70 Rate Period Days, the interest equivalent of the 60-day

<PAGE>

rate; (2) 70 or more but fewer than 85 Rate Period Days, the arithmetic average
of the interest equivalent of the 60-day and 90-day rates; (3) 85 or more but
fewer than 99 Rate Period Days, the interest equivalent of the 90-day rate; (4)
99 or more but fewer than 120 Rate Period Days, the arithmetic average of the
interest equivalent of the 90-day and 120-day rates; (5) 120 or more but fewer
than 141 Rate Period Days, the interest equivalent of the 120-day rate; (6) 141
or more but fewer than 162 Rate Period Days, the arithmetic average of the
interest equivalent of the 120-day and 180-day rates; and (7) 162 or more but
fewer than 183 Rate Period Days, the interest equivalent of the 180-day rate,
in each case on commercial paper placed on behalf of issuers whose corporate
bonds are rated "AA" by Standard & Poor's or the equivalent of such rating by
Standard & Poor's or another rating agency, as made available on a discount
basis or otherwise by the Federal Reserve Bank of New York for the Business Day
next preceding such date; or (ii) in the event that the Federal Reserve Bank of
New York does not make available any such rate, then the arithmetic average of
such rates, as quoted on a discount basis or otherwise, by certain commercial
paper dealers to the Auction Agent for the close of business on the Business
Day next preceding such date.

        "Agent Member" means a member of or participant in the Securities
Depository that will act on behalf of a Bidder.

        "All Hold Order Rate," with respect to a Rate Period for which an
Auction is held, means the lesser of the Kenny Index (if the Rate Period for
which the Auction is held consists of fewer than 183 Rate Period Days) or the
product of (i)(1) the "AA" Composite Commercial Paper Rate on the Auction Date
for such Rate Period, if such Rate Period consists of fewer than 183 Rate
Period Days, (2) the Treasury Bill Rate on such Auction Date for such Rate
Period, if such Rate Period consists of more than 182 but fewer than 365 Rate
Period Days or (3) the Treasury Note Rate on such Auction Date for such Rate
Period, if such Rate Period is more than 364 Rate Period Days (the rate
described in the foregoing clause (i)(1), (2) or (3), as applicable, being
referred to herein as the "Benchmark Rate"), and (ii) 1 minus the maximum
marginal regular Federal individual income tax rate applicable to ordinary
income or the maximum marginal regular Federal corporate income tax rate
applicable to ordinary income, whichever is greater; provided, however, that if
the Trust has notified the Auction Agent of its intent to allocate to shares of
such series of Municipal Preferred in such Rate Period any net capital gains or
other income taxable for federal income tax purposes ("Taxable Income"), the
Applicable Rate on shares of Municipal Preferred for such Rate Period will be
(A) if the Taxable Yield Rate (as defined below) is greater than the Benchmark
Rate, then the Benchmark Rate, or (B) if the Taxable Yield Rate is less than or
equal to the Benchmark Rate, then the rate equal to the sum of (x) the lesser
of the Kenny Index (if such Rate Period consists of fewer than 183 Rate Period
Days) or the product of the Benchmark Rate multiplied by the factor set forth
in the preceding clause (ii) and (y) the product of the maximum marginal
regular Federal individual income tax rate applicable to ordinary income or the
maximum marginal regular Federal corporate income tax rate applicable to
ordinary income, whichever is greater, multiplied by the Taxable Yield Rate.
For purposes of the foregoing, Taxable Yield Rate means the rate determined by
(a) dividing the amount of Taxable Income available for distribution per share
of Municipal Preferred by the number of days in the Dividend Period in respect
of which such Taxable Income is contemplated to be distributed, (b) multiplying
the amount determined in (a) above by 365 (in the case of a Dividend Period of
7 Rate Period Days) or 360 (in the case of any other Dividend Period), and (c)
dividing the amount determined in (b) above by $25,000.

        "Applicable Rate" means the rate per annum at which dividends are
payable on shares of Municipal Preferred for any Rate Period thereof.

        "Auction Agency Agreement" means an agreement between the Trust and the
Auction Agent which provides, among other things, that the Auction Agent will
follow the Auction Procedures for purposes of determining the Applicable Rate
for shares of a series of Municipal Preferred so long as the Applicable Rate
for such shares is to be based on the results of an Auction.

        "Auction Agent" means the entity appointed as such by a resolution of
the Board of Trustees.

        "Bidder" means a Beneficial Owner or a Potential Beneficial Owner
placing an Order with its Broker-Dealer or an Existing Holder or Potential
Holder placing an order with the Auction Agent or on whose behalf an Order is
placed with an Auction Agent.


<PAGE>

        "Board of Trustees" means the Board of Trustees of the Trust or any
duly authorized committee thereof.

        "Broker-Dealer" means any broker-dealer, commercial bank or other
entity permitted by law to perform the functions required of a Broker-Dealer,
that is a member of, or a participant in, the Securities Depository or is an
affiliate of such member or participant, has been selected by the Trust and has
entered into a Broker-Dealer Agreement that remains effective.

        "Broker-Dealer Agreement" means an agreement among the Trust, the
Auction Agent and a Broker-Dealer pursuant to which such Broker-Dealer agrees
to follow the Auction Procedures.

        "Business Day" shall mean a day on which the New York Stock Exchange is
open for trading, and which is neither a Saturday, Sunday nor any other day on
which banks in The City of New York, New York are authorized by law to close.

        "Code" means the Internal Revenue Code of 1986, as amended.

        "Date of Original Issue" with respect to shares of a series of
Municipal Preferred means the date on which the Trust initially issued such
shares.

        "Dividend Payment Date" with respect to shares of a series of Municipal
Preferred means any date on which dividends on shares of such series of
Municipal Preferred are payable as provided under "Description of Municipal
Preferred -- Dividends and Dividend Periods."

        "Dividend Period" with respect to shares of a series of Municipal
Preferred means the period from and including the Date of Original Issue of
shares of such series of Municipal Preferred to but excluding the initial
Dividend Payment Date for such shares and any period thereafter from and
including one Dividend Payment Date for such shares to but excluding the next
succeeding Dividend Payment Date for such shares.

        "Existing Holder" with respect to shares of a series of Municipal
Preferred means a Broker-Dealer (or any such other person as may be permitted
by the Trust) that is listed on the records of the Auction Agent as a holder of
shares of such series of Municipal Preferred.

        "Gross-Up Payment" has the meaning specified under "Dividends and
Dividend Periods - Gross-Up Payments."

        "Initial Rate Period" means the period from and including the Date of
Original Issue of shares of Municipal Preferred to but excluding Wednesday,
________ __, 2000 for Series W shares and Friday, ________ __, 2000 for Series
F shares.

        "Kenny Index" has the meaning specified under "Taxable Equivalent of
the Short-Term Municipal Bond Rate."

        "Minimum Rate Period" means any Rate Period consisting of 7 Rate Period
Days.

        "Potential Holder" with respect to shares of a series of Municipal
Preferred means a Broker-Dealer (or any such other person as may be permitted
by the Trust) that is not an Existing Holder of shares of Municipal Preferred
or that is an Existing Holder of such shares that wishes to become the Existing
Holder of additional shares.


<PAGE>

        "Rate Multiple" with respect to shares of a series of Municipal
Preferred means a percentage, determined as set forth below, based on the
prevailing rating of shares of Municipal Preferred in effect at the close of
business on the Business Day next preceding the relevant Auction Date:

<TABLE>
<CAPTION>
<S>                                                                           <C>
PREVAILING RATING                                                             PERCENTAGE

"aa3"/AA- or higher....................................................          110%
"a3"/A-................................................................          125%
"baa3"/BBB-............................................................          150%
"ba3"/BB-..............................................................          200%
Below "ba3"/BB-........................................................          250%
</TABLE>

provided, however, that in the event the Trust has notified the Auction Agent
of its intent to allocate income taxable for federal income tax purposes to
shares of Municipal Preferred prior to the Auction establishing the Applicable
Rate for such shares, the applicable percentage in the foregoing table shall be
divided by the quantity 1 minus the maximum marginal regular Federal individual
income tax rate applicable to ordinary income or the maximum marginal regular
Federal corporate income tax rate applicable to ordinary income, whichever is
greater. If the ratings for shares of Municipal Preferred are split between two
of the foregoing categories, the lower rating will determine the prevailing
rating. If the shares of Municipal Preferred are rated by only one rating
agency, such rating will be the prevailing rating.

        "Rate Period" with respect to shares of a series of Municipal Preferred
means the Initial Rate Period of shares of such series of Municipal Preferred
and any Subsequent Rate Period of such shares.

        "Rate Period Days," for any Rate Period or Dividend Period, means the
number of days that would constitute such Rate Period or Dividend Period but
for either (i) the shortening or lengthening, as the case may be, of such Rate
Period or Dividend Period as set forth under "Description of Municipal
Preferred -- Dividends and Dividend Periods" because the day on which dividends
would otherwise be payable is not a Business Day or (ii) the shortening of such
Rate Period pursuant to the provisions relating to the designation of Special
Rate Periods as set forth in the Statement of Additional Information under
"Description of Municipal Preferred -- Designation of Special Rate Periods."

        "Reference Rate" means (i) the higher of the Taxable Equivalent of the
Short-Term Municipal Bond Rate and the "AA" Composite Commercial Paper Rate in
the case of Minimum Rate Periods and Special Rate Periods of 28 Rate Period
Days or fewer; (ii) the "AA" Composite Commercial Paper Rate in the case of
Special Rate Periods of more than 28 Rate Period Days but fewer than 183 Rate
Period Days; and (iii) the Treasury Bill Rate in the case of Special Rate
Periods of more than 182 Rate Period Days but fewer than 365 Rate Period Days.

        "Securities Depository" means The Depository Trust Company and its
successors and assigns or any other securities depository selected by the Trust
which agrees to follow the procedures required to be followed by such
securities depository in connection with shares of Municipal Preferred.

        "Special Rate Period" with respect to shares of a series of Municipal
Preferred means any Subsequent Rate Period commencing on the date designated by
the Trust, as set forth under "Description of Municipal Preferred --
Designation of Special Rate Periods," and ending on the last day of the last
Dividend Period thereof.

        "Submission Deadline" means 1:30 P.M. New York City time, on any
Auction Date or such other time on any Auction Date by which Broker-Dealers are
required to submit Orders to the Auction Agent as specified by the Auction
Agent from time to time.


<PAGE>

        "Submitted Bid" means a valid Bid submitted or deemed submitted to the
Auction Agent by a Broker-Dealer by the Submission Deadline.

        "Submitted Hold Order" means a valid Hold Order submitted or deemed
submitted to the Auction Agent by a Broker-Dealer by the Submission Deadline.

        "Subsequent Rate Period" with respect to shares of a series of
Municipal Preferred means any period from and including the first day following
the Initial Rate Period of shares of such series of Municipal Preferred to but
excluding the next Dividend Payment Date for such shares and any period
thereafter from and including one Dividend Payment Date for such shares to but
excluding the next succeeding Dividend Payment Date for such shares; provided,
however, that if any Subsequent Rate Period is also a Special Rate Period, such
term shall mean the period commencing on the first day of such Special Rate
Period and ending on the last day of the last Dividend Period thereof.

        "Taxable Equivalent of the Short-Term Municipal Bond Rate," on any date
for any Minimum Rate Period or Special Rate Period of 28 Rate Period Days or
fewer, means 90% of the quotient of (A) the per annum rate expressed on an
interest equivalent basis equal to the Standard & Poor's Kenny 30-day High
Grade Index or any successor index (the "Kenny Index") (provided, however, that
any such successor index must be approved by Moody's (if Moody's is then rating
the shares of Municipal Preferred) and Standard & Poor's (if Standard & Poor's
is then rating the shares of Municipal Preferred)), made available for the
Business Day immediately preceding such date but in any event not later than
8:30 A.M., New York City time, on such date by Standard & Poor's J.J. Kenny
Evaluation Services or any successor thereto, based upon 30-day yield
evaluations at par of short-term bonds the interest on which is excludable for
regular federal income tax purposes under the Code, of "high grade" component
issuers selected by Standard & Poor's J.J. Kenny Evaluation Services or any
such successor from time to time in its discretion, which component issuers
shall include, without limitation, issuers of general obligation bonds but
shall exclude any bonds the interest on which constitutes an item of tax
preference under Section 57(a)(5) of the Code, or successor provisions, for
purposes of the "alternative minimum tax," divided by (B) 1.00 minus the
maximum marginal regular Federal individual income tax rate applicable to
ordinary income or the maximum marginal regular Federal corporate income tax
rate applicable to ordinary income (in each case expressed as a decimal),
whichever is greater; provided, however, that if the Kenny Index is not made so
available by 8:30 A.M., New York City time, on such date by Standard & Poor's
J.J. Kenny Evaluation Services or any successor, the Taxable Equivalent of the
Short-Term Municipal Bond Rate shall mean the quotient of (A) the per annum
rate expressed on an interest equivalent basis equal to the most recent Kenny
Index so made available for any preceding Business Day, divided by (B) 1.00
minus the maximum marginal regular Federal individual income tax rate
applicable to ordinary income or the maximum marginal regular Federal corporate
income tax rate applicable to ordinary income (in each case expressed as a
decimal), whichever is greater.

        "Treasury Bill" means a direct obligation of the U.S. Government having
a maturity at the time of issuance of 364 days or less.

        "Treasury Bill Rate," on any date for any Rate Period, means: (i) the
bond equivalent yield, calculated in accordance with prevailing industry
convention, of the rate on the most recently auctioned Treasury Bill with a
remaining maturity closest to the length of such Rate Period, as quoted in The
Wall Street Journal on such date for the Business Day next preceding such date;
or (ii) in the event that any such rate is not published in The Wall Street
Journal, then the bond equivalent yield, calculated in accordance with
prevailing industry convention, as calculated by reference to the arithmetic
average of the bid price quotations of the most recently auctioned Treasury
Bill with a remaining maturity closest to the length of such Rate Period, as
determined by bid price quotations as of the close of business on the Business
Day immediately preceding such date obtained from certain U.S. Government
securities dealers to the Auction Agent.


<PAGE>

        "Treasury Note" means a direct obligation of the U.S. Government having
a maturity at the time of issuance of five years or less but more than 364
days.

        "Treasury Note Rate," on any date for any Rate Period, means: (i) the
yield on the most recently auctioned Treasury Note with a remaining maturity
closest to the length of such Rate Period, as quoted in The Wall Street Journal
on such date for the Business Day next preceding such date; or (ii) in the
event that any such rate is not published in The Wall Street Journal, then the
yield as calculated by reference to the arithmetic average of the bid price
quotations of the most recently auctioned Treasury Note with a remaining
maturity closest to the length of such Rate Period, as determined by bid price
quotations as of the close of business on the Business Day immediately
preceding such date obtained from certain U.S. Government securities dealers to
the Auction Agent.


<PAGE>


                                   APPENDIX A

                      INVESTMENT TECHNIQUES AND PRACTICES

        In pursuing its investment objective, the Trust may engage in the
following principal and non-principal techniques and practices. Investment
techniques and practices which are the principal focus of the Trust are also
described, together with their risks, under "Investment Objective and Policies"
and "Risk Factors and Special Considerations" in the Prospectus. Both principal
and non-principal investment techniques and practices are described, together
with their risks in the SAI.

INVESTMENT TECHNIQUES/PRACTICES

SYMBOLS.x  permitted   --  not permitted

Debt Securities
 Asset-Backed Securities
 Collateralized Mortgage Obligations and Multiclass
 Pass-Through Securities                                     x
 Corporate Asset-Backed Securities                           x
 Mortgage Pass-Through Securities                            x
 Stripped Mortgage-Backed Securities                         x
 Corporate Securities                                        x
 Loans and Other Direct Indebtedness                         x
 Lower Rated Bonds                                           x
 Municipal Bonds                                             x
 Speculative Bonds                                           x
 U.S. Government Securities                                  x
 Variable and Floating Rate Obligations                      --
 Zero Coupon Bonds, Deferred Interest Bonds and PIK Bonds    x
 Equity Securities                                           x
 Foreign Securities Exposure
 Brady Bonds                                                 --
 Depositary Receipts                                         --
 Dollar-Denominated Foreign Debt Securities                  --
 Emerging Markets                                            --
 Foreign Securities                                          --
 Forward Contracts                                           --
 Futures Contracts                                            x
 Indexed Securities/Structured Products                       x
 Inverse Floating Rate Obligations                            x
 Investment in Other Investment Companies
 Open-End Funds                                              --
 Closed-End Funds                                             x
 Lending of Portfolio Securities                             --
 Leveraging Transactions
 Bank Borrowings                                             --*
 Mortgage "Dollar-Roll" Transactions                         x**
 Reverse Repurchase Agreements                               --*
 Options
 Options on Foreign Currencies                               --*
 Options on Futures Contracts                                --*

<PAGE>

 Options on Securities                                       --*
 Options on Stock Indices                                    --*
 Reset Options                                               --*
 "Yield Curve" Options                                       --*
 Repurchase Agreements                                       x
 Restricted Securities                                       x
 Short Sales                                                 --*
 Short Sales Against the Box                                 --
 Short Term Instruments                                      x
 Swaps and Related Derivative Instruments                    x
 Temporary Borrowings                                        x
 Temporary Defensive Positions                               x
 Warrants                                                    --
 "When-Issued" Securities                                    x

- -----------------------
*    May only be changed with shareholder approval
**   The Trust will only enter into "covered" mortgage dollar-roll
     transactions, meaning that the Trust segregates liquid securities it will
     repurchase and does not use these transactions as a form of leverage.



<PAGE>


<TABLE>
<CAPTION>
            TABLE OF CONTENTS OF STATEMENT OF ADDITIONAL INFORMATION
<S>                                                                                     <C>

                                                                                        PAGE

Use of Proceeds...................................................................       B-__
Investment Objective and Policies.................................................       B-__
Trust Charges and Expenses........................................................       B-__
Management of the Trust...........................................................       B-__
Portfolio Transactions............................................................       B-__
Net Asset Value...................................................................       B-__
The Auction.......................................................................       B-__
Description of Municipal Preferred................................................       B-__
Repurchase of Common Shares.......................................................       B-__
Tax Matters.......................................................................       B-__
Shareholder Liability.............................................................       B-__
Custodian.........................................................................       B-__
Independent Accountants...........................................................       B-__
Glossary..........................................................................       B-__
Financial Statements..............................................................        F-1
Appendix A - Description of Investments...........................................        A-1
Appendix B -- Ratings of Investments..............................................        B-1
Appendix D -- Auction Procedures..................................................        C-1
Appendix D -- Settlement Procedures...............................................        D-1
Appendix E -- Rating Agency Futures and Options
Restrictions......................................................................        E-1
</TABLE>



<PAGE>






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

                                    $______

                           MFS MUNICIPAL INCOME TRUST

               MUNICIPAL AUCTION RATE CUMULATIVE PREFERRED SHARES

                            ______ SHARES, SERIES W
                            ______ SHARES, SERIES F

                                    ________

                                   PROSPECTUS

                               ________ __, 2000

                                    ________

                              SALOMON SMITH BARNEY


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



<PAGE>



                           MFS MUNICIPAL INCOME TRUST
                      STATEMENT OF ADDITIONAL INFORMATION

        This Statement of Additional Information ("SAI") relating to the Series
W and Series F Municipal Auction Rate Cumulative Preferred shares ("Municipal
Preferred") offered by MFS Municipal Income Trust (the "Trust") contains
information which may be useful to investors but which is not included in the
Prospectus of the Trust. This SAI is not a prospectus and is authorized for
distribution only when accompanied or preceded by the Prospectus of the Trust
dated ________ __, 2000, describing the Municipal Preferred (the "Prospectus").
This SAI should be read together with the Prospectus. Investors may obtain a
free copy of the Prospectus by calling Massachusetts Financial Services Company
at 1-800-637-2304. Capitalized terms used but not defined in this SAI have the
meanings ascribed to them in the Prospectus.

<TABLE>
<CAPTION>
                               TABLE OF CONTENTS

<S>                                                                                       <C>

USE OF PROCEEDS.....................................................................      B-__
INVESTMENT OBJECTIVE AND POLICIES...................................................      B-__
TRUST CHARGES AND EXPENSES..........................................................      B-__
MANAGEMENT OF THE TRUST.............................................................      B-__
PORTFOLIO TRANSACTIONS..............................................................      B-__
NET ASSET VALUE.....................................................................      B-__
THE AUCTION.........................................................................      B-__
DESCRIPTION OF MUNICIPAL PREFERRED..................................................      B-__
REPURCHASE OF COMMON SHARES.........................................................      B-__
TAX MATTERS.........................................................................      B-__
SHAREHOLDER LIABILITY...............................................................      B-__
CUSTODIAN...........................................................................      B-__
INDEPENDENT ACCOUNTANTS.............................................................      B-__
GLOSSARY............................................................................      B-__
FINANCIAL STATEMENTS................................................................       F-1
APPENDIX A -- Description of Investments............................................       A-1
APPENDIX B -- Ratings of Investments................................................       B-1
APPENDIX C -- Auction Procedures....................................................       C-1
APPENDIX D -- Settlement Procedures.................................................       D-1
APPENDIX E -- Rating Agency Futures and Options
 Restrictions......................................................................       E-1
</TABLE>


        This Statement of Additional Information is dated ________ __, 2000.


<PAGE>



                                USE OF PROCEEDS

        The net proceeds of the offering of shares of Municipal Preferred will
be approximately $________ after payment of the sales load to Salomon Smith
Barney Inc. (the "Underwriter") and estimated offering costs.

        The net proceeds of the offering will be invested as described under
"Use of Proceeds" in the Prospectus.

                       INVESTMENT OBJECTIVE AND POLICIES

        The Trust's Prospectus describes its investment objective and
investment policies. This SAI includes additional information concerning, among
other things, the investment policies of the Trust and information about
certain securities and investment techniques that are described or referred to
in the Prospectus or in which the Trust expects to engage. Except as indicated
under "Fundamental Investment Policies," the Trust's investment policies are
not fundamental and the Trustees may change the policies without shareholder
approval.

FUNDAMENTAL INVESTMENT POLICIES

        The Trust has adopted the following policies which cannot be changed
without the approval of the holders of a "majority of the outstanding" Common
Shares and Preferred Shares, including shares of Municipal Preferred, voting
together as a single class, and of the holders of a "majority of the
outstanding" Preferred Shares, including shares of Municipal Preferred, voting
as a separate class. A "majority of the outstanding" shares means the lesser of
(i) 67% of the shares represented at a meeting at which more than 50% of the
outstanding shares are represented or (ii) more than 50% of the outstanding
shares. All percentage limitations set forth below apply immediately after a
purchase or initial investment and any subsequent change in any applicable
percentage resulting from market fluctuations does not require elimination of
any security from the portfolio. The Trust may not:

        (1)    borrow money or pledge, mortgage or hypothecate its assets,
               except as a temporary measure for extraordinary or emergency
               purposes or for a repurchase of its shares, and in no event in
               excess of 1/3 of its assets (the Trust intends to borrow money
               only from banks);

        (2)    purchase any security or evidence of interest therein on margin,
               except that the Trust may obtain such short-term credit as may
               be necessary for the clearance of purchases and sales of
               securities and except that the Trust may make deposits on margin
               in connection with interest rate futures contracts;

        (3)    purchase or sell any put or call option or any combination
               thereof, provided that this shall not prevent the purchase,
               ownership, holding or sale of contracts for the future delivery
               of fixed income securities;

        (4)    underwrite securities issued by other persons except insofar as
               the Trust may technically be deemed an underwriter under the
               Securities Act of 1933 in selling a portfolio security;

        (5)    purchase or sell real estate (including limited partnership
               interests but excluding securities secured by real estate or
               interests therein), interests in oil, gas or mineral leases,
               commodities or commodity contracts (except contracts for the
               future acquisition or delivery of fixed income securities) in
               the ordinary course of the business of the Trust (the Trust
               reserves the freedom of action to hold and to sell real estate
               acquired as a result of the ownership of securities);

        (6)    purchase securities of any issuer if such purchase at the time
               thereof would cause more than 10% of the voting securities of
               such issuer to be held by the Trust;


<PAGE>

        (7)    issue any senior security (as that term is defined in the
               Investment Company Act of 1940 (the "1940 Act"), if such
               issuance is specifically prohibited by the 1940 Act or the rules
               and regulations promulgated thereunder;

        (8)    make loans to other persons except through the use of repurchase
               agreements, the purchase of commercial paper or the purchase of
               all or a portion of an issue of debt securities in accordance
               with its investment objective, policies and restrictions, and
               provided that not more than 10% of the assets of the Trust will
               be invested in repurchase agreements maturing in more than seven
               days.

        The requirement that at least 80% of the Trust's assets under normal
circumstances be invested in Municipal Bonds is a fundamental policy. In
addition, subject to these restrictions, the Trust may enter into repurchase
agreements only with member banks of the Federal Reserve System and only
collateralized by U.S. Government securities; however, this operating policy is
not fundamental and may be changed without shareholder approval.

        For purposes of the investment restrictions described above and the
state and federal restrictions described below, the issuer of a tax-exempt
security is deemed to be the entity (public or private) ultimately responsible
for the payment of the principal of and interest on the security.

OTHER INVESTMENT POLICIES

        In addition to the foregoing restrictions, the Trust will not, as a
matter of operating policy, (i) pledge, mortgage or hypothecate for any purpose
in excess of 15% of its assets (taken at market value), (ii) invest more than
5% of its total assets at the time of investment in unsecured obligations of
issuers which, including predecessors, controlling persons, general partners
and guarantors, have a record of less than three years' continuous business
operation or relevant business experience, (iii) purchase or retain in its
portfolio any securities issued by an issuer any of whose officers, directors,
trustees or security holders is an officer or Trustee of the Trust, or is a
member, partner, officer or Director of the Adviser if, after the purchase of
the securities of such issuer by the Trust, one or more of such persons owns
beneficially more than 1/2 of 1% of the shares or securities, or both (all
taken at market value), of such issuer and such persons owning more than 1/2 of
1% of such shares or securities together own beneficially more than 5% of such
shares or securities, or both (all taken at market value), (iv) sell any
security which it does not own unless by virtue of its ownership of other
securities the Trust has at the time of sale a right to obtain securities,
without payment of further consideration, equivalent in kind and amount to the
securities sold and provided that if such right is conditional the sale is made
upon the same conditions, (v) invest for the purpose of exercising control or
management, (vi) purchase securities issued by any registered investment
company except by purchase in the open market where no commission or profit to
a sponsor or dealer results from such purchase other than the customary
broker's commission, or except when such purchase, though not made in the open
market, is part of a plan of merger or consolidation, provided, however, that
the Trust shall not purchase the securities of any registered investment
company if such purchase at the time thereof would cause more than 10% of the
total assets of the Trust (taken at market value) to be invested in the
securities of such issuers or would cause more than 3% of the outstanding
voting securities of any such issuer to be held by the Trust, and provided
further, that the Trust shall not purchase securities issued by any open-end
investment company, or (vii) knowingly invest in securities which are subject
to legal or contractual restrictions on resale (other than repurchase
agreements) if, as a result thereof, more than 15% of the total assets of the
Trust (taken at market value) would be so invested. These policies are not
fundamental and may be changed by the Trust without shareholder approval.

        Restrictions imposed by Moody's Investors Service, Inc. ("Moody's") or
Standard & Poor's Ratings Group ("Standard & Poor's"), or both, on engaging in
futures and options transactions as described under "Description of Municipal
Preferred -- Asset Maintenance," are not fundamental policies and may be

<PAGE>

changed by the Trust from time to time without shareholder approval; provided,
however, that if Moody's or Standard & Poor's, or both, are rating the shares
of Municipal Preferred, the Trust must receive written confirmation from
Moody's or Standard & Poor's, or both, as appropriate, that any such change
would not impair the ratings then assigned by Moody's and Standard & Poor's to
shares of Municipal Preferred. See also "Description of Municipal Preferred --
Rating Agency Guidelines" for a description of other rating agency
restrictions, none of which is a fundamental policy of the Trust and which may
be changed by the Trust from time to time without shareholder approval subject
to the foregoing proviso.

                           TRUST CHARGES AND EXPENSES

        For the services provided by Massachusetts Financial Services Company
("MFS" or the "Adviser") under the Advisory Agreement, the Trust pays MFS a
fee, as described under "Management of the Trust - The Adviser" in the
Prospectus.

        Pursuant to the Registrar, Transfer Agency and Service Agreement with
respect to the Common Shares of the Trust, between the Trust and MFS Service
Center, Inc., for account maintenance, the Trust currently pays MFS Service
Center, Inc. ("MFSC") a fee based on the total number of accounts for all
closed- end funds advised by MFS for which MFSC acts as registrar and transfer
agent. If the total number of accounts is less than 75,000, the annual account
fee is $9.00. If the total number of accounts is 75,000 or more, the annual
account fee is $8.00. For dividend services, MFSC charges $0.75 per dividend
reinvestment and $0.75 per cash infusion. If the total amount of fees related
to dividend services is less than $1,000 per month for all closed-end funds
advised by MFS for which MFSC acts as registrar and transfer agent, the minimum
fee for the Trust for these services will be $167 per month. The Trust will
reimburse MFSC for reasonable out-of-pocket expenses and advances incurred by
MFSC and for any other expenses incurred by MFSC at the request, or with the
consent, of the Trust.

<TABLE>
<CAPTION>
                    RECENT FEES PAID TO THE ADVISER AND MFSC
<S>                                                              <C>            <C>         <C>

                                                                       YEAR ENDED OCTOBER 31,
                                                                 ------------------------------------
                                                                    1999        1998         1997

                                                                       (DOLLARS IN THOUSANDS)

Management fee................................................     $2,856       $2,952      $3,032
Transfer agent fee............................................       $104         $111        $115
</TABLE>


                             BROKERAGE COMMISSIONS

        The Trust did not pay any brokerage commissions for the fiscal years
ended October 31, 1999, 1998 and 1997.

                            MANAGEMENT OF THE TRUST

TRUSTEES AND OFFICERS

        The Trustees and officers of the Trust, their ages and their principal
occupations for at least the last five years are set forth below. (Their titles
may have varied during that period.) Unless otherwise noted, the address of
each Trustee and officer is 500 Boylston Street, Boston, Massachusetts 02116.
Trustees and officers who are "interested persons" of the Trust, as defined in
the 1940 Act, are denoted by an asterisk (*). The Board of Trustees is divided
into three classes, each class having a term of three years ending with the

<PAGE>

annual meeting of shareholders (or any adjournment thereof) held in the year of
expiration, or until the election of a successor. Each year, the term of office
of one class expires: Mr. Schmidt will continue in office until 2001; Messrs.
Poorvu and Stone and Ms. Smith will continue in office until 2002; and Messrs.
Ives, Perera, Scott and Shames will continue in office until 2003.

<TABLE>
<CAPTION>
<S>                              <C>                       <C>
                                                                    PRINCIPAL
                                                                  OCCUPATION(S)
                                       POSITION                    DURING PAST
        NAME AND AGE                  WITH TRUST                  FIVE YEARS(1)

JEFFREY L. SHAMES,* (born        Trustee, Chairman and     Chairman and President;
6/2/55)                                President           Massachusetts Financial
                                                           Services Company, Chairman
                                                           and Chief Executive Officer.

J. ATWOOD IVES, (born                   Trustee            Eastern Enterprises
5/1/36)                                                    (diversified services
                                                           company), Chairman,
                                                           Trustee and Chief
                                                           Executive Officer.

LAWRENCE T. PERERA, (born               Trustee            Hemenway & Barnes
6/23/35)                                                   (attorneys), Partner.

WILLIAM J. POORVU, (born                Trustee            Harvard University
4/10/35)                                                   Graduate School of
                                                           Business Administration,
                                                           Adjunct Professor;
                                                           CBL & Associates Properties, Inc.
                                                           (real estate investment trust),
                                                           Director; The Baupost Fund (a
                                                           registered investment company),
                                                           Vice Chairman and Trustee.

CHARLES W. SCHMIDT, (born               Trustee            Private Investor; IT
3/18/28)                                                   Group, Inc. (diversified
                                                           environmental services and
                                                           consulting), Director.

ARNOLD D. SCOTT,* (born                 Trustee            Massachusetts Financial
12/16/42)                                                  Services Company, Senior
                                                           Executive Vice President
                                                           and Director.

ELAINE R. SMITH, (born                  Trustee            Independent consultant.
4/25/46)

DAVID B. STONE, (born                   Trustee            North American Management
9/2/27)                                                    Corp. (Investment Adviser),
                                                           Chairman and Director; Eastern
                                                           Enterprises (diversified
                                                           services company).


<PAGE>

STEPHEN E. CAVAN,* (born      Secretary and Clerk          Massachusetts Financial
11/6/53)                                                   Services Company, Senior
                                                           Vice President, General
                                                           Counsel and Secretary.

JAMES R. BORDEWICK, JR.,*     Assistant Secretary and      Massachusetts Financial
(born 3/6/59)                 Assistant Clerk              Services Company, Senior
                                                           Vice President and
                                                           Associate General Counsel.

JAMES O. YOST,* (born         Treasurer                    Massachusetts Financial
6/12/60)                                                   Services Company, Senior
                                                           Vice President.

ELLEN MOYNIHAN,* (born        Assistant Treasurer          Massachusetts Financial
11/13/57)                                                  Services Company, Vice
                                                           President (since September,
                                                           1996); Deloitte & Touche
                                                           LLP, Senior Manager (until
                                                           September 1996).

MARK E. BRADLEY,* (born       Assistant Treasurer          Massachusetts Financial
11/23/59)                                                  Services Company, Vice
                                                           President (since March,
                                                           1997); Putnam Investments,
                                                           Vice President (prior to
                                                           March 1997).
</TABLE>

(1)     Directorships or Trusteeships of companies required to report to the
        Securities and Exchange Commission (the "SEC") (i.e., "public
        companies").

        Each Trustee and officer holds comparable positions with certain MFS
affiliates or with certain other funds of which MFS or a subsidiary of MFS is
the investment adviser or distributor.

        All Trustees serve as Trustees of 38 funds within the MFS fund complex
advised by MFS, investment adviser to the Trust, except for Mr. Scott, who
serves as Trustee of 79 funds within the MFS fund complex, and Mr. Shames, who
serves as Trustee of 108 funds within the MFS fund complex. Messrs. Scott and
Shames are "interested persons" (as defined under the 1940 Act) of the Trust
because they are each an officer and director of MFS; Messrs. Scott and Shames
each own shares of common stock of MFS.

        At the next annual meeting of the Trust's shareholders, holders of
outstanding shares of Municipal Preferred, voting together as one separate
class, will elect two trustees, and holders of outstanding Common Shares and
shares of Municipal Preferred, voting together as a single class, will elect
one trustee. See "Description of Municipal Preferred -- Voting Rights."

        The Trust pays each Trustee who is not an officer of the Adviser a fee
of $7,000 per year plus $400 per meeting and $400 per committee meeting
attended, together with such Trustee's actual out-of-pocket expenses relating
to attendance at meetings. In addition, each Trustee who is not an officer of

<PAGE>

the Adviser will be entitled to receive certain benefits pursuant to the
Trust's retirement plan. Under this plan, each such Trustee (or his or her
beneficiaries) will be entitled to receive an annual retirement or death
benefit in an amount of up to a maximum of 50% of such Trustee's average annual
compensation, depending on the Trustee's length of service.

TRUSTEES AND TRUSTEES' FEES

Set forth below is certain information concerning the cash compensation paid to
these Trustees and benefits accrued, and estimated benefits payable, under the
retirement plan.
<TABLE>
<CAPTION>
<S>                     <C>             <C>              <C>             <C>

                                        RETIREMENT                           TOTAL
                                         BENEFIT         ESTIMATED          TRUSTEE
                         TRUSTEE         ACCRUED          CREDITED         FEES FROM
                           FEES          AS PART           YEARS             TRUST
                           FROM          OF TRUST            OF            AND FUND
       TRUSTEE          TRUST (1)       EXPENSE(1)       SERVICE(2)       COMPLEX (3)
       -------          ---------       ----------       ----------       -----------

J. Atwood Ives            $13,367        $4,876                17        $132,623
Lawrence T. Perera        $13,367        $6,094                21        $144,098
William J. Poorvu         $13,367        $6,161                21        $141,338
Charles W. Schmidt        $13,367        $6,161                14        $137,678
Arnold D. Scott              0              0               N/A               0
Jeffrey L. Shames            0              0               N/A               0
Elaine R. Smith           $13,367        $5,356                27        $144,098
David B. Stone            $15,767        $6,961                12        $151,418

</TABLE>

- -----------------
(1)     For fiscal year ended October 31, 1999.

(2)     Based on normal retirement age of 73 (age 74 for Mr. Stone).

(3)     For calendar year 1999. All Trustees receiving compensation served as
        Trustees of 34 funds within the MFS fund complex (having aggregate net
        assets at December 31, 1999, of approximately $58.6 billion).


<PAGE>

<TABLE>
<CAPTION>
<S>                  <C>             <C>                <C>            <C>
                     ESTIMATED ANNUAL BENEFITS PAYABLE BY THE TRUST UPON RETIREMENT (4)

                                              YEARS OF SERVICE
                     -------------------------------------------------------------------
     AVERAGE

     TRUSTEE
      FEES               3                 5                7             10 OR MORE
- ------------------   -----------     ---------------    -----------    -----------------

     $12,030           $1,805            $3,008           $4,211            $6,015
     $13,093           $1,964            $3,273           $4,583            $6,546
     $14,156           $2,123            $3,539           $4,954            $7,078
     $15,218           $2,283            $3,805           $5,326            $7,609
     $16,281           $2,442            $4,070           $5,698            $8,141
     $17,344           $2,602            $4,336           $6,070            $8,672

</TABLE>
- -----------------

(4) Other funds in the MFS fund complex provide similar retirement benefits to
the Trustees.

        In addition to the provisions discussed in the Prospectus under
"Certain Provisions in the Declaration of Trust," the Declaration provides that
the obligations of the Trust are not binding upon the Trustees of the Trust
individually, but only upon the assets and property of the Trust. The
Declaration also provides that the Trust will indemnify its Trustees and
officers against liabilities and expenses incurred in connection with
litigation in which they may be involved because of their offices with the
Trust but that such indemnification will not relieve any officer or Trustee of
any liability to the Trust or its shareholders by reason of willful
misfeasance, bad faith, gross negligence or reckless disregard of his or her
duties. The Trust, at its expense, provides liability insurance for the benefit
of its Trustees and officers.

INVESTMENT ADVISER

        MFS, a Delaware corporation, is the Trust's Adviser. The principal
business address of MFS is 500 Boylston Street, Boston, Massachusetts 02116.

        MFS also serves as investment adviser to each of the funds in the MFS
Family of Funds (the "MFS Funds"), to MFS Intermediate Income Trust, MFS
Government Markets Income Trust, MFS Multimarket Income Trust, MFS Charter
Income Trust, MFS Special Value Trust, MFS Institutional Trust, MFS Variable
Insurance Trust, Sun Growth Variable Annuity Fund, Inc., MFS/Sun Life Series
Trust and seven variable accounts, each of which is a registered investment
company established by Sun Life of Canada (U.S.) in connection with the sale of
Compass-2 and Compass-3 combination fixed/variable annuity contracts. MFS and
its wholly-owned subsidiary, MFS Institutional Advisers, Inc., provide
investment advice to substantial private clients. Net assets under the
management of the MFS organization were approximately $151.19 billion on behalf
of approximately 5.1 million investors as of June 30, 2000. As of such date,
the MFS organization managed approximately $5.2 billion of assets in municipal
obligations.

        Michael Roberge, a Senior Vice President of MFS, has been the portfolio
manager of the Fund since December, 1997.

        General. The Investment Advisory Agreement between MFS and the Trust
(the "Advisory Agreement") provides that, subject to the direction of the Board
of Trustees of the Trust, MFS is responsible for the actual management of the
Trust's portfolio. The responsibility for making decisions to buy, sell or hold
a particular security rests with the Adviser, subject to review by the Board of
Trustees. The Adviser also provides certain administrative services and general
office facilities.


<PAGE>

        The Adviser is not dependent on any other party in providing the
investment advisory services required in the management of the Trust. The
Adviser may, however, consider analyses from various sources, including
broker-dealers with which the Trust does business.

        The Adviser pays the compensation of the Trust's officers and of the
Trustees who are affiliated with the Adviser. The Adviser also furnishes at its
own expense all necessary administrative services, including office space,
equipment, clerical personnel, investment advisory facilities and all executive
and supervisory personnel necessary for managing the Trust's investments,
effecting the Trust's portfolio transactions and, in general, administrating
its affairs.

        The Advisory Agreement also provides that neither MFS or its personnel
shall be liable for any error of judgment or mistake of law or for any loss
arising out of any investment or for any act or omission in the execution and
management of the Trust, except for willful misfeasance, bad faith or gross
negligence in the performance of its or their duties or by reason of reckless
disregard of its or their obligations and duties under the Advisory Agreement.

        Advisory Fee. For the services provided by MFS under the Advisory
Agreement, the Trust pays it a fee computed and paid monthly in an amount equal
to the sum of 0.4% of the average daily net assets of the Trust and 6.32% of
the gross income (i.e., income other than gains from the sale of securities or
gains received from futures contracts) of the Trust, in each case on an
annualized basis, for the Trust's then-current fiscal year. This advisory fee
may be higher than that paid by funds with similar investment objectives.

        Payment of Expenses. The Trust pays the compensation of the six
Trustees who are not affiliated with MFS and all the Trust's expenses (other
than those assumed by MFS), including governmental fees, interest charges,
taxes, membership dues in the Investment Company Institute allocable to the
Trust, fees and expenses of independent auditors, of legal counsel, and of any
transfer agent, registrar or dividend disbursing agent of the Trust, to MFS as
administrator to the Trust, expenses of repurchasing shares, expenses of
preparing, printing and mailing share certificates, shareholder reports,
notices, proxy statements and reports to governmental officers and commissions,
brokerage and other expenses connected with the execution, recording and
settlement of portfolio security transactions, insurance premiums, fees and
expenses of the Trust's custodian, for all services to the Trust, including
safekeeping of funds and securities and maintaining required books and
accounts, expenses of calculating the net asset value of the Trust's shares,
expenses of shareholder meetings, expenses in connection with the Dividend
Reinvestment and Cash Purchase Plan relating to the Common Shares of the Trust
and SEC fees.

        Use of Name. The Advisory Agreement provides that if MFS ceases to
serve as the Adviser to the Trust, the Trust will change its name so as to
delete the initials "MFS" and that MFS may render services to others and may
permit fund clients in addition to the Trust to use the initials "MFS" in their
names.

        The Advisory Agreement will continue in effect only if such continuance
is specifically approved at least annually by the Board of Trustees or by vote
of a majority of the Trust's outstanding voting securities and, in either case,
by a majority of the Trustees who are not parties to the Advisory Agreement or
interested persons of any such party. The Advisory Agreement terminates
automatically if it is assigned and may be terminated without penalty by vote
of a majority of the Trust's outstanding voting securities or by either party
on not more than 60 days' nor less than 30 days' written notice.

CODES OF ETHICS

        The Trust, the Adviser and the Underwriter have adopted codes of ethics
as required under the 1940 Act. Subject to certain conditions and restrictions,
these codes permit personnel subject to the codes to invest in securities for

<PAGE>

their own accounts, including securities that may be purchased, held or sold by
the Trust. Securities transactions by some of these persons may be subject to
prior approval of the Adviser's Compliance Department. Securities transactions
of certain personnel are subject to quarterly reporting and review
requirements. These codes of ethics can be reviewed and copied at the SEC's
Public Reference Room in Washington, D.C. Information on the operation of the
Public Reference Room may be obtained by calling the Commission at
1-202-942-8090. These codes of ethics also are available on the EDGAR Database
on the SEC's Internet site at http://www.sec.gov, and copies of these codes of
ethics may be obtained, after paying a duplicating fee, by electronic request
at the following e-mail address: publicinfo@sec.gov, or by writing the SEC's
Public Reference Section, Washington, D.C. 20549-0102.

                             PORTFOLIO TRANSACTIONS

        Specific decisions to purchase or sell securities for the Trust are
made by the Trust's portfolio manager who is an employee of MFS and who is
appointed and supervised by its senior officers. The portfolio manager may
serve other clients of the Trust's Adviser or any subsidiary of the Adviser in
a similar capacity.

        The primary consideration in portfolio security transactions is
execution at the most favorable prices. The Adviser has complete freedom as to
the markets in and the broker-dealers through which it seeks this result.
Municipal Bonds and other debt securities are traded principally in the
over-the-counter market on a net basis through dealers acting for their own
account and not as brokers. The cost of securities purchased from underwriters
includes an underwriter's commission or concession, and the prices at which
securities are purchased and sold from and to dealers include a dealer's
mark-up or mark-down. The Adviser normally seeks to deal directly with the
primary market makers, unless in its opinion, better execution is available
elsewhere. Subject to the requirement of seeking execution at the most
favorable price, securities may, as authorized by the Advisory Agreement, be
bought from or sold to dealers who have furnished statistical, research and
other information or services to the Adviser or who have sold shares of funds
for which MFS serves as investment adviser. At present no arrangements to
recapture commission payments are in effect.

        In certain instances, there may be securities which are suitable for
the Trust's portfolio as well as for that of one or more of the other clients
of the Trust's Adviser or any subsidiary of the Adviser. Investment decisions
for the Trust and for the Adviser's other clients are made with a view to
achieving their respective investment objectives. It may develop that a
particular security is bought or sold for only one client even though it might
be held by, or bought or sold for, other clients. Likewise, a particular
security may be bought for one or more clients when one or more other clients
are selling that same security. Some simultaneous transactions are inevitable
when several clients receive investment advice from the same investment
adviser, particularly when the same security is suitable for the investment
objectives of more than one client. When two or more clients are simultaneously
engaged in the purchase or sale of the same security, the securities are
allocated among clients in a manner believed to be equitable to each. It is
recognized that in some cases this system could have a detrimental effect on
the price or volume of the security as far as the Trust is concerned. In other
cases, however, it is believed that the ability of the Trust to participate in
volume transactions will produce better executions for the Trust.

        For the fiscal years ended October 31, 1997, 1998 and 1999, the Trust
paid no brokerage commissions for the execution of portfolio transactions. The
rates of portfolio turnover for each of the fiscal years ended October 31,
1997, 1998 and 1999 were 21%, 12% and 15%, respectively.

                                NET ASSET VALUE

        Net asset value of the Trust will be determined no less frequently than
as of the close of regular trading on the New York Stock Exchange (the
"Exchange") (generally 4:00 p.m. New York City time) on the last Business Day
of each week (generally Friday), and at such other times as the Trust may
authorize. The net asset value of the Trust equals the value of the Trust's

<PAGE>

assets less the Trust's liabilities. Debt securities (other than short-term
obligations which mature in 60 days or less), including listed issues, are
valued on the basis of valuations furnished by dealers or by a pricing service
with consideration to factors such as institutional-size trading in similar
groups of securities, yield, quality, coupon rate, maturity, type of issue,
trading characteristics, and other market data, without exclusive reliance upon
exchange or over-the-counter prices. Short-term obligations, which mature in 60
days or less, are valued at amortized cost, which approximates market value.
Securities for which there are no such quotations are valued at fair value as
determined in good faith by or at the direction of the Trustees.

        In determining net asset value for the Trust, the Trust's custodian
utilizes the valuations of portfolio securities furnished by a pricing service
approved by the Board of Trustees. Securities for which quotations are not
readily available (which will constitute a majority of the securities held by
the Trust) are valued at fair value as determined by the pricing service using
methods which include consideration of the following: yields or prices of
municipal bonds of comparable quality, type of issue, coupon, maturity and
rating; indications as to value from dealers; and general market conditions.
The pricing service may employ electronic data processing techniques or a
matrix system, or both, to determine valuations. The procedures of the pricing
service and its valuations are reviewed by the officers of the Trust under the
general supervision of the Board of Trustees.

                                  THE AUCTION

GENERAL

        The Statement creating the Municipal Preferred shares (the
"Statement"), provides that the Applicable Rate for each Rate Period of
Municipal Preferred after the Initial Rate Period therefor shall be equal to
the rate per annum that the Auction Agent advises has resulted on the Business
Day preceding the first day of such Subsequent Rate Period (an "Auction Date")
from implementation of the auction procedures (the "Auction Procedures") set
forth in the Statement and summarized below, in which persons determine to hold
or offer to sell or, based on dividend rates bid by them, offer to purchase or
sell such shares. Each periodic implementation of the Auction Procedures is
referred to herein as an "Auction." The following summary is qualified by
reference to the Auction Procedures set forth in the Statement.

        As used herein with respect to shares of Municipal Preferred, (i)
"Applicable Rate" means the rate per annum at which dividends are payable on
such shares for any Rate Period thereof, (ii) "Beneficial Owner" means a
customer of a Broker-Dealer who is listed on the records of that Broker-Dealer
(or, if applicable, the Auction Agent) as a holder of such shares, (iii)
"Business Day" means a day on which the New York Stock Exchange is open for
trading and is not a Saturday, Sunday or other day on which banks in New York
City are authorized by law to close, (iv) "Date of Original Issue" means the
date on which the Trust initially issued such shares, (v) "Dividend Payment
Date" means any date on which dividends on such shares are payable as provided
under "Description of Municipal Preferred -- Dividends -- General," (vi)
"Dividend Period" means the period from and including the Date of Original
Issue of such shares to but excluding the initial Dividend Payment Date for
such shares and any period thereafter from and including one Dividend Payment
Date for such shares to but excluding the next succeeding Dividend Payment Date
for such shares, (vii) "Existing Holder" means a Broker-Dealer (or any such
other Person as may be permitted by the Trust) that is listed on the records of
the Auction Agent as a holder of such shares, (viii) "Initial Rate Period"
means the period from and including the Date of Original Issue of such shares
to but excluding the initial Dividend Payment Date for such shares, (ix)
"Potential Beneficial Owner" means a customer of a Broker-Dealer that is not a
Beneficial Owner of such shares that wishes to purchase such shares, or that is
a Beneficial Owner that wishes to purchase additional such shares, (x)

<PAGE>

"Potential Holder" means a Broker-Dealer (or any such other Person as may be
permitted by the Trust) that is not an Existing Holder of such shares or that
is an Existing Holder of such shares that wishes to become the Existing Holder
of additional such shares, (xi) "Rate Period" means the Initial Rate Period of
such shares and any Subsequent Rate Period, including any Special Rate Period,
of such shares, (xii) "Subsequent Rate Period" means any period from and
including the first day following the Initial Rate Period of such shares to but
excluding the next Dividend Payment Date for such shares and any period
thereafter from and including one Dividend Payment Date for such shares to but
excluding the next succeeding Dividend Payment Date for such shares; provided,
however, that if any Subsequent Rate Period is also a Special Rate Period, such
term shall mean the period commencing on the first day of such Special Rate
Period and ending on the last day of the last Dividend Period thereof, (xiii)
"Minimum Rate Period" means any Rate Period consisting of 7 Rate Period Days
and (xiv) "Special Rate Period" means any Subsequent Rate Period commencing on
the date designated by the Trust, as set forth under "Description of Municipal
Preferred -- Dividends -- Designation of Special Rate Periods," and ending on
the last day of the last Dividend Period thereof.

        AUCTION AGENCY AGREEMENT. The Trust will enter into an agreement (the
"Auction Agency Agreement") with ______ (together with any successor bank or
trust company or other entity entering into a similar agreement with the Trust,
the "Auction Agent") which provides, among other things, that the Auction Agent
will follow the Auction Procedures for purposes of determining the Applicable
Rate for shares of Municipal Preferred so long as the Applicable Rate for such
shares is to be based on the results of an Auction.

        BROKER-DEALER AGREEMENTS. Each Auction requires the participation of
one or more broker-dealers. The Auction Agent will enter into an agreement with
Salomon Smith Barney Inc., and may enter into similar agreements (collectively,
the "Broker-Dealer Agreements") with one or more additional broker-dealers
(collectively, the "Broker-Dealers") selected by the Trust, which provide for
the participation of Broker-Dealers in Auctions. See "Broker-Dealers" below.

        SECURITIES DEPOSITORY. The Depository Trust Company ("DTC," together
with any successor securities depository selected by the Trust, the "Securities
Depository") will act as the Securities Depository for the Agent Members with
respect to shares of Municipal Preferred. One certificate for all of the shares
of Municipal Preferred will be registered in the name of Cede & Co. ("Cede"),
as nominee of the Securities Depository. Such certificate will bear a legend to
the effect that such certificate is issued subject to the provisions
restricting transfers of shares of Municipal Preferred contained in the
Statement. The Trust will also issue stop-transfer instructions to the transfer
agent for shares of Municipal Preferred. Prior to the commencement of the right
of holders of Preferred Shares to elect a majority of the Trust's trustees, as
described below under "Description of Municipal Preferred -- Voting Rights,"
Cede will be the holder of record of all shares of Municipal Preferred, and
owners of shares of Municipal Preferred will not be entitled to receive
certificates representing their ownership interest in such shares.

        DTC, a New York-chartered limited purpose trust company, performs
services for its participants (including the Agent Members), some of whom
(and/or their representatives) own DTC. DTC maintains lists of its participants
and will maintain the positions (ownership interests) held by each such
participant (the "Agent Member") in shares of Municipal Preferred, whether for
its own account or as a nominee for another person.

AUCTION DATES; ADVANCE NOTICE OF ALLOCATION OF TAXABLE INCOME

        The first Auction for shares of Series W Municipal Preferred will be
held on Tuesday, ________ __, 2000, the Business Day preceding the Dividend
Payment Date for the Initial Rate Period of Series W shares of Municipal
Preferred. The first Auction for shares of Series F Municipal Preferred will be
held on Thursday, ________ __, 2000, the Business Day preceding the Dividend
Payment Date for the Initial Rate Period of Series F shares of Municipal
Preferred. See "Description of Municipal Preferred -- Dividends." Thereafter,
Auctions will normally be held every Tuesday for Series W Municipal Preferred,
and each Subsequent Rate Period will normally begin on the following Wednesday,
and every Thursday for Series F Municipal Preferred, and each Subsequent Rate
Period will normally begin on the following Friday, unless the then-current
Rate Period is a Special Rate Period or, in certain circumstances, the day that
would normally be the Auction Date or the first day of such Subsequent Rate
Period is not a Business Day. The Auction Date and the first day of the related
Rate Period (also a Dividend Payment Date) must be Business Days but need not
be consecutive days. See "Description of Municipal Preferred -- Dividends" for
information concerning the circumstances under which the first day of a Rate
Period or the Auction Date, or both, may be moved to a date other than such
specified days.


<PAGE>

        Except as noted below, whenever the Trust intends to include any net
capital gain or other income taxable for federal income tax purposes in any
dividend on shares of Municipal Preferred, the Trust shall, in the case of
Minimum Rate Periods or Special Rate Periods of 28 Rate Period Days or fewer,
and may, in the case of any other Special Rate Period, notify the Auction Agent
of the amount to be so included not later than the Dividend Payment Date next
preceding the Auction Date on which the Applicable Rate for such dividend is to
be established. Whenever the Auction Agent receives such notice from the Trust,
it will be required in turn to notify each Broker-Dealer, who, on or prior to
such Auction Date, in accordance with its Broker-Dealer Agreement, will be
required to notify its customers who are Beneficial Owners and Potential
Beneficial Owners believed by it to be interested in submitting an Order in the
Auction to be held on such Auction Date. The Trust may also include such net
capital gain or other income taxable for federal income tax purposes in a
dividend on shares of Municipal Preferred without giving advance notice if the
dividend is increased by a Gross-Up Payment. The Trust must notify the Auction
Agent of the amount not later than the Dividend Payment Date next preceding the
next Auction Date. See also "Description of Municipal Preferred -- Dividends --
Gross-up Payments" below.

ORDERS BY EXISTING HOLDERS AND POTENTIAL HOLDERS

        Prior to the Submission Deadline (as defined under "Submission of
Orders by Broker-Dealers to Auction Agent" below) on each Auction Date for
shares of Municipal Preferred:

               (a) each Beneficial Owner of such shares may submit to its
Broker-Dealer by telephone or otherwise a:

                      (i) "Hold Order" -- indicating the number of outstanding
               shares of Municipal Preferred, if any, that such Beneficial
               Owner desires to continue to hold without regard to the
               Applicable Rate for such shares for the next succeeding Rate
               Period;

                      (ii) "Bid" -- indicating the number of outstanding shares
               of Municipal Preferred, if any, that such Beneficial Owner
               offers to sell if the Applicable Rate for such shares for the
               next succeeding Rate Period shall be less than the rate per
               annum specified by such Beneficial Owner in such bid; and/or

                      (iii) "Sell Order" -- indicating the number of
               outstanding shares of Municipal Preferred, if any, that such
               Beneficial Owner offers to sell without regard to the Applicable
               Rate for such shares for the next succeeding Rate Period; and

               (b) Broker-Dealers shall contact customers who are Potential
        Beneficial Owners by telephone or otherwise to determine whether such
        customers desire to submit Bids, in which they will indicate the number
        of shares of Municipal Preferred that they offer to purchase if the
        Applicable Rate for such shares for the next succeeding Rate Period is
        not less than the rate per annum specified in such Bids.

The communication to a Broker-Dealer of the foregoing information is herein
referred to as an "Order" and collectively as "Orders." A Beneficial Owner or a
Potential Beneficial Owner placing an Order with its Broker-Dealer, and such
Broker-Dealer placing an Order with the Auction Agent, is herein referred to as
a "Bidder" and collectively as "Bidders." The submission by a Broker-Dealer of
an Order to the Auction Agent shall likewise be referred to herein as an
"Order" and collectively as "Orders," and an Existing Holder or Potential
Holder who places an Order with the Auction Agent or on whose behalf an Order
is placed with the Auction Agent shall likewise be referred to herein as a
"Bidder" and collectively as "Bidders."

        A Beneficial Owner may submit different types of Orders to its
Broker-Dealer with respect to shares of Municipal Preferred then held by such
Beneficial Owner. A Bid placed by a Beneficial Owner specifying a rate higher

<PAGE>

than the Applicable Rate determined in the Auction shall constitute an
irrevocable offer to sell the shares subject thereto. A Beneficial Owner that
submits a Bid to its Broker-Dealer having a rate higher than the Maximum Rate
on the Auction Date thereof will be treated as having submitted a Sell Order to
its Broker-Dealer. A Beneficial Owner that fails to submit to its Broker-Dealer
prior to the Submission Deadline for shares of Municipal Preferred an Order or
Orders covering all the outstanding shares of Municipal Preferred held by such
Beneficial Owner will be deemed to have submitted a Hold Order to its
Broker-Dealer covering the number of outstanding shares of Municipal Preferred
held by such Beneficial Owner and not subject to Orders submitted to its
Broker-Dealer; provided, however, that if a Beneficial Owner fails to submit to
its Broker-Dealer prior to the Submission Deadline for shares of Municipal
Preferred an Order or Orders covering all of the outstanding shares of
Municipal Preferred held by such Beneficial Owner for an Auction relating to a
Special Rate Period consisting of more than 28 Rate Period Days, such
Beneficial Owner will be deemed to have submitted a Sell Order to its
Broker-Dealer covering the number of outstanding shares of Municipal Preferred
held by such Beneficial Owner and not subject to Orders submitted to its
Broker-Dealer. A Sell Order shall constitute an irrevocable offer to sell the
shares of Municipal Preferred subject thereto at a price per share equal to
$25,000. A Beneficial Owner of shares of Municipal Preferred that offers to
become the Beneficial Owner of additional shares of Municipal Preferred is, for
purposes of such offer, a Potential Beneficial Owner.

        A Potential Beneficial Owner of shares of Municipal Preferred may
submit to its Broker-Dealer Bids in which it offers to purchase shares of
Municipal Preferred if the Applicable Rate for the next Rate Period is not less
than the rate specified in such Bid. A Bid placed by a Potential Beneficial
Owner specifying a rate not higher than the Maximum Rate shall constitute an
irrevocable offer to purchase the number of shares of Municipal Preferred
specified in such Bid if the rate determined in the Auction is equal to or
greater than the rate specified in such Bid.

        As described more fully below under "Submission of Orders by
Broker-Dealers to Auction Agent," the Broker-Dealers will submit the Orders of
their respective customers who are Beneficial Owners and Potential Beneficial
Owners to the Auction Agent, designating themselves (unless otherwise permitted
by the Trust) as Existing Holders in respect of shares subject to Orders
submitted or deemed submitted to them by Beneficial Owners and as Potential
Holders in respect of shares subject to Orders submitted to them by Potential
Beneficial Owners. However, neither the Trust nor the Auction Agent will be
responsible for a Broker-Dealer's failure to comply with the foregoing. Any
Order placed with the Auction Agent by a Broker-Dealer as or on behalf of an
Existing Holder or a Potential Holder will be treated in the same manner as an
Order placed with a Broker-Dealer by a Beneficial Owner or a Potential
Beneficial Owner, as described in the preceding paragraph. Similarly, any
failure by a Broker-Dealer to submit to the Auction Agent an Order in respect
of any shares of Municipal Preferred held by it or its customers who are
Beneficial Owners will be treated in the same manner as a Beneficial Owner's
failure to submit to its Broker-Dealer an Order in respect of shares of
Municipal Preferred held by it, as described in the second preceding paragraph.
For information concerning the priority given to different types of Orders
placed by Existing Holders, see "Submission of Orders by Broker-Dealers to
Auction Agent" below.

        Neither the Trust nor an affiliate may submit an Order in any Auction,
except that any Broker-Dealer that is an affiliate of the Trust may submit
Orders in an Auction, but only if such Orders are not for its own account.

        The Auction Procedures include a pro rata allocation of shares for
purchase and sale, which may result in an Existing Holder continuing to hold or
selling, or a Potential Holder purchasing, a number of shares of Municipal
Preferred that is fewer than the number of shares of Municipal Preferred
specified in its Order. See "Acceptance and Rejection of Submitted Bids and
Submitted Sell Orders and Allocation of Shares" below. To the extent the
allocation procedures have that result, Broker-Dealers that have designated
themselves as Existing Holders or Potential Holders in respect of customer
Orders will be required to make appropriate pro rata allocations among their
respective customers. Each purchase or sale shall be made for settlement on the
Business Day next succeeding the Auction Date at a price per share equal to
$25,000. See "Notification of Results; Settlement" below.

        As described above, any Bid specifying a rate higher than the Maximum
Rate (as defined below) will (i) be treated as a Sell Order if submitted by a

<PAGE>

Beneficial Owner or an Existing Holder and (ii) not be accepted if submitted by
a Potential Beneficial Owner or a Potential Holder. Accordingly, the Auction
Procedures establish the Maximum Rate as a maximum rate per annum that can
result from an Auction. See "Determination of Sufficient Clearing Bids, Winning
Bid Rate and Applicable Rate" and "Acceptance and Rejection of Submitted Bids
and Submitted Sell Orders and Allocation of Shares" below.

        As used herein, "Maximum Rate," when used with respect to shares of
Municipal Preferred on an Auction Date, means:

               (i) in the case of any Auction Date which is not the Auction
        Date immediately prior to the first day of any proposed Special Rate
        Period, the product of (1) the Reference Rate on such Auction Date for
        the next Rate Period and (2) the Rate Multiple on such Auction Date,
        unless such shares have or had a Special Rate Period (other than a
        Special Rate Period of 28 Rate Period Days or fewer) and an Auction at
        which Sufficient Clearing Bids existed has not yet occurred for a
        Minimum Rate Period after such Special Rate Period, in which case the
        higher of:

                      (A) the dividend rate on such shares for the then-ending
               Rate Period; and

                      (B) the product of (x) the higher of (I) the Reference
               Rate on such Auction Date for a Rate Period equal in length to
               the then-ending Rate Period, if such then-ending Rate Period was
               364 Rate Period Days or fewer, or the Treasury Note Rate on such
               Auction Date for a Rate Period equal in length to the
               then-ending Rate Period, if such then-ending Rate Period was
               more than 364 Rate Period Days, and (II) the Reference Rate on
               such Auction Date for a Rate Period equal in length to such
               Special Rate Period, if such Special Rate Period was 364 Rate
               Period Days or fewer, or the Treasury Note Rate on such Auction
               Date for a Rate Period equal in length to such Special Rate
               Period, if such Special Rate Period was more than 364 Rate
               Period Days and (y) the Rate Multiple on such Auction Date; or

                (ii) in the case of any Auction Date which is the Auction Date
        immediately prior to the first day of any proposed Special Rate Period,
        the product of (1) the highest of (x) the Reference Rate on such
        Auction Date for a Rate Period equal in length to the then-ending Rate
        Period, if such then-ending Rate Period was 364 Rate Period Days or
        fewer, or the Treasury Note Rate on such Auction Date for a Rate Period
        equal in length to the then-ending Rate Period, if such then-ending
        Rate Period was more than 364 Rate Period Days, (y) the Reference Rate
        on such Auction Date for the Special Rate Period for which the Auction
        is being held if such Special Rate Period is 364 Rate Period Days or
        fewer or the Treasury Note Rate on such Auction Date for the Special
        Rate Period for which the Auction is being held if such Special Rate
        Period is more than 364 Rate Period Days, and (z) the Reference Rate on
        such Auction Date for Minimum Rate Periods and (2) the Rate Multiple on
        such Auction Date.

        As used herein, "Reference Rate" shall mean (i) the higher of the
Taxable Equivalent of the Short-Term Municipal Bond Rate and the "AA" Composite
Commercial Paper Rate in the case of Minimum Rate Periods and Special Rate
Periods of 28 Rate Period Days or fewer; (ii) the "AA" Composite Commercial
Paper Rate in the case of Special Rate Periods of more than 28 Rate Period Days
but fewer than 183 Rate Period Days; and (iii) the Treasury Bill Rate in the
case of Special Rate Periods of more than 182 Rate Period Days but fewer than
365 Rate Period Days.

As used herein, "Taxable Equivalent of the Short-Term Municipal Bond Rate," on
any date for any Minimum Rate Period or Special Rate Period of 28 Rate Period
Days or fewer, shall mean 90% of the quotient of (A) the per annum rate
expressed on an interest equivalent basis equal to the Standard & Poor's Kenny
30 day High Grade Index or any successor index (the "Kenny Index") (provided,
however, that any such successor index must be approved by Moody's (if Moody's

<PAGE>

is then rating the shares of Municipal Preferred) and Standard & Poor's (if
Standard & Poor's is then rating the shares of Municipal Preferred)), made
available for the Business Day immediately preceding such date but in any event
not later than 8:30 A.M., New York City time, on such date by Standard & Poor's
J.J. Kenny Evaluation Services or any successor thereto, based upon 30-day
yield evaluations at par of short-term bonds, the interest on which is
excludable for regular federal income tax purposes under the Code, of "high
grade" component issuers selected by Standard & Poor's J.J. Kenny Evaluation
Services or any such successor from time to time in its discretion, which
component issuers shall include, without limitation, issuers of general
obligation bonds but shall exclude any bonds the interest on which constitutes
an item of tax preference under Section 57(a)(5) of the Code, or successor
provisions, for purposes of the "alternative minimum tax," divided by (B) 1.00
minus the maximum marginal regular Federal individual income tax rate
applicable to ordinary income or the maximum marginal regular Federal corporate
income tax rate applicable to ordinary income (in each case expressed as a
decimal), whichever is greater; provided, however, that if the Kenny Index is
not made so available by 8:30 A.M., New York City time, on such date by
Standard & Poor's J.J. Kenny Evaluation Services or any successor, the Taxable
Equivalent of the Short-Term Municipal Bond Rate shall mean the quotient of (A)
the per annum rate expressed on an interest equivalent basis equal to the most
recent Kenny Index so made available for any preceding Business Day, divided by
(B) 1.00 minus the maximum marginal regular Federal individual income tax rate
applicable to ordinary income or the maximum marginal regular Federal corporate
income tax rate applicable to ordinary income (in each case expressed as a
decimal), whichever is greater.

        As used herein, " 'AA' Composite Commercial Paper Rate," on any date
for any Rate Period, means:

                (i) (A) in the case of any Minimum Rate Period or any Special
        Rate Period of fewer than 49 Rate Period Days, the interest equivalent
        of the 30-day rate; provided, however, that if such Rate Period is a
        Minimum Rate Period and the "AA" Composite Commercial Paper Rate is
        being used to determine the Applicable Rate when all of the outstanding
        shares of Municipal Preferred are subject to Submitted Hold Orders,
        then the interest equivalent of the seven-day rate, and (B) in the case
        of any Special Rate Period of (1) 49 or more but fewer than 70 Rate
        Period Days, the interest equivalent of the 60-day rate; (2) 70 or more
        but fewer than 85 Rate Period Days, the arithmetic average of the
        interest equivalent of the 60-day and 90-day rates; (3) 85 or more but
        fewer than 99 Rate Period Days, the interest equivalent of the 90-day
        rate; (4) 99 or more but fewer than 120 Rate Period Days, the
        arithmetic average of the interest equivalent of the 90-day and 120-day
        rates; (5) 120 or more but fewer than 141 Rate Period Days, the
        interest equivalent of the 120-day rate; (6) 141 or more but fewer than
        162 Rate Period Days, the arithmetic average of the interest equivalent
        of the 120-day and 180-day rates; and (7) 162 or more but fewer than
        183 Rate Period Days, the interest equivalent of the 180-day rate, in
        each case on commercial paper placed on behalf of issuers whose
        corporate bonds are rated "AA" by Standard & Poor's or the equivalent
        of such rating by Standard & Poor's or another rating agency, as made
        available on a discount basis or otherwise by the Federal Reserve Bank
        of New York for the Business Day immediately preceding such date; or

               (ii) in the event that the Federal Reserve Bank of New York does
        not make available any such rate, then the arithmetic average of such
        rates, as quoted on a discount basis or otherwise, by the Commercial
        Paper Dealers to the Auction Agent for the close of business on the
        Business Day next preceding such date.

If any Commercial Paper Dealer does not quote a rate required to determine the
"AA" Composite Commercial Paper Rate, the "AA" Composite Commercial Paper Rate
shall be determined on the basis of the quotation or quotations furnished by
the remaining Commercial Paper Dealer or Commercial Paper Dealers and any
Substitute Commercial Paper Dealer or Substitute Commercial Paper Dealers
selected by the Trust to provide such rate or rates not being supplied by any
Commercial Paper Dealer or Commercial Paper Dealers, as the case may be, or, if
the Trust does not select any such Substitute Commercial Paper Dealer or
Substitute Commercial Paper Dealers, by the remaining Commercial Paper Dealer
or Commercial Paper Dealers. For purposes of this definition, the "interest
equivalent" of a rate stated on a discount basis (a "discount rate") for

<PAGE>

commercial paper of a given days' maturity shall be equal to the quotient
(rounded upwards to the next higher one-thousandth (0.001) of 1%) of (A) the
discount rate divided by (B) the difference between (x) 1.00 and (y) a fraction
the numerator of which shall be the product of the discount rate times the
number of days in which such commercial paper matures and the denominator of
which shall be 360. As used herein, "Commercial Paper Dealers" means [Lehman
Commercial Paper Incorporated, Goldman, Sachs & Co. and Merrill Lynch, Pierce,
Fenner & Smith Incorporated] and such other commercial paper dealer or dealers
as the Trust may from time to time appoint, or, in lieu of any thereof, their
respective affiliates or successors. As used herein, "Substitute Commercial
Paper Dealer" means [CS First Boston Corporation or Morgan Stanley & Co.
Incorporated] or their respective affiliates or successors, if such entity is a
commercial paper dealer, provided that none of such entities shall be a
Commercial Paper Dealer.

        As used herein, "Treasury Bill Rate," on any date for any Rate Period,
means:

               (i) the bond equivalent yield, calculated in accordance with
        prevailing industry convention, of the rate on the most recently
        auctioned Treasury Bill with a remaining maturity closest to the length
        of such Rate Period, as quoted in The Wall Street Journal on such date
        for the Business Day next preceding such date; or

               (ii) in the event that any such rate is not published in The
        Wall Street Journal, then the bond equivalent yield, calculated in
        accordance with prevailing industry convention, as calculated by
        reference to the arithmetic average of the bid price quotations of the
        most recently auctioned Treasury Bill with a remaining maturity closest
        to the length of such Rate Period, as determined by bid price
        quotations as of the close of business on the Business Day immediately
        preceding such date obtained from the U.S. Government Securities
        Dealers to the Auction Agent.

        As used herein, "Treasury Note Rate," on any date for any Rate Period,
means:

               (i) the yield on the most recently auctioned Treasury Note with
        a remaining maturity closest to the length of such Rate Period, as
        quoted in The Wall Street Journal on such date for the Business Day
        next preceding such date; or

                (ii) in the event that any such rate is not published in The
        Wall Street Journal, then the yield as calculated by reference to the
        arithmetic average of the bid price quotations of the most recently
        auctioned Treasury Note with a remaining maturity closest to the length
        of such Rate Period, as determined by bid price quotations as of the
        close of business on the Business Day immediately preceding such date
        obtained from the U.S. Government Securities Dealers to the Auction
        Agent.

        For purposes of the foregoing, "Treasury Bill" means a direct
obligation of the U.S. Government having a maturity at the time of issuance of
364 days or less, and "Treasury Note" means a direct obligation of the U.S.
Government having a maturity at the time of issuance of five years or less but
more than 364 days. If any U.S. Government Securities Dealer does not quote a
rate required to determine the Treasury Bill Rate or the Treasury Note Rate,
such rate shall be determined on the basis of the quotation or quotations
furnished by the remaining U.S. Government Securities Dealer or U.S. Government
Securities Dealers and any Substitute U.S. Government Securities Dealers
selected by the Trust to provide such rate or rates not being supplied by any
U.S. Government Securities Dealer or U.S. Government Securities Dealers, as the
case may be, or, if the Trust does not select any such Substitute U.S.
Government Securities Dealer or Substitute U.S. Government Securities Dealers,
by the remaining U.S. Government Securities Dealer or U.S. Government
Securities Dealers. As used herein, "U.S. Government Securities Dealer" means
[Lehman Government Securities Incorporated, Goldman, Sachs & Co., Salomon Smith
Barney Inc. and Morgan Guaranty Trust Company of New York] or their respective
affiliates or successors, if such entity is a U.S. Government securities
dealer. As used herein, "Substitute U.S. Government Securities Dealer" shall
mean [CS First Boston Corporation and Merrill Lynch, Pierce, Fenner & Smith
Incorporated] or their respective affiliates or successors, if such entity is a
U.S. Government securities dealer, provided that none of such entities shall be
a U.S. Government Securities Dealer.


<PAGE>

        The applicable "AA" Composite Commercial Paper Rates, Taxable
Equivalent of the Short-Term Municipal Bond Rates, Treasury Bill Rates and
Treasury Note Rates will be the rates announced on such Auction Date for the
Business Day immediately prior to such Auction Date.

        The "Rate Multiple" will be a percentage, determined as set forth
below, based on the prevailing rating of shares of Municipal Preferred in
effect at the close of business on the Business Day next preceding such Auction
Date:
<TABLE>
<CAPTION>
<S>                                                                            <C>

PREVAILING RATING                                                              PERCENTAGE

"aa3"/AA- or higher.........................................................      110%
"a3"/A-.....................................................................      125%
"baa3"/BBB-.................................................................      150%
"ba3"/BB-...................................................................      200%
Below "ba3"/BB-.............................................................      250%
</TABLE>

provided, however, that in the event the Trust has notified the Auction Agent
of its intent to allocate income taxable for federal income tax purposes to
shares of Municipal Preferred prior to the Auction establishing the Applicable
Rate for such shares, the applicable percentage in the foregoing table shall be
divided by the quantity 1 minus the maximum marginal regular Federal individual
income tax rate applicable to ordinary income or the maximum marginal regular
Federal corporate income tax rate applicable to ordinary income, whichever is
greater. If the shares of Municipal Preferred are rated by only one rating
agency, such rating will be the prevailing rating.

For purposes of this definition, the "prevailing rating" of shares of
Municipal Preferred shall be (i) "aa3"/AA- or higher if such shares have a
rating of "aa3" or better by Moody's and AA- or better by Standard & Poor's or
the equivalent of such ratings by such agencies or a substitute rating agency
or substitute rating agencies selected as provided below, (ii) if not "aa3"/AA-
or higher, then "a3"/A- if such shares have a rating of "a3" or better by
Moody's and A- or better by Standard & Poor's or the equivalent of such ratings
by such agencies or a substitute rating agency or substitute rating agencies
selected as provided below, (iii) if not "aa3"/AA- or higher or "a3"/A-, then
"baa3"/BBB- if such shares have a rating of "baa3" or better by Moody's and
BBB- or better by Standard & Poor's or the equivalent of such ratings by such
agencies or a substitute rating agency or substitute rating agencies selected
as provided below, (iv) if not "aa3"/AA- or higher, "a3"/A- or "baa3"/BBB-,
then "ba3"/BB- if such shares have a rating of "ba3" or better by Moody's and
BB- or better by Standard & Poor's or the equivalent of such ratings by such
agencies or a substitute rating agency or substitute rating agencies selected
as provided below, and (v) if not "aa3"/AA- or higher, "a3"/A-, "baa3"/BBB-, or
"ba3"/BB-, then Below "ba3"/BB-; provided, however, that if such shares are
rated by only one rating agency, the prevailing rating shall be determined
without reference to the rating of any other rating agency. The Trust will take
all reasonable action necessary to enable either Standard & Poor's or Moody's
to provide a rating for shares of Municipal Preferred. If neither Standard &
Poor's nor Moody's shall make such a rating available, Salomon Smith Barney
Inc. or its successor shall select at least one nationally recognized
statistical rating organization (as that term is used in the rules and
regulations of the SEC under the Securities Exchange Act of 1934, as amended)
to act as a substitute rating agency in respect of the shares of Municipal
Preferred, and the Trust shall take all reasonable action to enable such rating
agency to provide a rating for such shares.

SUBMISSION OF ORDERS BY BROKER-DEALERS TO AUCTION AGENT

        Prior to 1:30 P.M., New York City time, on each Auction Date, or such
other time on the Auction Date specified by the Auction Agent (the "Submission
Deadline"), each Broker-Dealer will submit to the Auction Agent in writing all
Orders obtained by it for the Auction to be conducted on such Auction Date,
designating itself (unless otherwise permitted by the Trust) as the Existing

<PAGE>

Holder or Potential Holder, as the case may be, in respect of the shares of
Municipal Preferred subject to such Orders. Any Order submitted by a Beneficial
Owner or a Potential Beneficial Owner to its Broker-Dealer, or by a
Broker-Dealer to the Auction Agent, prior to the Submission Deadline on any
Auction Date, shall be irrevocable.

        If any rate specified in any Bid contains more than three figures to
the right of the decimal point, the Auction Agent will round such rate to the
next highest one-thousandth (0.001) of 1%.

        If one or more Orders of an Existing Holder is submitted to the Auction
Agent covering in the aggregate more than the number of outstanding shares of
Municipal Preferred subject to an Auction held by such Existing Holder, such
Orders will be considered valid in the following order of priority:

               (a) all Hold Orders will be considered valid, but only up to and
        including in the aggregate the number of shares of Municipal Preferred
        held by such Existing Holder, and, if the number of shares subject to
        such Hold Orders exceeds the number of shares held by such Existing
        Holder, the number of shares subject to each such Hold Order shall be
        reduced pro rata to cover the number of shares held by such Existing
        Holder;

               (b) (i) any Bid will be considered valid up to and including the
        excess of the number of shares of Municipal Preferred held by such
        Existing Holder over the number of shares of Municipal Preferred
        subject to any Hold Orders referred to in clause (a) above;

                      (ii) subject to subclause (i), if more than one Bid of an
               Existing Holder is submitted to the Auction Agent with the same
               rate and the number of shares of Municipal Preferred subject to
               such Bids is greater than such excess, such Bids will be
               considered valid up to and including the amount of such excess,
               and the number of shares of Municipal Preferred subject to each
               Bid with the same rate will be reduced pro rata to cover the
               number of shares of Municipal Preferred equal to such excess;

                      (iii) subject to subclauses (i) and (ii), if more than
               one Bid of an Existing Holder is submitted to the Auction Agent
               with different rates, such Bids shall be considered valid in the
               ascending order of their respective rates up to and including
               the amount of such excess; and

                      (iv) in any such event, the number, if any, of such
               shares subject to any portion of Bids considered not valid in
               whole or in part under this clause (b) will be treated as the
               subject of a Bid by or on behalf of a Potential Holder at the
               rate specified therein; and

               (c) all Sell Orders will be considered valid up to and including
        the excess of the number of outstanding shares of Municipal Preferred
        held by such Existing Holder over the sum of shares of Municipal
        Preferred subject to valid Hold Orders referred to in clause (a) above
        and valid Bids referred to in clause (b) above.

        If more than one Bid of a Potential Holder for shares of Municipal
Preferred is submitted to the Auction Agent by or on behalf of any Potential
Holder, each Bid submitted will be a separate Bid with the rate and number of
shares therein specified.

DETERMINATION OF SUFFICIENT CLEARING BIDS, WINNING BID RATE AND APPLICABLE RATE

        Not earlier than the Submission Deadline on each Auction Date, the
Auction Agent will assemble all valid Orders submitted or deemed submitted to
it by the Broker-Dealers (each such Hold Order, Bid or Sell Order as submitted
or deemed submitted by a Broker-Dealer being herein referred to as a "Submitted
Hold Order," a "Submitted Bid" or a "Submitted Sell Order," as the case may be,

<PAGE>

or as a "Submitted Order" and collectively as "Submitted Hold Orders,"
"Submitted Bids" or "Submitted Sell Orders," as the case may be, or as
"Submitted Orders") and will determine the excess of the number of outstanding
shares of Municipal Preferred over the number of outstanding shares of
Municipal Preferred subject to Submitted Hold Orders (such excess being herein
referred to as the "Available Municipal Preferred") and whether Sufficient
Clearing Bids have been made in the Auction. "Sufficient Clearing Bids" will
have been made if the number of outstanding shares of Municipal Preferred that
are the subject of Submitted Bids of Potential Holders specifying rates not
higher than the Maximum Rate equals or exceeds the number of outstanding shares
of Municipal Preferred that are the subject of Submitted Sell Orders (including
the number of shares subject to Bids of Existing Holders specifying rates
higher than the Maximum Rate).

        If Sufficient Clearing Bids have been made, the Auction Agent will
determine the lowest rate specified in the Submitted Bids (the "Winning Bid
Rate") which, taking into account the rates in the Submitted Bids of Existing
Holders, would result in Existing Holders continuing to hold an aggregate
number of outstanding shares of Municipal Preferred which, when added to the
number of outstanding shares of Municipal Preferred to be purchased by
Potential Holders, based on the rates in their Submitted Bids, would equal not
less than the Available Municipal Preferred. In such event, the Winning Bid
Rate will be the Applicable Rate for the next Rate Period for all shares of
Municipal Preferred.

        If Sufficient Clearing Bids have not been made (other than because all
of the outstanding shares of Municipal Preferred are subject to Submitted Hold
Orders), the Applicable Rate for the next Rate Period for all shares of
Municipal Preferred will be equal to the Maximum Rate. If Sufficient Clearing
Bids have not been made, Beneficial Owners that have submitted or that are
deemed to have submitted Sell Orders may not be able to sell in the Auction all
shares of Municipal Preferred subject to such Sell Orders but will continue to
own shares of Municipal Preferred for the next Rate Period, dividends for which
may include income taxable to such Beneficial Owners. See "The Auction --
Auction Dates; Advance Notice of Allocation of Taxable Income" above and
"Acceptance and Rejection of Submitted Bids and Submitted Sell Orders and
Allocation of Shares" below.

        If all of the outstanding shares of Municipal Preferred are subject to
Submitted Hold Orders, the Applicable Rate for the next Rate Period will be the
lesser of the Kenny Index (if such Rate Period consists of fewer than 183 Rate
Period Days) or the product of (i) (1) the "AA" Composite Commercial Paper Rate
on the Auction Date for such Rate Period, if such Rate Period consists of fewer
than 183 Rate Period Days; (2) the Treasury Bill Rate on such Auction Date for
such Rate Period, if such Rate Period consists of more than 182 but fewer than
365 Rate Period Days; or (3) the Treasury Note Rate on such Auction Date for
such Rate Period, if such Rate Period is more than 364 Rate Period Days (the
rate described in the foregoing clause (i)(1), (2) or (3) as applicable, being
referred to herein as the "Benchmark Rate") and (ii) 1 minus the maximum
marginal regular Federal individual income tax rate applicable to ordinary
income or the maximum marginal regular Federal corporate income tax rate
applicable to ordinary income, whichever is greater; provided, however, that if
the Trust has notified the Auction Agent of its intent to allocate to shares of
Municipal Preferred in such Rate Period any net capital gain or other income
taxable for federal income tax purposes ("Taxable Income"), the Applicable Rate
for shares of Municipal Preferred for such Rate Period will be (A) if the
Taxable Yield Rate (as defined below) is greater than the Benchmark Rate, then
the Benchmark Rate, or (B) if the Taxable Yield Rate is less than or equal to
the Benchmark Rate, then the rate equal to the sum of (x) the lesser of the
Kenny Index (if such Rate Period consists of fewer than 183 Rate Period Days)
or the product of the Benchmark Rate multiplied by the factor set forth in the
preceding clause (ii) and (y) the product of the maximum marginal regular
Federal individual income tax rate applicable to ordinary income or the maximum

<PAGE>

marginal regular Federal corporate income tax applicable to ordinary income,
whichever is greater, multiplied by the Taxable Yield Rate. For purposes of the
foregoing, "Taxable Yield Rate" means the rate determined by (a) dividing the
amount of Taxable Income available for distribution per share of Municipal
Preferred by the number of days in the Dividend Period in respect of which such
Taxable Income is contemplated to be distributed, (b) multiplying the amount
determined in (a) above by 365 (in the case of a Dividend Period of 7 Rate
Period Days) or 360 (in the case of any other Dividend Period), and (c)
dividing the amount determined in (b) above by $25,000. In calculating the "AA"
Composite Commercial Paper Rate, the Treasury Bill Rate and the Treasury Note
Rate for such purpose, the rates used will be the rates or yields specified in
the applicable definitions of "AA" Composite Commercial Paper Rate, Treasury
Bill Rate and Treasury Note Rate set forth under "The Auction -- Orders by
Existing Holders and Potential Holders."

ACCEPTANCE AND REJECTION OF SUBMITTED BIDS AND SUBMITTED SELL ORDERS AND
ALLOCATION OF SHARES

        Based on the determinations made under "Determination of Sufficient
Clearing Bids, Winning Bid Rate and Applicable Rate" above and, subject to the
discretion of the Auction Agent to round and allocate certain shares as
described below, Submitted Bids and Submitted Sell Orders will be accepted or
rejected in the order of priority set forth in the Auction Procedures, with the
result that Existing Holders and Potential Holders of shares of Municipal
Preferred will sell, continue to hold and/or purchase such shares as set forth
below. Existing Holders that submitted or were deemed to have submitted Hold
Orders (or on whose behalf Hold Orders were submitted or deemed to have been
submitted) will continue to hold the shares of Municipal Preferred subject to
such Hold Orders.

        If Sufficient Clearing Bids have been made:

               (a) Each Existing Holder that placed or on whose behalf was
        placed a Submitted Sell Order or Submitted Bid specifying any rate
        higher than the Winning Bid Rate will sell the outstanding shares of
        Municipal Preferred subject to such Submitted Sell Order or Submitted
        Bid;

               (b) Each Existing Holder that placed or on whose behalf was
        placed a Submitted Bid specifying a rate lower than the Winning Bid
        Rate will continue to hold the outstanding shares of Municipal
        Preferred subject to such Submitted Bid;

               (c) Each Potential Holder that placed or on whose behalf was
        placed a Submitted Bid specifying a rate lower than the Winning Bid
        Rate will purchase the number of outstanding shares of Municipal
        Preferred subject to such Submitted Bid;

               (d) Each Existing Holder that placed or on whose behalf was
        placed a Submitted Bid specifying a rate equal to the Winning Bid Rate
        will continue to hold the shares of Municipal Preferred subject to such
        Submitted Bid, unless the number of outstanding shares of Municipal
        Preferred subject to all such Submitted Bids is greater than the number
        of shares of Municipal Preferred in excess of the Available Municipal
        Preferred over the number of shares of Municipal Preferred accounted
        for in clauses (b) and (c) above, in which event each Existing Holder
        with such a Submitted Bid will continue to hold a number of outstanding
        shares of Municipal Preferred subject to such Submitted Bid determined
        on a pro rata basis based on the number of outstanding shares of
        Municipal Preferred subject to all such Submitted Bids of such Existing
        Holders; and

               (e) Each Potential Holder that placed or on whose behalf was
        placed a Submitted Bid specifying a rate equal to the Winning Bid Rate
        will purchase any shares of Available Municipal Preferred not accounted
        for in clauses (b) through (d) above on a pro rata basis based on the
        outstanding shares of Municipal Preferred subject to all such Submitted
        Bids.

        If Sufficient Clearing Bids have not been made (unless this results
because all outstanding shares of Municipal Preferred are subject to Submitted
Hold Orders):

               (a) Each Existing Holder that placed or on whose behalf was
        placed a Submitted Bid specifying a rate equal to or lower than the
        Maximum Rate will continue to hold the outstanding shares of Municipal
        Preferred subject to such Submitted Bid;


<PAGE>

               (b) Each Potential Holder that placed or on whose behalf was
        placed a Submitted Bid specifying a rate equal to or lower than the
        Maximum Rate will purchase the number of outstanding shares of
        Municipal Preferred subject to such Submitted Bid; and

               (c) Each Existing Holder that placed or on whose behalf was
        placed a Submitted Bid specifying a rate higher than the Maximum Rate
        or a Submitted Sell Order will sell a number of shares of Municipal
        Preferred determined on a pro rata basis based on the number of
        outstanding shares of Municipal Preferred subject to all such Submitted
        Bids and Submitted Sell Orders.

        If, as a result of the pro rata allocation described in clauses (d) or
(e) of the second preceding paragraph or clause (c) of the next preceding
paragraph, any Existing Holder would be entitled or required to sell, or any
Potential Holder would be entitled or required to purchase, a fraction of a
share of Municipal Preferred, the Auction Agent will, in such manner as, in its
sole discretion, it will determine, round up or down to the nearest whole share
the number of shares of Municipal Preferred being sold or purchased on such
Auction Date so that the number of shares sold or purchased by each Existing
Holder or Potential Holder will be whole shares of Municipal Preferred. If as a
result of the pro rata allocation described in clause (e) of the second
preceding paragraph, any Potential Holder would be entitled or required to
purchase less than a whole share of Municipal Preferred, the Auction Agent
will, in such manner as, in its sole discretion, it will determine, allocate
shares of Municipal Preferred for purchase among Potential Holders so that only
whole shares of Municipal Preferred are purchased by any such Potential Holder,
even if such allocation results in one or more of such Potential Holders not
purchasing shares of Municipal Preferred.

NOTIFICATION OF RESULTS; SETTLEMENT

        The Auction Agent will be required to advise each Broker-Dealer that
submitted an Order of the Applicable Rate for the next Rate Period and, if the
Order was a Bid or Sell Order, whether such Bid or Sell Order was accepted or
rejected, in whole or in part, by telephone by approximately 3:00 P.M., New
York City time, on each Auction Date. Each Broker-Dealer that submitted an
Order for the account of a customer will then be required to advise such
customer of the Applicable Rate for the next Rate Period and, if such Order was
a Bid or a Sell Order, whether such Bid or Sell Order was accepted or rejected,
in whole or in part, will be required to confirm purchases and sales with each
customer purchasing or selling shares of Municipal Preferred as a result of the
Auction and will be required to advise each customer purchasing or selling
shares of Municipal Preferred as a result of the Auction to give instructions
to its Agent Member of the Securities Depository to pay the purchase price
against delivery of such shares or to deliver such shares against payment
therefor, as appropriate. The Auction Agent will be required to record each
transfer of shares of Municipal Preferred on the registry of Existing Holders
to be maintained by the Auction Agent. See "General" above.

        In accordance with the Securities Depository's normal procedures, on
the Business Day after the Auction Date, the transactions described above will
be executed through the Securities Depository and the accounts of the
respective Agent Members at the Securities Depository will be debited and
credited and shares delivered as necessary to effect the purchases and sales of
shares of Municipal Preferred as determined in the Auction. Purchasers will
make payment through their Agent Members in same-day funds to the Securities
Depository against delivery through their Agent Members; the Securities
Depository will make payment in accordance with its normal procedures, which
now provide for payment against delivery by their Agent Members in same-day
funds. The settlement procedures to be used with respect to Auctions for shares
of Municipal Preferred are set forth in Appendix D hereto.

        If any Existing Holder selling shares of Municipal Preferred in an
Auction fails to deliver such shares, the Broker-Dealer of any person that was
to have purchased shares of Municipal Preferred in such Auction may deliver to
such person a number of whole shares of Municipal Preferred that is less than

<PAGE>

the number of shares that otherwise was to be purchased by such person. In such
event, the number of shares of Municipal Preferred to be so delivered shall be
determined by such Broker-Dealer. Delivery of such lesser number of shares
shall constitute good delivery.

CONCERNING THE AUCTION AGENT

        The Auction Agent is acting as agent for the Trust in connection with
Auctions. In the absence of bad faith or negligence on its part, the Auction
Agent will not be liable for any action taken, suffered, or omitted or for any
error of judgment made by it in the performance of its duties under the Auction
Agency Agreement and will not be liable for any error of judgment made in good
faith unless the Auction Agent will have been negligent in ascertaining the
pertinent facts.

        The Auction Agent may rely upon, as evidence of the identities of the
Existing Holders of shares of Municipal Preferred, a list of initial owners of
such shares provided by the Trust, the results of Auctions, notices from any
Broker-Dealer (or other Person, if permitted by the Trust) with respect to
transfers described in the Prospectus under "The Auction -- Secondary Market
Trading and Transfer of Municipal Preferred" and notices from the Trust. The
Auction Agent is not required to accept any such notice for an Auction unless
it is received by the Auction Agent by 3:00 P.M., New York City time, on the
Business Day preceding such Auction.

        The Auction Agent will be the transfer agent, registrar, dividend
disbursing agent and redemption agent for shares of Municipal Preferred. The
registrar for shares of Municipal Preferred will send notices to holders of
shares of Municipal Preferred of any special meetings at which holders of
Municipal Preferred have the right to elect trustees of the Trust. See
"Description of Municipal Preferred -- Voting Rights" below.

        The Auction Agent may terminate the Auction Agency Agreement upon
notice to the Trust on a date no earlier than 45 days after such notice. If the
Auction Agent should resign, the Trust will use its best efforts to enter into
an agreement with a successor Auction Agent containing substantially the same
terms and conditions as the Auction Agency Agreement. The Trust may remove the
Auction Agent provided that prior to such removal the Trust shall have entered
into such an agreement with a successor Auction Agent.

BROKER-DEALERS

        The Auction Agent after each Auction for shares of Municipal Preferred
will pay to each Broker-Dealer, from funds provided by the Trust, a service
charge at the annual rate of 1/4 of 1% in the case of any Auction immediately
preceding a Rate Period of less than one year, or a percentage agreed to by the
Trust and the Broker-Dealers in the case of any Auction immediately preceding a
Rate Period of one year or longer, of the purchase price of shares of Municipal
Preferred placed by such Broker-Dealer at such Auction. For the purposes of the
preceding sentence, shares of Municipal Preferred will be placed by a
Broker-Dealer if such shares were (i) the subject of Hold Orders deemed to have
been submitted to the Auction Agent by the Broker-Dealer and were acquired by
such Broker-Dealer for its own account or were acquired by such Broker-Dealer
for its customers who are Beneficial Owners or (ii) the subject of an Order
submitted by such Broker-Dealer that is (A) a Submitted Bid of an Existing
Holder that resulted in such Existing Holder continuing to hold such shares as
a result of the Auction or (B) a Submitted Bid of a Potential Holder that
resulted in such Potential Holder purchasing such shares as a result of the
Auction or (C) a valid Hold Order.

        The Trust may request the Auction Agent to terminate one or more
Broker-Dealer Agreements at any time, provided that at least one Broker-Dealer
Agreement is in effect after such termination.

        The Broker-Dealer Agreements provide that a Broker-Dealer (other than
an affiliate of the Trust) may submit Orders in Auctions for its own account,
unless the Trust notifies all Broker-Dealers that they may no longer do so, in
which case Broker-Dealers may continue to submit Hold Orders and Sell Orders

<PAGE>

for their own accounts. Any Broker-Dealer that is an affiliate of the Trust may
submit Orders in Auctions, but only if such Orders are not for its own account.
If a Broker-Dealer submits an Order for its own account in any Auction, it
might have an advantage over other Bidders because it would have knowledge of
all Orders submitted by it in that Auction; such Broker-Dealer, however, would
not have knowledge of Orders submitted by other Broker-Dealers in that Auction.

        The Broker-Dealers expect, but are not obligated, to maintain a
secondary trading market in shares of Municipal Preferred outside of Auctions.
There can be no assurance that a secondary trading market in shares of
Municipal Preferred will develop or, if it does develop, that it will provide
owners with liquidity of investment. The shares of Municipal Preferred will not
be registered on any stock exchange or on the National Association of
Securities Dealers Automated Quotations system.

                       DESCRIPTION OF MUNICIPAL PREFERRED

        The descriptions of the shares of Municipal Preferred contained in the
Prospectus and this Statement of Additional Information do not purport to be
complete and are subject to and qualified in their entireties by reference to
the Declaration and the Statement. Copies of the Declaration and the form of
the Statement are filed as exhibits to the Registration Statement of which the
Prospectus and this Statement of Additional Information are a part and may be
inspected, and copies thereof may be obtained, as described under "Further
Information" in the Prospectus.

GENERAL

        The shares of Municipal Preferred will rank on a parity with each
other, with shares of any other series of Municipal Preferred and with shares
of any other series of Preferred Shares as to the payment of dividends and the
distribution of assets upon dissolution, liquidation or winding up of the
affairs of the Trust.

DIVIDENDS

        GENERAL. The holders of shares of Municipal Preferred offered pursuant
to the Prospectus will be entitled to receive, when, as and if declared by the
Board of Trustees, out of funds legally available therefor in accordance with
the Declaration, the Statement and applicable law, cumulative cash dividends at
the Applicable Rate thereof, determined as set forth below under "Determination
of Dividend Rate," and no more (except as otherwise provided below under
"Gross-up Payments"), payable on the respective dates determined as set forth
below. Holders of shares of Municipal Preferred shall not be entitled to any
dividend, whether payable in cash, property or shares, in excess of full
cumulative dividends on shares of Municipal Preferred. No interest, or sum of
money in lieu of interest, will be payable in respect of any dividend payment
or payments on shares of Municipal Preferred which may be in arrears, and,
except as otherwise provided herein, no additional sum of money will be payable
in respect of any such arrearage.

        Dividends on shares of Municipal Preferred shall accumulate at the
Applicable Rate from the Date of Original Issue and, except as provided below,
shall be payable on Wednesday, ________ __, ____ and each Wednesday thereafter
with respect to shares of Series W Municipal Preferred and Friday, ________ __,
____ and each Friday thereafter with respect to shares of Series F Municipal
Preferred; provided, however, that (1) if the Wednesday or Friday, as the case
may be, on which dividends would otherwise be payable on shares of such series
is not a Business Day, then such dividends shall be payable on shares of such
series on the first Business Day that falls after such Wednesday or Friday, as
the case may be; and (2) the Trust in its discretion may establish Dividend
Payment Dates in respect of any Special Rate Period of such shares consisting
of more than 28 Rate Period Days that differ from those set forth above;
provided, however, that such dates shall be set forth in the Notice of Special
Rate Period relating to such Special Rate Period, as delivered to the Auction
Agent and filed with the Secretary of the Trust; and further provided that (1)
any such Dividend Payment Date shall be a Business Day and (2) the last
Dividend Payment Date in respect of such Special Rate Period shall be the
Business Day immediately following the last day thereof, as such last day is
determined as set forth below under "Designation of Special Rate Periods."


<PAGE>

        The amount of dividends per share payable on shares of Municipal
Preferred on any date on which dividends shall be payable on such shares shall
be computed by multiplying the Applicable Rate in effect for such Dividend
Period or Dividend Periods or part thereof for which dividends have not been
paid by a fraction, the numerator of which shall be the number of days in such
Dividend Period or Dividend Periods or part thereof and the denominator of
which shall be 365 if such Dividend Period consists of 7 Rate Period Days and
360 for all other Dividend Periods, and applying the rate obtained against
$25,000. Any dividend payment made on shares of Municipal Preferred shall first
be credited against the earliest accumulated but unpaid dividends due with
respect to such shares.

        Each dividend on shares of Municipal Preferred will be paid on the
Dividend Payment Date therefor to the holders of record as their names appear
on the record books of the Trust on the Business Day next preceding such
Dividend Payment Date. Dividends in arrears for any past Dividend Period may be
declared and paid at any time, without reference to any regular Dividend
Payment Date, to the holders of record as their names appear on the record
books of the Trust on such date, not exceeding 15 days preceding the payment
date thereof, as may be fixed by the Board of Trustees.

        The Securities Depository, in accordance with its current procedures,
is expected to credit on each Dividend Payment Date dividends received from the
Trust to the accounts of the respective Agent Members in next-day funds. Each
of the initial Broker-Dealers, however, has represented to the Trust that such
Broker-Dealer (or if such Broker-Dealer does not act as Agent Member, the Agent
Member designated by such Broker-Dealer) will make such dividend payments
available in same-day funds on each Dividend Payment Date to Beneficial Owners
that use such Broker-Dealer or its designee as Agent Member. A Beneficial Owner
of shares of Municipal Preferred that does not use one of the initial Broker-
Dealers or a designee thereof as its Agent Member should contact the Agent
Member used by such Beneficial Owner to determine whether such Agent Member
will make dividend payments available to such Beneficial Owner in next-day or
same-day funds. If any Agent Member does not make such dividends available in
same-day funds to a Beneficial Owner, such Beneficial Owner who uses such Agent
Member would not have same-day funds available to it until the next Business
Day, which, in the case of a Dividend Payment Date that is a Wednesday, would
be the following Thursday if it is a Business Day, and which, in the case of a
Dividend Payment Date that is a Friday, would be the following Monday if it is
a Business Day.

        DETERMINATION OF DIVIDEND RATE. The dividend rates on shares of
Municipal Preferred offered pursuant to the Prospectus during the period from
and after the Date of Original Issue thereof to and including the last day of
the Initial Rate Period therefor will be equal to the rate per annum set forth
with respect to such shares on the cover page of the Prospectus. For each
Subsequent Rate Period thereafter, the dividend rate on such shares will be
equal to the rate per annum that results from an Auction on the Auction Date
next preceding such Subsequent Rate Period; provided, however, if:

               (i) an Auction for any Subsequent Rate Period is not held for
        any reason other than as described below, the dividend rate on such
        shares for such Subsequent Rate Period will be the Maximum Rate on the
        Auction Date therefor;

               (ii) any Failure to Deposit shall have occurred with respect to
        shares of Municipal Preferred during any Rate Period thereof (other
        than any Special Rate Period of more than 364 Rate Period Days or any
        Rate Period succeeding any Special Rate Period of more than 364 Rate
        Period Days during which a Failure to Deposit occurred that has not
        been cured), but, prior to 12:00 Noon, New York City time, on the third
        Business Day next succeeding the date on which such Failure to Deposit
        occurred, such Failure to Deposit shall have been cured in accordance
        with the next succeeding paragraph and the Trust shall have paid to the
        Auction Agent a late charge ("Late Charge") equal to the sum of (1) if

<PAGE>

        such Failure to Deposit consisted of the failure timely to pay to the
        Auction Agent the full amount of dividends with respect to any Dividend
        Period of such shares, an amount computed by multiplying (x) 200% of
        the Reference Rate for the Rate Period during which such Failure to
        Deposit occurs on the Dividend Payment Date for such Dividend Period by
        (y) a fraction, the numerator of which shall be the number of days for
        which such Failure to Deposit has not been cured in accordance with the
        next succeeding paragraph (including the day such Failure to Deposit
        occurs and excluding the day such Failure to Deposit is cured) and the
        denominator of which shall be 360, and applying the rate obtained
        against the aggregate Liquidation Preference of the outstanding shares
        of Municipal Preferred and (2) if such Failure to Deposit consisted of
        the failure timely to pay to the Auction Agent the Redemption Price of
        the shares of Municipal Preferred, if any, for which a Notice of
        Redemption has been mailed by the Trust, an amount computed by
        multiplying (x) 200% of the Reference Rate for the Rate Period during
        which such Failure to Deposit occurs on the redemption date by (y) a
        fraction, the numerator of which shall be the number of days for which
        such Failure to Deposit is not cured in accordance with the next
        succeeding paragraph (including the day such Failure to Deposit occurs
        and excluding the day such Failure to Deposit is cured) and the
        denominator of which shall be 360, and applying the rate obtained
        against the aggregate Liquidation Preference of the outstanding shares
        of Municipal Preferred to be redeemed, no Auction will be held in
        respect of shares of Municipal Preferred for the Subsequent Rate Period
        thereof and the dividend rate for such Subsequent Rate Period will be
        the Maximum Rate on the Auction Date for such Subsequent Rate Period;

               (iii) any Failure to Deposit shall have occurred with respect to
        shares of Municipal Preferred during any Rate Period thereof (other
        than any Special Rate Period of more than 364 Rate Period Days or any
        Rate Period succeeding any Special Rate Period of more than 364 Rate
        Period Days during which a Failure to Deposit occurred that has not
        been cured), and, prior to 12:00 Noon, New York City time, on the third
        Business Day next succeeding the date on which such Failure to Deposit
        occurred, such Failure to Deposit shall not have been cured in
        accordance with the next succeeding paragraph or the Trust shall not
        have paid the applicable Late Charge to the Auction Agent, no Auction
        will be held in respect of Municipal Preferred for the first Subsequent
        Rate Period thereof thereafter (or for any Rate Period thereafter to
        and including the Rate Period during which (1) such Failure to Deposit
        is cured in accordance with the next succeeding paragraph and (2) the
        Trust pays the applicable Late Charge to the Auction Agent (the
        condition set forth in this clause (2) to apply only in the event
        Moody's is rating such shares at the time the Trust cures such Failure
        to Deposit), in each case no later than 12:00 Noon, New York City time,
        on the fourth Business Day prior to the end of such Rate Period), and
        the dividend rate for shares of Municipal Preferred for each such
        Subsequent Rate Period will be a rate per annum equal to the Maximum
        Rate on the Auction Date for such Subsequent Rate Period (but with the
        prevailing rating for such shares, for purposes of determining such
        Maximum Rate, being deemed to be "Below 'ba3'/BB-"); or

               (iv) any Failure to Deposit shall have occurred with respect to
        shares of Municipal Preferred during a Special Rate Period thereof of
        more than 364 Rate Period Days, or during any Rate Period thereof
        succeeding any Special Rate Period of more than 364 Rate Period Days
        during which a Failure to Deposit occurred that has not been cured,
        and, prior to 12:00 Noon, New York City time, on the fourth Business
        Day preceding the Auction Date for the Rate Period subsequent to such
        Rate Period, such Failure to Deposit shall not have been cured in
        accordance with the next succeeding paragraph or, in the event Moody's
        is then rating such shares, the Trust shall not have paid the
        applicable Late Charge to the Auction Agent (such Late Charge, for
        purposes of this subparagraph (iv), to be calculated by using, as the
        Reference Rate, the Reference Rate applicable to a Rate Period (x)
        consisting of more than 182 Rate Period Days but fewer than 365 Rate
        Period Days and (y) commencing on the date on which the Rate Period
        during which Failure to Deposit occurs commenced), no Auction will be
        held in respect of shares of Municipal Preferred for such Subsequent
        Rate Period (or for any Rate Period thereafter to and including the

<PAGE>

        Rate Period during which (1) such Failure to Deposit is cured in
        accordance with the next succeeding paragraph and (2) the Trust pays
        the applicable Late Charge to the Auction Agent (the condition set
        forth in this clause (2) to apply only in the event Moody's is rating
        such shares at the time the Trust cures such Failure to Deposit), in
        each case no later than 12:00 Noon, New York City time, on the fourth
        Business Day prior to the end of such Rate Period), and the dividend
        rate for shares of Municipal Preferred for each such Subsequent Rate
        Period shall be a rate per annum equal to the Maximum Rate on the
        Auction Date for such Subsequent Rate Period (but with the prevailing
        rating for such shares, for purposes of determining such Maximum Rate,
        being deemed to be "Below 'ba3'/BB-") (the rate per annum at which
        dividends are payable on shares of Municipal Preferred for any Rate
        Period being herein referred to as the "Applicable Rate" for such
        shares).

        A Failure to Deposit with respect to shares of Municipal Preferred
shall have been cured (if such Failure to Deposit is not solely due to the
willful failure of the Trust to make the required payments to the Auction
Agent) with respect to any Rate Period if, within the respective time periods
described immediately above, the Trust shall have paid to the Auction Agent (i)
all accumulated and unpaid dividends on the shares of Municipal Preferred and
(ii) without duplication, the Redemption Price for the shares of Municipal
Preferred, if any, for which a Notice of Redemption has been mailed; provided,
however, that the foregoing clause (ii) shall not apply to the Trust's failure
to pay the Redemption Price in respect of shares of Municipal Preferred when
the related Notice of Redemption provides that redemption of such shares is
subject to one or more conditions precedent and any such condition precedent
shall not have been satisfied at the time or times and in the manner specified
in such Notice of Redemption.

        The Trust shall pay to the Auction Agent, not later than 12:00 noon,
New York City time, on the Business Day next preceding each Dividend Payment
Date for shares of Municipal Preferred, an aggregate amount of funds available
on the next Business Day in The City of New York, New York, equal to the
dividends to be paid to all Holders of such shares on such Dividend Payment
Date. All moneys paid to the Auction Agent for the payment of dividends (or for
payment of any Late Charge) shall be held in trust for the payment of such
dividends (and any such Late Charge) by the Auction Agent for the benefit of
the Holders specified above. Any moneys paid to the Auction Agent in accordance
with the foregoing but not applied by the Auction Agent to the payment of
dividends (and any such Late Charge) will, to the extent permitted by law, be
repaid to the Trust at the end of 90 days from the date on which such moneys
were so to have been applied.

        GROSS-UP PAYMENTS. Holders of shares of Municipal Preferred shall be
entitled to receive, when, as and if declared by the Board of Trustees, out of
funds legally available therefor in accordance with the Declaration, the
Statement and applicable law, dividends in an amount equal to the aggregate
Gross-up Payment in accordance with the following:

        If, in the case of any Minimum Rate Period or any Special Rate Period
of 28 Rate Period Days or fewer, or in the case of any Special Rate Period, the
Trust allocates any net capital gain or other income taxable for federal income
tax purposes to a dividend paid on shares of Municipal Preferred without having
given advance notice thereof to the Auction Agent as described above under "The
Auction -- Auction Dates; Advance Notice of Allocation of Taxable Income" (such
allocation is referred to herein as a "Taxable Allocation") solely by reason of
the fact that such allocation is made retroactively as a result of the
redemption of all or a portion of the outstanding shares of Municipal Preferred
or the liquidation of the Trust or any other reason, the Trust will, prior to
the end of the calendar year in which such dividend was paid, provide notice
thereof to the Auction Agent and direct the Trust's dividend disbursing agent
to send such notice with a Gross-up Payment to each holder of shares (initially
Cede & Co., as nominee of the Securities Depository) that was entitled to such
dividend payment during such calendar year at such holder's address as the same
appears or last appeared on the record books of the Trust.

        If, in the case of any Special Rate Period of more than 28 Rate Period
Days, the Trust makes a Taxable Allocation to a dividend paid on shares of
Municipal Preferred, the Trust shall, prior to the end of the calendar year in
which such dividend was paid, provide notice thereof to the Auction Agent and
direct the Trust's dividend disbursing agent to send such notice with a
Gross-up Payment to each holder of shares that was entitled to such dividend
payment during such calendar year at such holder's address as the same appears
or last appeared on the record books of the Trust.


<PAGE>

        The Trust shall not be required to make Gross-up Payments with respect
to any net capital gain or other taxable income determined by the Internal
Revenue Service to be allocable in a manner different from that allocated by
the Trust.

        A "Gross-up Payment" in respect of any dividend means payment to a
holder of shares of Municipal Preferred of an amount which, giving effect to
the Taxable Allocations made with respect to such dividend, would cause such
holder's after-tax returns (taking into account both the Taxable Allocations
and the Gross-up Payment) to be equal to the after-tax return the holder would
have received if no such Taxable Allocations had occurred. Such Gross-up
Payment shall be calculated: (i) without consideration being given to the time
value of money; (ii) assuming that no holder of shares of Municipal Preferred
is subject to the Federal alternative minimum tax with respect to dividends
received from the Trust; and (iii) assuming that each holder of shares of
Municipal Preferred is taxable at the maximum marginal regular Federal
individual income tax rate applicable to ordinary income or net capital gain,
as applicable, or the maximum marginal regular Federal corporate income tax
rate applicable to ordinary income or net capital gain, as applicable,
whichever is greater, in effect at the time such Gross-up Payment is made.

        RESTRICTIONS ON DIVIDENDS AND OTHER PAYMENTS. Under the 1940 Act, the
Board of Trustees may not declare any dividend (except a dividend payable in
Common Shares), or declare any other distribution, upon Common Shares, or
purchase Common Shares, unless in every such case the Preferred Shares,
including the shares of Municipal Preferred, have, at the time of any such
declaration or purchase (and after giving effect thereto), an asset coverage
(as defined in and determined pursuant to the 1940 Act) of at least 200% (or
such other percentage as may in the future be required by law).

        In addition, for so long as any shares of Municipal Preferred are
outstanding, except as set forth in the following paragraph or otherwise
described herein, (A) the Trust may not declare, pay or set apart for payment
any dividend or other distribution (other than a dividend or distribution paid
in shares of, or in options, warrants or rights to subscribe for or purchase,
Common Shares or other shares, if any, ranking junior to the shares of
Municipal Preferred as to the payment of dividends and the distribution of
assets upon dissolution, liquidation or winding up of the affairs of the Trust)
in respect of Common Shares or any other shares of the Trust ranking junior to
or on a parity with the shares of Municipal Preferred as to the payment of
dividends or the distribution of assets upon dissolution, liquidation or
winding up of the affairs of the Trust, or call for redemption, redeem,
purchase or otherwise acquire for consideration any Common Shares or any other
such junior shares (except by conversion into or exchange for shares of the
Trust ranking junior to the shares of Municipal Preferred as to the payment of
dividends and the distribution of assets upon dissolution, liquidation or
winding up of the affairs of the Trust), or any such parity shares (except by
conversion into or exchange for shares of the Trust ranking junior to or on a
parity with the shares of Municipal Preferred as to payment of dividends and
the distribution of assets upon dissolution, liquidation or winding up of the
affairs of the Trust), unless (1) full cumulative dividends on shares of
Municipal Preferred through their most recently ended Dividend Period shall
have been paid or shall have been declared and sufficient funds for the payment
thereof deposited with the Auction Agent and (2) the Trust has redeemed the
full number of shares of Municipal Preferred required to be redeemed by any
provision for mandatory redemption pertaining thereto and (B) if either Moody's
or Standard & Poor's is rating the shares of Municipal Preferred, the Trust may
not declare, pay or set apart for payment any dividend or other distribution

<PAGE>

(other than a dividend or distribution paid in shares of, or in options,
warrants or rights to subscribe for or purchase, Common Shares or other shares,
if any, ranking junior to shares of Municipal Preferred as to the payment of
dividends and the distribution of assets upon dissolution, liquidation or
winding up of the affairs of the Trust) in respect of Common Shares or any
other shares of the Trust ranking junior to shares of Municipal Preferred as to
the payment of dividends or the distribution of assets upon dissolution,
liquidation or winding up of the affairs of the Trust, or call for redemption,
redeem, purchase or otherwise acquire for consideration any Common Shares or
any other such junior shares (except by conversion into or exchange for shares
of the Trust ranking junior to the shares of Municipal Preferred as to the
payment of dividends or the distribution of assets upon dissolution,
liquidation or winding up of the affairs of the Trust), unless immediately
after such transaction the Discounted Value of Moody's Eligible Assets or
Standard & Poor's Eligible Assets, or both, as the case may be, would at least
equal the Municipal Preferred Basic Maintenance Amount (see "Description of
Municipal Preferred -- Rating Agency Guidelines" and "-- Redemption").

        Except as set forth in the next sentence, no dividends shall be
declared or paid or set apart for payment on any class or series of shares of
beneficial interest of the Trust ranking, as to the payment of dividends, on a
parity with shares of Municipal Preferred for any period unless full cumulative
dividends have been or contemporaneously are declared and paid on the shares of
Municipal Preferred through their most recent Dividend Payment Date. When
dividends are not paid in full upon the shares of Municipal Preferred through
their most recent Dividend Payment Date or upon any other class or series of
shares ranking on a parity as to the payment of dividends with shares of
Municipal Preferred through their most recent respective dividend payment
dates, all dividends declared upon shares of Municipal Preferred and any other
such class or series of shares ranking on a parity as to the payment of
dividends with shares of Municipal Preferred shall be declared pro rata so that
the amount of dividends declared per share on shares of Municipal Preferred and
such other class or series of shares shall in all cases bear to each other the
same ratio that accumulated dividends per share on the shares of Municipal
Preferred and such other class or series of shares bear to each other (for
purposes of this sentence, the amount of dividends declared per share of
Municipal Preferred shall be based on the Applicable Rate for such share for
the Dividend Periods during which dividends were not paid in full).

        Under the Code, the Trust must, among other things, distribute at least
90% of the sum of its net investment income (including the excess, if any, of
net short-term capital gain over net long-term capital loss) and its net
tax-exempt income each year in order to maintain its qualification for tax
treatment as a regulated investment company. The foregoing limitations on
dividends, distributions and purchases may under certain circumstances impair
the Trust's ability to maintain such qualification. See "Tax Matters -- Federal
Income Tax Matters."

        DESIGNATION OF SPECIAL RATE PERIODS. The Trust, at its option, may
designate any succeeding Subsequent Rate Period of shares of Municipal
Preferred as a Special Rate Period consisting of a specified number of Rate
Period Days evenly divisible by seven and not more than 1,820 (approximately 5
years), subject to adjustment as described below. A designation of a Special
Rate Period shall be effective only if (i) notice thereof shall have been given
as provided herein, (ii) an Auction for such shares shall have been held on the
Auction Date immediately preceding the first day of such proposed Special Rate
Period and Sufficient Clearing Bids for such shares shall have existed in such
Auction and (iii) if the Trust shall have mailed a Notice of Redemption with
respect to any shares of Municipal Preferred, as described under "Redemption --
Notice of Redemption" below, the Redemption Price with respect to such shares
shall have been deposited with the Auction Agent. In the event the Trust wishes
to designate any succeeding Subsequent Rate Period for shares of Municipal
Preferred as a Special Rate Period consisting of more than 28 Rate Period Days,
the Trust shall notify Standard & Poor's (if Standard & Poor's is then rating
such shares) and Moody's (if Moody's is then rating such shares) in advance of
the commencement of such Subsequent Rate Period that the Trust wishes to
designate such Subsequent Rate Period as a Special Rate Period and shall
provide Standard & Poor's (if Standard & Poor's is then rating such shares) and
Moody's (if Moody's is then rating such shares) with such documents as either
may request.

        In the event the Trust wishes to designate a Subsequent Rate Period as
a Special Rate Period, but the day following what would otherwise be the last
day of such Special Rate Period is not (a) a Wednesday that is a Business Day
in the case of a series of Municipal Preferred designated as "Series W
Municipal Preferred," or (b) a Friday that is a Business Day in the case of a
series of Municipal Preferred designated as "Series F Municipal Preferred,"
then the Trust shall designate such Subsequent Rate Period as a Special Rate
Period consisting of the period commencing on the first day following the end
of the immediately preceding Rate Period and ending (a) on the first Tuesday
that is followed by a Wednesday that is a Business Day proceeding what would
otherwise be such last day, in the case of Series W Municipal Preferred, or (b)
on the first Thursday that is followed by a Friday that is a Business Day
proceeding what would otherwise be such last day in the case of Series F
Municipal Preferred.


<PAGE>

        If the Trust proposes to designate any succeeding Subsequent Rate
Period of shares of Municipal Preferred as a Special Rate Period, not less than
20 (or such lesser number of days as may be agreed to from time to time by the
Auction Agent) nor more than 30 days prior to the date the Trust proposes to
designate as the first day of such Special Rate Period (which shall be such day
that would otherwise be the first day of a Minimum Rate Period), notice shall
be (i) published or caused to be published by the Trust in a newspaper of
general circulation to the financial community in The City of New York, New
York, which carries financial news, and (ii) mailed by the Trust by first-class
mail, postage prepaid, to the holders of shares of Municipal Preferred. Each
such notice shall state (A) that the Trust may exercise its option to designate
a succeeding Subsequent Rate Period of shares of Municipal Preferred as a
Special Rate Period, specifying the first day thereof and (B) that the Trust
will, by 11:00 A.M., New York City time, on the second Business Day next
preceding such date (or by such later time or date, or both, as may be agreed
to by the Auction Agent), notify the Auction Agent of either (x) its
determination, subject to certain conditions, to exercise such option, in which
case the Trust shall specify the Special Rate Period designated, or (y) its
determination not to exercise such option.

        No later than 11:00 A.M., New York City time, on the second Business
Day next preceding the first day of any proposed Special Rate Period as to
which notice has been given as set forth in the preceding paragraph (or such
later time or date, or both, as may be agreed to by the Auction Agent), the
Trust shall deliver to the Auction Agent either:

               (i) a notice ("Notice of Special Rate Period") stating (A) that
        the Trust has determined to designate the next succeeding Rate Period
        of shares of Municipal Preferred as a Special Rate Period, specifying
        the same and the first day thereof, (B) the Auction Date immediately
        prior to the first day of such Special Rate Period, (C) that such
        Special Rate Period shall not commence if (1) an Auction for such
        shares shall not be held on such Auction Date for any reason or (2) an
        Auction for such shares shall be held on such Auction Date but
        Sufficient Clearing Bids for such shares shall not exist in such
        Action, (D) the scheduled Dividend Payment Dates for such shares during
        such Special Rate Period and (E) the Special Redemption Provisions, if
        any, applicable to such shares in respect of such Special Rate Period;
        such notice to be accompanied by a Municipal Preferred Basic
        Maintenance Report showing that, as of the third Business Day next
        preceding such proposed Special Rate Period, Moody's Eligible Assets
        (if Moody's is then rating such shares) and Standard & Poor's Eligible
        Assets (if Standard & Poor's is then rating such shares) each have an
        aggregate Discounted Value at least equal to the Municipal Preferred
        Basic Maintenance Amount as of such Business Day (assuming for purposes
        of the foregoing calculation that (a) the Maximum Rate is the Maximum
        Rate on such Business Day as if such Business Day were the Auction Date
        for the proposed Special Rate Period, and (b) the Moody's Discount
        Factors applicable to Moody's Eligible Assets will be determined by
        reference to the first Moody's Exposure Period longer than the Moody's
        Exposure Period then applicable to the Trust); or

               (ii) a notice stating that the Trust has determined not to
        exercise its option to designate a Special Rate Period of shares of
        Municipal Preferred and that the next succeeding Rate Period shall be a
        Minimum Rate Period.

        If the Trust fails to deliver either such notice (and, in the case of
the notice described in clause (i) above, a Municipal Preferred Basic
Maintenance Report to the effect set forth in clause (i) (if either Moody's or
Standard & Poor's is then rating the shares of Municipal Preferred)) with
respect to any designation of any proposed Special Rate Period to the Auction
Agent by 11:00 A.M., New York City time, on the second Business Day next
preceding the first day of such proposed Special Rate Period (or by such later
time or date, or both, as may be agreed to by the Auction Agent), the Trust
shall be deemed to have delivered a notice to the Auction Agent with respect to
such Special Rate Period to the effect set forth in clause (ii) above. In the

<PAGE>

event the Trust delivers to the Auction Agent a notice described in clause (i)
above, it shall file a copy of such notice with the Secretary of the Trust, and
the contents of such notice shall be binding on the Trust. In the event the
Trust delivers to the Auction Agent a notice described in clause (ii) above,
the Trust will provide Moody's (if Moody's is then rating the shares of
Municipal Preferred) and Standard & Poor's (if Standard & Poor's is then rating
the shares of Municipal Preferred) a copy of such notice.

VOTING RIGHTS

        Holders of shares of Municipal Preferred are entitled to vote on
certain matters as described herein under "Investment Objective and Policies --
Fundamental Investment Policies" and in the Prospectus under "Description of
Municipal Preferred -- Voting Rights" and "Certain Provisions in the
Declaration of Trust."

        In connection with the election of the Trust's trustees, holders of
outstanding Preferred Shares, including shares of Municipal Preferred, voting
together as one separate class, shall be entitled to elect two of the Trust's
trustees, and the remaining trustees will be elected by holders of Common
Shares and Preferred Shares, including shares of Municipal Preferred, voting
together as a single class. In addition, if at any time dividends (whether or
not earned or declared) on outstanding Preferred Shares, including shares of
Municipal Preferred, shall be due and unpaid in an amount equal to two full
years' dividends thereon, and sufficient cash or specified securities shall not
have been deposited with the Auction Agent for the payment of such dividends,
then, as the sole remedy of holders of outstanding Preferred Shares, including
shares of Municipal Preferred, the number of trustees constituting the Board of
Trustees shall be automatically increased by the smallest number that, when
added to the two trustees elected exclusively by the holders of Preferred
Shares, including shares of Municipal Preferred, as described above, would
constitute a majority of the Board of Trustees as so increased by such smallest
number; and at a special meeting of shareholders which will be called and held
as soon as practicable, and at all subsequent meetings at which trustees are to
be elected, the holders of Preferred Shares, including shares of Municipal
Preferred, voting as a separate class, will be entitled to elect the smallest
number of additional trustees that, together with the two trustees which such
holders will be in any event entitled to elect, constitutes a majority of the
total number of trustees of the Trust as so increased. The terms of office of
the persons who are trustees at the time of that election will continue. If the
Trust thereafter shall pay, or declare and set apart for payment, in full all
dividends payable on all outstanding Preferred Shares, including shares of
Municipal Preferred, the voting rights stated in the preceding sentence shall
cease, and the terms of office of all of the additional trustees elected by the
holders of Preferred Shares, including shares of Municipal Preferred (but not
of the trustees with respect to whose election the holders of Common Shares
were entitled to vote or the two trustees the holders of Preferred Shares have
the right to elect in any event), will terminate automatically.

        So long as any shares of Municipal Preferred are outstanding, the Trust
may not, without the affirmative vote of the holders of at least a majority of
the shares of Municipal Preferred outstanding at the time, voting together as
one separate class:

        (a) authorize, create or issue additional shares of Municipal Preferred
        or classes or series of Preferred Shares ranking prior to or on a
        parity with shares of Municipal Preferred with respect to the payment
        of dividends or the distribution of assets upon dissolution,
        liquidation or winding up of the affairs of the Trust (except that the
        Trust may, without the vote of the holders of shares of Municipal
        Preferred, authorize, create or issue additional shares of Municipal
        Preferred or classes or series of Preferred Shares ranking on a parity
        with shares of Municipal Preferred with respect to the payment of
        dividends and the distribution of assets upon dissolution, liquidation
        or winding up of the affairs of the Trust if the Trust obtains written
        confirmation from Moody's (if Moody's is then rating the shares of
        Municipal Preferred) and Standard & Poor's (if Standard & Poor's is
        then rating the shares of Municipal Preferred) that the issuance of any
        such additional shares or class or series of shares would not impair
        the rating then assigned by such rating agency to shares of Municipal
        Preferred; provided, however, that if Moody's or Standard & Poor's is
        not then rating the shares of Municipal Preferred the aggregate
        liquidation preference of all Preferred Shares of the Trust outstanding
        after any such issuance, exclusive of accumulated and unpaid dividends,
        may not exceed $_______); or


<PAGE>

        (b) amend, alter or repeal the provisions of the Declaration, the
        By-Laws or the Statement, whether by merger, consolidation or
        otherwise, so as to materially affect any preference, right or power of
        the shares of Municipal Preferred or the holders thereof (provided,
        however, that a division of a share of Municipal Preferred shall be
        deemed to affect any such preference, right or power only if the terms
        of such division adversely affect the holders of any shares of
        Municipal Preferred);

provided, however, that (i) none of the actions permitted by the exception to
(a) above will be deemed to affect such preferences, rights or powers and (ii)
the authorization, creation and issuance of classes or series of shares ranking
junior to the Municipal Preferred with respect to the payment of dividends and
the distribution of assets upon dissolution, liquidation or winding up of the
affairs of the Trust will be deemed to affect such preferences, rights or
powers only if at least one of Moody's or Standard & Poor's is then rating the
shares of Municipal Preferred and such issuance would, at the time thereof,
cause the Trust not to satisfy the 1940 Act Municipal Preferred Asset Coverage
or the Municipal Preferred Basic Maintenance Amount. So long as any shares of
Municipal Preferred are outstanding, the Trust may not, without the affirmative
vote of the holders of at least 66 2/3% of the shares of Municipal Preferred
outstanding at the time, voting as a separate class, file a voluntary
application for relief under Federal bankruptcy law or any similar application
under state law for so long as the Trust is solvent and does not foresee
becoming insolvent. If any action set forth in this paragraph would adversely
affect the rights of one or more series (the "Affected Series") of Municipal
Preferred in a manner different from any other series of Municipal Preferred,
the Trust will not approve any such action without the affirmative vote of the
holders of at least a majority of the shares of each such Affected Series
outstanding at the time (each such Affected Series voting as a separate class).

        Voting provisions will not apply with respect to shares of Municipal
Preferred if, at or prior to the time when a vote is required, such shares
shall have been (i) redeemed or (ii) called for redemption and sufficient funds
shall have been deposited in trust to effect such redemption.

        The Board of Trustees may, without shareholder approval, amend, alter
or repeal any or all of the definitions and related provisions required to be
contained in the Statement by the rating agencies in the event the Trust
receives written confirmation from Moody's or Standard & Poor's, or both, as
appropriate, that any such amendment, alteration or repeal would not impair the
ratings then assigned by Moody's and Standard & Poor's to shares of Municipal
Preferred.

RATING AGENCY GUIDELINES

        The Trust intends that, so long as shares of Municipal Preferred are
outstanding, the composition of its portfolio will reflect guidelines
established by at least one of Moody's or Standard & Poor's in connection with
the Trust's receipt on the Date of Original Issue of the shares of Municipal
Preferred of ratings of "Aaa" from Moody's or AAA from Standard & Poor's.
Moody's and Standard & Poor's, nationally recognized independent rating
agencies, issue ratings for various securities reflecting their perceived
creditworthiness of such securities. The guidelines described below have been
developed by Moody's and Standard & Poor's in connection with other issuances
of asset-backed and similar securities, including debt obligations and
adjustable rate preferred shares, generally on a case-by-case basis through
discussions with the issuers of those securities. The guidelines are designed
to ensure that assets underlying outstanding debt or preferred shares will be
sufficiently varied and will be of sufficient quality and amount to justify
investment grade ratings. The guidelines do not have the force of law, but have
been adopted by the Trust in order to satisfy current requirements necessary
for Moody's or Standard & Poor's, or both, to issue the above-described ratings

<PAGE>

for shares of Municipal Preferred, which ratings are generally relied upon by
investors in purchasing such securities. In the context of a closed-end
investment company such as the Trust, therefore, the guidelines provide a set
of tests for portfolio composition and asset coverage that supplement (and in
some cases are more restrictive than) the applicable requirements under the
1940 Act. A rating agency's guidelines will apply to shares of Municipal
Preferred only so long as such rating agency is rating such shares. The Board
of Trustees may, without shareholder approval, amend, alter or repeal any or
all of the definitions and related provisions which have been adopted by the
Trust pursuant to the rating agency guidelines in the event the Trust receives
written confirmation from Moody's or Standard & Poor's, or both, as
appropriate, that any such change would not impair the ratings then assigned by
Moody's and Standard & Poor's to shares of Municipal Preferred.

        So long as either Standard & Poor's or Moody's, or both, are rating the
shares of Municipal Preferred, the Trust may not, among other things, (1) buy
or sell futures or write put or call options and similar securities and buy or
sell Inverse Floaters, except to the extent set forth in the Statement, which
include the restrictions set forth as Appendix E to this Statement of
Additional Information, (2) borrow money, except that the Trust may, without
obtaining the written confirmation described below, borrow money for the
purpose of clearing securities transactions if (a) the Municipal Preferred
Basic Maintenance Amount would continue to be satisfied after giving effect to
such borrowing (which shall mean, for purposes of the calculation of the
Municipal Preferred Basic Maintenance Amount, adding the amount of the
liability for such borrowing to the calculation of the Municipal Preferred
Basic Maintenance Amount) and (b) such borrowing (i) is privately arranged with
a bank or other person and is evidenced by a promissory note or other evidence
of indebtedness that is not intended to be publicly distributed or (ii) is for
"temporary purposes," is evidenced by a promissory note or other evidence of
indebtedness and is an amount not exceeding 5 per centum of the value of the
total assets of the Trust at the time of the borrowing (for purposes of the
foregoing, "temporary purpose" means that the borrowing is to be repaid within
sixty days and is not to be extended or renewed), (3) issue additional shares
of Municipal Preferred or any class or series of shares ranking prior to or on
a parity with the shares of Municipal Preferred with respect to the payment of
dividends or the distribution of assets upon dissolution, liquidation or
winding up of the affairs of the Trust, or reissue any shares of Municipal
Preferred previously purchased or redeemed by the Trust, (4) engage in any
short sales of securities, (5) lend any securities, (6) merge or consolidate
into or with any corporation, (7) change the pricing service (currently the
Trust uses both Muller Data Corporation and Standard & Poor's J.J. Kenny
Evaluation Services) referred to in the definition of Market Value to a pricing
service other than Muller Data Corporation or Standard & Poor's J.J. Kenny
Evaluation Services, or (8) enter into reverse repurchase agreements, unless in
each case (except as described above) it has received written confirmation from
Standard & Poor's or Moody's, or both, as appropriate, that any such action
would not impair the rating then assigned by such rating agency to shares of
Municipal Preferred. While the Trust does not presently intend to borrow, and
while the Trust is restricted under the 1940 Act from borrowing in excess of 33
1/3% of its total assets and is otherwise restricted from borrowing pursuant to
rating agency guidelines, under certain circumstances and notwithstanding
adverse interest rate or market conditions, the Trust is permitted to borrow
for temporary or emergency purposes (e.g., to make required distributions or
pay dividends) or to repurchase shares when such borrowing is deemed to be in
the best interest of the common shareholders. See "Repurchase of Common Shares"
herein and "Repurchase of Common Shares; Conversion to Open-End Fund" in the
Prospectus for the circumstances under which the Trust may purchase Common
Shares and incur indebtedness in connection therewith. Should the Trust borrow,
the Trust would be required to pay when due the interest obligation on any debt
incurred by the Trust before it would be able to pay dividends on shares of
Municipal Preferred, and it is likely that the Trust would be required to pay
the principal amount of any such debt prior to meeting the liquidation
preference of the shares of Municipal Preferred. Because the interest expense
on borrowings by the Trust will reduce the Trust's net investment earnings
available to pay dividends on shares of Municipal Preferred, borrowing may
impair the Trust's ability to pay such dividends on shares of Municipal
Preferred. This risk is heightened in the event the Trust incurs variable rate
debt, the interest rate on which may increase with increases in prevailing
market rates.

ASSET MAINTENANCE

        1940 ACT MUNICIPAL PREFERRED ASSET COVERAGE. The Trust will be required
under rating agency guidelines to maintain, as of the last Business Day of each
month on which any shares of Municipal Preferred are outstanding, asset
coverage of at least 200% with respect to such shares (or such other asset
coverage as may in the future be specified in or under the 1940 Act as the

<PAGE>

minimum asset coverage for senior securities which are shares of a closed-end
investment company as a condition of declaring dividends on its Common Shares).
If the Trust fails to maintain such asset coverage in accordance with the
requirements of the rating agency or agencies then rating the shares of
Municipal Preferred ("1940 Act Municipal Preferred Asset Coverage") and such
failure is not cured as of the last Business Day of the following month (the
"1940 Act Cure Date"), the Trust will be required under certain circumstances
to redeem certain of the shares of Municipal Preferred. See "Redemption" below.

        MUNICIPAL PREFERRED BASIC MAINTENANCE AMOUNT. The Trust will be
required under rating agency guidelines to maintain, as of each Business Day (a
"Valuation Date") on which shares of Municipal Preferred are outstanding,
assets having in the aggregate a Discounted Value at least equal to the
Municipal Preferred Basic Maintenance Amount established by the rating agency
or agencies then rating the shares of Municipal Preferred. If the Trust fails
to meet such requirement on any Valuation Date and such failure is not cured on
or before the second Business Day after such Valuation Date (the "Municipal
Preferred Basic Maintenance Cure Date"), the Trust will be required under
certain circumstances to redeem certain of the shares of Municipal Preferred.
See "Redemption" below.

        The "Municipal Preferred Basic Maintenance Amount" as of any Valuation
Date is defined as the dollar amount equal to the sum of:

               (A) (i) the product of the number of shares of Municipal
        Preferred outstanding on such date multiplied by $25,000 (plus the
        product of the number of shares of any other series of Preferred Shares
        outstanding on such date multiplied by the liquidation preference of
        such shares), plus any redemption premium applicable to shares of
        Municipal Preferred (or other Preferred Shares) then subject to
        redemption;

                      (ii) the aggregate amount of dividends that will have
               accumulated at the Applicable Rate (whether or not earned or
               declared) to (but not including) the first Dividend Payment Date
               for each share of Municipal Preferred outstanding that follows
               such Valuation Date (plus the aggregate amount of dividends,
               whether or not earned or declared, that will have accumulated in
               respect of other outstanding Preferred Shares to, but not
               including, the first respective dividend payment dates for such
               other shares that follow such Valuation Date);

                      (iii) subject to certain exceptions, the aggregate amount
               of dividends that would accumulate on shares of Municipal
               Preferred outstanding from such first Dividend Payment Date
               through the 49th day after such Valuation Date, at the Maximum
               Rate (calculated as if such Valuation Date were the Auction Date
               for the Rate Period commencing on such Dividend Payment Date)
               for a Minimum Rate Period thereof to commence on such Dividend
               Payment Date, assuming, solely for purposes of the foregoing,
               that if on such Valuation Date the Trust shall have delivered a
               Notice of Special Rate Period to the Auction Agent with respect
               to such shares, such Maximum Rate shall be the higher of (a) the
               Maximum Rate for the Special Rate Period of such shares to
               commence on such Dividend Payment Date and (b) the Maximum Rate
               for a Minimum Rate Period of such shares to commence on such
               Dividend Payment Date, multiplied by the Volatility Factor
               applicable to a Minimum Rate Period, or, in the event the Trust
               shall have delivered a Notice of Special Rate Period to the
               Auction Agent with respect to such shares designating a Special
               Rate Period consisting of 49 Rate Period Days or more, the
               Volatility Factor applicable to a Special Rate Period of that
               length;

                      (iv) the amount of anticipated Trust expenses for the 90
               days subsequent to such Valuation Date;

                      (v) the amount of the Trust's Maximum Potential Gross-up
               Payment Liability as of such Valuation Date; and


<PAGE>

                      (vi) any current liabilities as of such Valuation Date to
               the extent not reflected in any of (A)(i) through (A)(v)
               (including, without limitation, any payables for Municipal
               Obligations purchased as of such Valuation Date and any
               liabilities incurred for the purpose of clearing securities
               transactions) less

               (B) the value of any Trust assets irrevocably deposited by the
        Trust for the payment of any of (A)(i) through (A)(vi), all as
        calculated in accordance with the requirements of the rating agency or
        agencies then rating the shares of Municipal Preferred.

For purposes of the foregoing, "Maximum Potential Gross-up Payment Liability,"
as of any Valuation Date, means the aggregate amount of Gross-up Payments that
would be due if the Trust were to make Taxable Allocations, with respect to any
taxable year, estimated based upon dividends paid and the amount of
undistributed realized net capital gain and other taxable income earned by the
Trust, as of the end of the calendar month immediately preceding such Valuation
Date, and assuming such Gross-up Payments are fully taxable.

        In managing the Trust's portfolio, the Adviser will not alter the
composition of the Trust's portfolio if, in the reasonable belief of the
Adviser, the effect of any such alteration would be to cause the Trust to have
Eligible Assets with an aggregate Discounted Value, as of the immediately
preceding Valuation Date, less than the Municipal Preferred Basic Maintenance
Amount as of such Valuation Date; provided, however, that in the event that, as
of the immediately preceding Valuation Date, the aggregate Discounted Value of
the Trust's Eligible Assets exceeded the Municipal Preferred Basic Maintenance
Amount by 5% or less, the Adviser will not alter the composition of the Trust's
portfolio in a manner reasonably expected to reduce the aggregate Discounted
Value of the Trust's Eligible Assets unless the Trust shall have confirmed
that, after giving effect to such alteration, the aggregate Discounted Value of
the Trust's Eligible Assets would exceed the Municipal Preferred Basic
Maintenance Amount.

        Upon any failure to maintain the required Discounted Value, the Trust
will seek to alter the composition of its portfolio to reattain the Municipal
Preferred Basic Maintenance Amount on or prior to the Municipal Preferred Basic
Maintenance Cure Date, thereby incurring additional transaction costs and
possible losses and/or gains on dispositions of portfolio securities.

        On or before the third Business Day after a Valuation Date on which the
Trust fails to meet the Municipal Preferred Basic Maintenance Amount, and on
the third Business Day after the Municipal Preferred Basic Maintenance Cure
Date with respect to such Valuation Date, the Trust is required to deliver to
the Auction Agent (so long as either Moody's or Standard & Poor's is rating the
shares of Municipal Preferred) a report with respect to the calculation of the
Municipal Preferred Basic Maintenance Amount and the value of its portfolio
holdings as of the date of such failure or such cure date, as the case may be
(a "Municipal Preferred Basic Maintenance Report"). The Trust will also
deliver, as required, a Municipal Preferred Basic Maintenance Report as of (i)
the fifteenth day of each month (or, if such day is not a Business Day, the
next succeeding Business Day) and (ii) the last Business Day of each month, in
each case on or before the third Business Day after such day. Within ten
Business Days after delivery of such report relating to the last Business Day
of each of ________, ________, ________ and ________ of each year, commencing
________ __, 200_, the Trust will deliver a letter prepared by the Trust's
independent accountants regarding the accuracy of the calculations made by the
Trust in its most recent Municipal Preferred Basic Maintenance Report. If any
such letter prepared by the Trust's independent accountants shows that an error
was made in the most recent Municipal Preferred Basic Maintenance Report, the
calculation or determination made by the Trust's independent accountants will
be conclusive and binding on the Trust.

        The Discount Factors and guidelines for determining the market value of
the Trust's portfolio holdings, described below, have been based by the rating
agencies on criteria such as the sensitivity of the market value of the

<PAGE>

relevant asset to changes in interest rates, the liquidity and depth of the
market for the relevant asset, the credit quality of the relevant asset (for
example, the lower the rating of a debt obligation, the higher the related
discount factor) and the frequency with which the relevant asset is marked to
market. The ratings may be changed, suspended or withdrawn as a result of
changes in, or the unavailability of, such information.

        STANDARD & POOR'S AAA RATING GUIDELINES. For purposes of calculating
the Discounted Value of the Trust's portfolio under current Standard & Poor's
guidelines, the fair market value of Municipal Obligations eligible for
consideration under such guidelines ("Standard & Poor's Eligible Assets") must
be discounted by certain discount factors set forth in the table below
("Standard & Poor's Discount Factors"). The Discounted Value of a Municipal
Obligation under Standard & Poor's guidelines is the fair market value thereof
divided by the Standard & Poor's Discount Factor. The Standard & Poor's
Discount Factor used to discount a particular Municipal Obligation will be
determined by reference to the "Standard & Poor's Exposure Period" (currently,
three Business Days) and the Standard & Poor's rating on such Municipal
Obligation. Standard & Poor's Discount Factors for a range of exposure periods
are set forth below:

<TABLE>
<CAPTION>
<S>                                          <C>       <C>       <C>      <C>        <C>
                                                      STANDARD & POOR'S DISCOUNT FACTORS
                                                               RATING CATEGORY
                                             -----------------------------------------------------

EXPOSURE PERIOD                               AAA*      AA*        A*      BBB*      UNRATED**

45 Business Days..........................   190%      195%      210%     250%          220%
25 Business Days..........................   170       175       190      230           220
10 Business Days..........................   155       160       175      215           220
7 Business Days...........................   150       155       170      210           220
3 Business Days...........................   130       135       150      190           220

</TABLE>

- ------------------------
* Standard & Poor's rating.

** Standard & Poor's Eligible Assets not rated or rated less than BBB by
Standard & Poor's and not rated at least the equivalent of an "A" rating by
another nationally recognized credit rating agency.

        Since the Standard & Poor's Exposure Period currently applicable to the
Trust is three Business Days, the Standard & Poor's Discount Factors currently
applicable to Standard & Poor's Eligible Assets will be determined by reference
to the factors set forth opposite the line entitled "3 Business Days."
Notwithstanding the foregoing, (i) the Standard & Poor's Discount Factor for
short-term Municipal Obligations will be 115%, so long as such Municipal
Obligations are rated A-1+ or SP-1+ by Standard & Poor's and mature or have a
demand feature exercisable within 30 days or less, 120% if such Municipal
Obligations are rated A-1 or SP-1- by Standard & Poor's and mature or have a
demand feature exercisable within 30 days or less, or 125% if such Municipal
Obligations are not rated by Standard & Poor's but are rated VMIG-1, P-1 or
MIG-1 by Moody's; provided, however, that any such Moody's-rated short-term
Municipal Obligations which have demand features exercisable within 30 days or
less must be backed by a letter of credit, liquidity facility or guarantee from
a bank or other financial institution with a short-term rating of at least A-1+
from Standard & Poor's; and further provided that such Moody's-rated short-term
Municipal Obligations may comprise no more than 50% of short-term Municipal
Obligations that qualify as Standard & Poor's Eligible Assets; (ii) no Standard
& Poor's Discount Factor will be applied to cash, futures, options, Inverse
Floaters and similar instruments or to Receivables for Municipal Obligations
Sold; and (iii) except as set forth in clause (i) above, in the case of any

<PAGE>

Municipal Obligation that is not rated by Standard & Poor's but qualifies as a
Standard & Poor's Eligible Asset pursuant to clause (1)(c) of the following
paragraph, such Municipal Obligation will be deemed to have a Standard & Poor's
rating one full rating category lower than the Standard & Poor's rating
category that is the equivalent of the rating category in which such Municipal
Obligation is placed by another nationally recognized credit rating agency. For
purposes of the foregoing, Anticipation Notes rated SP-1+ or, if not rated by
Standard & Poor's, rated MIG-1 or VMIG-1 by Moody's, which do not mature or
have a demand feature at par exercisable in 30 days and which do not have a
long-term rating, will be considered to be short-term Municipal Obligations.
"Receivables for Municipal Obligations Sold," for purposes of calculating
Standard & Poor's Eligible Assets as of any Valuation Date, means the book
value of receivables for Municipal Obligations sold as of or prior to such
Valuation Date if such receivables are due within five business days of such
Valuation Date. Although not provided in the Statement, the Trust has agreed
with Standard & Poor's that, in calculating the Discounted Value of the Trust's
portfolio, although the Statement does not so provide, (1) Standard & Poor's
Discount Factors will be applied to futures and Inverse Floaters and (2) a
Discount Factor of 388% will be applied to Municipal Obligations rated AAA by
Standard & Poor's which are not interest bearing or do not pay interest at
least semi-annually.

        The Standard & Poor's guidelines impose certain minimum issue size,
issuer, geographical diversification and other requirements for purposes of
determining Standard & Poor's Eligible Assets. Solely for purposes of this
definition, the term "Municipal Obligation" means any obligation the interest
on which is exempt from regular federal income taxation and which is issued by
any of the fifty United States, the District of Columbia or any of the
territories of the United States, their subdivisions, counties, cities, towns,
villages, school districts and agencies (including authorities and special
districts created by the states), and federally sponsored agencies such as
local housing authorities. Notwithstanding the foregoing limitations:

               (1) In order to be considered Standard & Poor's Eligible Assets,
          Municipal Obligations owned by the Trust must:

                      (a) be interest bearing and pay interest at least
               semi-annually;

                      (b) be payable in U.S. dollars;

                      (c) be publicly rated BBB or higher by Standard & Poor's
               or, except in the case of Anticipation Notes that are Grant
               Anticipation Notes or Bond Anticipation Notes which must be
               rated by Standard & Poor's to be included in Standard & Poor's
               Eligible Assets, if not rated by Standard & Poor's but rated by
               another nationally recognized credit rating agency, be publicly
               rated A or higher by such agency;

                      (d) not be private placements (except in the case of
               Inverse Floaters);

                      (e) be part of an issue with an original issue size of at
               least $20 million or, if of an issue with an original issue size
               below $20 million (but in no event lower than $10 million), be
               issued by an issuer with a total of at least $50 million of
               securities outstanding; and

                      (f) is not subject to a covered call or covered put
               option written by the Trust.

               (2) Municipal Obligations (excluding Escrowed Bonds) of any one
        issuer or guarantor (excluding bond insurers) will be considered
        Standard & Poor's Eligible Assets only to the extent the Market Value
        of such Municipal Obligations does not exceed 10% of the aggregate
        Market Value of Standard & Poor's Eligible Assets, provided that 2% is
        added to the applicable Standard & Poor's Discount Factor for every 1%
        by which the Market Value of such Municipal Obligations exceeds 5% of
        the aggregate Market Value of Standard & Poor's Eligible Assets, and
        provided that Municipal Obligations (excluding Escrowed Bonds) not
        rated or rated less than BBB by Standard & Poor's and not rated at
        least A by another nationally recognized credit rating agency of any
        one issuer or guarantor (excluding bond insurers) shall constitute
        Standard & Poor's Eligible Assets only to the extent the Market Value
        of such Municipal Obligations does not exceed 5% of the aggregate
        Market Value of Standard & Poor's Eligible Assets.

               (3) Municipal Obligations not rated at least BBB or not rated by
        Standard & Poor's or not rated at least A by another nationally

<PAGE>

        recognized credit rating agency will be considered Standard & Poor's
        Eligible Assets only to the extent the Market Value of such Municipal
        Obligations does not exceed 50% of the aggregate Market Value of
        Standard & Poor's Eligible Assets; provided, however, that if the
        Market Value of such Municipal Obligations exceeds 50% of the aggregate
        Market Value of Standard & Poor's Eligible Assets, a portion of such
        Municipal Obligations (selected by the Trust) shall not be considered
        Standard & Poor's Eligible Assets, so that the Market Value of such
        Municipal Obligations (excluding such portion) does not exceed 50% of
        the aggregate Market Value of Standard & Poor's Eligible Assets.

               (4) Long-term Municipal Obligations (excluding Escrowed Bonds)
        issued by issuers in any one state or territory will be considered
        Standard & Poor's Eligible Assets only to the extent the Market Value
        of such Municipal Obligations does not exceed 25% of the aggregate
        Market Value of Standard & Poor's Eligible Assets.

               (5) Municipal Obligations which are not interest bearing or do
        not pay interest at least semi-annually shall be considered Standard &
        Poor's Eligible Assets if rated AAA by Standard & Poor's.

        MOODY'S "AAA" RATING GUIDELINES. For purposes of calculating the
Discounted Value of the Trust's portfolio under current Moody's guidelines,
Municipal Obligations eligible for consideration under such guidelines
("Moody's Eligible Assets") must be discounted by certain discount factors set
forth in the table below ("Moody's Discount Factors"). The Discounted Value of
a Municipal Obligation under Moody's guidelines is, as of any Valuation Date,
(i) with respect to a Moody's Eligible Asset that is not currently callable as
of such Valuation Date at the option of the issuer thereof, the quotient of the
market value thereof divided by the applicable Moody's Discount Factor, or (ii)
with respect to a Moody's Eligible Asset that is currently callable as of such
Valuation Date at the option of the issuer thereof, the quotient of (a) the
lesser of the market value or call price thereof, including any call premium,
divided by (b) the applicable Moody's Discount Factor. The Moody's Discount
Factor used to discount a particular Municipal Obligation will be determined by
reference to the "Moody's Exposure Period" (currently, the period commencing on
a given Valuation Date and ending 49 days thereafter) and the Moody's rating on
such Municipal Obligation. Moody's Discount Factors for a range of exposure
periods are set forth below:
<TABLE>
<CAPTION>
<S>                          <C>     <C>     <C>     <C>     <C>        <C>         <C>        <C>

                                          MOODY'S DISCOUNT FACTORS RATING CATEGORY

EXPOSURE PERIOD              AAA*    AA*     A*      BAA*    OTHER**    (V)MIG-1*** SP-1+****  UNRATED*****

7 weeks.............         151%    159%    166%    173%     187%       136%        148%         225%
8 weeks or less but greater
  than 7 weeks......         154     161     168     176      190        137         149          231
9 weeks or less but greater
  than 8 weeks......         156     163     170     177      192        138         150          240

</TABLE>

- -----------------------
*     Moody's rating.
  **  Municipal Obligations not rated by Moody's but rated BBB by Standard &
      Poor's.
 ***  Municipal Obligations rated MIG-1 or VMIG-1, which do not mature or have a
      demand feature at par exercisable in 30 days
      and which do not have a long-term rating.
****  Municipal Obligations not rated by Moody's but rated SP-1+ by Standard
      & Poor's, which do not mature or have a demand feature at par
      exercisable in 30 days and which do not have a long-term rating.
***** Municipal Obligations not rated or rated lower than Baa3 by Moody's and
      not rated or rated lower than BBB by Standard & Poor's.


<PAGE>

        Since the Moody's Exposure Period currently applicable to the Trust is
49 days, the Moody's Discount Factors currently applicable to Moody's Eligible
Assets will be determined by reference to the factors set forth opposite the
line entitled "7 weeks." Notwithstanding the foregoing, (i) the Moody's
Discount Factor for short-term Municipal Obligations will be 115%, so long as
such Municipal Obligations are rated at least MIG-1, VMIG-1 or P-1 by Moody's
and mature or have a demand feature at par exercisable in 30 days or less or
125% so long as such Municipal Obligations are rated at least A-1+/AA or
SP-1+/AA by Standard & Poor's and mature or have a demand feature at par
exercisable in 30 days or less and (ii) no Moody's Discount Factor will be
applied to cash or to Receivables for Municipal Obligations Sold. "Receivables
for Municipal Obligations Sold," for purposes of calculating Moody's Eligible
Assets as of any Valuation Date, means no more than the aggregate of the
following: (i) the book value of receivables for Municipal Obligations sold as
of or prior to such Valuation Date if such receivables are due within five
business days of such Valuation Date, and if the trades which generated such
receivables are (x) settled through clearing house firms with respect to which
the Trust has received prior written authorization from Moody's or (y) with
counterparties having a Moody's long-term debt rating of at least Baa3; and
(ii) the Moody's Discounted Value of Municipal Obligations sold as of or prior
to such Valuation Date which generated receivables, if such receivables are due
within five business days of such Valuation Date but do not comply with either
of conditions (x) or (y).

        The Moody's guidelines impose certain minimum issue size, issuer,
geographical diversification and other requirements for purposes of determining
Moody's Eligible Assets, as set forth in the table below:

<TABLE>
<CAPTION>
<S>                                     <C>                   <C>                <C>
                                           MINIMUM              MAXIMUM                MAXIMUM
                                         ISSUE SIZE           UNDERLYING         STATE OR TERRITORY
RATING                                  ($ MILLIONS)          OBLIGOR (%)         CONCENTRATION(%)

Aaa...............................           10                  100                     100
Aa................................           10                   20                      60
A.................................           10                   10                      40
Baa...............................           10                    6                      20
Other*............................           10                    4                      12
Unrated**.........................           10                    4                      12

</TABLE>

- --------------------
*     Municipal Obligations not rated by Moody's but rated BBB by Standard &
      Poor's.
**    Municipal Obligations not rated or rated lower than Baa3 by Moody's and
      not rated or rated lower than BBB by Standard & Poor's.

        For purposes of the foregoing table, the percentages provided, for a
given rating, in the columns entitled "Maximum Underlying Obligor" and "Maximum
State or Territory Concentration" shall apply to the aggregate total of the
Municipal Obligations in the rating category indicated and all rated Municipal
Obligations in lower rating categories, as well as unrated Municipal
Obligations that are Moody's Eligible Assets.

        The percentages set forth in the preceding table are based upon Moody's
Eligible Assets calculated excluding cash. Current Moody's guidelines also
require that Municipal Obligations constituting Moody's Eligible Assets (i) pay
interest in cash, (ii) if applicable, not have suspended ratings, and (iii) not
be subject to a covered call or a covered put option written by the Trust. For
purposes of determining the Moody's Discount Factors applicable to such
Standard & Poor's-rated Municipal Obligations, any such Municipal Obligation
(excluding short-term Municipal Obligations) will be deemed to have a Moody's
rating which is one full rating category lower than its Standard & Poor's
rating. For purposes of applying the foregoing requirements, Municipal
Obligations rated MIG-1, VMIG-1, or P-1, or, if not rated by Moody's, rated
A-1+/AA or SP-1+/AA by Standard & Poor's, will be considered to have a
long-term rating of A. In general, Municipal Obligations which are rated less
than Baa3 by Moody's or less than BBB by Standard & Poor's or not rated by
Moody's or Standard & Poor's may comprise no more than 40% of the aggregate
Market Value of Moody's Eligible Assets.


<PAGE>

        The Trust will enter into futures and options transactions only for
bona fide hedging purposes and not for leveraging or speculative purposes. So
long as either Standard & Poor's or Moody's is rating the Municipal Preferred,
the Trust will only engage in futures or options transactions in accordance
with guidelines of such ratings agencies and, to the extent transactions would
not be permitted by such guidelines, only after it has received written
confirmation from Standard & Poor's or Moody's, as appropriate, that such
transactions would not impair the ratings then assigned by such rating agency
to shares of Municipal Preferred. The guidelines in effect with respect to
futures and options transactions in which the Trust may engage are set forth in
the Statement and are included as Appendix E to this Statement of Additional
Information.

REDEMPTION

        OPTIONAL REDEMPTION.  Except as described below,

               (i) shares of Municipal Preferred are redeemable, at the option
        of the Trust, as a whole or from time to time in part, on the second
        Business Day preceding any Dividend Payment Date therefor, out of funds
        legally available therefor in accordance with the Declaration, the
        Statement and applicable law, at a redemption price per share equal to
        the sum of $25,000 plus an amount equal to accumulated but unpaid
        dividends thereon (whether or not earned or declared) to (but not
        including) the date fixed for redemption; provided, however, that (1)
        shares of Municipal Preferred may not be redeemed in part if after such
        partial redemption fewer than 500 shares remain outstanding; (2) unless
        otherwise provided in the Statement, shares of Municipal Preferred are
        redeemable by the Trust during the Initial Rate Period thereof only on
        the second Business Day next preceding the last Dividend Payment Date
        for such Initial Rate Period; and (3) subject to the next succeeding
        sentence, the Notice of Special Rate Period relating to a Special Rate
        Period of shares of Municipal Preferred, as delivered to the Auction
        Agent and filed with the Secretary of the Trust, may provide that such
        shares shall not be redeemable during the whole or any part of such
        Special Rate Period (except as provided in (ii) below) or shall be
        redeemable during the whole or any part of such Special Rate Period
        only upon payment of such redemption premium or premiums as shall be
        specified therein ("Special Redemption Provisions"); and

               (ii) shares of Municipal Preferred are redeemable, at the option
        of the Trust, as a whole but not in part, out of funds legally
        available therefor in accordance with the Declaration, the Statement
        and applicable law, on the first day following any Dividend Period
        thereof included in a Rate Period of more than 364 Rate Period Days if,
        on the date of determination of the Applicable Rate for such shares for
        such Rate Period, such Applicable Rate equaled or exceeded on such date
        of determination the Treasury Note Rate for such Rate Period, at a
        redemption price of $25,000 per share plus an amount equal to
        accumulated but unpaid dividends thereon (whether or not earned or
        declared) to (but not including) the date fixed for redemption.

A Notice of Special Rate Period relating to shares of Municipal Preferred for a
Special Rate Period may contain Special Redemption Provisions only if the Board
of Trustees, after consultation with the Broker-Dealer or Broker-Dealers for
such Special Rate Period of such shares, determines that such Special
Redemption Provisions are in the best interest of the Trust.

        If fewer than all of the outstanding shares of Municipal Preferred are
to be redeemed as set forth above, the number of shares to be redeemed shall be
determined by the Board of Trustees, and such shares shall be redeemed pro rata
from the holders of record of shares of such series (initially Cede & Co. as
nominee of the Securities Depository) in proportion to the number of such
shares held by such holders. Since the nominee of the Securities Depository is
the only record holder of shares of Municipal Preferred, the Securities

<PAGE>

Depository will determine the number of shares to be redeemed from the accounts
of the Agent Members. The Agent Members, in turn, may determine to redeem
shares from some persons listed on their records as beneficial owners (which
may include an Agent Member holding shares for its own account) without
redeeming shares from the accounts of other persons listed on their records as
beneficial owners.

        The Trust may not mail a Notice of Redemption relating to an optional
redemption as described above on any date unless on such date (a) the Trust has
available certain Deposit Securities with maturity or tender dates not later
than the day preceding the applicable redemption date and having a value not
less than the amount (including any applicable premium) due to holders of
shares of Municipal Preferred by reason of the redemption of such shares on
such redemption date and (b) the Discounted Value of Moody's Eligible Assets
(if Moody's is then rating the shares of Municipal Preferred) and the
Discounted Value of Standard & Poor's Eligible Assets (if Standard & Poor's is
then rating the shares of Municipal Preferred) each at least equal the
Municipal Preferred Basic Maintenance Amount and would at least equal the
Municipal Preferred Basic Maintenance Amount immediately subsequent to such
redemption if such redemption were to occur on such date. For purposes of
determining in clause (b) of the preceding sentence whether the Discounted
Value of Moody's Eligible Assets at least equals the Municipal Preferred Basic
Maintenance Amount, the Moody's Discount Factors applicable to Moody's Eligible
Assets will be determined by reference to the first Moody's Exposure Period
longer than the Moody's Exposure Period then applicable to the Trust.

        MANDATORY REDEMPTION. The Trust will be required to redeem, at a
redemption price equal to $25,000 per share plus accumulated but unpaid
dividends thereon (whether or not earned or declared) to (but not including)
the date fixed by the Board of Trustees for redemption (such amount, together
with the redemption prices described above under "Optional Redemption," being
herein referred to as the "Redemption Price"), certain of the shares of
Municipal Preferred to the extent permitted under the 1940 Act, the
Declaration, the Statement and any applicable law, if the Trust fails to
maintain the Municipal Preferred Basic Maintenance Amount or the 1940 Act
Municipal Preferred Asset Coverage in accordance with the requirements of the
rating agency or rating agencies then rating the shares of Municipal Preferred
and such failure is not cured on or before the Municipal Preferred Basic
Maintenance Cure Date or the 1940 Act Cure Date (herein respectively referred
to as a "Cure Date"), as the case may be. The number of shares of Municipal
Preferred to be redeemed will be equal to the lesser of (a) the minimum number
of shares of Municipal Preferred, together with all other Preferred Shares
subject to redemption or retirement, the redemption of which, if deemed to have
occurred immediately prior to the opening of business on the Cure Date, would
have resulted in the satisfaction of the Municipal Preferred Basic Maintenance
Amount or the 1940 Act Municipal Preferred Asset Coverage, as the case may be,
on such Cure Date (provided, however, that, if there is no such minimum number
of shares of Municipal Preferred and other Preferred Shares the redemption or
retirement of which would have had such result, all shares of Municipal
Preferred and Preferred Shares then outstanding will be redeemed), and (b) the
maximum number of shares of Municipal Preferred, together with all other
Preferred Shares subject to redemption or retirement, that can be redeemed out
of funds expected to be legally available therefor. In determining the shares
of Municipal Preferred required to be redeemed in accordance with the
foregoing, the Trust will allocate the number of shares required to be redeemed
to satisfy the Municipal Preferred Basic Maintenance Amount or the 1940 Act
Municipal Preferred Asset Coverage, as the case may be, pro rata among shares
of Municipal Preferred and any other Preferred Shares subject to redemption or
retirement.

        The Trust is required to effect such a mandatory redemption not earlier
than 20 days and not later than 40 days after such Cure Date, except that if
the Trust does not have funds legally available under the Declaration, the
Statement and applicable law for the redemption of all of the required number
of shares of Municipal Preferred and other Preferred Shares which are subject
to mandatory redemption or retirement or the Trust otherwise is unable to
effect such redemption on or prior to 40 days after such Cure Date, the Trust
will redeem those shares of Municipal Preferred and other Preferred Shares
which it was unable to redeem on the earliest practicable date on which it is

<PAGE>

able to effect such redemption. If fewer than all of the outstanding shares of
Municipal Preferred are to be redeemed pursuant to a mandatory redemption, the
number of shares to be redeemed shall be redeemed pro rata from the holders of
such shares in proportion to the number of such shares held by such holders, in
the same manner as described above in respect of optional redemptions of fewer
than all outstanding shares of Municipal Preferred.

        NOTICE OF REDEMPTION. Notice of redemption shall be given by mailing
the same to each holder of the shares to be redeemed (initially Cede & Co. as
nominee of the Securities Depository), not less than 20 nor more than 45 days
prior to the date fixed for redemption thereof, to the respective addresses of
such holders as the same shall appear on the record books of the Trust ("Notice
of Redemption"). Each such notice shall state (i) the redemption date; (ii) the
number of shares of Municipal Preferred to be redeemed; (iii) the CUSIP number
for such shares; (iv) the Redemption Price; (v) the place or places where
certificate(s) for such shares (properly endorsed or assigned for transfer, if
the Board of Trustees shall so require and the notice shall so state) are to be
surrendered for payment of the Redemption Price; (vi) that dividends on the
shares to be redeemed will cease to accumulate on such redemption date; and
(vii) the provisions of the Statement under which such redemption is made. If
fewer than all shares of Municipal Preferred held by any holder are to be
redeemed, the notice mailed to such holder shall also specify the number of
shares to be redeemed from such holder. The Trust may provide in any Notice of
Redemption relating to an optional redemption that such redemption is subject
to one or more conditions precedent and that the Trust shall not be required to
effect such redemption unless each such condition shall have been satisfied at
the time or times and in the manner specified in such Notice of Redemption.

        OTHER REDEMPTION PROCEDURES. To the extent that any redemption for
which a Notice of Redemption has been mailed is not made by reason of the
absence of legally available funds therefor, such redemption will be made as
soon as practicable to the extent such funds become available. Failure to
redeem shares of Municipal Preferred will be deemed to exist at any time after
the date specified for redemption in a Notice of Redemption when the Trust
shall have failed, for any reason whatsoever, to deposit with the Auction Agent
the Redemption Price with respect to any shares for which such Notice of
Redemption has been mailed. Notwithstanding the fact that the Trust may not
have redeemed shares of Municipal Preferred for which a Notice of Redemption
has been mailed, dividends may be declared and paid on shares of Municipal
Preferred and will include those shares of Municipal Preferred for which a
Notice of Redemption has been mailed. The first two sentences of this paragraph
shall not apply in the event the Trust provides in any Notice of Redemption
relating to an optional redemption that such redemption is subject to one or
more conditions precedent and any such condition precedent shall not have been
satisfied at the time or times and in the manner specified in such Notice of
Redemption.

        Provided a Notice of Redemption has been mailed as described above,
upon the deposit with the Auction Agent (on the Business Day next preceding the
date fixed for redemption thereby, in funds available on the next Business Day
in The City of New York, New York) of funds sufficient to redeem the shares of
Municipal Preferred that are the subject of such notice, dividends on such
shares will cease to accumulate and such shares will no longer be deemed
outstanding for any purpose, and all rights of the holders of the shares so
called for redemption will cease and terminate, except the right of the holders
thereof to receive the Redemption Price, but without any interest or other
additional amount, except as otherwise provided above under "Dividends --
Determination of Dividend Rate" and "-- Gross-up Payments." Upon surrender in
accordance with the Notice of Redemption of the certificates for any shares so
redeemed (properly endorsed or assigned for transfer, if the Board of Trustees
shall so require and the notice shall so state), the Redemption Price shall be
paid by the Auction Agent to the holders of shares of Municipal Preferred
subject to redemption. In the case that fewer than all of the shares
represented by any such certificate are redeemed, a new certificate shall be
issued, representing the unredeemed shares, without cost to the holder thereof.

<PAGE>

The Trust will be entitled to receive from the Auction Agent, promptly after
the date fixed for redemption, any cash deposited with the Auction Agent in
excess of (i) the aggregate Redemption Price of the shares of Municipal
Preferred called for redemption on such date and (ii) all other amounts to
which holders of shares of Municipal Preferred called for redemption may be
entitled. Any funds so deposited that are unclaimed at the end of 90 days from
such redemption date will, to the extent permitted by law, be repaid to the
Trust, after which time the holders of shares of Municipal Preferred so called
for redemption may look only to the Trust for payment of the Redemption Price
and all other amounts to which they may be entitled. The Trust will be entitled
to receive, from time to time after the date fixed for redemption, any interest
on the funds so deposited.

        Notwithstanding the foregoing, if any dividends on shares of Municipal
Preferred (whether or not earned or declared) are in arrears, no shares of
Municipal Preferred shall be redeemed unless all outstanding shares of
Municipal Preferred are simultaneously redeemed, and the Trust shall not
purchase or otherwise acquire any shares of Municipal Preferred; provided,
however, that the foregoing shall not prevent the purchase or acquisition of
all outstanding shares of Municipal Preferred pursuant to the successful
completion of an otherwise lawful purchase or exchange offer made on the same
terms to, and accepted by, holders of all outstanding shares of Municipal
Preferred.

        Except as described above with respect to redemptions and under "The
Auction -- Orders by Existing Holders and Potential Holders," the Declaration
and the Statement do not prohibit the Trust or any affiliate of the Trust from
purchasing or otherwise acquiring any shares of Municipal Preferred.

        The Trust has the right to arrange for third parties to purchase from
the holders thereof shares of Municipal Preferred which are to be redeemed as
described above.

LIQUIDATION

        Upon a dissolution, liquidation or winding up of the affairs of the
Trust, whether voluntary or involuntary, the holders of shares of Municipal
Preferred then outstanding will be entitled to receive and to be paid out of
the assets of the Trust available for distribution to its shareholders, before
any payment or distribution shall be made on the Common Shares or on any other
class of shares of the Trust ranking junior to the Municipal Preferred upon
dissolution, liquidation or winding up of the affairs of the Trust, an amount
equal to the liquidation preference with respect to such shares. The
liquidation preference for shares of Municipal Preferred shall be $25,000 per
share, plus an amount equal to all dividends thereon (whether or not earned or
declared) accumulated but unpaid to (but not including) the date of final
distribution in same-day funds, together with any applicable Gross-up Payments
in connection with the dissolution, liquidation or winding up of the affairs of
the Trust. After the payment to the holders of the shares of Municipal
Preferred of the full preferential amounts provided for as described herein,
the holders of Municipal Preferred as such shall have no right or claim to any
of the remaining assets of the Trust. In the event the assets of the Trust
available for distribution to the holders of shares of Municipal Preferred,
upon any dissolution, liquidation or winding up of the affairs of the Trust,
whether voluntary or involuntary, shall be insufficient to pay in full all
amounts to which such holders are entitled, no such distribution shall be made
on account of any other class or series of Preferred Shares ranking on a parity
with the shares of Municipal Preferred upon such dissolution, liquidation or
winding up unless proportionate distributive amounts shall be paid on account
of the shares of Municipal Preferred, ratably, in proportion to the full
distributable amounts for which holders of all such parity shares are
respectively entitled upon such dissolution, liquidation or winding up. Subject
to the rights of the holders of any series or class or classes of shares
ranking on a parity with the shares of Municipal Preferred with respect to the
distribution of assets upon dissolution, liquidation or winding up of the
affairs of the Trust, after payment shall have been made in full to the holders
of the shares of Municipal Preferred as described herein, but not prior
thereto, any other series or class or classes of shares ranking junior to the
shares of Municipal Preferred with respect to the distribution of assets upon
dissolution, liquidation or winding up shall, subject to the respective terms
and provisions (if any) applying thereto, be entitled to receive any and all
assets remaining to be paid or distributed, and the holders of the shares of
Municipal Preferred shall not be entitled to share therein.

        Neither the sale of all or substantially all the property or business
of the Trust, nor the merger or consolidation of the Trust into or with any
Massachusetts business trust or corporation nor the merger or consolidation of
any Massachusetts business trust or corporation into or with the Trust shall be
a dissolution, liquidation or winding up of the affairs of the Trust, whether
voluntary or involuntary, for the purposes of the foregoing paragraph.


<PAGE>

                          REPURCHASE OF COMMON SHARES

        The Trust is a closed-end management investment company and as such its
shareholders do not, and will not, have the right to redeem their shares of the
Trust. The Trust, however, may repurchase its common shares from time to time
in the open market or otherwise as and when it is deemed advisable by the
Trustees. Such repurchases will be made only when the Trust's common shares are
trading at a discount of 5 percent or more from the net asset value of those
shares. The Trust may incur debt to finance share repurchase transactions.

        The common shares of the Trust trade in the open market at a price
which is a function of several factors, including their net asset value and
yield. The common shares of closed-end investment companies generally sell at
market prices varying from their net asset values. If the Trust repurchases its
common shares for a price below their net asset value, the net asset value of
those common shares that remain outstanding will be enhanced, but this does not
necessarily mean that the market price of those outstanding shares will be
affected, either positively or negatively. Further, interest on borrowings to
finance share repurchase transactions will reduce the Trust's net income.

                                  TAX MATTERS

FEDERAL INCOME TAX MATTERS

        The Trust has elected to be treated and intends to qualify each year as
a "regulated investment company" under Subchapter M of the Code, by meeting all
applicable requirements of Subchapter M, including requirements as to the
nature of the Trust's gross income, the amount of Trust distributions (as a
percentage of both the Trust's overall income and its tax-exempt income), and
the composition of the Trust's portfolio assets. Because the Trust intends to
distribute all of its net investment income and net realized capital gains to
shareholders in accordance with the timing requirements imposed by the Code, it
is not expected that the Trust will be required to pay any federal income or
excise taxes.

        However, if at any time when shares of Municipal Preferred are
outstanding, the Trust does not meet applicable asset coverage requirements,
the Trust will be required to suspend distributions to holders of Common Shares
until the requisite asset coverage is restored. Such a suspension of
distributions may cause the Trust to fail applicable distribution requirements
under the Code, which could result in liability for a 4% federal excise tax on
undistributed amounts, or could cause the Trust to fail to qualify as a
regulated investment company. If the Trust should fail to qualify as a
regulated investment company in any year for this or any other reason, the
Trust would incur a regular corporate federal income tax upon its taxable
income and Trust distributions would generally be taxable as ordinary dividend
income to the shareholders.

        The portion of the Trust's distributions of net investment income that
is attributable to interest from tax-exempt securities will be designated by
the Trust as an "exempt-interest dividend" under the Code and will generally be
exempt from federal income tax in the hands of shareholders so long as at least
50% of the total value of the Trust's assets consists of tax-exempt securities
at the close of each quarter of the Trust's taxable year. Distributions of
tax-exempt interest earned from certain securities may, however, be treated as
an item of tax preference for shareholders under the federal alternative
minimum tax, and all exempt-interest dividends may increase a corporate
shareholder's alternative minimum tax. The percentage of income designated as
tax-exempt will be applied uniformly to all distributions by the Trust of net
investment income made during each fiscal year of the Trust and may differ from
the percentage of distributions consisting of tax-exempt interest in any
particular month. Shareholders are required to report exempt-interest dividends
received from the Trust on their federal income tax returns.


<PAGE>

        In order for any distributions to holders of Municipal Preferred to be
eligible to be treated as exempt-interest dividends, the shares of Municipal
Preferred must be treated as equity for federal income tax purposes. Based in
part on certain representations made by the Trust to Bingham Dana LLP relating
to the lack of any present intention to redeem or purchase shares of Municipal
Preferred at any time in the future, it is the opinion of Bingham Dana LLP that
the shares of Municipal Preferred will constitute equity for federal income tax
purposes. This opinion relies in part on a published ruling of the Internal
Revenue Service stating that certain auction rate preferred stock similar in
many material respects to the Municipal Preferred represents equity. The
opinion of Bingham Dana LLP represents only its best legal judgment and is not
binding on the Internal Revenue Service or the courts. If the Internal Revenue
Service were successfully to assert that variable rate preferred stock such as
the Municipal Preferred should be treated as debt for federal income tax
purposes, dividends on shares of Municipal Preferred would be treated as
taxable interest for federal income tax purposes. In such event, dividends on
shares of Municipal Preferred would not be increased by the Trust and holders
of shares of Municipal Preferred would not be entitled to any additional
distributions from the Trust (including any Gross-up Payments) to offset the
effect of paying federal income tax on Trust distributions so recharacterized
as interest. Bingham Dana LLP has advised the Trust that, should the Internal
Revenue Service pursue in court the position that the shares of Municipal
Preferred should be treated as debt for federal income tax purposes, the
Internal Revenue Service would be unlikely to prevail.

        The Trust may also recognize some net investment income that is not
tax-exempt, as well as capital gains and losses as a result of the disposition
of securities and from certain futures transactions. Shareholders of the Trust
normally will have to pay federal income taxes, and any state or local taxes,
on the non exempt-interest dividends and capital gain distributions they
receive from the Trust; however, the Trust does not expect that the
non-tax-exempt portion of its net investment income, if any, will be
substantial. That portion of net investment income distributions not designated
as exempt-interest dividends, and any distributions from net short-term capital
gains, are taxable to the Trust's shareholders as ordinary income for federal
income tax purposes. Because the Trust expects to earn primarily tax-exempt
interest income, it is expected that no Trust dividends will qualify for the
dividends received deduction for corporations. Distributions of net capital
gains (i.e., the excess of net long-term capital gains over net short-term
capital losses), whether paid in cash or reinvested in additional shares, are
taxable to shareholders as long-term capital gains for federal income tax
purposes without regard to the length of time the shareholders have held their
shares. Any Trust dividend that is declared in October, November, or December
of any calendar year, that is payable to shareholders of record in such a
month, and that is paid the following January will be treated as if received by
the shareholders on December 31 of the year in which the dividend is declared.
The Trust will notify shareholders regarding the federal tax status of its
distributions after the end of each calendar year.

        The Internal Revenue Service requires that a regulated investment
company that has two or more classes of shares designate to each such class
proportionate amounts of each type of its income for each tax year based upon
the percentage of total dividends distributed to each class for such year. The
Trust intends each year to allocate, to the fullest extent practicable, net
tax-exempt interest income, net capital gain and other taxable income, if any,
between its Common Shares and Municipal Preferred shares, in proportion to the
total dividends paid to each class with respect to such year. To the extent
permitted under applicable law, the Trust reserves the right to make special
allocations of income within a class, consistent with the objective of the
Trust.

        Any Trust distribution will have the effect of reducing the per share
net asset value of shares in the Trust by the amount of the distribution.
Shareholders purchasing shares shortly before the record date of any
distribution other than an exempt-interest dividend may thus pay the full price
for the shares and then effectively receive a portion of the purchase price
back as a taxable distribution. In addition, shareholders disposing of shares

<PAGE>

after tax-exempt income has been accrued but not yet declared as a dividend
should be aware that a portion of the sales proceeds realized upon disposition
of the shares may reflect the existence of such accrued tax-exempt income, and
that this portion of the proceeds may be subject to tax as a capital gain even
though it would have been tax-exempt had it been declared as a dividend prior
to the disposition.

        Interest on indebtedness incurred by shareholders to purchase or carry
shares of the Trust will not be deductible for federal income tax purposes.
Exempt-interest dividends are taken into account in calculating the amount of
social security and railroad retirement benefits that may be subject to federal
income tax. Exempt-interest dividends paid from interest on certain private
activity bonds and certain industrial development bonds will not be tax-exempt
to any shareholder that is a "substantial user" (or is related to a
"substantial user") of the facilities financed by those bonds; persons who are,
or are related to, substantial users of such facilities should consult their
tax advisers before purchasing shares of the Trust.

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

        From time to time the Trust may make a tender or repurchase 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 shares
of Municipal Preferred, held or considered under Code rules to be held by such
shareholder. Shareholders who tender all Common Shares and dispose of all
shares of Municipal Preferred held, or considered held, by them will be treated
as having sold such shares and generally will realize a capital gain or loss.
If, however, a shareholder tenders fewer than all of its Common Shares, or
retains a substantial portion of its Municipal Preferred, 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
(including holders of Municipal Preferred) will be treated as having received
taxable distributions from the Trust. Likewise, if the Trust redeems some but
not all of the Municipal Preferred held by a holder of Municipal Preferred and
such holder of Municipal Preferred is treated as having received a taxable
dividend upon such redemption, there is a remote risk that holders of Common
Shares and non-redeeming holders of Municipal Preferred will be treated as
having received taxable distributions from the Trust.

        Any investment in zero coupon bonds, deferred interest bonds,
payment-in-kind bonds, certain stripped securities, and certain securities
purchased at a market discount will cause the Trust to recognize income prior
to the receipt of cash payments with respect to those securities. In order to
distribute this income and avoid a tax on the Trust, the Trust may be required
to liquidate portfolio securities that it might otherwise have continued to
hold, potentially resulting in additional taxable gain or loss to the Trust.

        The Trust's transactions in options, if any, and futures contracts will
be subject to special tax rules that may affect the amount, timing, and
character of Trust income and distributions to shareholders. For example,
certain positions held by the Trust on the last business day of each taxable
year will be marked to market (i.e., treated as if closed out) on that day, and
any gain or loss associated with the positions will be treated as 60% long-term
and 40% short-term capital gain or loss. Certain positions held by the Trust
that substantially diminish its risk of loss with respect to other positions in
its portfolio may constitute "straddles," and may be subject to special tax
rules that would cause deferral of Trust losses, adjustments in the holding

<PAGE>

periods of Trust securities, and conversion of short-term into long-term
capital losses. Certain tax elections exist for straddles that may alter the
effects of these rules. The Trust will limit its activities in options, if any,
and futures contracts to the extent necessary to meet the requirements of
Subchapter M of the Code.

        Dividends and certain other payments to persons who are not citizens or
residents of the United States or U.S. entities ("Non-U.S. Persons") are
generally subject to U.S. tax withholding at the rate of 30%. The Trust intends
to withhold U.S. federal income tax at the rate of 30% (or any lower rate
permitted under an applicable treaty) on taxable dividends and other payments
to Non-U.S. Persons that are subject to such withholding. Any amounts
overwithheld may be recovered by such persons by filing a claim for refund with
the U.S. Internal Revenue Service within the time period appropriate to such
claims. Distributions received from the Trust by Non-U.S. Persons also may be
subject to tax under the laws of their own jurisdictions.

        The Trust is also required in certain circumstances to apply backup
withholding at the rate of 31% on taxable dividends and redemption proceeds
paid to any shareholder (including a Non-U.S. Person) who does not furnish to
the Trust certain information and certifications or who is otherwise subject to
backup withholding. Backup withholding will not, however, be applied to
payments that have been subject to 30% withholding.

STATE INCOME TAX MATTERS

        As long as it qualifies as a regulated investment company under the
Code, the Trust will not be required to pay Massachusetts income or excise
taxes.

        The exemption of exempt-interest dividends for federal income tax
purposes does not necessarily result in exemption under the tax laws of any
state or local taxing authority. Some states do exempt from tax that portion of
the exempt-interest dividend which represents interest received by a regulated
investment company on its holdings of tax-exempt securities of that state and
its political subdivisions and instrumentalities. Therefore, the Trust will
report annually to its shareholders the percentage of interest income earned by
the Trust during the preceding year from Municipal Bonds and will indicate, on
a state-by-state basis only, the source of such income. Residents of certain
states may be subject to an intangibles tax or a personal property tax on all
or a portion of the value of their shares.

        Distributions of the Trust that are derived from interest on
obligations of the U.S. Government and certain of its agencies and
instrumentalities (but generally not from capital gains realized upon the
disposition of such obligations) may be exempt from state and local taxes. The
Trust intends to advise shareholders of the extent, if any, to which its
distributions consist of such interest. Shareholders are urged to consult their
tax advisers regarding the possible exclusion of a portion of their dividends
for state and local income tax purposes as well as more generally regarding the
state and local tax consequences of an investment in the Trust.

                             SHAREHOLDER LIABILITY

        The Trust is an entity of the type commonly known as a "Massachusetts
business trust." Under Massachusetts law, shareholders of such a trust may,
under certain circumstances, be held personally liable as partners for its
obligations. However, the Declaration of Trust contains an express disclaimer
of shareholder liability for acts or obligations of the Trust and provides for
indemnification and reimbursement of expenses out of the Trust's property for
any shareholder held personally liable for the obligations of the Trust. The
Declaration of Trust also provides that the Trust shall maintain appropriate
insurance (for example, fidelity bonding and errors and omissions insurance)
for the protection of the Trust, its shareholders, Trustees, officers,
employees and agents covering possible tort and other liabilities. Thus, the
risk of a shareholder incurring financial loss on account of shareholder
liability is limited to circumstances in which both inadequate insurance
existed and the Trust itself was unable to meet its obligations.


<PAGE>

        The Declaration of Trust further provides that obligations of the Trust
are not binding upon the Trustees individually but only upon the property of
the Trust and that the Trustees will not be liable for errors of judgment or
mistakes of fact or law, but nothing in the Declaration of Trust 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.

                   CUSTODIAN AND SHAREHOLDER SERVICING AGENT

        State Street Bank and Trust Company, 225 Franklin Street, Boston,
Massachusetts 02110 is the custodian and dividend disbursing agent for the
Trust. MFS Service Center, Inc., 2 Avenue de Lafayette, Boston, Massachusetts
02111-1738, is the shareholder servicing agent.

                            INDEPENDENT ACCOUNTANTS

        Deloitte & Touche LLP are the Trust's independent public accountants
and certify financial statements of the Trust as required to be certified by
any law or regulation and provide certain other tax-related services for the
Trust (such as tax return preparation and assistance and consultation with
respect to the preparation of filings with the SEC). The principal business
address of Deloitte & Touche LLP is 200 Berkeley Street, Boston, Massachusetts
02116. The financial statements included in this SAI have been so included, and
the financial highlights included in the Prospectus have been so included, in
reliance upon the report of Deloitte & Touche LLP given on the authority of
said firm as experts in accounting and auditing.

                                    GLOSSARY

        " 'AA' Composite Commercial Paper Rate" has the meaning set forth on
pages B-__ to B-__ of this Statement of Additional Information.

        "Adviser" means Massachusetts Financial Services Company.

        "Affected Series" has the meaning set forth on page B-__ of this
Statement of Additional Information.

        "Affiliate" means, for purposes of the definition of "Outstanding," any
Person known to the Auction Agent to be controlled by, in control of or under
common control with the Trust; provided, however, that no Broker-Dealer
controlled by, in control of or under common control with the Trust shall be
deemed to be an Affiliate nor shall any corporation or any Person controlled
by, in control of or under common control with such corporation, one of the
directors, trustees or executive officers of which is a trustee of the Trust be
deemed to be an Affiliate solely because such director, trustee or executive
officer is also a trustee of the Trust.

        "Agent Member" means a member of or participant in the Securities
Depository that will act on behalf of a Bidder.

        "Anticipation Notes" means Tax Anticipation Notes (TANs), Revenue
Anticipation Notes (RANs), Tax and Revenue Anticipation Notes (TRANs), Grant
Anticipation Notes (GANs) that are rated by Standard & Poor's and Bond
Anticipation Notes (BANs).

        "Applicable Rate" has the meaning set forth on page B-__ of this
Statement of Additional Information.

        "Auction" means each periodic implementation of the Auction Procedures.


<PAGE>

        "Auction Agency Agreement" has the meaning set forth on page B-__ of
this Statement of Additional Information.

        "Auction Agent" means the entity appointed as such by a resolution of
the Board of Trustees.

        "Auction Date," with respect to any Rate Period, means the Business Day
next preceding the first day of such Rate Period.

        "Auction Procedures" means the procedures for conducting Auctions as
described in this Statement of Additional Information, including Appendix C
hereto.

        "Available Municipal Preferred" has the meaning set forth on page B-__
of this Statement of Additional Information.

        "Benchmark Rate" has the meaning set forth on page B-__ of this
Statement of Additional Information.

        "Beneficial Owner" has the meaning set forth on page B-__ of this
Statement of Additional Information.

        "Bid" has the meaning set forth on page B-__ of this Statement of
Additional Information.

        "Bidder" and "Bidders" have the respective meanings set forth on page
B-__ of this Statement of Additional Information.

        "Board of Trustees" or "Board" means the Board of Trustees of the Trust
or any duly authorized committee thereof.

        "Broker-Dealer" means any broker-dealer, commercial bank or other
entity permitted by law to perform the functions required of a Broker-Dealer,
that is a member of, or a participant in, the Securities Depository or is an
affiliate of such member or participant, has been selected by the Trust and has
entered into a Broker-Dealer Agreement that remains effective.

        "Broker-Dealer Agreement" means an agreement among the Trust, the
Auction Agent and a Broker-Dealer pursuant to which such Broker-Dealer agrees
to follow the procedures specified in the Statement, the Prospectus and this
Statement of Additional Information.

        "Business Day" has the meaning set forth on page B-__ of this Statement
of Additional Information.

        "By-Laws" means the Amended and Restated By-Laws of MFS Municipal
Income Trust, as may be further amended from time to time.

        "Cede" means Cede & Co., the nominee of DTC in whose name the shares of
Municipal Preferred initially will be registered.

        "CFTC" has the meaning set forth on page B-__ of this Statement of
Additional Information.

        "Code" means the Internal Revenue Code of 1986, as amended.

        "Commercial Paper Dealers" has the meaning set forth on page B-__ of
this Statement of Additional Information.

        "Common Shares" means the common shares of beneficial interest, without
par value, of the Trust.


<PAGE>

        "Cure Date" means the Municipal Preferred Basic Maintenance Cure Date
or the 1940 Act Cure Date, as the case may be.

        "Date of Original Issue" has the meaning set forth on page B-__ of this
Statement of Additional Information.

        "Declaration" means the Amended and Restated Declaration of Trust dated
________ __, 2000 of the Trust, on file with the Secretary of The Commonwealth
of Massachusetts and as hereafter restated or amended from time to time.

        "Deposit Securities" means cash and Municipal Obligations rated at
least A-1+ or SP-1+ by Standard & Poor's, except that, for purposes of
determining whether the Trust may mail a Notice of Redemption, such Municipal
Obligations shall be considered "Deposit Securities" only if they are also
rated P-1, MIG-1 or VMIG-1 by Moody's.

        "Discount Factor" means a Moody's Discount Factor or a Standard &
Poor's Discount Factor, as the case may be.

        "Discounted Value" means, as of any Valuation Date, (i) with respect to
a Standard & Poor's Eligible Asset, the quotient of the Market Value thereof
divided by the applicable Standard & Poor's Discount Factor and (ii)(a) with
respect to a Moody's Eligible Asset that is not currently callable as of such
Valuation Date at the option of the issuer thereof, the quotient of the Market
Value thereof divided by the applicable Moody's Discount Factor, or (b) with
respect to a Moody's Eligible Asset that is currently callable as of such
Valuation Date at the option of the issuer thereof, the quotient of (1) the
lesser of the Market Value or call price thereof, including any call premium,
divided by (2) the applicable Moody's Discount Factor.

        "Dividend Payment Date" has the meaning set forth on page B-__ of this
Statement of Additional Information.

        "Dividend Period" has the meaning set forth on page B-__ of this
Statement of Additional Information.

        "DTC" has the meaning set forth on page B-__ of this Statement of
Additional Information.

        "Eligible Assets" means Moody's Eligible Assets or Standard & Poor's
Eligible Assets, as the case may be.

        "Escrowed Bonds" means Municipal Obligations that (i) have been
determined to be legally defeased in accordance with Standard & Poor's legal
defeasance criteria, (ii) have been determined to be economically defeased in
accordance with Standard & Poor's economic defeasance criteria and assigned a
rating of AAA by Standard & Poor's, (iii) are not rated by Standard & Poor's
but have been determined to be legally defeased by Moody's, or (iv) have been
determined to be economically defeased by Moody's and assigned a rating no
lower than the rating that is Moody's equivalent of Standard & Poor's AAA
rating.

        "Exchange" has the meaning set forth on page B-__ of this Statement of
Additional Information.

        "Existing Holder" has the meaning set forth on page B-__ of this
Statement of Additional Information.

        "Failure to Deposit," with respect to shares of Municipal Preferred,
means a failure by the Trust to pay to the Auction Agent, not later than 12:00
noon, New York City time, (A) on the Business Day next preceding any Dividend
Payment Date for such shares, in funds available on such Dividend Payment Date

<PAGE>

in The City of New York, New York, the full amount of any dividend (whether or
not earned or declared) to be paid on such Dividend Payment Date on any share
or (B) on the Business Day next preceding any redemption date in funds
available on such redemption date for such shares in The City of New York, New
York, the Redemption Price to be paid on such redemption date for any share
after notice of redemption is mailed as set forth in the Statement, the
Prospectus or this Statement of Additional Information; provided, however, that
the foregoing clause (B) shall not apply to the Trust's failure to pay the
Redemption Price in respect of shares of Municipal Preferred when the related
Notice of Redemption provides that redemption of such shares is subject to one
or more conditions precedent and any such condition precedent shall not have
been satisfied at the time or times and in the manner specified in such Notice
of Redemption.

        "Gross-up Payment" has the meaning set forth on page B-__ of this
Statement of Additional Information.

        "Hold Order" has the meaning set forth on page B-__ of this Statement
of Additional Information.

        "Holder" means the registered holder of shares of Municipal Preferred
as the same appears on the record books of the Trust.

        "Initial Margin" means the amount of cash or securities deposited with
a broker as a margin payment at the time of purchase or sale of a futures
contract.

        "Initial Rate Period" has the meaning set forth on page B-__ of this
Statement of Additional Information.

        "IRS" means the Internal Revenue Service.

        "Inverse Floater" shall mean trust certificates or other instruments
evidencing interests in one or more municipal securities that qualify as
Standard & Poor's Eligible Assets (and are not part of a private placement of
municipal securities and satisfy the issuer and size requirements of the
definition of Standard & Poor's Eligible Assets) the interest rates on which
are adjusted at short-term intervals on a basis that is inverse to the
simultaneous readjustment of the interest rates on corresponding floating rate
trust certificates or other instruments issued by the same issuer, provided
that the ratio of the aggregate dollar amount of floating rate instruments to
inverse floating rate instruments issued by the same issuer does not exceed one
to one at their time or original issuance unless the floating rate instrument
has only one reset remaining until maturity.

        "Kenny Index" has the meaning set forth on page B-__ of this Statement
of Additional Information.

        "Late Charge" has the meaning set forth on page B-__ of this Statement
of Additional Information.

        "Liquidation Preference," with respect to a given number of shares of
Municipal Preferred, means $25,000 times that number.

        "Market Value" of any asset of the Trust means the market value thereof
determined by the pricing service designated from time to time by the Board of
Trustees. Market Value of any asset shall include any interest accrued thereon.
The pricing service will use current industry standards to value portfolio
securities. The pricing service may employ electronic data processing
techniques or a matrix system, or both, to determine valuations. Securities for
which quotations are not readily available shall be valued at fair value as
determined by the pricing service using methods which include consideration of:
yields or prices of municipal bonds of comparable quality, type of issue,
coupon, maturity and rating; indications as to value from dealers; and general
market conditions. In the event the pricing service is unable to value a

<PAGE>

security, the security shall be valued at the lower of two dealer bids obtained
by the Trust from dealers who are members of the National Association of
Securities Dealers, Inc. and make a market in the security, at least one of
which shall be in writing. Futures contracts and options are valued at closing
prices for such instruments established by the exchange or board of trade on
which they are traded, or if market quotations are not readily available, are
valued at fair value on a consistent basis using methods determined in good
faith by the Trustees.

        "Maximum Potential Gross-up Payment Liability" has the meaning set
forth on pages B-__ to B-__ of this Statement of Additional Information.

        "Maximum Rate" has the meaning set forth on pages B-__ to B-__ of this
Statement of Additional Information.

        "Minimum Rate Period" means any Rate Period consisting of 7 Rate Period
Days.

        "Moody's" means Moody's Investors Service, Inc. and its successors.

        "Moody's Discount Factors" has the meaning set forth on pages B-__ to
B-__ of this Statement of Additional Information.

        "Moody's Eligible Assets" has the meaning set forth on page B-__ of
this Statement of Additional Information.

        "Moody's Exposure Period" has the meaning set forth on page B-__ of
this Statement of Additional Information.

        "Moody's Volatility Factor" means, as of any Valuation Date, (i) in the
case of any Minimum Rate Period, any Special Rate Period of 28 Rate Period Days
or fewer, or any Special Rate Period of 57 Rate Period Days or more, a
multiplicative factor equal to 275%, except as otherwise provided in the last
sentence of this definition; (ii) in the case of any Special Rate Period of
more than 28 but fewer than 36 Rate Period Days, a multiplicative factor equal
to 203%; (iii) in the case of any Special Rate Period of more than 35 but fewer
than 43 Rate Period Days, a multiplicative factor equal to 217%; (iv) in the
case of any Special Rate Period of more than 42 but fewer than 50 Rate Period
Days, a multiplicative factor equal to 226%; and (v) in the case of any Special
Rate Period of more than 49 but fewer than 57 Rate Period Days, a
multiplicative factor equal to 235%. If, as a result of the enactment of
changes to the Code, the greater of the maximum marginal Federal individual
income tax rate applicable to ordinary income and the maximum marginal Federal
corporate income tax rate applicable to ordinary income will increase, such
increase being rounded up to the next five percentage points, until the
effective date of such increase, the Moody's Volatility Factor in the case of
any Rate Period described in (i) above in this definition instead shall be
determined by reference to the following table:

          FEDERAL                    VOLATILITY
     TAX RATE INCREASE                 FACTOR
- -----------------------------    --------------------

              5%                        295%
             10%                        317%
             15%                        341%
             20%                        369%
             25%                        400%
             30%                        436%
             35%                        477%
             40%                        525%

        "Municipal Obligations" shall mean "Municipal Obligations" as defined
on page 10 of the prospectus filed as part of the Trust's registration
statement on Form N-2 on file with the Securities and Exchange Commission, as
such registration statement may be amended from time to time.


<PAGE>

        "Municipal Preferred" means the Municipal Auction Rate Cumulative
Preferred Shares, Series W and/or Series F without par value, liquidation
preference $25,000 per share, of the Trust.

        "Municipal Preferred Basic Maintenance Amount" has the meaning set
forth on page B-__ of this Statement of Additional Information.

        "Municipal Preferred Basic Maintenance Cure Date" has the meaning set
forth on page B-__ of this Statement of Additional Information.

        "Municipal Preferred Basic Maintenance Report" has the meaning set
forth on page B-__ of this Statement of Additional Information.

        "1940 Act" means the Investment Company Act of 1940, as amended.

        "1940 Act Cure Date" has the meaning set forth on page B-__ of this
Statement of Additional Information.

        "1940 Act Municipal Preferred Asset Coverage" has the meaning set forth
on page B-__ of this Statement of Additional Information.

        "Notice of Redemption" has the meaning set forth on page B-__ of this
Statement of Additional Information.

        "Notice of Special Rate Period" has the meaning set forth on page B-__
of this Statement of Additional Information.

        "Order" and "Orders" have the respective meanings set forth on page
B-__ of this Statement of Additional Information.

        "Outstanding" means, as of any Auction Date with respect to shares of
Municipal Preferred, the number of such shares theretofore issued by the Trust
except, without duplication, (i) any shares of Municipal Preferred theretofore
canceled or delivered to the Auction Agent for cancellation or redeemed by the
Trust, (ii) any shares of Municipal Preferred as to which the Trust or any
Affiliate thereof shall be an Existing Holder, and (iii) any shares of
Municipal Preferred represented by any certificate in lieu of which a new
certificate has been executed and delivered by the Trust.

        "Person" means and includes an individual, a partnership, a
corporation, a trust, an unincorporated association, a joint venture or other
entity or a government or any agency or political subdivision thereof.

        "Potential Beneficial Owner" has the meaning set forth on page B-__ of
this Statement of Additional Information.

        "Potential Holder" has the meaning set forth on page B-__ of this
Statement of Additional Information.

        "Preferred Shares" means the preferred shares of beneficial interest,
without par value of the Trust, and includes the Municipal Preferred.

        "Rate Multiple" has the meaning set forth on page B-__ of this
Statement of Additional Information.

        "Rate Period" has the meaning set forth on page B-__ of this Statement
of Additional Information.


<PAGE>

        "Rate Period Days," for any Rate Period or Dividend Period, means the
number of days that would constitute such Rate Period or Dividend Period but
for the application of the second paragraph under "Description of Municipal
Preferred -- Dividends -- General" or the second paragraph under "Description
of Municipal Preferred -- Dividends -- Designation of Special Rate Periods."

        "Receivables for Municipal Obligations Sold," for purposes of
calculating Moody's Eligible Assets or Standard & Poor's Eligible Assets, as
the case may be, has the meaning set forth on pages B-__ and B-__ of this
Statement of Additional Information, respectively.

        "Redemption Price" has the meaning set forth on page B-__ of this
Statement of Additional Information.

        "Reference Rate" has the meaning set forth on page B-__ of this
Statement of Additional Information.

        "SEC" means the Securities and Exchange Commission.

        "Securities Depository" means The Depository Trust Company and its
successors and assigns or any other securities depository selected by the Trust
which agrees to follow the procedures required to be followed by such
securities depository in connection with shares of Municipal Preferred.

        "Sell Order" has the meaning set forth on page B-__ of this Statement
of Additional Information.

        "Special Rate Period" has the meaning set forth on page B-__ of this
Statement of Additional Information.

        "Special Redemption Provisions" has the meaning set forth on page B-__
of this Statement of Additional Information.

        "Standard & Poor's" means Standard & Poor's Ratings Services, a
division of The McGraw-Hill Companies, and its successors.

        "Standard & Poor's Discount Factors" has the meaning set forth on pages
B-__ to B-__ of this Statement of Additional Information.

        "Standard & Poor's Eligible Assets" has the meaning set forth on page
B-__ of this Statement of Additional Information.

        "Standard & Poor's Exposure Period" has the meaning set forth on pages
B-__ to B-__ of this Statement of Additional Information.

        "Standard & Poor's Volatility Factor" means, as of any Valuation Date,
a multiplicative factor equal to (i) 305% in the case of any Minimum Rate
Period or any Special Rate Period of 28 Rate Period Days or fewer, (ii) 268% in
the case of any Special Rate Period of more than 28 Rate Period Days but fewer
than 183 Rate Period Days, and (iii) 204% in the case of any Special Rate
Period of more than 182 Rate Period Days.

        "Statement" means the Statement creating the Municipal Preferred shares.

        "Submission Deadline" means 1:30 P.M., New York City time, on any
Auction Date or such other time on any Auction Date by which Broker-Dealers are
required to submit Orders to the Auction Agent as specified by the Auction
Agent from time to time.

        "Submitted Bid" and "Submitted Bids" have the respective meanings set
forth on page B-__ of this Statement of Additional Information.


<PAGE>

        "Submitted Hold Order" and "Submitted Hold Orders" have the respective
meanings set forth on page B-__ of this Statement of Additional Information.

        "Submitted Order" and "Submitted Orders" have the respective meanings
set forth on page B-__ of this Statement of Additional Information.

        "Submitted Sell Order" and "Submitted Sell Orders" have the respective
meanings set forth on page B-__ of this Statement of Additional Information.

        "Subsequent Rate Period" has the meaning set forth on page B-__ of this
Statement of Additional Information.

        "Substitute Commercial Paper Dealer" has the meaning set forth on page
B-__ of this Statement of Additional Information.

        "Substitute U.S. Government Securities Dealer" has the meaning set
forth on page B-__ of this Statement of Additional Information.

        "Sufficient Clearing Bids" has the meaning set forth on page B-__ of
this Statement of Additional Information.

        "Taxable Allocation" has the meaning set forth on page B-__ of this
Statement of Additional Information.

        "Taxable Equivalent of the Short-Term Municipal Bond Rate" has the
meaning set forth on page B-__ of this Statement of Additional Information.

        "Taxable Income" has the meaning set forth on page B-__ of this
Statement of Additional Information.

        "Taxable Yield Rate" has the meaning set forth on page B-__ of this
Statement of Additional Information.

        "Treasury Bill" has the meaning set forth on page B-__ of this
Statement of Additional Information.

        "Treasury Bill Rate" has the meaning set forth on page B-__ of this
Statement of Additional Information.

        "Treasury Note" has the meaning set forth on page B-__ of this
Statement of Additional Information.

        "Treasury Note Rate" has the meaning set forth on page B-__ of this
Statement of Additional Information.

        "Trust" means MFS Municipal Income Trust, a Massachusetts business
trust, which is the issuer of the shares of Municipal Preferred.

        "U.S. Government Securities Dealer" has the meaning set forth on page
B-__ of this Statement of Additional Information.

        "Valuation Date" has the meaning set forth on page B-__ of this
Statement of Additional Information.

        "Variation Margin" means, in connection with an outstanding futures
contract owned or sold by the Trust, the amount of cash or securities paid to
or received from a broker (subsequent to the Initial Margin payment) from time
to time as the price of such futures contract fluctuates.


<PAGE>

        "Volatility Factor" means, as of any Valuation Date, the greater of the
Moody's Volatility Factor and the Standard & Poor's Volatility Factor.

        "Voting Period" means a period that shall commence (A) if at the close
of business on any dividend payment date accumulated dividends (whether or not
earned or declared) on any outstanding Preferred Share, including Municipal
Preferred, equal to at least two full years' dividends shall be due and unpaid
and sufficient cash or specified securities shall not have been deposited with
the Auction Agent for the payment of such accumulated dividends; or (B) if at
any time holders of Preferred Shares are entitled under the 1940 Act to elect a
majority of the trustees of the Trust.

        "Winning Bid Rate" has the meaning set forth on page B-__ of this
Statement of Additional Information.



<PAGE>


                              FINANCIAL STATEMENTS

The financial statements for the Trust contained in the Trust's Annual Report
to Shareholders, dated October 31, 1999 (audited) and Semi-Annual Report to
Shareholders, dated April 30, 2000 (unaudited), have been incorporated by
reference into this Statement of Additional Information. The financial
statements contained in the Trust's Annual Report to Shareholders, dated
October 31, 1999, and notes thereto have been so incorporated in reliance upon
the reports of Deloitte & Touche LLP, the Trust's independent accountants.




<PAGE>


                                   APPENDIX A

                           DESCRIPTION OF INVESTMENTS

Set forth below is a description of investment techniques and practices which
the Trust may generally use in pursuing its investment objective and principal
investment policies, and the risks associated with these investment techniques
and practices.

DEBT SECURITIES
To the extent the Trust invests in the following types of debt securities, its
net asset value may change as the general levels of interest rates fluctuate.
When interest rates decline, the value of debt securities can be expected to
rise. Conversely, when interest rates rise, the value of debt securities can be
expected to decline. The Trust's investment in debt securities with longer
terms to maturity are subject to greater volatility than the Trust's
shorter-term obligations. Debt securities may have all types of interest rate
payment and reset terms, including fixed rate, adjustable rate, zero coupon,
contingent, deferred, payment in kind and auction rate features.

ASSET-BACKED SECURITIES: The Trust may purchase the following types of
asset-backed securities:

        COLLATERALIZED MORTGAGE OBLIGATIONS AND MULTICLASS PASS-THROUGH
SECURITIES: The Trust may invest a portion of its assets in collateralized
mortgage obligations or "CMOs," which are debt obligations collateralized by
mortgage loans or mortgage pass-through securities (such collateral referred to
collectively as "Mortgage Assets"). Unless the context indicates otherwise, all
references herein to CMOs include multiclass pass-through securities.

        Interest is paid or accrues on all classes of the CMOs on a monthly,
quarterly or semi-annual basis. The principal of and interest on the Mortgage
Assets may be allocated among the several classes of a CMO in innumerable ways.
In a common structure, payments of principal, including any principal
prepayments, on the Mortgage Assets are applied to the classes of a CMO in the
order of their respective stated maturities or final distribution dates, so
that no payment of principal will be made on any class of CMOs until all other
classes having an earlier stated maturity or final distribution date have been
paid in full. Certain CMOs may be stripped (securities which provide only the
principal or interest factor of the underlying security). See "Stripped
Mortgage-Backed Securities" below for a discussion of the risks of investing in
these stripped securities and of investing in classes consisting of interest
payments or principal payments.

        The Trust may also invest in parallel pay CMOs and Planned Amortization
Class CMOs ("PAC Bonds"). Parallel pay CMOs are structured to provide payments
of principal on each payment date to more than one class. These simultaneous
payments are taken into account in calculating the stated maturity date or
final distribution date of each class, which, as with other CMO structures,
must be retired by its stated maturity date or final distribution date but may
be retired earlier.

        CORPORATE ASSET-BACKED SECURITIES: The Trust may invest in corporate
asset-backed securities. These securities, issued by trusts and special purpose
corporations, are backed by a pool of assets, such as credit card and
automobile loan receivables, representing the obligations of a number of
different parties. These securities present certain risks. For instance, in the
case of credit card receivables, these securities may not have the benefit of
any security interest in the related collateral. Credit card receivables are
generally unsecured and the debtors are entitled to the protection of a number
of state and federal consumer credit laws, many of which give such debtors the
right to set off certain amounts owed on the credit cards, thereby reducing the
balance due. Most issuers of automobile receivables permit the servicers to
retain possession of the underlying obligations. If the servicer were to sell

<PAGE>

these obligations to another party, there is a risk that the purchaser would
acquire an interest superior to that of the holders of the related automobile
receivables. In addition, because of the large number of vehicles involved in a
typical issuance and technical requirements under state laws, the trustee for
the holders of the automobile receivables may not have a proper security
interest in all of the obligations backing such receivables. Therefore, there
is the possibility that recoveries on repossessed collateral may not, in some
cases, be available to support payments on these securities. The underlying
assets (e.g., loans) are also subject to prepayments which shorten the
securities' weighted average life and may lower their return.

        Corporate asset-backed securities are backed by a pool of assets
representing the obligations of a number of different parties. To lessen the
effect of failures by obligors on underlying assets to make payments, the
securities may contain elements of credit support which fall into two
categories: (i) liquidity protection and (ii) protection against losses
resulting from ultimate default by an obligor on the underlying assets.
Liquidity protection refers to the provision of advances, generally by the
entity administering the pool of assets, to ensure that the receipt of payments
on the underlying pool occurs in a timely fashion. Protection against losses
resulting from ultimate default ensures payment through insurance policies or
letters of credit obtained by the issuer or sponsor from third parties. The
Trust will not pay any additional or separate fees for credit support. The
degree of credit support provided for each issue is generally based on
historical information respecting the level of credit risk associated with the
underlying assets. Delinquency or loss in excess of that anticipated or failure
of the credit support could adversely affect the return on an investment in
such a security.

        MORTGAGE PASS-THROUGH SECURITIES: The Trust may invest in mortgage
pass-through securities. Mortgage pass-through securities are securities
representing interests in "pools" of mortgage loans. Monthly payments of
interest and principal by the individual borrowers on mortgages are passed
through to the holders of the securities (net of fees paid to the issuer or
guarantor of the securities) as the mortgages in the underlying mortgage pools
are paid off. The average lives of mortgage pass-throughs are variable when
issued because their average lives depend on prepayment rates. The average life
of these securities is likely to be substantially shorter than their stated
final maturity as a result of unscheduled principal prepayment. Prepayments on
underlying mortgages result in a loss of anticipated interest, and all or part
of a premium if any has been paid, and the actual yield (or total return) to
the Trust may be different than the quoted yield on the securities. Mortgage
premiums generally increase with falling interest rates and decrease with
rising interest rates. Like other fixed income securities, when interest rates
rise the value of a mortgage pass-through security generally will decline;
however, when interest rates are declining, the value of mortgage pass-through
securities with prepayment features may not increase as much as that of other
fixed-income securities. In the event of an increase in interest rates which
results in a decline in mortgage prepayments, the anticipated maturity of
mortgage pass-through securities held by the Trust may increase, effectively
changing a security which was considered short or intermediate-term at the time
of purchase into a long-term security. Long- term securities generally
fluctuate more widely in response to changes in interest rates than short or
intermediate-term securities.

        Payment of principal and interest on some mortgage pass-through
securities (but not the market value of the securities themselves) may be
guaranteed by the full faith and credit of the U.S. Government (in the case of
securities guaranteed by the Government National Mortgage Association
("GNMA")); or guaranteed by agencies or instrumentalities of the U.S.
Government (such as the Federal National Mortgage Association "FNMA") or the
Federal Home Loan Mortgage Corporation, ("FHLMC") which are supported only by
the discretionary authority of the U.S. Government to purchase the agency's
obligations). Mortgage pass-through securities may also be issued by
non-governmental issuers (such as commercial banks, savings and loan
institutions, private mortgage insurance companies, mortgage bankers and other
secondary market issuers). Some of these mortgage pass-through securities may
be supported by various forms of insurance or guarantees.

        Interests in pools of mortgage-related securities differ from other
forms of debt securities, which normally provide for periodic payment of
interest in fixed amounts with principal payments at maturity or specified call
dates. Instead, these securities provide a monthly payment which consists of
both interest and principal payments. In effect, these payments are a
"pass-through" of the monthly payments made by the individual borrowers on
their mortgage loans, net of any fees paid to the issuer or guarantor of such

<PAGE>

securities. Additional payments are caused by prepayments of principal
resulting from the sale, refinancing or foreclosure of the underlying property,
net of fees or costs which may be incurred. Some mortgage pass-through
securities (such as securities issued by the GNMA) are described as "modified
pass-through." These securities entitle the holder to receive all interests and
principal payments owed on the mortgages in the mortgage pool, net of certain
fees, at the scheduled payment dates regardless of whether the mortgagor
actually makes the payment.

        The principal governmental guarantor of mortgage pass-through
securities is GNMA. GNMA is a wholly owned U.S. Government corporation within
the Department of Housing and Urban Development. GNMA is authorized to
guarantee, with the full faith and credit of the U.S. Government, the timely
payment of principal and interest on securities issued by institutions approved
by GNMA (such as savings and loan institutions, commercial banks and mortgage
bankers) and backed by pools of Federal Housing Administration ("FHA") insured
or Veterans Administration ("VA") guaranteed mortgages. These guarantees,
however, do not apply to the market value or yield of mortgage pass-through
securities. GNMA securities are often purchased at a premium over the maturity
value of the underlying mortgages. This premium is not guaranteed and will be
lost if prepayment occurs.

        Government-related guarantors (i.e., whose guarantees are not backed by
the full faith and credit of the U.S. Government) include FNMA and FHLMC. FNMA
is a government-sponsored corporation owned entirely by private stockholders.
It is subject to general regulation by the Secretary of Housing and Urban
Development. FNMA purchases conventional residential mortgages (i.e., mortgages
not insured or guaranteed by any governmental agency) from a list of approved
seller/servicers which include state and federally chartered savings and loan
associations, mutual savings banks, commercial banks, credit unions and
mortgage bankers. Pass-through securities issued by FNMA are guaranteed as to
timely payment by FNMA of principal and interest.

        FHLMC is also a government-sponsored corporation owned by private
stockholders. FHLMC issues Participation Certificates ("PCs") which represent
interests in conventional mortgages (i.e., not federally insured or guaranteed)
for FHLMC's national portfolio. FHLMC guarantees timely payment of interest and
ultimate collection of principal regardless of the status of the underlying
mortgage loans.

        Commercial banks, savings and loan institutions, private mortgage
insurance companies, mortgage bankers and other secondary market issuers also
create pass through pools of mortgage loans. Such issuers may also be the
originators and/or servicers of the underlying mortgage-related securities.
Pools created by such non-governmental issuers generally offer a higher rate of
interest than government and government-related pools because there are no
direct or indirect government or agency guarantees of payments in the former
pools. However, timely payment of interest and principal of mortgage loans in
these pools may be supported by various forms of insurance or guarantees,
including individual loan, title, pool and hazard insurance and letters of
credit. The insurance and guarantees are issued by governmental entities,
private insurers and the mortgage poolers. There can be no assurance that the
private insurers or guarantors can meet their obligations under the insurance
policies or guarantee arrangements. The Trust may also buy mortgage-related
securities without insurance or guarantees.

        STRIPPED MORTGAGE-BACKED SECURITIES: The Trust may invest a portion of
its assets in stripped mortgage-backed securities ("SMBS") which are derivative
multiclass mortgage securities issued by agencies or instrumentalities of the
U.S. Government, or by private originators of, or investors in, mortgage loans,
including savings and loan institutions, mortgage banks, commercial banks and
investment banks.

        SMBS are usually structured with two classes that receive different
proportions of the interest and principal distributions from a pool of mortgage
assets. A common type of SMBS will have one class receiving some of the
interest and most of the principal from the Mortgage Assets, while the other
class will receive most of the interest and the remainder of the principal. In
the most extreme case, one class will receive all of the interest (the
interest-only or "IO class) while the other class will receive all of the
principal (the principal-only or "PO class). The yield to maturity on an IO is
extremely sensitive to the rate of principal payments, including prepayments on

<PAGE>

the related underlying Mortgage Assets, and a rapid rate of principal payments
may have a material adverse effect on such security's yield to maturity. If the
underlying Mortgage Assets experience greater than anticipated prepayments of
principal, the Trust may fail to fully recoup its initial investment in these
securities. The market value of the class consisting primarily or entirely of
principal payments generally is unusually volatile in response to changes in
interest rates. Because SMBS were only recently introduced, established trading
markets for these securities have not yet developed, although the securities
are traded among institutional investors and investment banking firms.

        CORPORATE SECURITIES: The Trust may invest in debt securities, such as
convertible and non-convertible bonds, notes and debentures, issued by
corporations, limited partnerships and other similar entities.

        LOANS AND OTHER DIRECT INDEBTEDNESS: The Trust may purchase loans and
other direct indebtedness. In purchasing a loan, the Trust acquires some or all
of the interest of a bank or other lending institution in a loan to a
corporate, governmental or other borrower. Many such loans are secured,
although some may be unsecured. Such loans may be in default at the time of
purchase. Loans that are fully secured offer the Trust more protection than an
unsecured loan in the event of non-payment of scheduled interest or principal.
However, there is no assurance that the liquidation of collateral from a
secured loan would satisfy the corporate borrowers obligation, or that the
collateral can be liquidated.

        These loans are made generally to finance internal growth, mergers,
acquisitions, stock repurchases, leveraged buy-outs and other corporate
activities. Such loans are typically made by a syndicate of lending
institutions, represented by an agent lending institution which has negotiated
and structured the loan and is responsible for collecting interest, principal
and other amounts due on its own behalf and on behalf of the others in the
syndicate, and for enforcing its and their other rights against the borrower.
Alternatively, such loans may be structured as a novation, pursuant to which
the Trust would assume all of the rights of the lending institution in a loan
or as an assignment, pursuant to which the Trust would purchase an assignment
of a portion of a lenders interest in a loan either directly from the lender or
through an intermediary. The Trust may also purchase trade or other claims
against companies, which generally represent money owned by the company to a
supplier of goods or services. These claims may also be purchased at a time
when the company is in default.

        Certain of the loans and the other direct indebtedness acquired by the
Trust may involve revolving credit facilities or other standby financing
commitments which obligate the Trust to pay additional cash on a certain date
or on demand. These commitments may have the effect of requiring the Trust to
increase its investment in a company at a time when the Trust might not
otherwise decide to do so (including at a time when the company's financial
condition makes it unlikely that such amounts will be repaid). To the extent
that the Trust is committed to advance additional funds, it will at all times
hold and maintain in a segregated account cash or other high grade debt
obligations in an amount sufficient to meet such commitments.

        The Trust's ability to receive payment of principal, interest and other
amounts due in connection with these investments will depend primarily on the
financial condition of the borrower. In selecting the loans and other direct
indebtedness which the Trust will purchase, the Adviser will rely upon its own
(and not the original lending institution's) credit analysis of the borrower.
As the Trust may be required to rely upon another lending institution to
collect and pass onto the Trust amounts payable with respect to the loan and to
enforce the Trust's rights under the loan and other direct indebtedness, an
insolvency, bankruptcy or reorganization of the lending institution may delay
or prevent the Trust from receiving such amounts. In such cases, the Trust will
evaluate as well the creditworthiness of the lending institution and will treat
both the borrower and the lending institution as an "issuer" of the loan for
purposes of certain investment restrictions pertaining to the diversification
of the Trust's portfolio investments. The highly leveraged nature of many such
loans and other direct indebtedness may make such loans and other direct
indebtedness especially vulnerable to adverse changes in economic or market
conditions. Investments in such loans and other direct indebtedness may involve
additional risk to the Trust.

        LOWER RATED BONDS: The Trust may invest in fixed income securities
rated Ba or lower by Moody's or BB or lower by S&P or Fitch IBCA, Duff & Phelps
and comparable unrated securities (commonly known as "junk bonds"). See
Appendix D for a description of bond ratings. No minimum rating standard is

<PAGE>

required by the Trust. These securities are considered speculative and, while
generally providing greater income than investments in higher rated securities,
will involve greater risk of principal and income (including the possibility of
default or bankruptcy of the issuers of such securities) and may involve
greater volatility of price (especially during periods of economic uncertainty
or change) than securities in the higher rating categories and because yields
vary over time, no specific level of income can ever be assured. These lower
rated high yielding fixed income securities generally tend to reflect economic
changes (and the outlook for economic growth), short-term corporate and
industry developments and the market's perception of their credit quality
(especially during times of adverse publicity) to a greater extent than higher
rated securities which react primarily to fluctuations in the general level of
interest rates (although these lower rated fixed income securities are also
affected by changes in interest rates). In the past, economic downturns or an
increase in interest rates have, under certain circumstances, caused a higher
incidence of default by the issuers of these securities and may do so in the
future, especially in the case of highly leveraged issuers. The prices for
these securities may be affected by legislative and regulatory developments.
The market for these lower rated fixed income securities may be less liquid
than the market for investment grade fixed income securities. Furthermore, the
liquidity of these lower rated securities may be affected by the market's
perception of their credit quality. Therefore, the Adviser's judgment may at
times play a greater role in valuing these securities than in the case of
investment grade fixed income securities, and it also may be more difficult
during times of certain adverse market conditions to sell these lower rated
securities to meet redemption requests or to respond to changes in the market.

        While the Adviser may refer to ratings issued by established credit
rating agencies, it is not the Trust's policy to rely exclusively on ratings
issued by these rating agencies, but rather to supplement such ratings with the
Adviser's own independent and ongoing review of credit quality. To the extent
the Trust invests in these lower rated securities, the achievement of its
investment objectives may be a more dependent on the Adviser's own credit
analysis than in the case of a fund investing in higher quality fixed income
securities. These lower rated securities may also include zero coupon bonds,
deferred interest bonds and PIK bonds.

        MUNICIPAL BONDS: The Trust will invest in debt securities issued by or
on behalf of states, territories and possessions of the United States and the
District of Columbia and their political subdivisions, agencies or
instrumentalities, the interest on which is exempt from federal income tax
("Municipal Bonds"). Municipal Bonds include debt securities which pay interest
income that is subject to the alternative minimum tax. The Trust may invest in
Municipal Bonds whose issuers pay interest on the Bonds from revenues from
projects such as multifamily housing, nursing homes, electric utility systems,
hospitals or life care facilities.

        If a revenue bond is secured by payments generated from a project, and
the revenue bond is also secured by a lien on the real estate comprising the
project, foreclosure by the indenture trustee on the lien for the benefit of
the bondholders creates additional risks associated with owning real estate,
including environmental risks.

        Housing revenue bonds typically are issued by a state, county or local
housing authority and are secured only by the revenues of mortgages originated
by the authority using the proceeds of the bond issue. Because of the
impossibility of precisely predicting demand for mortgages from the proceeds of
such an issue, there is a risk that the proceeds of the issue will be in excess
of demand, which would result in early retirement of the bonds by the issuer.
Moreover, such housing revenue bonds depend for their repayment upon the cash
flow from the underlying mortgages, which cannot be precisely predicted when
the bonds are issued. Any difference in the actual cash flow from such
mortgages from the assumed cash flow could have an adverse impact upon the
ability of the issuer to make scheduled payments of principal and interest on
the bonds, or could result in early retirement of the bonds. Additionally, such
bonds depend in part for scheduled payments of principal and interest upon

<PAGE>

reserve funds established from the proceeds of the bonds, assuming certain
rates of return on investment of such reserve funds. If the assumed rates of
return are not realized because of changes in interest rate levels or for other
reasons, the actual cash flow for scheduled payments of principal and interest
on the bonds may be inadequate. The financing of multi-family housing projects
is affected by a variety of factors, including satisfactory completion of
construction within cost constraints, the achievement and maintenance of a
sufficient level of occupancy, sound management of the developments, timely and
adequate increases in rents to cover increases in operating expenses, including
taxes, utility rates and maintenance costs, changes in applicable laws and
governmental regulations and social and economic trends.

        Electric utilities face problems in financing large construction
programs in inflationary periods, cost increases and delay occasioned by
environmental considerations (particularly with respect to nuclear facilities),
difficulty in obtaining fuel at reasonable prices, the cost of competing fuel
sources, difficulty in obtaining sufficient rate increases and other regulatory
problems, the effect of energy conservation and difficulty of the capital
market to absorb utility debt.

        Health care facilities include life care facilities, nursing homes and
hospitals. Life care facilities are alternative forms of long-term housing for
the elderly which offer residents the independence of condominium life style
and, if needed, the comprehensive care of nursing home services. Bonds to
finance these facilities have been issued by various state industrial
development authorities. Since the bonds are secured only by the revenues of
each facility and not by state or local government tax payments, they are
subject to a wide variety of risks. Primarily, the projects must maintain
adequate occupancy levels to be able to provide revenues adequate to maintain
debt service payments. Moreover, in the case of life care facilities, since a
portion of housing, medical care and other services may be financed by an
initial deposit, there may be risk if the facility does not maintain adequate
financial reserves to secure estimated actuarial liabilities. The ability of
management to accurately forecast inflationary cost pressures weighs
importantly in this process. The facilities may also be affected by regulatory
cost restrictions applied to health care delivery in general, particularly
state regulations or changes in Medicare and Medicaid payments or
qualifications, or restrictions imposed by medical insurance companies. They
may also face competition from alternative health care or conventional housing
facilities in the private or public sector. Hospital bond ratings are often
based on feasibility studies which contain projections of expenses, revenues
and occupancy levels. A hospital's gross receipts and net income available to
service its debt are influenced by demand for hospital services, the ability of
the hospital to provide the services required, management capabilities,
economic developments in the service area, efforts by insurers and government
agencies to limit rates and expenses, confidence in the hospital, service area
economic developments, competition, availability and expense of malpractice
insurance, Medicaid and Medicare funding, and possible federal legislation
limiting the rates of increase of hospital charges.

        The Trust may invest in municipal lease securities. These are undivided
interests in a portion of an obligation in the form of a lease or installment
purchase which is issued by state and local governments to acquire equipment
and facilities. Municipal leases frequently have special risks not normally
associated with general obligation or revenue bonds. Leases and installment
purchase or conditional sale contracts (which normally provide for title to the
leased asset to pass eventually to the governmental issuer) have evolved as a
means for governmental issuers to acquire property and equipment without
meeting the constitutional and statutory requirements for the issuance of debt.
The debt-issuance limitations are deemed to be inapplicable because of the
inclusion in many leases or contracts of "non-appropriation" clauses that
provide that the governmental issuer has no obligation to make future payments
under the lease or contract unless money is appropriated for such purpose by
the appropriate legislative body on a yearly or other periodic basis. Although
the obligations will be secured by the leased equipment or facilities, the
disposition of the property in the event of non-appropriation or foreclosure
might, in some cases, prove difficult. There are, of course, variations in the
security of municipal lease securities, both within a particular classification
and between classifications, depending on numerous factors.

        The Trust may also invest in bonds for industrial and other projects,
such as sewage or solid waste disposal or hazardous waste treatment facilities.
Financing for such projects will be subject to inflation and other general
economic factors as well as construction risks including labor problems,
difficulties with construction sites and the ability of contractors to meet
specifications in a timely manner. Because some of the materials, processes and
wastes involved in these projects may include hazardous components, there are
risks associated with their production, handling and disposal.


<PAGE>

        SPECULATIVE BONDS: The Trust may invest in fixed income and convertible
securities rated Baa by Moody's or BBB by S&P or Fitch IBCA, Duff & Phelps and
comparable unrated securities. See Appendix D for a description of bond
ratings. These securities, while normally exhibiting adequate protection
parameters, have speculative characteristics and changes in economic conditions
or other circumstances are more likely to lead to a weakened capacity to make
principal and interest payments than in the case of higher grade securities.

        U.S. GOVERNMENT SECURITIES: The Trust may invest in U.S. Government
Securities including (i) U.S. Treasury obligations, all of which are backed by
the full faith and credit of the U.S. Government and (ii) U.S. Government
Securities, some of which are backed by the full faith and credit of the U.S.
Treasury, e.g., direct pass-through certificates of the GNMA; some of which are
backed only by the credit of the issuer itself, e.g., obligations of the
Student Loan Marketing Association; and some of which are supported by the
discretionary authority of the U.S. Government to purchase the agency's
obligations, e.g., obligations of the FNMA.

        U.S. Government Securities also include interests in trust or other
entities representing interests in obligations that are issued or guaranteed by
the U.S. Government, its agencies, authorities or instrumentalities.

        ZERO COUPON BONDS, DEFERRED INTEREST BONDS AND PIK BONDS: The Trust may
invest in zero coupon bonds, deferred interest bonds and bonds on which the
interest is payable in kind ("PIK bonds"). Zero coupon and deferred interest
bonds are debt obligations which are issued at a significant discount from face
value. The discount approximates the total amount of interest the bonds will
accrue and compound over the period until maturity or the first interest
payment date at a rate of interest reflecting the market rate of the security
at the time of issuance. While zero coupon bonds do not require the periodic
payment of interest, deferred interest bonds provide for a period of delay
before the regular payment of interest begins. PIK bonds are debt obligations
which provide that the issuer may, at its option, pay interest on such bonds in
cash or in the form of additional debt obligations. Such investments benefit
the issuer by mitigating its need for cash to meet debt service, but also
require a higher rate of return to attract investors who are willing to defer
receipt of such cash. Such investments may experience greater volatility in
market value than debt obligations which make regular payments of interest. The
Trust will accrue income on such investments for tax and accounting purposes,
which is distributable to shareholders and which, because no cash is received
at the time of accrual, may require the liquidation of other portfolio
securities to satisfy the Trust's distribution obligations.

EQUITY SECURITIES
The Trust may invest in all types of equity securities, including the
following: common stocks, preferred stocks and preference stocks; and
securities such as bonds, warrants or rights that are convertible into stocks.
These securities may be listed on securities exchanges, traded in various
over-the-counter markets or have no organized market.

FUTURES CONTRACTS
The Trust may purchase and sell futures contracts ("Futures Contracts") on
interest rates or interest-rate related instruments. The Trust may also
purchase and sell Futures Contracts on foreign or domestic fixed income
securities or indices of such securities including municipal bond indices and
any other indices of foreign or domestic fixed income securities that may
become available for trading. Such investment strategies will be used for
hedging purposes and for non-hedging purposes, subject to applicable law.

        A Futures Contract is a bilateral agreement providing for the purchase
and sale of a specified type and amount of a financial instrument or commodity,
or for the making and acceptance of a cash settlement, at a stated time in the
future for a fixed price. By its terms, a Futures Contract provides for a
specified settlement month in which, in the case of the majority of commodities
and interest rate futures contracts, the underlying commodities or fixed income
securities are delivered by the seller and paid for by the purchaser, or on
which, in the case of index futures contracts and certain interest rate futures

<PAGE>

contracts, the difference between the price at which the contract was entered
into and the contract's closing value is settled between the purchaser and
seller in cash. Futures Contracts differ from options in that they are
bilateral agreements, with both the purchaser and the seller equally obligated
to complete the transaction. Futures Contracts call for settlement only on the
expiration date and cannot be "exercised" at any other time during their term.

        The purchase or sale of a Futures Contract differs from the purchase or
sale of a security or the purchase of an option in that no purchase price is
paid or received. Instead, an amount of cash or cash equivalents, which varies
but may be as low as 5% or less of the value of the contract, must be deposited
with the broker as "initial margin." Subsequent payments to and from the
broker, referred to as "variation margin," are made on a daily basis as the
value of the index or instrument underlying the Futures Contract fluctuates,
making positions in the Futures Contract more or less valuable -- a process
known as "mark-to-market."

        Interest rate Futures Contracts may be purchased or sold to attempt to
protect against the effects of interest rate changes on the Trust's current or
intended investments in fixed income securities. For example, if the Trust
owned long-term bonds and interest rates were expected to increase, the Trust
might enter into interest rate futures contracts for the sale of debt
securities. Such a sale would have much the same effect as selling some of the
long-term bonds in the Trust's portfolio. If interest rates did increase, the
value of the debt securities in the portfolio would decline, but the value of
the Trust's interest rate futures contracts would increase at approximately the
same rate, subject to the correlation risks described below, thereby keeping
the net asset value of the Trust from declining as much as it otherwise would
have.

        Similarly, if interest rates were expected to decline, interest rate
futures contracts may be purchased to hedge in anticipation of subsequent
purchases of long-term bonds at higher prices. Since the fluctuations in the
value of the interest rate futures contracts should be similar to that of
long-term bonds, the Trust could protect itself against the effects of the
anticipated rise in the value of long-term bonds without actually buying them
until the necessary cash became available or the market had stabilized. At that
time, the interest rate futures contracts could be liquidated and the Trust's
cash reserves could then be used to buy long-term bonds on the cash market. The
Trust could accomplish similar results by selling bonds with long maturities
and investing in bonds with short maturities when interest rates are expected
to increase. However, since the futures market may be more liquid than the cash
market in certain cases or at certain times, the use of interest rate futures
contracts as a hedging technique may allow the Trust to hedge its interest rate
risk without having to sell its portfolio securities.

        The use by the Trust of Futures Contracts also involves the risks
described under the caption "Special Risk Factors -- Futures, Swaps and Other
Derivative Transactions" in this Appendix.

INDEXED SECURITIES
The Trust may purchase securities with principal and/or interest payments whose
prices are indexed to the prices of other securities, securities indices,
precious metals or other commodities, or other financial indicators. Indexed
securities typically, but not always, are debt securities or deposits whose
value at maturity or coupon rate is determined by reference to a specific
instrument or statistic. The Trust may also purchase indexed deposits with
similar characteristics. Gold- indexed securities, for example, typically
provide for a maturity value that depends on the price of gold, resulting in a
security whose price tends to rise and fall together with gold prices. Certain
indexed securities may expose the Trust to the risk of loss of all or a portion
of the principal amount of its investment and/or the interest that might
otherwise have been earned on the amount invested.

        The performance of indexed securities depends to a great extent on the
performance of the security or other instrument to which they are indexed, and
may also be influenced by interest rate changes in the U.S. and abroad. At the
same time, indexed securities are subject to the credit risks associated with
the issuer of the security, and their values may decline substantially if the
issuer's creditworthiness deteriorates. Recent issuers of indexed securities
have included banks, corporations, and certain U.S. Government-sponsored
entities.


<PAGE>

INVERSE FLOATING RATE OBLIGATIONS
The Trust may invest in so-called "inverse floating rate obligations" or
"residual interest bonds" or other obligations or certificates relating thereto
structured to have similar features. In creating such an obligation, a
municipality issues a certain amount of debt and pays a fixed interest rate.
Half of the debt is issued as variable rate short term obligations, the
interest rate of which is reset at short intervals, typically 35 days. The
other half of the debt is issued as inverse floating rate obligations, the
interest rate of which is calculated based on the difference between a multiple
of (approximately two times) the interest paid by the issuer and the interest
paid on the short-term obligation. Under usual circumstances, the holder of the
inverse floating rate obligation can generally purchase an equal principal
amount of the short term obligation and link the two obligations in order to
create long-term fixed rate bonds. Because the interest rate on the inverse
floating rate obligation is determined by subtracting the short-term rate from
a fixed amount, the interest rate will decrease as the short-term rate
increases and will increase as the short-term rate decreases. The magnitude of
increases and decreases in the market value of inverse floating rate
obligations may be approximately twice as large as the comparable change in the
market value of an equal principal amount of long-term bonds which bear
interest at the rate paid by the issuer and have similar credit quality,
redemption and maturity provisions.

INVESTMENT IN OTHER INVESTMENT COMPANIES
The Trust may invest in other investment companies. The total return on such
investment will be reduced by the operating expenses and fees of such other
investment companies, including advisory fees.

        CLOSED-END FUNDS. The Trust may invest in closed-end investment
companies. Such investment may involve the payment of substantial premiums
above the value of such investment companies' portfolio securities.

LEVERAGING TRANSACTIONS
The Trust may engage in the types of transactions described below, which
involve "leverage" because in each case the Trust receives cash which it can
invest in portfolio securities and has a future obligation to make a payment.
The use of these transactions by the Trust will generally cause its net asset
value to increase or decrease at a greater rate than would otherwise be the
case. Any investment income or gains earned from the portfolio securities
purchased with the proceeds from these transactions which is in excess of the
expenses associated from these transactions can be expected to cause the net
asset value of the Trust's shares and distributions on the Trust's shares to
rise more quickly than would otherwise be the case. Conversely, if the
investment income or gains earned from the portfolio securities purchased with
proceeds from these transactions fail to cover the expenses associated with
these transactions, the net asset value of the Trust's shares is likely to
decrease more quickly than otherwise would be the case and distributions
thereon will be reduced or eliminated. Hence, these transactions are
speculative, involve leverage and increase the risk of owning or investing in
the shares of the Trust. These transactions also increase the Trust's expenses
because of interest and similar payments and administrative expenses associated
with them. Unless the appreciation and income on assets purchased with proceeds
from these transactions exceed the costs associated with them, the use of these
transactions by the Trust would diminish the investment performance of the
Trust compared with what it would have been without using these transactions.

BANK BORROWINGS: The Trust may borrow money for investment purposes from banks
and invest the proceeds in accordance with its investment objectives and
policies.

MORTGAGE "DOLLAR ROLL" TRANSACTIONS: The Trust may enter into mortgage "dollar
roll" transactions pursuant to which it sells mortgage-backed securities for
delivery in the future and simultaneously contracts to repurchase substantially
similar securities on a specified future date. During the roll period, the
Trust foregoes principal and interest paid on the mortgage-backed securities.
The Trust is compensated for the lost interest by the difference between the
current sales price and the lower price for the future purchase (often referred
to as the "drop") as well as by the interest earned on, and gains from, the
investment of the cash proceeds of the initial sale. The Trust may also be
compensated by receipt of a commitment fee.


<PAGE>

        If the income and capital gains from the Trust's investment of the cash
from the initial sale do not exceed the income, capital appreciation and gain
or loss that would have been realized on the securities sold as part of the
dollar roll, the use of this technique will diminish the investment performance
of the Trust compared with what the performance would have been without the use
of the dollar rolls. Dollar roll transactions involve the risk that the market
value of the securities the Trust is required to purchase may decline below the
agreed upon repurchase price of those securities. If the broker/dealer to whom
the Trust sells securities becomes insolvent, the Trust's right to purchase or
repurchase securities may be restricted. Successful use of mortgage dollar
rolls may depend upon the Adviser's ability to correctly predict interest rates
and prepayments. There is no assurance that dollar rolls can be successfully
employed. The Trust will only enter into "covered" mortgage dollar-roll
transactions, meaning that the Trust segregates liquid securities it will
repurchase and does not use these transactions as a form of leverage.

REPURCHASE AGREEMENTS
The Trust may enter into repurchase agreements with sellers who are member
firms (or a subsidiary thereof) of the New York Stock Exchange or members of
the Federal Reserve System, recognized primary U.S. Government securities
dealers or institutions which the Adviser has determined to be of comparable
creditworthiness. The securities that the Trust purchases and holds through its
agent are U.S. Government securities, the values of which are equal to or
greater than the repurchase price agreed to be paid by the seller. The
repurchase price may be higher than the purchase price, the difference being
income to the Trust, or the purchase and repurchase prices may be the same,
with interest at a standard rate due to the Trust together with the repurchase
price on repurchase. In either case, the income to the Trust is unrelated to
the interest rate on the Government securities.

        The repurchase agreement provides that in the event the seller fails to
pay the amount agreed upon on the agreed upon delivery date or upon demand, as
the case may be, the Trust will have the right to liquidate the securities. If
at the time the Trust is contractually entitled to exercise its right to
liquidate the securities, the seller is subject to a proceeding under the
bankruptcy laws or its assets are otherwise subject to a stay order, the
Trust's exercise of its right to liquidate the securities may be delayed and
result in certain losses and costs to the Trust. The Trust has adopted and
follows procedures which are intended to minimize the risks of repurchase
agreements. For example, the Trust only enters into repurchase agreements after
the Adviser has determined that the seller is creditworthy, and the Adviser
monitors that seller's creditworthiness on an ongoing basis. Moreover, under
such agreements, the value of the securities (which are marked to market every
business day) is required to be greater than the repurchase price, and the
Trust has the right to make margin calls at any time if the value of the
securities falls below the agreed upon collateral.

RESTRICTED SECURITIES
The Trust may purchase securities that are not registered under the Securities
Act of 1933, as amended ("1933 Act") ("restricted securities"), including those
that can be offered and sold to "qualified institutional buyers" under Rule
144A under the 1933 Act ("Rule 144A securities") and commercial paper issued
under Section 4(2) of the 1933 Act ("4(2) Paper"). A determination is made,
based upon a continuing review of the trading markets for the Rule 144A
security or 4(2) Paper, whether such security is liquid and thus not subject to
the Trust's limitation on investing in illiquid investments. The Board of
Trustees has adopted guidelines and delegated to MFS the daily function of
determining and monitoring the liquidity of Rule 144A securities and 4(2)
Paper. The Board, however, retains oversight of the liquidity determinations
focusing on factors such as valuation, liquidity and availability of
information. Investing in Rule 144A securities could have the effect of
decreasing the level of liquidity in the Trust to the extent that qualified
institutional buyers become for a time uninterested in purchasing these Rule
144A securities held in the Trust's portfolio. Subject to the Trust's
limitation on investments in illiquid investments, the Trust may also invest in
restricted securities that may not be sold under Rule 144A, which presents
certain risks. As a result, the Trust might not be able to sell these
securities when the Adviser wishes to do so, or might have to sell them at less
than fair value. In addition, market quotations are less readily available.
Therefore, judgment may at times play a greater role in valuing these
securities than in the case of unrestricted securities.


<PAGE>

SHORT TERM INSTRUMENTS
The Trust may hold cash and invest in cash equivalents, such as short-term U.S.
Government Securities, commercial paper and bank instruments.

SWAPS AND RELATED DERIVATIVE INSTRUMENTS
The Trust may enter into interest rate swaps and other types of available swap
agreements, including swaps on securities, commodities and indices, and related
types of derivatives, such as caps, collars and floors. A swap is an agreement
between two parties pursuant to which each party agrees to make one or more
payments to the other on regularly scheduled dates over a stated term, based on
different interest rates, security or commodity prices, the prices or rates of
other types of financial instruments or assets or the levels of specified
indices. Under a typical swap, one party may agree to pay a fixed rate or a
floating rate determined by reference to a specified instrument, rate or index,
multiplied in each case by a specified amount (the "notional amount"), while
the other party agrees to pay an amount equal to a different floating rate
multiplied by the same notional amount. On each payment date, the obligations
of parties are netted, with only the net amount paid by one party to the other.
All swap agreements entered into by the Trust with the same counterparty are
generally governed by a single master agreement, which provides for the netting
of all amounts owed by the parties under the agreement upon the occurrence of
an event of default, thereby reducing the credit risk to which such party is
exposed.

        Swap agreements are typically individually negotiated and structured to
provide exposure to a variety of different types of investments or market
factors. Swap agreements may be entered into for hedging or non-hedging
purposes and therefore may increase or decrease the Trust's exposure to the
underlying instrument, rate, asset or index. Swap agreements can take many
different forms and are known by a variety of names. The Trust is not limited
to any particular form or variety of swap agreement if the Adviser determines
it is consistent with the Trust's investment objective and policies.

        For example, the Trust may enter into an interest rate swap in order to
protect against declines in the value of fixed income securities held by the
Trust. In such an instance, the Trust would agree with a counterparty to pay a
fixed rate (multiplied by a notional amount) and the counterparty would agree
to pay a floating rate multiplied by the same notional amount. If interest
rates rise, resulting in a diminution in the value of the Trust's portfolio,
the Trust would receive payments under the swap that would offset, in whole or
part, such diminution in value. The Trust might also enter into a swap on a
particular security, or a basket or index of securities, in order to gain
exposure to the underlying security or securities, as an alternative to
purchasing such securities. Such transactions could be more efficient or less
costly in certain instances than an actual purchase or sale of the securities.

        The Trust may enter into other related types of over-the-counter
derivatives, such as "caps", "floors" and "collars", for the same types of
hedging or non-hedging purposes. Caps and floors are similar to swaps, except
that one party pays a fee at the time the transaction is entered into and has
no further payment obligations, while the other party is obligated to pay an
amount equal to the amount by which a specified fixed or floating rate exceeds
or is below another rate (multiplied by a notional amount). A collar is in
effect a combination of a cap and a floor, with payments made only within or
outside a specified range of prices or rates.

        The Trust will maintain liquid and unencumbered assets to cover its
current obligations under swap and other over-the-counter derivative
transactions. If the Trust enters into a swap agreement on a net basis (i.e.,
the two payment streams are netted out, with the Trust receiving or paying, as
the case may be, only the net amount of the two payments), the Trust will
maintain liquid and unencumbered assets with a daily value at least equal to
the excess, if any, of the Trust's accrued obligations under the swap agreement
over the accrued amount the Trust is entitled to receive under the agreement.
If the Trust enters into a swap agreement on other than a net basis, it will
maintain liquid and unencumbered assets with a value equal to the full amount
of the Trust's accrued obligations under the agreement.

        The most significant factor in the performance of swaps, caps, floors
and collars is the change in the underlying price, rate or index level that

<PAGE>

determines the amount of payments to be made under the arrangement. If the
Adviser is incorrect in its forecasts of such factors, the investment
performance of the Trust would be less than what it would have been if these
investment techniques had not been used. If a swap agreement calls for payments
by the Trust, the Trust must be prepared to make such payments when due. In
addition, if the counterparty's creditworthiness would decline, the value of
the swap agreement would be likely to decline, potentially resulting in losses.

        If the counterparty defaults, the Trust's risk of loss consists of the
net amount of payments that the Trust is contractually entitled to receive. The
Trust anticipates that it will be able to eliminate or reduce its exposure
under these arrangements by assignment or other disposition or by entering into
an offsetting agreement with the same or another counterparty, but there can be
no assurance that it will be able to do so.

        The uses by the Trust of swaps and related derivative instruments also
involves the risks described under the caption "Special Risk Factors --
Futures, Swaps and Other Derivative Transactions" in this Appendix.

TEMPORARY BORROWINGS
The Trust may borrow money for temporary purposes (e.g., to meet redemption
requests or settle outstanding purchases of portfolio securities).

TEMPORARY DEFENSIVE POSITIONS
The Trust may temporarily invest either in tax-exempt securities in the higher
rating categories of recognized rating agencies or in cash or cash equivalent
short-term obligations of similar quality, including, but not limited to,
short-term municipal obligations, certificates of deposit, commercial paper,
short-term notes, obligations issued or guaranteed by the U.S. Government, its
agencies, authorities or instrumentalities and repurchase agreements. Interest
on certain of these short-term obligations will be subject to federal income
tax.

"WHEN-ISSUED" SECURITIES
The Trust may purchase securities on a "when-issued" or on a "forward delivery"
basis which means that the securities will be delivered to the Trust at a
future date usually beyond customary settlement time. The commitment to
purchase a security for which payment will be made on a future date may be
deemed a separate security. In general, the Trust does not pay for such
securities until received, and does not start earning interest on the
securities until the contractual settlement date. While awaiting delivery of
securities purchased on such bases, the Trust will identify liquid and
unencumbered assets equal to its forward delivery commitment.

SPECIAL RISK FACTORS -- FUTURES, SWAPS AND OTHER DERIVATIVE TRANSACTIONS

RISK OF IMPERFECT CORRELATION OF HEDGING INSTRUMENTS WITH THE TRUST'S
PORTFOLIO: The Trust's ability effectively to hedge all or a portion of its
portfolio through transactions in derivatives, including Futures Contracts,
swaps and other types of derivatives depends on the degree to which price
movements in the underlying index or instrument correlate with price movements
in the relevant portion of the Trust's portfolio. In the case of derivative
instruments based on an index, the portfolio will not duplicate the components
of the index, and in the case of derivative instruments on fixed income
securities, the portfolio securities which are being hedged may not be the same
type of obligation underlying such derivatives. The use of derivatives for
"cross hedging" purposes may involve greater correlation risks. Consequently,
the Trust bears the risk that the price of the portfolio securities being
hedged will not move in the same amount or direction as the underlying index or
obligation.

        The trading of derivatives for hedging purposes entails the additional
risk of imperfect correlation between movements in the price of the derivative
and the price of the underlying index or obligation. The anticipated spread
between the prices may be distorted due to the differences in the nature of the
markets such as differences in margin requirements, the liquidity of such
markets and the participation of speculators in the derivatives markets. In
this regard, trading by speculators in derivatives has in the past occasionally
resulted in market distortions, which may be difficult or impossible to
predict, particularly near the expiration of such instruments.


<PAGE>

RISKS OF NON-HEDGING TRANSACTIONS: The Trust may enter transactions in
derivatives for non-hedging purposes as well as hedging purposes. Non- hedging
transactions in such instruments involve greater risks and may result in losses
which may not be offset by increases in the value of portfolio securities or
declines in the cost of securities to be acquired. The Trust will only write
covered options, such that liquid and unencumbered assets necessary to satisfy
an option exercise will be identified, unless the option is covered in such
other manner as may be in accordance with the rules of the exchange on which,
or the counterparty with which, the option is traded and applicable laws and
regulations. Nevertheless, the method of covering an option employed by the
Trust may not fully protect it against risk of loss and, in any event, the
Trust could suffer losses on the option position which might not be offset by
corresponding portfolio gains. The Trust may also enter into futures, Forward
Contracts or swaps for non-hedging purposes. For example, the Trust may enter
into such a transaction as an alternative to purchasing or selling the
underlying instrument or to obtain desired exposure to an index or market. In
such instances, the Trust will be exposed to the same economic risks incurred
in purchasing or selling the underlying instrument or instruments. However,
transactions in futures, Forward Contracts or swaps may be leveraged, which
could expose the Trust to greater risk of loss than such purchases or sales.
Entering into transactions in derivatives for other than hedging purposes,
therefore, could expose the Trust to significant risk of loss if the prices,
rates or values of the underlying instruments or indices do not move in the
direction or to the extent anticipated.

        With respect to the writing of straddles on securities, the Trust
incurs the risk that the price of the underlying security will not remain
stable, that one of the options written will be exercised and that the
resulting loss will not be offset by the amount of the premiums received. Such
transactions, therefore, create an opportunity for increased return by
providing the Trust with two simultaneous premiums on the same security, but
involve additional risk, since the Trust may have an option exercised against
it regardless of whether the price of the security increases or decreases.

RISK OF A POTENTIAL LACK OF A LIQUID SECONDARY MARKET: Prior to exercise or
expiration, a futures or option position can only be terminated by entering
into a closing purchase or sale transaction. This requires a secondary market
for such instruments on the exchange on which the initial transaction was
entered into. While the Trust will enter into options or futures positions only
if there appears to be a liquid secondary market therefor, there can be no
assurance that such a market will exist for any particular contract at any
specific time. In that event, it may not be possible to close out a position
held by the Trust, and the Trust could be required to purchase or sell the
instrument underlying an option, make or receive a cash settlement or meet
ongoing variation margin requirements. Under such circumstances, if the Trust
has insufficient cash available to meet margin requirements, it will be
necessary to liquidate portfolio securities or other assets at a time when it
is disadvantageous to do so. The inability to close out options and futures
positions, therefore, could have an adverse impact on the Trust's ability
effectively to hedge its portfolio, and could result in trading losses.

        The liquidity of a secondary market in a Futures Contract or option
thereon may be adversely affected by "daily price fluctuation limits,"
established by exchanges, which limit the amount of fluctuation in the price of
a contract during a single trading day. Once the daily limit has been reached
in the contract, no trades may be entered into at a price beyond the limit,
thus preventing the liquidation of open futures or option positions and
requiring traders to make additional margin deposits. Prices have in the past
moved to the daily limit on a number of consecutive trading days.

        The trading of Futures Contracts and options is also subject to the
risk of trading halts, suspensions, exchange or clearinghouse equipment
failures, government intervention, insolvency of a brokerage firm or
clearinghouse or other disruptions of normal trading activity, which could at
times make it difficult or impossible to liquidate existing positions or to
recover excess variation margin payments.

MARGIN: Because of low initial margin deposits made upon the establishment of a
futures, forward or swap position (certain of which may require no initial

<PAGE>

margin deposits) and the writing of an option, such transactions involve
substantial leverage. As a result, relatively small movements in the price of
the contract can result in substantial unrealized gains or losses. Where the
Trust enters into such transactions for hedging purposes, any losses incurred
in connection therewith should, if the hedging strategy is successful, be
offset, in whole or in part, by increases in the value of securities or other
assets held by the Trust or decreases in the prices of securities or other
assets the Trust intends to acquire. Where the Trust enters into such
transactions for other than hedging purposes, the margin requirements
associated with such transactions could expose the Trust to greater risk.

POTENTIAL BANKRUPTCY OF A CLEARINGHOUSE OR BROKER: When the Trust enters into
transactions in exchange-traded futures or options, it is exposed to the risk
of the potential bankruptcy of the relevant exchange clearinghouse or the
broker through which the Trust has effected the transaction. In that event, the
Trust might not be able to recover amounts deposited as margin, or amounts owed
to the Trust in connection with its transactions, for an indefinite period of
time, and could sustain losses of a portion or all of such amounts. Moreover,
the performance guarantee of an exchange clearinghouse generally extends only
to its members and the Trust could sustain losses, notwithstanding such
guarantee, in the event of the bankruptcy of its broker.

TRADING AND POSITION LIMITS: The exchanges on which futures and options are
traded may impose limitations governing the maximum number of positions on the
same side of the market and involving the same underlying instrument which may
be held by a single investor, whether acting alone or in concert with others
(regardless of whether such contracts are held on the same or different
exchanges or held or written in one or more accounts or through one or more
brokers). Further, the CFTC and the various contract markets have established
limits referred to as "speculative position limits" on the maximum net long or
net short position which any person may hold or control in a particular futures
or option contract. An exchange may order the liquidation of positions found to
be in violation of these limits and it may impose other sanctions or
restrictions. The Adviser does not believe that these trading and position
limits will have any adverse impact on the strategies for hedging the
portfolios of the Trust.

RISKS OF OPTIONS ON FUTURES CONTRACTS: The amount of risk the Trust assumes
when it purchases an Option on a Futures Contract is the premium paid for the
option, plus related transaction costs. In order to profit from an option
purchased, however, it may be necessary to exercise the option and to liquidate
the underlying Futures Contract, subject to the risks of the availability of a
liquid offset market described herein. The writer of an Option on a Futures
Contract is subject to the risks of commodity futures trading, including the
requirement of initial and variation margin payments, as well as the additional
risk that movements in the price of the option may not correlate with movements
in the price of the underlying security, index, currency or Futures Contract.




<PAGE>


                                   APPENDIX B

                             RATINGS OF INVESTMENTS


The ratings of Moody's, S&P and Fitch IBCA, Duff & Phelps represent their
opinions as to the quality of various debt instruments. It should be
emphasized, however, that ratings are not absolute standards of quality.
Consequently, debt instruments with the same maturity, coupon and rating may
have different yields while debt instruments of the same maturity and coupon
with different ratings may have the same yield.

                        MOODY'S INVESTORS SERVICE, INC.

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

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

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

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

                       STANDARD & POOR'S RATINGS SERVICES

AAA: An obligation rated AAA has the highest rating assigned by Standard &
Poor's. The obligor's capacity to meet its financial commitment on the
obligation is EXTREMELY STRONG.


<PAGE>

AA: An obligation rated AA differs from the highest rated obligations only in
small degree. The obligor's capacity to meet its financial commitment on the
obligation is VERY STRONG.

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

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

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.

BB: 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.

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

CC: An obligation rated CC is CURRENTLY HIGHLY VULNERABLE to nonpayment.

C: Subordinated debt or preferred stock obligation rated C 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. A C rating will also be
assigned to a preferred stock issue in arrears on dividends or sinking Trust
payments, but that is currently paying.

D: 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 Standard & Poor's 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.

R: This symbol is attached to the ratings of instruments with significant
noncredit risks. It highlights risks to principal or volatility of expected
returns which are not addressed in the credit rating. Examples include:
obligations linked or indexed to equities, currencies, or commodities;
obligations exposed to severe prepayment risk -- such as interest-only or
principal-only mortgage securities; and obligations with unusually risky
interest terms, such as inverse floaters.


<PAGE>

                           FITCH IBCA, DUFF & PHELPS

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.

AA
VERY HIGH CREDIT QUALITY. 'AA' ratings denote a very low expectation of credit
risk. They indicate very strong capacity for timely payment of financial
commitments. This capacity is not significantly vulnerable to foreseeable
events.

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

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

SPECULATIVE GRADE

BB
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.

B
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, favourable 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, favourable 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

<PAGE>

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 of repaying all obligations.

NOTES TO LONG-TERM ANd SHORT-TERM RATINGS:

"+" 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 Rating Watch 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.



<PAGE>


                                   APPENDIX C

                               AUCTION PROCEDURES

        The following procedures will be set forth in the Statement. The terms
not defined below are defined in the Glossary or in the Prospectus or this
Statement of Additional Information.

        1.  ORDERS.

        (a) Prior to the Submission Deadline on each Auction Date for shares of
a series of Municipal Preferred:

               (i) each Beneficial Owner of shares of such series may submit to
        its Broker-Dealer by telephone or otherwise information as to:

                      (A) the number of Outstanding shares, if any, of such
               series held by such Beneficial Owner which such Beneficial Owner
               desires to continue to hold without regard to the Applicable
               Rate for shares of such series for the next succeeding Rate
               Period of such shares;

                      (B) the number of Outstanding shares, if any, of such
               series held by such Beneficial Owner which such Beneficial Owner
               offers to sell if the Applicable Rate for shares of such series
               for the next succeeding Rate Period of shares of such series
               shall be less than the rate per annum specified by such
               Beneficial Owner; and/or

                      (C) the number of Outstanding shares, if any, of such
               series held by such Beneficial Owners which such Beneficial
               Owner offers to sell without regard to the Applicable Rate for
               shares of such series for the next Rate Period of shares of such
               series;

and

               (ii) one or more Broker-Dealers, using lists of Potential
        Beneficial Owners, shall in good faith for the purpose of conducting a
        competitive Auction in a commercially reasonable manner, contact
        Potential Beneficial Owners (by telephone or otherwise), including
        Persons that are not Beneficial Owners, on such lists to determine the
        number of shares, if any, of such series which each such Potential
        Beneficial Owner offers to purchase if the Applicable Rate for shares
        of such series for the next succeeding Rate Period of shares of such
        series shall not be less than the rate per annum specified by such
        Potential Beneficial Owner.

For purposes hereof, the communication by a Beneficial Owner or Potential
Beneficial Owner to a Broker-Dealer, or by a Broker-Dealer to the Auction
Agent, of information referred to in clause (i)(A), (i)(B), (i)(C), or (ii) of
this subparagraph (a) is hereinafter referred to as an "Order" and collectively
as "Orders" and each Beneficial Owner and each Potential Beneficial Owner
placing an Order with a Broker-Dealer, and such Broker-Dealer placing an Order
with the Auction Agent, is hereinafter referred to as a "Bidder" and
collectively as "Bidders"; an Order containing the information referred to in
clause (i)(A) of this subparagraph (a) is hereinafter referred to as a "Hold
Order" and collectively as "Hold Orders"; an Order containing the information
referred to in clause (i)(B) or (ii) of this subparagraph (a) is hereinafter
referred to as a "Bid" and collectively as "Bids"; and an Order containing the
information referred to in clause (i)(C) of this subparagraph (a) is
hereinafter referred to as a "Sell Order" and collectively as "Sell Orders."

        (b)(i) A Bid by a Beneficial Owner or an Existing Holder of shares of a
series of Municipal Preferred subject to an Auction on any Auction Date shall
constitute an irrevocable offer to sell:


<PAGE>

                      (A) the number of Outstanding shares of such series
               specified in such Bid if the Applicable Rate for shares of such
               series determined on such Auction Date shall be less than the
               rate specified therein;

                      (B) such number or a lesser number of Outstanding shares
               of such series to be determined as set forth in paragraph
               4(a)(iv) herein if the Applicable Rate for shares of such series
               determined on such Auction Date shall be equal to the rate
               specified therein; or

                      (C) the number of Outstanding shares of such series
               specified in such Bid if the rate specified therein shall be
               higher than the Maximum Rate for shares of such series, or such
               number or a lesser number of Outstanding shares of such series
               to be determined as set forth in paragraph 4(b)(iii) herein if
               the rate specified therein shall be higher than the Maximum Rate
               for shares of such series and Sufficient Clearing Bids for
               shares of such series do not exist.

               (ii) A Sell Order by a Beneficial Owner or an Existing Holder of
        shares of a series of Municipal Preferred subject to an Auction on any
        Auction Date shall constitute an irrevocable offer to sell:

                      (A) the number of Outstanding shares of such series
               specified in such Sell Order; or

                      (B) such number or a lesser number of Outstanding shares
               of such series as set forth in paragraph 4(b)(iii) herein if
               Sufficient Clearing Bids for shares of such series do not exist;

provided, however, that a Broker-Dealer that is an Existing Holder with respect
to shares of a series of Municipal Preferred shall not be liable to any Person
for failing to sell such shares pursuant to a Sell Order described in the
proviso to paragraph 2(c) herein if (1) such shares were transferred by the
Beneficial Owner thereof without compliance by such Beneficial Owner or its
transferee Broker-Dealer (or other transferee person, if permitted by the
Trust) with the provisions of paragraph 7 herein or (2) such Broker-Dealer has
informed the Auction Agent pursuant to the terms of its Broker-Dealer Agreement
that, according to such Broker-Dealer's records, such Broker-Dealer believes it
is not the Existing Holder of such shares.

               (iii) A Bid by a Potential Beneficial Holder or a Potential
        Holder of shares of a series of Municipal Preferred subject to an
        Auction on any Auction Date shall constitute an irrevocable offer to
        purchase:

                      (A) the number of Outstanding shares of such series
               specified in such Bid if the Applicable Rate for shares of such
               series determined on such Auction Date shall be higher than the
               rate specified therein; or

                      (B) such number or a lesser number of Outstanding shares
               of such series as set forth in paragraph 4(a)(v) herein if the
               Applicable Rate for shares of such series determined on such
               Auction Date shall be equal to the rate specified therein.

        (c) No Order for any number of shares of Municipal Preferred other than
whole shares shall be valid.

        2.  SUBMISSION OF ORDERS BY BROKER-DEALERS TO AUCTION AGENT.

        (a) Each Broker-Dealer shall submit in writing to the Auction Agent
prior to the Submission Deadline on each Auction Date all Orders for shares of
Municipal Preferred of a series subject to an Auction on such Auction Date
obtained by such Broker-Dealer, designating itself (unless otherwise permitted
by the Trust) as an Existing Holder in respect of shares subject to Orders
submitted or deemed submitted to it by Beneficial Owners and as a Potential
Holder in respect of shares subject to Orders submitted to it by Potential
Beneficial Owners, and shall specify with respect to each Order for such
shares:


<PAGE>

               (i) the name of the Bidder placing such Order (which shall be
        the Broker-Dealer unless otherwise permitted by the Trust);

               (ii) the aggregate number of shares of such series that are the
subject of such Order;

               (iii) to the extent that such Bidder is an Existing Holder of
shares of such series:

                      (A) the number of shares, if any, of such series subject
to any Hold Order of such Existing Holder;

                      (B) the number of shares, if any, of such series subject
               to any Bid of such Existing Holder and the rate specified in
               such Bid; and

                      (C) the number of shares, if any, of such series subject
to any Sell Order of such Existing Holder; and

               (iv) to the extent such Bidder is a Potential Holder of shares
        of such series, the rate and number of shares of such series specified
        in such Potential Holder's Bid.

        (b) If any rate specified in any Bid contains more than three figures
to the right of the decimal point, the Auction Agent shall round such rate up
to the next highest one thousandth (.001) of 1%.

        (c) If an Order or Orders covering all of the Outstanding shares of
Municipal Preferred of a series held by any Existing Holder is not submitted to
the Auction Agent prior to the Submission Deadline, the Auction Agent shall
deem a Hold Order to have been submitted by or on behalf of such Existing
Holder covering the number of Outstanding shares of such series held by such
Existing Holder and not subject to Orders submitted to the Auction Agent;
provided, however, that if an Order or Orders covering all of the Outstanding
shares of such series held by any Existing Holder is not submitted to the
Auction Agent prior to the Submission Deadline for an Auction relating to a
Special Rate Period consisting of more than 28 Rate Period Days, the Auction
Agent shall deem a Sell Order to have been submitted by or on behalf of such
Existing Holder covering the number of outstanding shares of such series held
by such Existing Holder and not subject to Orders submitted to the Auction
Agent.

        (d) If one or more Orders of an Existing Holder is submitted to the
Auction Agent covering in the aggregate more than the number of Outstanding
shares of Municipal Preferred of a series subject to an Auction held by such
Existing Holder, such Orders shall be considered valid in the following order
of priority:

               (i) all Hold Orders for shares of such series shall be
        considered valid, but only up to and including in the aggregate the
        number of Outstanding shares of such series held by such Existing
        Holder, and if the number of shares of such series subject to such Hold
        Orders exceeds the number of Outstanding shares of such series held by
        such Existing Holder, the number of shares subject to each such Hold
        Order shall be reduced pro rata to cover the number of Outstanding
        shares of such series held by such Existing Holder;

               (ii) (A) any Bid for shares of such series shall be considered
        valid up to and including the excess of the number of Outstanding
        shares of such series held by such Existing Holder over the number of
        shares of such series subject to any Hold Orders referred to in clause
        (i) above;

                      (B) subject to subclause (A), if more than one Bid of an
               Existing Holder for shares of such series is submitted to the
               Auction Agent with the same rate and the number of Outstanding
               shares of such series subject to such Bids is greater than such

<PAGE>

               excess, such Bids shall be considered valid up to and including
               the amount of such excess, and the number of shares of such
               series subject to each Bid with the same rate shall be reduced
               pro rata to cover the number of shares of such series equal to
               such excess;

                      (C) subject to subclauses (A) and (B), if more than one
               Bid of an Existing Holder for shares of such series is submitted
               to the Auction Agent with different rates, such Bids shall be
               considered valid in the ascending order of their respective
               rates up to and including the amount of such excess; and

                      (D) in any such event, the number, if any, of such
               Outstanding shares of such series subject to any portion of Bids
               considered not valid in whole or in part under this clause (ii)
               shall be treated as the subject of a Bid for shares of such
               series by or on behalf of a Potential Holder at the rate therein
               specified; and

               (iii) all Sell Orders for shares of such series shall be
        considered valid up to and including the excess of the number of
        Outstanding shares of such series held by such Existing Holder over the
        sum of shares of such series subject to valid Hold Orders referred to
        in clause (i) above and valid Bids referred to in clause (ii) above.

        (e) If more than one Bid for one or more shares of a series of
Municipal Preferred is submitted to the Auction Agent by or on behalf of any
Potential Holder, each such Bid submitted shall be a separate Bid with the rate
and number of shares therein specified.

        (f) Any Order submitted by a Beneficial Owner or a Potential Beneficial
Owner to its Broker-Dealer, or by a Broker-Dealer to the Auction Agent, prior
to the Submission Deadline on any Auction Date, shall be irrevocable.

        3.  DETERMINATION OF SUFFICIENT CLEARING BIDS, WINNING BID RATE AND
APPLICABLE RATE.

        (a) Not earlier than the Submission Deadline on each Auction Date for
shares of a series of Municipal Preferred, the Auction Agent shall assemble all
valid Orders submitted or deemed submitted to it by the Broker-Dealers in
respect of shares of such series (each such Order as submitted or deemed
submitted by a Broker-Dealer being hereinafter referred to individually as a
"Submitted Hold Order," a "Submitted Bid" or a "Submitted Sell Order," as the
case may be, or as a "Submitted Order" and collectively as "Submitted Hold
Orders," "Submitted Bids" or "Submitted Sell Orders," as the case may be, or as
"Submitted Orders") and shall determine for such series:

               (i) the excess of the number of Outstanding shares of such
        series over the number of Outstanding shares of such series subject to
        Submitted Hold Orders (such excess being hereinafter referred to as the
        "Available Municipal Preferred" of such series);

               (ii) from the Submitted Orders for shares of such series
        whether:

                      (A) the number of Outstanding shares of such series
               subject to Submitted Bids of Potential Holders specifying one or
               more rates equal to or lower than the Maximum Rate for shares of
               such series;

               exceeds or is equal to the sum of:

                      (B) the number of Outstanding shares of such series
               subject to Submitted Bids of Existing Holders specifying one or
               more rates higher than the Maximum Rate for shares of such
               series; and


<PAGE>

                      (C) the number of Outstanding shares of such series
               subject to Submitted Sell Orders

               (in the event such excess or such equality exists (other than
               because the number of shares of such series in subclauses (B)
               and (C) above is zero because all of the Outstanding shares of
               such series are subject to Submitted Hold Orders), such
               Submitted Bids in subclause (A) above being hereinafter referred
               to collectively as "Sufficient Clearing Bids" for shares of such
               series); and

               (iii) if Sufficient Clearing Bids for shares of such series
        exist, the lowest rate specified in such Submitted Bids (the "Winning
        Bid Rate" for shares of such series) which if:

                      (A) (I) each such Submitted Bid of Existing Holders
               specifying such lowest rate and (II) all other such Submitted
               Bids of Existing Holders specifying lower rates were rejected,
               thus entitling such Existing Holders to continue to hold the
               shares of such series that are subject to such Submitted Bids;
               and

                      (B) (I) each such Submitted Bid of Potential Holders
               specifying such lowest rate and (II) all other such Submitted
               Bids of Potential Holders specifying lower rates were accepted;

would result in such Existing Holders described in subclause (A) above
continuing to hold an aggregate number of Outstanding shares of such series
which, when added to the number of Outstanding shares of such series to be
purchased by such Potential Holders described in subclause (B) above, would
equal not less than the Available Municipal Preferred of such series.

        (b) Promptly after the Auction Agent has made the determinations
pursuant to subparagraph (a) of this paragraph 3, the Auction Agent shall
advise the Trust of the Maximum Rate for shares of the series of Municipal
Preferred for which an Auction is being held on the Auction Date and, based on
such determination, the Applicable Rate for shares of such series for the next
succeeding Rate Period thereof as follows:

               (i) if Sufficient Clearing Bids for shares of such series exist,
        that the Applicable Rate for all shares of such series for the next
        succeeding Rate Period thereof shall be equal to the Winning Bid Rate
        for shares of such series so determined;

               (ii) if Sufficient Clearing Bids for shares of such series do
        not exist (other than because all of the Outstanding shares of such
        series are subject to Submitted Hold Orders), that the Applicable Rate
        for all shares of such series for the next succeeding Rate Period
        thereof shall be equal to the Maximum Rate for shares of such series;
        or

               (iii) if all of the Outstanding shares of such series are
        subject to Submitted Hold Orders, that the Applicable Rate for all
        shares of such series for the next succeeding Rate Period thereof shall
        be as set forth in subparagraph (c) of this paragraph 3.

        (c) For purposes of subparagraph (b)(iii) of this paragraph 3, the
Applicable Rate for shares of such series for the next succeeding Rate Period
of shares of such series shall be equal to the lesser of the Kenny Index (if
such Rate Period consists of fewer than 183 Rate Period Days) or the product of
(A) (I) the "AA" Composite Commercial Paper Rate on such Auction Date for such
Rate Period, if such Rate Period consists of fewer than 183 Rate Period Days;
(II) the Treasury Bill Rate on such Auction Date for such Rate Period, if such
Rate Period consists of more than 182 but fewer than 365 Rate Period Days; or
(III) the Treasury Note Rate on such Auction Date for such Rate Period, if such
Rate Period is more than 364 Rate Period Days (the rate described in the

<PAGE>

foregoing clause (A)(I), (II) or (III), as applicable, being referred to herein
as the "Benchmark Rate") and (B) 1 minus the maximum marginal regular Federal
individual income tax rate applicable to ordinary income or the maximum
marginal regular Federal corporate income tax rate applicable to ordinary
income, whichever is greater; provided, however, that if the Trust has notified
the Auction Agent of its intent to allocate to shares of such series in such
Rate Period any net capital gains or other income taxable for federal income
tax purposes ("Taxable Income"), the Applicable Rate for shares of such series
for such Rate Period will be (i) if the Taxable Yield Rate (as defined below)
is greater than the Benchmark Rate, then the Benchmark Rate, or (ii) if the
Taxable Yield Rate is less than or equal to the Benchmark Rate, then the rate
equal to the sum of (x) the lesser of the Kenny Index (if such Rate Period
consists of fewer than 183 Rate Period Days) or the product of the Benchmark
Rate multiplied by the factor set forth in the preceding clause (B) and (y) the
product of the maximum marginal regular Federal individual income tax rate
applicable to ordinary income or the maximum marginal regular Federal corporate
income tax applicable to ordinary income, whichever is greater, multiplied by
the Taxable Yield Rate. For purposes of the foregoing, Taxable Yield Rate means
the rate determined by (a) dividing the amount of Taxable Income available for
distribution per such share of Municipal Preferred by the number of days in the
Dividend Period in respect of which such Taxable Income is contemplated to be
distributed, (b) multiplying the amount determined in (a) above by 365 (in the
case of a Dividend Period of 7 Rate Period Days) or 360 (in the case of any
other Dividend Period), and (c) dividing the amount determined in (b) above by
$25,000.

        4. ACCEPTANCE AND REJECTION OF SUBMITTED BIDS AND SUBMITTED SELL ORDERS
AND ALLOCATION OF SHARES. Existing Holders shall continue to hold the shares of
Municipal Preferred that are subject to Submitted Hold Orders, and, based on
the determinations made pursuant to paragraph 3(a) herein, the Submitted Bids
and Submitted Sell Orders shall be accepted or rejected by the Auction Agent
and the Auction Agent shall take such other action as set forth below:

        (a) If Sufficient Clearing Bids for shares of a series of Municipal
Preferred have been made, all Submitted Sell Orders with respect to shares of
such series shall be accepted and, subject to the provisions of subparagraphs
(d) and (e) of this paragraph 4, Submitted Bids with respect to shares of such
series shall be accepted or rejected as follows in the following order of
priority and all other Submitted Bids with respect to shares of such series
shall be rejected:

               (i) Existing Holders' Submitted Bids for shares of such series
        specifying any rate that is higher than the Winning Bid Rate for shares
        of such series shall be accepted, thus requiring each such Existing
        Holder to sell the shares of Municipal Preferred subject to such
        Submitted Bids;

               (ii) Existing Holders' Submitted Bids for shares of such series
        specifying any rate that is lower than the Winning Bid Rate for shares
        of such series shall be rejected, thus entitling each such Existing
        Holder to continue to hold the shares of Municipal Preferred subject to
        such Submitted Bids;

               (iii) Potential Holders' Submitted Bids for shares of such
        series specifying any rate that is lower than the Winning Bid Rate for
        shares of such series shall be accepted;

               (iv) each Existing Holders' Submitted Bid for shares of such
        series specifying a rate that is equal to the Winning Bid Rate for
        shares of such series shall be rejected, thus entitling such Existing
        Holder to continue to hold the share of Municipal Preferred subject to
        such Submitted Bid, unless the number of Outstanding shares of
        Municipal Preferred subject to all such Submitted Bids shall be greater
        than the number of shares of Municipal Preferred ("remaining shares")
        in the excess of the Available Municipal Preferred of such series over
        the number of shares of Municipal Preferred subject to Submitted Bids
        described in clauses (ii) and (iii) of this subparagraph (a), in which
        event such Submitted Bid of such Existing Holder shall be rejected in
        part, and such Existing Holder shall be entitled to continue to hold

<PAGE>

        shares of Municipal Preferred subject to such Submitted Bid, but only
        in an amount equal to the number of shares of Municipal Preferred of
        such series obtained by multiplying the number of remaining shares by a
        fraction, the numerator of which shall be the number of Outstanding
        shares of Municipal Preferred held by such Existing Holder subject to
        such Submitted Bid and the denominator of which shall be the aggregate
        number of Outstanding shares of Municipal Preferred subject to such
        Submitted Bids made by all such Existing Holders that specified a rate
        equal to the Winning Bid Rate for shares of such series; and

               (v) each Potential Holder's Submitted Bid for shares of such
        series specifying a rate that is equal to the Winning Bid Rate of
        shares of such series shall be accepted but only in an amount equal to
        the number of shares of such series obtained by multiplying the number
        of shares in the excess of the Available Municipal Preferred of such
        series over the number of shares of Municipal Preferred subject to
        Submitted Bids described in clauses (ii) through (iv) of this
        subparagraph (a) by a fraction, the numerator of which shall be the
        number of Outstanding shares of Municipal Preferred subject to such
        Submitted Bids and the denominator of which shall be the aggregate
        number of Outstanding shares of Municipal Preferred subject to such
        Submitted Bids made by all such Potential Holders that specified a rate
        equal to the Winning Bid Rate for shares of such series.

        (b) If Sufficient Clearing Bids for shares of a series of Municipal
Preferred have not been made (other than because all of the Outstanding shares
of such series are subject to Submitted Hold Orders), subject to the provisions
of subparagraph (d) of this paragraph 4, Submitted Orders for shares of such
series shall be accepted or rejected as follows in the following order of
priority and all other Submitted Bids for shares of such series shall be
rejected:

               (i) Existing Holders' Submitted Bids for shares of such series
        specifying any rate that is equal to or lower than the Maximum Rate for
        shares of such series shall be rejected, thus entitling such Existing
        Holders to continue to hold the shares of Municipal Preferred subject
        to such Submitted Bids;

               (ii) Potential Holders' Submitted Bids for shares of such series
        specifying any rate that is equal to or lower than the Maximum Rate for
        shares of such series shall be accepted; and

               (iii) Each Existing Holder's Submitted Bid for shares of such
        series specifying any rate that is higher than the Maximum Rate for
        shares of such series and the Submitted Sell Orders for shares of such
        series of each Existing Holder shall be accepted, thus entitling each
        Existing Holder that submitted or on whose behalf was submitted any
        such Submitted Bid or Submitted Sell Order to sell the shares of such
        series subject to such Submitted Bid or Submitted Sell Order, but in
        both cases only in an amount equal to the number of shares of such
        series obtained by multiplying the number of shares of such series
        subject to Submitted Bids described in clause (ii) of this subparagraph
        (b) by a fraction, the numerator of which shall be the number of
        Outstanding shares of such series held by such Existing Holder subject
        to such Submitted Bid or Submitted Sell Order and the denominator of
        which shall be the aggregate number of Outstanding shares of such
        series subject to all such Submitted Bids and Submitted Sell Orders.

        (c) If all of the Outstanding shares of a series of Municipal Preferred
are subject to Submitted Hold Orders, all Submitted Bids for shares of such
series shall be rejected.

        (d) If, as a result of the procedures described in clause (iv) or (v)
of subparagraph (a) or clause (iii) of subparagraph (b) of this paragraph 4,
any Existing Holder would be entitled or required to sell, or any Potential
Holder would be entitled or required to purchase, a fraction of a share of a
series of Municipal Preferred on any Auction Date, the Auction Agent shall, in
such manner as it shall determine in its sole discretion, round up or down the
number of shares of Municipal Preferred of such series to be purchased or sold
by any Existing Holder or Potential Holder on such Auction Date as a result of
such procedures so that the number of shares so purchased or sold by each
Existing Holder or Potential Holder on such Auction Date shall be whole shares
of Municipal Preferred.

        (e) If, as a result of the procedures described in clause (v) of
subparagraph (a) of this paragraph 4, any Potential Holder would be entitled or
required to purchase less than a whole share of series of Municipal Preferred

<PAGE>

on any Auction Date, the Auction Agent shall, in such manner as it shall
determine in its sole discretion, allocate shares of Municipal Preferred of
such series for purchase among Potential Holders so that only whole shares of
Municipal Preferred of such series are purchased on such Auction Date as a
result of such procedures by any Potential Holder, even if such allocation
results in one or more Potential Holders not purchasing shares of Municipal
Preferred of such series on such Auction Date.

        (f) Based on the results of each Auction for shares of a series of
Municipal Preferred, the Auction Agent shall determine the aggregate number of
shares of such series to be purchased and the aggregate number of shares of
such series to be sold by Potential Holders and Existing Holders and, with
respect to each Potential Holder and Existing Holder, to the extent that such
aggregate number of shares to be purchased and such aggregate number of shares
to be sold differ, determine to which other Potential Holder(s) or Existing
Holder(s) they shall deliver, or from which other Potential Holder(s) or
Existing Holder(s) they shall receive, as the case may be, shares of Municipal
Preferred of such series. Notwithstanding any provision of the Auction
Procedures or the Settlement Procedures to the contrary, in the event an
Existing Holder or Beneficial Owner of shares of a series of Municipal
Preferred with respect to whom a Broker-Dealer submitted a Bid to the Auction
Agent for such shares that was accepted in whole or in part, or submitted or is
deemed to have submitted a Sell Order for such shares that was accepted in
whole or in part, fails to instruct its Agent Member to deliver such shares
against payment therefor, partial deliveries of shares of Municipal Preferred
that have been made in respect of Potential Holders' or Potential Beneficial
Owners' Submitted Bids for shares of such series that have been accepted in
whole or in part shall constitute good delivery to such Potential Holders and
Potential Beneficial Owners.

        (g) Neither the Trust nor the Auction Agent nor any affiliate of either
shall have any responsibility or liability with respect to the failure of an
Existing Holder, a Potential Holder, a Beneficial Owner, a Potential Beneficial
Owner or its respective Agent Member to deliver shares of Municipal Preferred
of any series or to pay for shares of Municipal Preferred of any series sold or
purchased pursuant to the Auction Procedures or otherwise.

        5. NOTIFICATION OF ALLOCATIONS. Except as noted below, whenever the
Trust intends to include any net capital gain or other income taxable for
federal income tax purposes in any dividend on shares of Municipal Preferred,
the Trust shall, in the case of a Minimum Rate Period or a Special Rate Period
of 28 Rate Period Days or fewer, and may, in the case of any other Special Rate
Period, notify the Auction Agent of the amount to be so included not later than
the Dividend Payment Date next preceding the Auction Date on which the
Applicable Rate for such dividend is to be established. Whenever the Auction
Agent receives such notice from the Trust, it will be required in turn to
notify each Broker-Dealer, who, on or prior to such Auction Date, in accordance
with its Broker-Dealer Agreement, will be required to notify its Beneficial
Owners and Potential Beneficial Owners of shares of Municipal Preferred
believed by it to be interested in submitting an Order in the Auction to be
held on such Auction Date. The Trust may also include such net capital gain or
other income taxable for federal income tax purposes in a dividend on shares of
Municipal Preferred without giving advance notice if the dividend is increased
by a Gross-Up Payment. The Trust must notify the Auction Agent of the amount
not later than the Dividend Payment Date next preceding the next Auction Date.

        6. AUCTION AGENT. For so long as any shares of Municipal Preferred are
outstanding, the Auction Agent, duly appointed by the Trust to so act, shall be
in each case a commercial bank, trust company or other financial institution
independent of the Trust and its affiliates (which however, may engage or have
engaged in business transactions with the Trust or its affiliates) and at no
time shall the Trust or any of its affiliates act as the Auction Agent in
connection with the Auction Procedures. If the Auction Agent resigns or for any
reason its appointment is terminated during any period that any shares of
Municipal Preferred are outstanding, the Board of Trustees shall use its best
efforts promptly thereafter to appoint another qualified commercial bank, trust
company or financial institution to act as the Auction Agent. The Auction
Agent's registry of Existing Holders of shares of a series of Municipal

<PAGE>

Preferred shall be conclusive and binding on the Broker-Dealers. A
Broker-Dealer may inquire of the Auction Agent between 3:00 p.m. on the
Business Day preceding an Auction for shares of a series of Municipal Preferred
and 9:30 a.m. on the Auction Date for such Auction to ascertain the number of
shares of a series in respect of which the Auction Agent has determined such
Broker-Dealer to be an Existing Holder. If such Broker-Dealer believes it is
the Existing Holder of fewer shares of such series than specified by the
Auction Agent in response to such Broker-Dealer's inquiry, such Broker-Dealer
may so inform the Auction Agent of that belief. Such Broker-Dealer shall not,
in its capacity as Existing Holder of shares of such series, submit Orders in
such Auction in respect of shares of such series covering in the aggregate more
than the number of shares of such series specified by the Auction Agent in
response to such Broker-Dealer's inquiry.

        7. TRANSFER OF SHARES OF MUNICIPAL PREFERRED. Unless otherwise
permitted by the Trust, a Beneficial Owner or an Existing Holder may sell,
transfer or otherwise dispose of shares of Municipal Preferred only in whole
shares and only pursuant to a Bid or Sell Order placed with the Auction Agent
in accordance with the procedures described herein or to a Broker-Dealer;
provided, however, that (a) a sale, transfer or other disposition of shares of
Municipal Preferred from a customer of a Broker-Dealer who is listed on the
records of that Broker-Dealer as the holder of such shares to that
Broker-Dealer or another customer of that Broker-Dealer shall not be deemed to
be a sale, transfer or other disposition for purposes of this paragraph 7 if
such Broker-Dealer remains the Existing Holder of the shares so sold,
transferred or disposed of immediately after such sale, transfer or disposition
and (b) in the case of all transfers other than pursuant to Auctions, the
Broker-Dealer (or other Person, if permitted by the Trust) to whom such
transfer is made shall advise the Auction Agent of such transfer.

        8. GLOBAL CERTIFICATE. Prior to the commencement of a Voting Period,
(i) all of the shares of a series of Municipal Preferred outstanding from time
to time shall be represented by one global certificate registered in the name
of the Securities Depository or its nominee and (ii) no registration of
transfer of shares of a series of Municipal Preferred shall be made on the
books of the Trust to any Person other than the Securities Depository or its
nominee.


<PAGE>


                                   APPENDIX D

                             SETTLEMENT PROCEDURES

        Capitalized terms used herein have the respective meanings specified in
the forepart of the Prospectus or the Glossary included in the Prospectus, as
the case may be.

        (a) On each Auction Date for shares of Municipal Preferred, the Auction
Agent shall notify by telephone the Broker-Dealers that participated in the
Auction held on such Auction Date and submitted an Order to the Auction Agent
as or on behalf of an Existing Holder or Potential Holder of:

               (i) the Applicable Rate fixed for the next Rate Period;

               (ii) whether Sufficient Clearing Bids existed for the
        determination of the Applicable Rate;

               (iii) if such Broker-Dealer submitted a Bid or a Sell Order to
        the Auction Agent as or on behalf of an Existing Holder, whether such
        Bid or Sell Order was accepted or rejected, in whole or in part, and
        the number of shares, if any, of Municipal Preferred then outstanding
        to be sold by such Existing Holder;

               (iv) if such Broker-Dealer submitted a Bid to the Auction Agent
        as or on behalf of a Potential Holder, whether such Bid was accepted or
        rejected, in whole or in part, and the number of shares, if any, of
        Municipal Preferred to be purchased by such Potential Holder;

               (v) if the aggregate number of shares of Municipal Preferred to
        be sold by all Existing Holders with respect to whom such Broker-Dealer
        submitted Bids or Sell Orders to the Auction Agent is different than
        the aggregate number of shares of Municipal Preferred to be purchased
        by all Potential Holders with respect to whom such Broker-Dealer
        submitted Bids to the Auction Agent, the name or names of one or more
        other Broker-Dealers (and the Agent Member, if any, of each such other
        Broker-Dealer) and the number of shares of Municipal Preferred to be
        (x) purchased from one or more Existing Holders with respect to whom
        such other Broker-Dealers submitted Bids or Sell Orders to the Auction
        Agent, or (y) sold to one or more Potential Holders with respect to
        whom such other Broker-Dealers submitted Bids to the Auction Agent; and

               (vi) the scheduled Auction Date of the next succeeding Auction
        for shares of Municipal Preferred.

        (b) On each Auction Date for shares of Municipal Preferred, each
Broker-Dealer that submitted an Order to the Auction Agent as or on behalf of
any Existing Holder or Potential Holder shall:

               (i) advise each Existing Holder and Potential Holder (and each
        Beneficial Owner and Potential Beneficial Owner) with respect to whom
        such Broker-Dealer submitted a Bid or Sell Order to the Auction Agent
        whether such Bid or Sell Order was accepted or rejected, in whole or in
        part;

               (ii) instruct each Potential Holder (and each Potential
        Beneficial Owner) with respect to whom such Broker-Dealer submitted a
        Bid to the Auction Agent that was accepted, in whole or in part, to
        instruct such Bidder's Agent Member to pay to such Broker-Dealer (or
        its Agent Member) through the Securities Depository the amount
        necessary to purchase the number of shares of Municipal Preferred to be
        purchased pursuant to such Bid against receipt of such shares;


<PAGE>

               (iii) instruct each Existing Holder (and each Beneficial Owner)
        with respect to whom such Broker-Dealer submitted a Bid to the Auction
        Agent that was accepted, in whole or in part, or a Sell Order that was
        accepted, in whole or in part, to instruct such Bidder's Agent Member
        to deliver to such Broker-Dealer (or its Agent Member) through the
        Securities Depository the number of shares of Municipal Preferred to be
        sold pursuant to such Bid or Sell Order against payment therefor;

               (iv) advise each Existing Holder (and each Beneficial Owner)
        with respect to whom such Broker-Dealer submitted an Order to the
        Auction Agent and each Potential Holder (and each Potential Beneficial
        Owner) with respect to whom such Broker-Dealer submitted a Bid to the
        Auction Agent of the Applicable Rate for the next succeeding Rate
        Period;

               (v) advise each Existing Holder (and each Beneficial Owner) with
        respect to whom such Broker-Dealer submitted an Order to the Auction
        Agent of the Auction Date of the next succeeding Auction; and

               (vi) advise each Potential Holder (and each Potential Beneficial
        Owner) with respect to whom such Broker-Dealer submitted a Bid to the
        Auction Agent that was accepted, in whole or in part, of the Auction
        Date of the next succeeding Auction for Municipal Preferred.

        (c) On the basis of the information provided to it pursuant to
paragraph (a) above, each Broker-Dealer that submitted a Bid or Sell Order to
the Auction Agent for any shares of Municipal Preferred shall allocate any
funds received by it (or its Agent Member) in respect of such shares pursuant
to paragraph (b)(ii) above and any shares of Municipal Preferred received by it
(or its Agent Member) pursuant to paragraph (b)(iii) above among the Potential
Holders and Potential Beneficial Owners, if any, with respect to whom such
Broker-Dealer submitted Bids to the Auction Agent for such shares, the Existing
Holders and Beneficial Owners, if any, with respect to whom such Broker-Dealer
submitted Bids or Sell Orders to the Auction Agent for such shares, and any
Broker-Dealers identified to it by the Auction Agent pursuant to paragraph
(a)(v) above.

        (d) On the Business Day after the Auction Date, the Securities
Depository shall execute the transactions described above, debiting and
crediting the accounts of the respective Agent Members as necessary to effect
the purchases and sales of shares of Municipal Preferred as determined in the
Auction for shares of Municipal Preferred.

<PAGE>


                                   APPENDIX E

                 RATING AGENCY FUTURES AND OPTIONS RESTRICTIONS

        The following restrictions will be set forth in the Statement creating
the preferred shares (the "Statement") of the Trust. The terms not defined
below are defined in the Glossary, the Prospectus, the Statement of Additional
Information or the Statement, filed as an exhibit to the Registration Statement
of the Trust. Reference is made to the Statement for the full text of the
rating agency restrictions on futures and options transactions and certain
other actions or investments by the Trust.

        (a) For so long as any Municipal Preferred are rated by Standard &
Poor's or Moody's, the Trust will not purchase or sell futures contracts,
write, purchase or sell options on futures contracts or write put options
(except covered put options) or call options (except covered call options) on
portfolio securities unless it receives written confirmation from Standard &
Poor's or Moody's, or both, as the case may be, that engaging in such
transactions will not impair the ratings then assigned to the Municipal
Preferred by Standard & Poor's or Moody's, or both, except that the Trust may
purchase or sell futures contracts based on the Bond Buyer Municipal Bond Index
(the "Municipal Index") or United States Treasury Bonds or Notes ("Treasury
Bonds") and write, purchase or sell put and call options on such contracts
(collectively, "Hedging Transactions"), subject to the following limitations:

               (i) the Trust will not engage in any Hedging Transaction based
        on the Municipal Index (other than transactions which terminate a
        futures contract or option held by the Trust by the Trust's taking an
        opposite position thereto ("Closing Transactions")), which would cause
        the Trust at the time of such transaction to own or have sold the least
        of (A) more than 1,000 outstanding futures contracts based on the
        Municipal Index, (B) outstanding futures contracts based on the
        Municipal Index exceeding in number 25% of the quotient of the Market
        Value of the Trust's total assets divided by $1,000 or (C) outstanding
        futures contracts based on the Municipal Index exceeding in number 10%
        of the average number of daily open interest futures contracts based on
        the Municipal Index in the 30 days preceding the time of effecting such
        transaction as reported by The Wall Street Journal.

               (ii) the Trust will not engage in any Hedging Transaction based
        on Treasury Bonds (other than Closing Transactions) which would cause
        the Trust at the time of such transaction to own or have sold the
        lesser of (A) outstanding futures contracts based on Treasury Bonds
        exceeding in number 50% of the quotient of the Market Value of the
        Trust's total assets divided by $100,000 ($200,000 in the case of the
        two-year United States Treasury Note) or (B) outstanding futures
        contracts based on Treasury Bonds exceeding in number 10% of the
        average number of daily open interest futures contracts based on
        Treasury Bonds in the 30 days preceding the time of effecting such
        transaction as reported by The Wall Street Journal;

               (iii) the Trust will engage in Closing Transactions to close out
        any outstanding futures contract which the Trust owns or has sold or
        any outstanding option thereon owned by the Trust in the event (A) the
        Trust does not have Standard & Poor's Eligible Assets or Moody's
        Eligible Assets, as the case may be, with an aggregate Discounted Value
        equal to or greater than the Municipal Preferred Basic Maintenance
        Amount on two consecutive Valuation Dates and (B) the Trust is required
        to pay Variation Margin on the second such Valuation Date;

               (iv) the Trust will engage in a Closing Transaction to close out
        any outstanding futures contract or option thereon in the month prior
        to the delivery month under the terms of such futures contract or
        option thereon unless the Trust holds the securities deliverable under
        such terms; and


<PAGE>

               (v) when the Trust writes a futures contract or option thereon,
        it will either maintain an amount of cash, cash equivalents or high
        grade (rated A or better by Standard & Poor's or Moody's, as the case
        may be), fixed-income securities in a segregated account with the
        Trust's custodian, so that the amount so segregated plus the amount of
        Initial Margin and Variation Margin held in the account of or on behalf
        of the Trust's broker with respect to such futures contract or option
        equals the Market Value of the futures contract or option, or, in the
        event the Trust writes a futures contract or option thereon which
        requires delivery of an underlying security, it shall hold such
        underlying security in its portfolio.

        For purposes of determining whether the Trust has Standard & Poor's
Eligible Assets or Moody's Eligible Assets, as the case may be, with a
Discounted Value that equals or exceeds the Municipal Preferred Basic
Maintenance Amount, the Discounted Value of cash or securities held for the
payment of Initial Margin or Variation Margin shall be zero and the aggregate
Discounted Value of Standard & Poor's Eligible Assets or Moody's Eligible
Assets, as the case may be, shall be reduced by an amount equal to (I) 30% of
the aggregate settlement value, as marked to market, of any outstanding futures
contracts based on the Municipal Index which are owned by the Trust plus (II)
25% of the aggregate settlement value, as marked to market, of any outstanding
futures contracts based on Treasury Bonds which contracts are owned by the
Trust.


<PAGE>


                                     PART C

OTHER INFORMATION

Item 24.       Financial Statements and Exhibits

        (1)  Financial Statements:

               Included in Part A

               Financial Highlights

               Included in Part B

               Included in Part B are the financial statements contained in the
               Registrant's Annual Report dated October 31, 1999 (which were
               previously filed electronically pursuant to Section 30(b)(2) of
               the Investment Company Act of 1940 - Accession Number:
               0000950146-00-000009); and the financial statements contained in
               the Registrant's Semi-Annual Report dated April 30, 2000 (which
               were previously filed electronically pursuant to Section
               30(b)(2) of the Investment Company Act of 1940 - Accession
               Number: 0000950156-00-000321).

               The Financial Statements contained in Part B are as follows:

               Investment Portfolio, October 31, 1999; Statement of Assets and
               Liabilities, October 31, 1999; Statement of Operations, October
               31, 1999; Statement of Changes in Net Assets, years ended
               October 31, 1998 and 1999; Notes to Financial Statements;
               Financial Highlights; Report of Independent Accountants.

               Investment Portfolio, April 30, 2000; Statement of Assets and
               Liabilities, April 30, 2000; Statement of Operations, April 30,
               2000; Statement of Changes in Net Assets, six months ended April
               30, 2000 and year ended October 31, 1999; Notes to Financial
               Statements; Financial Highlights.

        (2)  Exhibits
               (a)(1)  Form of Amended and Restated Declaration of Trust
               (a)(2)  Statement Creating the Municipal Preferred shares
               (b)     Amended and Restated By-Laws dated December 21, 1994
                       (previously filed as Exhibit (b)(2) to Amendment No. 8
                       to the Registrant's Registration Statement on Form N-2
                       filed with the Securities and Exchange Commission on
                       February 28, 1995 ("Amendment No. 8") and incorporated
                       herein by reference).
               (c)     Not applicable
               (d)(1)  Portions of the Amended and Restated Declaration of
                       Trust, included as Exhibit (a)(1), Statement Creating
                       the Municipal Preferred shares, included as Exhibit
                       (a)(2), and the Amended and Restated By-Laws of the
                       Registrant, included as Exhibit (b)
               (d)(2)  Form of specimen certificate for the municipal auction
                       rate cumulative preferred shares
               (e)     The section "Dividend Reinvestment and Cash Purchase
                       Plan" in the Registrant's Annual Report to
                       its Shareholders, for its fiscal year ended October 31,
                       1999 (incorporated herein by reference)

<PAGE>

               (f)     Not applicable
               (g)(1)  Investment Advisory Agreement with Massachusetts
                       Financial Services Company (previously filed
                       as Exhibit (g)(1) to Amendment No. 9 to the Registrant's
                       Registration Statement on Form N-2 filed with the
                       Securities and Exchange Commission on January 27, 1998
                       ("Amendment No. 9") and incorporated herein by reference)
               (g)(2)  Master Administrative Services Agreement dated March 1,
                       1997, as amended and restated April 1, 1999, by and
                       among Massachusetts Financial Services Company and the
                       Registrant (incorporated by reference to MFS Series
                       Trust III (File Nos. 2-60491 and 811-2794)
                       Post-Effective Amendment No.
                       28 filed with the SEC via EDGAR on March 30, 1999)
               (h)     Form of Underwriting Agreement with Salomon Smith Barney
                       Inc. to be filed by amendment
               (i)     Form of Retirement Plan for Non-Interested Person
                       Trustees, as amended and restated February 17, 1999
                       (incorporated by reference to MFS Growth Opportunities
                       Fund (File Nos. 2-36431 and 811-2032) Post-Effective
                       Amendment No. 29 filed with the SEC via EDGAR on
                       February 26, 1999)
               (j)(1)  Custodian Agreement between the Registrant and State
                       Street Bank and Trust Company (previously filed as
                       Exhibit (j)(1) to Amendment No. 9 and incorporated herein
                       by reference)
               (j)(2)  Amendments to the Custodian Agreement between the
                       Registrant and State Street Bank and Trust Company
                       (previously filed as Exhibits (j)(1)-(4) to Amendment
                       No. 9 and incorporated herein by reference)
               (k)(1)  Form of Auction Agency Agreement to be filed by
                       amendment.
               (k)(2)  Form of Broker-Dealer Agreement to be filed by amendment.
               (k)(3)  Loan Agreement by and among the Banks named therein, and
                       The First National Bank of Boston, and the MFS Funds
                       named therein (previously filed as Exhibit (k)(3) to
                       Amendment No. 8 and incorporated herein by reference)
               (k)(4)  Registrar, Transfer Agency and Service Agreement between
                       Registrant and MFS Service Center, Inc., dated August
                       15, 1994 (previously filed as Exhibit (k)(2) to
                       Amendment No. 8 and incorporated herein by reference)
               (l)     Opinion and consent of Bingham Dana LLP, counsel to
                       Registrant, to be filed by amendment
               (m)     Not applicable
               (n)     Consent of independent accountants
               (o)     Not applicable
               (p)     Not applicable
               (q)     Not applicable
               (r)     Codes of Ethics under rule 17j-1 of the Investment
                       Company Act of 1940 of the Registrant and the
                       Registrant's adviser, Massachusetts Financial Services
                       Company (incorporated by reference to Massachusetts
                       Investors Growth Stock Fund (File Nos. 2-14677 and
                       811-859) Post-Effective Amendment No. 67 filed with the
                       SEC via EDGAR on March 29, 2000)
               (s)     Powers of Attorney.


Item 25.         Marketing Arrangements.
                 Contained in the Underwriting Agreement to be filed by
                 amendment.

Item 26.         Other Expenses of Issuance and Distribution.
                 The following table sets forth the expenses to be incurred in

<PAGE>

                 connection with the Offer described in this Registration
                 Statement:

                 Underwriter fee                                  *
                 Registration fees                                *
                 Printing                                         *
                 Accounting fees and expenses                     *
                 Legal fees and  expenses                         *
                 Miscellaneous                                    *
                 Total                                            *

               -----------------------
               *  To be filed by amendment.

Item 27.         Persons Controlled by or under Common Control with Registrant.

                 None.

Item 28.         Number of Holders of Securities

                                                       Number of Record Holders
                 Title of Class                            as of July 17, 2000

                 Shares of Beneficial Interest                  20,554
                 Municipal Auction Rate Cumulative
                       Preferred Shares                          -0-

Item 29.         Indemnification.

                 Article V of the Registrant's Declaration of Trust provides
                 that the Registrant will indemnify its Trustees and officers
                 against liabilities and expenses incurred in connection with
                 litigation in which they may be involved because of their
                 offices with the Registrant, unless as to liabilities to the
                 Registrant or its shareholders, it is finally adjudicated that
                 they engaged in willful misfeasance, bad faith, gross
                 negligence or reckless disregard of the duties involved in
                 their offices, or with respect to any matter unless it is
                 adjudicated that they did not act in good faith in the
                 reasonable belief that their actions were in the best interest
                 of the Registrant. In the case of a settlement, such
                 indemnification will not be provided unless it has been
                 determined in accordance with the Declaration of Trust that
                 such officers or Trustees have not engaged in misfeasance, bad
                 faith, gross negligence or reckless disregard of the duties
                 involved in their offices.

                 The Trustees and officers of the Registrant and the personnel
                 of the Investment Adviser are insured under an errors and
                 omissions liability insurance policy. The Registrant and its
                 officers are also insured under the fidelity bond required by
                 Rule 17g-1 under the Investment Company Act of 1940.




<PAGE>



Item 30.         Business and Other Connections of Adviser.

                                MFS serves as investment adviser to the
                 following open-end Funds comprising the MFS Family of Funds
                 (except the Vertex Funds mentioned below): Massachusetts
                 Investors Trust, Massachusetts Investors Growth Stock Fund,
                 MFS Growth Opportunities Fund, MFS Government Securities Fund,
                 MFS Government Limited Maturity Fund, MFS Series Trust I
                 (which has ten series: MFS Managed Sectors Fund, MFS Cash
                 Reserve Fund, MFS Global Asset Allocation Fund, MFS Strategic
                 Growth Fund, MFS Research Growth and Income Fund, MFS Core
                 Growth Fund, MFS Equity Income Fund, MFS New Discovery Fund,
                 MFS Science and Technology Fund and MFS Research International
                 Fund), MFS Series Trust II (which has four series: MFS
                 Emerging Growth Fund, MFS Large Cap Growth Fund, MFS
                 Intermediate Income Fund and MFS Charter Income Fund), MFS
                 Series Trust III (which has three series: MFS High Income
                 Fund, MFS Municipal High Income Fund and MFS High Yield
                 Opportunities Fund), MFS Series Trust IV (which has four
                 series: MFS Money Market Fund, MFS Government Money Market
                 Fund, MFS Municipal Bond Fund and MFS Mid Cap Growth Fund),
                 MFS Series Trust V (which has five series: MFS Total Return
                 Fund, MFS Research Fund, MFS International Opportunities Fund,
                 MFS International Strategic Growth Fund and MFS International
                 Value Fund), MFS Series Trust VI (which has three series: MFS
                 Global Total Return Fund, MFS Utilities Fund and MFS Global
                 Equity Fund), MFS Series Trust VII (which has two series: MFS
                 Global Governments Fund and MFS Capital Opportunities Fund),
                 MFS Series Trust VIII (which has two series: MFS Strategic
                 Income Fund and MFS Global Growth Fund), MFS Series Trust IX
                 (which has eight series: MFS Bond Fund, MFS Limited Maturity
                 Fund, MFS Municipal Limited Maturity Fund, MFS Research Bond
                 Fund, MFS Intermediate Investment Grade Bond Fund, MFS Mid Cap
                 Value Fund, MFS Large Cap Value Fund and MFS High Quality Bond
                 Fund), MFS Series Trust X (which has ten series: MFS
                 Government Mortgage Fund, MFS Emerging Markets Equity Fund,
                 MFS International Growth Fund, MFS International Growth and
                 Income Fund, MFS Strategic Value Fund, MFS Emerging Markets
                 Debt Fund, MFS Income Fund, MFS European Equity Fund, MFS High
                 Yield Fund and MFS Concentrated Growth Fund), MFS Series Trust
                 XI (which has four series: MFS Union Standard Equity Fund,
                 Vertex All Cap Fund, Vertex Contrarian Fund and Vertex Income
                 Fund), and MFS Municipal Series Trust (which has 18 series:
                 MFS Alabama Municipal Bond Fund, MFS Arkansas Municipal Bond
                 Fund, MFS California Municipal Bond Fund, MFS Florida
                 Municipal Bond Fund, MFS Georgia Municipal Bond Fund, MFS
                 Maryland Municipal Bond Fund, MFS Massachusetts Municipal Bond
                 Fund, MFS Mississippi Municipal Bond Fund, MFS New York
                 Municipal Bond Fund, MFS North Carolina Municipal Bond Fund,
                 MFS Pennsylvania Municipal Bond Fund, MFS South Carolina
                 Municipal Bond Fund, MFS Tennessee Municipal Bond Fund, MFS
                 Virginia Municipal Bond Fund, MFS West Virginia Municipal Bond
                 Fund, MFS Municipal Income Fund, MFS New York High Income Tax
                 Free Fund and MFS Massachusetts High Income Tax Free Fund)
                 (the "MFS Funds"). The principal business address of each of
                 the MFS Funds is 500 Boylston Street, Boston, Massachusetts
                 02116.

                        MFS also serves as investment adviser of the following
                 open-end Funds: MFS Institutional Trust ("MFSIT") (which has
                 nine series) and MFS Variable Insurance Trust ("MVI") (which
                 has sixteen series). The principal business address of each of
                 the aforementioned funds is 500 Boylston Street, Boston,
                 Massachusetts 02116.


<PAGE>

                        In addition, MFS serves as investment adviser to the
                 following closed-end funds: MFS Municipal Income Trust, MFS
                 Multimarket Income Trust, MFS Government Markets Income Trust,
                 MFS Intermediate Income Trust, MFS Charter Income Trust and
                 MFS Special Value Trust (the "MFS Closed-End Funds"). The
                 principal business address of each of the MFS Closed-End Funds
                 is 500 Boylston Street, Boston, Massachusetts 02116.

                        Lastly, MFS serves as investment adviser to MFS/Sun
                 Life Series Trust ("MFS/SL") (which has 26 series), Money
                 Market Variable Account, High Yield Variable Account, Capital
                 Appreciation Variable Account, Government Securities Variable
                 Account, Global Governments Variable Account, Total Return
                 Variable Account and Managed Sectors Variable Account
                 (collectively, the "Accounts"). The principal business address
                 of MFS/SL is 500 Boylston Street, Boston, Massachusetts 02116.
                 The principal business address of each of the aforementioned
                 Accounts is One Sun Life Executive Park, Wellesley Hills,
                 Massachusetts 02181.

                        VERTEX INVESTMENT MANAGEMENT, INC., a Delaware
                 corporation and a wholly owned subsidiary of MFS, whose
                 principal business address is 500 Boylston Street, Boston,
                 Massachusetts 02116 ("Vertex"), serves as investment adviser
                 to Vertex All Cap Fund, Vertex Contrarian Fund and Vertex
                 Income Fund, each a series of MFS Series Trust XI. The
                 principal business address of the aforementioned Funds is 500
                 Boylston Street, Boston, Massachusetts 02116.

                        MFS INTERNATIONAL LTD. ("MIL"), a limited liability
                 company organized under the laws of Bermuda and a subsidiary
                 of MFS, whose principal business address is Cedar House, 41
                 Cedar Avenue, Hamilton HM12 Bermuda, serves as investment
                 adviser to and distributor for MFS American Funds known as the
                 MFS Funds after January 1999 (which will have 11 portfolios as
                 of January 1999): U.S. Equity Fund, U.S. Emerging Growth Fund,
                 U.S. High Yield Bond Fund, U.S. Dollar Reserve Fund, Charter
                 Income Fund, U.S. Research Fund, U.S. Strategic Growth Fund,
                 Global Equity Fund, European Equity Fund and European
                 Corporate Bond Fund) (the "MIL Funds"). The MIL Funds are
                 organized in Luxembourg and qualify as an undertaking for
                 collective investments in transferable securities (UCITS). The
                 principal business address of the MIL Funds is 47, Boulevard
                 Royal, L-2449 Luxembourg. MIL also serves as investment
                 adviser to and distributor for MFS Meridian U.S. Government
                 Bond Fund, MFS Meridian Charter Income Fund, MFS Meridian
                 Global Governments Fund, MFS Meridian U.S. Emerging Growth
                 Fund, MFS Meridian Global Equity Fund, MFS Meridian Limited
                 Maturity Fund, MFS Meridian Global Growth Fund, MFS Meridian
                 Money Market Fund, MFS Meridian Global Balanced Fund, MFS
                 Meridian U.S. Equity Fund, MFS Meridian Research Fund, MFS
                 Meridian U.S. High Yield Fund, MFS Meridian Emerging Markets
                 Debt Fund, MFS Meridian Strategic Growth Fund and MFS Meridian
                 Global Asset Allocation Fund and the MFS Meridian Research
                 International Fund (collectively the "MFS Meridian Funds").
                 Each of the MFS Meridian Funds is organized as an exempt
                 company under the laws of the Cayman Islands. The principal
                 business address of each of the MFS Meridian Funds is P.O. Box
                 309, Grand Cayman, Cayman Islands, British West Indies.

                        MFS INTERNATIONAL (U.K.) LTD. ("MIL-UK"), a private
                 limited company registered with the Registrar of Companies for

<PAGE>

                 England and Wales whose current address is Eversheds, Senator
                 House, 85 Queen Victoria Street, London, England EC4V 4JL, is
                 involved primarily in marketing and investment research
                 activities with respect to private clients and the MIL Funds
                 and the MFS Meridian Funds.

                        MFS INSTITUTIONAL ADVISORS (AUSTRALIA) LTD.
                 ("MFSI-AUSTRALIA"), a private limited company organized under
                 the Corporations Law of New South Wales, Australia whose
                 current address is Level 27, Australia Square, 264 George
                 Street, Sydney, NSW2000, Australia, is involved primarily in
                 investment management and distribution of Australian
                 superannuation unit trusts and acts as an investment adviser
                 to institutional accounts.

                        MFS HOLDINGS AUSTRALIA PTY LTD. ("MFS HOLDINGS
                 AUSTRALIA"), a private limited company organized pursuant to
                 the Corporations Law of New South Wales, Australia whose
                 current address is Level 27, Australia Square, 264 George
                 Street, Sydney, NSW2000 Australia, and whose function is to
                 serve primarily as a holding company.

                        MFS FUND DISTRIBUTORS, INC. ("MFD"), a wholly owned
                 subsidiary of MFS, serves as distributor for the MFS Funds,
                 MVI and MFSIT.

                        MFS SERVICE CENTER, INC. ("MFSC"), a wholly owned
                 subsidiary of MFS, serves as shareholder servicing agent to
                 the MFS Funds, the MFS Closed-End Funds, MFSIT and MVI.

                        MFS INSTITUTIONAL ADVISORS, INC. ("MFSI"), a wholly
                 owned subsidiary of MFS, provides investment advice to
                 substantial private clients.

                        MFS RETIREMENT SERVICES, INC. ("RSI"), a wholly owned
                 subsidiary of MFS, markets MFS products to retirement plans
                 and provides administrative and record keeping services for
                 retirement plans.

                        MASSACHUSETTS INVESTMENT MANAGEMENT CO., LTD.
                 ("MIMCO"), a wholly owned subsidiary of MFS, is a corporation
                 incorporated in Japan. MIMCO, whose address is Kamiyacho-Mori
                 Building, 3-20, Tranomon 4-chome, Minato-ku, Tokyo, Japan, is
                 involved in investment management activities.

                        MFS HERITAGE TRUST COMPANY ("MFS TRUST"), a New
                 Hampshire-chartered limited-purpose trust company whose
                 current address is 650 Elm Street, Suite 404, Manchester, NH
                 03101, provides directed trustee services to retirement plans.

                        MFS ORIGINAL RESEARCH PARTNERS, LLC, a Delaware limited
                 liability company and a wholly owned subsidiary of MFS whose
                 address is 500 Boylston Street, Boston, Massachusetts 02116,
                 is an adviser to domestic pooled private investment vehicles.

                        MFS ORIGINAL RESEARCH ADVISORS, LLC, a Delaware limited
                 liability company and a wholly owned subsidiary of MFS whose
                 address is 500 Boylston Street, Boston, Massachusetts 02116,
                 is an adviser to offshore pooled private investment vehicles.
                 MFS


<PAGE>

                        The Directors of MFS are Jeffrey L. Shames, Arnold D.
                 Scott, John W. Ballen, Kevin R. Parke, Thomas J. Cashman, Jr.,
                 Joseph W. Dello Russo, William W. Scott, Donald A. Stewart,
                 James Prieur and William W. Stinson. Mr. Shames is the
                 Chairman and Chief Executive Officer, Mr. Ballen is President
                 and Chief Investment Officer, Mr. Arnold Scott is a Senior
                 Executive Vice President, Mr. William Scott, Mr. Cashman, Mr.
                 Dello Russo and Mr. Parke are Executive Vice Presidents (Mr.
                 Dello Russo is also Chief Financial Officer and Chief
                 Administrative Officer and Mr. Parke is also Chief Equity
                 Officer), Stephen E. Cavan is a Senior Vice President, General
                 Counsel and Secretary of MFS, Robert T. Burns is a Senior Vice
                 President, Associate General Counsel and an Assistant
                 Secretary of MFS, and Thomas B. Hastings is a Vice President
                 and Treasurer of MFS.


                                MASSACHUSETTS INVESTORS TRUST
                                MASSACHUSETTS INVESTORS GROWTH STOCK FUND
                                MFS GROWTH OPPORTUNITIES FUND
                                MFS GOVERNMENT SECURITIES FUND
                                MFS SERIES TRUST I
                                MFS SERIES TRUST V
                                MFS SERIES TRUST VI
                                MFS SERIES TRUST X
                                MFS GOVERNMENT LIMITED MATURITY FUND

                        Jeffrey L. Shames is Chairman and President, Stephen E.
                 Cavan is the Clerk and Secretary, James O. Yost, a Senior Vice
                 President of MFS, is the Treasurer, Ellen M. Moynihan and Mark
                 E. Bradley, Vice Presidents of MFS, are the Assistant
                 Treasurers, James R. Bordewick, Jr., Senior Vice President and
                 Associate General Counsel of MFS, is the Assistant Clerk and
                 Assistant Secretary.

                                MFS SERIES TRUST II

                        Jeffrey L. Shames is Chairman and President, Stephen E.
                 Cavan is the Clerk and Secretary, James O. Yost is the
                 Treasurer, Ellen M. Moynihan and Mark E. Bradley are the
                 Assistant Treasurers, and James R. Bordewick, Jr. is the
                 Assistant Clerk and Assistant Secretary.

                                MFS GOVERNMENT MARKETS INCOME TRUST
                                MFS INTERMEDIATE INCOME TRUST

                        Jeffrey L. Shames is Chairman and President, Stephen E.
                 Cavan is the Clerk and Secretary, James O. Yost is the
                 Treasurer, Ellen M. Moynihan and Mark E. Bradley are the
                 Assistant Treasurers, and James R. Bordewick, Jr. is the
                 Assistant Clerk and Assistant Secretary.

                                MFS SERIES TRUST III

                        Jeffrey L. Shames is Chairman and President, Stephen E.
                 Cavan is the Clerk and Secretary, James O. Yost is the
                 Treasurer, Ellen M. Moynihan and Mark E. Bradley are the
                 Assistant Treasurers, and James R. Bordewick, Jr. is the
                 Assistant Clerk and Assistant Secretary.


<PAGE>

                                MFS SERIES TRUST IV
                                MFS SERIES TRUST IX

                        Jeffrey L. Shames is Chairman and President, Stephen E.
                 Cavan is the Clerk and Secretary, James O. Yost is the
                 Treasurer, Ellen M. Moynihan and Mark E. Bradley are the
                 Assistant Treasurers and James R. Bordewick, Jr. is the
                 Assistant Clerk and Assistant Secretary.

                                MFS SERIES TRUST VII

                        Jeffrey L. Shames is Chairman and President, Stephen E.
                 Cavan is the Clerk and Secretary, James O. Yost is the
                 Treasurer, Ellen M. Moynihan and Mark E. Bradley are the
                 Assistant Treasurers and James R. Bordewick, Jr. is the
                 Assistant Clerk and Assistant Secretary.

                                MFS SERIES TRUST VIII

                        Jeffrey L. Shames is Chairman and President, Stephen E.
                 Cavan is the Clerk and Secretary, James O. Yost is the
                 Treasurer, Ellen M. Moynihan and Mark E. Bradley are the
                 Assistant Treasurers and James R. Bordewick, Jr. is the
                 Assistant Clerk and Assistant Secretary.

                                MFS MUNICIPAL SERIES TRUST

                        Jeffrey L. Shames is Chairman and President, Stephen E.
                 Cavan is the Clerk and Secretary, James O. Yost is the
                 Treasurer, Ellen M. Moynihan and Mark E. Bradley are the
                 Assistant Treasurers and James R. Bordewick, Jr. is the
                 Assistant Clerk and Assistant Secretary.

                                MFS VARIABLE INSURANCE TRUST
                                MFS SERIES TRUST XI
                                MFS INSTITUTIONAL TRUST

                        Jeffrey L. Shames is the President and Chairman,
                 Stephen E. Cavan is the Clerk and Secretary, James O. Yost is
                 the Treasurer, Ellen M. Moynihan and Mark E. Bradley are the
                 Assistant Treasurers and James R. Bordewick, Jr. is the
                 Assistant Clerk and Assistant Secretary.

                                MFS MUNICIPAL INCOME TRUST

                        Jeffrey L. Shames is Chairman and President, Stephen E.
                 Cavan is the Clerk and Secretary, James O. Yost is the
                 Treasurer, Ellen M. Moynihan and Mark E. Bradley are the
                 Assistant Treasurers and James R. Bordewick, Jr. is the
                 Assistant Clerk and Assistant Secretary.

                                MFS MULTIMARKET INCOME TRUST
                                MFS CHARTER INCOME TRUST

                        Jeffrey L. Shames is Chairman and President, Stephen E.
                 Cavan is the Clerk and Secretary, James O. Yost is the

<PAGE>

                 Treasurer, Ellen M. Moynihan and Mark E. Bradley are the
                 Assistant Treasurers and James R. Bordewick, Jr. is the
                 Assistant Clerk and Assistant Secretary.

                                MFS SPECIAL VALUE TRUST

                        Jeffrey L. Shames is Chairman and President, Stephen E.
                 Cavan is the Clerk and Secretary, James O. Yost is the
                 Treasurer, Ellen M. Moynihan and Mark E. Bradley are the
                 Assistant Treasurers and James R. Bordewick, Jr. is the
                 Assistant Clerk and Assistant Secretary.

                                MFS/SUN LIFE SERIES TRUST

                                C. James Prieur, President and Director of Sun
                 Life Assurance Company of Canada, is the President, Stephen E.
                 Cavan is the Secretary, James O. Yost is the Treasurer, Ellen
                 M. Moynihan and Mark E. Bradley are the Assistant Treasurers
                 and James R. Bordewick, Jr., is the Assistant Secretary.

                                MONEY MARKET VARIABLE ACCOUNT
                                HIGH YIELD VARIABLE ACCOUNT
                                CAPITAL APPRECIATION VARIABLE ACCOUNT
                                GOVERNMENT SECURITIES VARIABLE ACCOUNT
                                TOTAL RETURN VARIABLE ACCOUNT
                                GLOBAL GOVERNMENTS VARIABLE ACCOUNT
                                MANAGED SECTORS VARIABLE ACCOUNT

                        C. James Prieur is the President, Stephen E. Cavan is
                 the Secretary, and James R. Bordewick, Jr., is the Assistant
                 Secretary.

                                MIL FUNDS

                        Jeffrey L. Shames is Chairman, Richard B. Bailey, John
                 A. Brindle, Richard W. S. Baker, Arnold D. Scott and William
                 F. Waters are Directors, Stephen E. Cavan is the Secretary,
                 James O. Yost is the Treasurer, Ellen M. Moynihan and Mark E.
                 Bradley are the Assistant Treasurers and James R. Bordewick,
                 Jr. is the Assistant Secretary.

                                MFS MERIDIAN FUNDS

                        Jeffrey L. Shames is Chairman, Richard B. Bailey, John
                 A. Brindle, Richard W. S. Baker, Arnold D. Scott and William
                 F. Waters are Directors, Stephen E. Cavan is the Secretary,
                 James O. Yost is the Treasurer, James R. Bordewick, Jr. is the
                 Assistant Secretary and Ellen M. Moynihan and Mark E. Bradley
                 are the Assistant Treasurers.

                                VERTEX

                        Jeffrey L. Shames is the Chairman and President, Arnold
                 D. Scott is a Director, Kevin R. Parke and John W. Ballen are
                 Executive Vice Presidents, John D. Laupheimer is a Senior Vice
                 President, Brian E. Stack is a Vice President, Joseph W. Dello
                 Russo is the Treasurer, Thomas B. Hastings is the Assistant
                 Treasurer, Stephen E. Cavan is the Secretary and Robert T.
                 Burns is the Assistant Secretary.


<PAGE>

                                MIL

                        Peter D. Laird is President and a Director, Arnold D.
                 Scott, Jeffrey L. Shames and Thomas J. Cashman, Jr. are
                 Directors, Stephen E. Cavan is a Director, Senior Vice
                 President and the Clerk, Robert T. Burns is an Assistant
                 Clerk, Joseph W. Dello Russo, Executive Vice President and
                 Chief Financial Officer of MFS, is the Treasurer and Thomas B.
                 Hastings is the Assistant Treasurer.

                                MIL-UK

                        Peter D. Laird is President and a Director, Thomas J.
                 Cashman, Arnold D. Scott and Jeffrey L. Shames are Directors,
                 Stephen E. Cavan is a Director and the Secretary, Joseph W.
                 Dello Russo is the Treasurer, Thomas B. Hastings is the
                 Assistant Treasurer and Robert T. Burns is the Assistant
                 Secretary.

                                MFSI - AUSTRALIA

                        Thomas J. Cashman, Jr. is President and a Director,
                 Graham E. Lenzer, John A. Gee and David Adiseshan are
                 Directors, Stephen E. Cavan is the Secretary, Joseph W. Dello
                 Russo is the Treasurer, Thomas B. Hastings is the Assistant
                 Treasurer, and Robert T. Burns is the Assistant Secretary.

                                MFS HOLDINGS - AUSTRALIA

                        Jeffrey L. Shames is the President and a Director,
                 Arnold D. Scott, Thomas J. Cashman, Jr., and Graham E. Lenzer
                 are Directors, Stephen E. Cavan is the Secretary, Joseph W.
                 Dello Russo is the Treasurer, Thomas B. Hastings is the
                 Assistant Treasurer, and Robert T. Burns is the Assistant
                 Secretary.

                                MFD

                        Arnold D. Scott and Jeffrey L. Shames are Directors,
                 William W. Scott, Jr., an Executive Vice President of MFS, is
                 the President, Stephen E. Cavan is the Secretary, Robert T.
                 Burns is the Assistant Secretary, Joseph W. Dello Russo is the
                 Treasurer, and Thomas B. Hastings is the Assistant Treasurer.

                               MFSC

                        Arnold D. Scott and Jeffrey L. Shames are Directors,
                 Joseph A. Recomendes, a Senior Vice President and Chief
                 Information Officer of MFS, is Vice Chairman and a Director,
                 Janet A. Clifford is the President, Joseph W. Dello Russo is
                 the Treasurer, Thomas B. Hastings is the Assistant Treasurer,
                 Stephen E. Cavan is the Secretary, and Robert T. Burns is the
                 Assistant Secretary.

                                MFSI

                        Thomas J. Cashman, Jr. is Chairman and a Director,
                 Jeffrey L. Shames, and Arnold D. Scott are Directors, Joseph
                 J. Trainor is the President and a Director, Leslie J. Nanberg
                 is a Senior Vice President, a Managing Director and a

<PAGE>

                 Director, Kevin R. Parke is the Executive Vice President and a
                 Managing Director, George F. Bennett, Jr., John A. Gee,
                 Brianne Grady, Joseph A. Kosciuszek and Joseph J. Trainor are
                 Senior Vice Presidents and Managing Directors, Joseph W. Dello
                 Russo is the Treasurer, Thomas B. Hastings is the Assistant
                 Treasurer and Robert T. Burns is the Secretary.

                                RSI

                        Arnold D. Scott is the Chairman and a Director, Martin
                 E. Beaulieu is the President, William W. Scott, Jr. is a
                 Director, Joseph W. Dello Russo is the Treasurer, Thomas B.
                 Hastings is the Assistant Treasurer, Stephen E. Cavan is the
                 Secretary and Robert T. Burns is the Assistant Secretary.

                                MIMCO

                        Jeffrey L. Shames, Arnold D. Scott and Mamoru Ogata are
                 Directors, Shaun Moran is the Representative Director, Joseph
                 W. Dello Russo is the Statutory Auditor, Robert DiBella is the
                 President and Thomas B. Hastings is the Assistant Statutory
                 Auditor.

                                MFS TRUST

                        The Directors of MFS Trust are Martin E. Beaulieu,
                 Stephen E. Cavan, Janet A. Clifford, Joseph W. Dello Russo and
                 Joseph A. Kosciuszek. Mr. Cavan is President, Mr. Dello Russo
                 is Treasurer, and Robert T. Burns is Clerk of MFS Trust.

                                MFS ORIGINAL RESEARCH PARTNERS, LLC

                        Joseph J. Trainor is the President and a Manager,
                 Jeffrey L. Shames, John W. Ballen and Kevin R. Parke are
                 Managers, Joseph W. Dello Russo is the Treasurer, Stephen E.
                 Cavan is the Secretary, Thomas B. Hastings is the Assistant
                 Treasurer and Robert T. Burns is the Assistant Secretary.

                                MFS ORIGINAL RESEARCH ADVISORS, LLC

                        Joseph J. Trainor is the President and a Manager,
                 Jeffrey L. Shames, John W. Ballen and Kevin R. Parke are
                 Managers, Joseph W. Dello Russo is the Treasurer, Stephen E.
                 Cavan is the Secretary, Thomas B. Hastings is the Assistant
                 Treasurer and Robert T. Burns is the Assistant Secretary.

                        In addition, the following persons, Directors or
                 officers of MFS, have the affiliations indicated:
<TABLE>
<CAPTION>
<S>                     <C>                           <C>

                        Donald A. Stewart              Chairman, Sun Life Assurance
                                                         Company of  Canada, Sun Life
                                                         Centre, 150 King Street
                                                         West, Toronto, Ontario,
                                                         Canada (Mr. Stewart is also
                                                         an officer and/or Director
                                                         of various subsidiaries and
                                                         affiliates of Sun Life)


<PAGE>

                                C. James Prieur        President and a Director, Sun
                                                         Life Assurance Company of
                                                         Canada, Sun Life Centre, 150
                                                         King Street West, Toronto,
                                                         Ontario, Canada (Mr. Prieur
                                                         is also an officer and/or
                                                         Director of various
                                                         subsidiaries and affiliates
                                                         of Sun Life)

                                William W. Stinson     Director, Sun Life Assurance
                                                         Company of Canada, Sun Life
                                                         Centre, 150 King Street
                                                         West, Toronto, Ontario,
                                                         Canada; Director, United
                                                         Dominion  ndustries Limited,
                                                         Charlotte, N.C.; Director,
                                                         PanCanadian  Petroleum
                                                         Limited, Calgary, Alberta;
                                                         Director, LWT Services,
                                                         Inc., Calgary Alberta;
                                                         Director, Western Star
                                                         Trucks, Inc., Kelowna,
                                                         British Columbia; Director,
                                                         Westshore Terminals Income
                                                         Fund, Vancouver, British
                                                         Columbia; Director (until
                                                         4/99), Canadian Pacific
                                                         Ltd., Calgary, Alberta
</TABLE>


Item 31.         Location of Accounts and Records:

                 Adviser:        Massachusetts Financial Services Company
                                 500 Boylston Street
                                 Boston, Massachusetts 02116

                 Custodian:      State Street Bank and Trust Company
                                 5-West
                                 North Quincy, Massachusetts 02171

                 Transfer Agent: MFS Service Center, Inc.
                 (for common     2 Avenue de Lafayette
                 shares)         Boston, Massachusetts 02111-1738


Item 32.         Management Services.
                 Not applicable.

Item 33.         Undertakings.

                 The undersigned Registrant hereby undertakes:

                 (1)  To suspend the offering of its preferred shares until it
                      amends its prospectus contained herein if (i) subsequent

<PAGE>

                      to the effective date of this Registration Statement, its
                      net asset value per share of beneficial interest declines
                      more than 10 percent from its net asset value per share
                      of beneficial interest as of the effective date of this
                      Registration Statement, or (ii) its net asset value per
                      share of beneficial interest increases to an amount
                      greater than its net proceeds as stated in the prospectus
                      contained herein.

                 (2)  Not applicable.

                 (3)  Not applicable.

                 (4)  Not applicable.

                 (5) (a) That, for the purpose of determining any liability
                         under the Securities Act of 1933, the information
                         omitted from the form of prospectus filed as a part of
                         this Registration Statement in reliance upon Rule 430A
                         and contained in a form of prospectus filed by the
                         Registrant under Rule 497(h) under the Securities Act
                         of 1933 shall be deemed to be a part of this
                         Registration Statement as of the time it was declared
                         effective; and

                     (b) That, for the purpose of determining any liability
                         under the Securities Act of 1933, each post-effective
                         amendment that contains a form of prospectus shall be
                         deemed to be a new registration statement relating to
                         the securities offered therein, and the offering of
                         the securities at that time shall be deemed to be the
                         initial bona fide offering thereof.

                 (6)     To send by first class mail or other means designed to
                         ensure equally prompt delivery, within two business
                         days of receipt of a written or oral request, the
                         Statement of Additional Information.


<PAGE>



                                   SIGNATURES


     Pursuant to the requirements of the Securities Act of 1933, as amended,
and the Investment Company Act of 1940, as amended, the Registrant has duly
caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Boston and The
Commonwealth of Massachusetts on the 24th day of July, 2000.


                                 MFS MUNICIPAL INCOME TRUST


                                 By:    James R. Bordewick, Jr.
                                        -----------------------
                                 Name:  James R. Bordewick, Jr.
                                 Title: Assistant Clerk and Assistant Secretary

     Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement on Form N-2 has been signed below by the following
persons in the capacities indicated on July 24, 2000.


          SIGNATURE              TITLE


JEFFREY L. SHAMES*               Chairman, President (Principal
- -----------------------------    Executive Officer) and Trustee
Jeffrey L. Shames


JAMES O. YOST*                   Treasurer (Principal Financial Officer
- -----------------------------    and Principal Accounting Officer)
JAMES O. YOST


J. ATWOOD IVES*                  Trustee
- -----------------------------
J. Atwood Ives


LAWRENCE T. PERERA*              Trustee
- -----------------------------
Lawrence T. Perera


WILLIAM J. POORVU*               Trustee
- -----------------------------
William J. Poorvu



CHARLES W. SCHMIDT*              Trustee
- -----------------------------
Charles W. Schmidt



<PAGE>



ARNOLD D. SCOTT*                 Trustee
- -----------------------------
Arnold D. Scott


ELAINE R. SMITH*                 Trustee
- -----------------------------
Elaine R. Smith


DAVID B. STONE*                  Trustee
- -----------------------------
David B. Stone


                                 *By:   James R. Bordewick, Jr.
                                      -------------------------------
                                 Name:  James R. Bordewick, Jr.
                                        as Attorney-in-fact

                                 Executed by James R. Bordewick, Jr. on behalf
                                 of those indicated pursuant to a Power of
                                 Attorney dated July 1, 2000; filed herewith.


<PAGE>


                               INDEX OF EXHIBITS


               (a)(1)  Form of Amended and Restated Declaration of Trust
               (a)(2)  Statement Creating the Municipal Preferred shares
               (d)(2)  Form of specimen certificate for the municipal auction
                       rate cumulative preferred shares
               (n)     Consent of independent accountants
               (s)     Powers of Attorney


</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-99.A(1)
<SEQUENCE>2
<FILENAME>0002.txt
<DESCRIPTION>FORM OF DECLARATION OF TRUST
<TEXT>

                                                                Exhibit (a)(1)









                           MFS MUNICIPAL INCOME TRUST




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

                          FORM OF AMENDED AND RESTATED
                              DECLARATION OF TRUST


                         Dated as of ________ __, 2000








<PAGE>





                               TABLE OF CONTENTS

                                                                           PAGE

ARTICLE I--Name and Definitions..............................................1

      Section 1.1.      Name
      Section 1.2.      Definitions

ARTICLE II--Trustees.........................................................3

      Section 2.1.      Number of Trustees
      Section 2.2.      Term of Office of Trustees
      Section 2.3.      Resignation and Appointment of Trustees
      Section 2.4.      Vacancies
      Section 2.5.      Delegation of Power to Other Trustees

ARTICLE III--Powers of Trustees..............................................5

      Section 3.1.      General
      Section 3.2.      Investments
      Section 3.3.      Legal Title
      Section 3.4.      Issuance and Repurchase of Securities
      Section 3.5.      Borrowing Money; Lending Trust Property
      Section 3.6.      Delegation; Committees
      Section 3.7.      Collection and Payment
      Section 3.8.      Expenses
      Section 3.9.      Manner of Acting; By-Laws
      Section 3.10.     Miscellaneous Powers
      Section 3.11.     Principal Transactions
      Section 3.12.     Trustees and Officers as Shareholders

ARTICLE IV--Investment Adviser, Distributor and Transfer Agent...............8

      Section 4.1.      Investment Adviser
      Section 4.2.      Distributor
      Section 4.3.      Transfer Agent
      Section 4.4.      Parties to Contract


<PAGE>

ARTICLE V--Limitations of Liability of Shareholders, Trustees and Others.....9

      Section 5.1.      No Personal Liability of Shareholders,
                     Trustees, etc.
      Section 5.2.      Non-Liability of Trustees, etc.
      Section 5.3.      Mandatory Indemnification
      Section 5.4.      No Bond Required of Trustees
      Section 5.5.      No Duty of Investigation; Notice in Trust
                     Instruments, etc.
      Section 5.6.      Reliance on Experts, etc.

ARTICLE VI--Shares of Beneficial Interest...................................12

      Section 6.1.      Beneficial Interest
      Section 6.2.      Rights of Shareholders
      Section 6.3.      Trust Only
      Section 6.4.      Issuance of Shares
      Section 6.5.      Register of Shares
      Section 6.6.      Transfer of Shares
      Section 6.7.      Notices
      Section 6.8.      Voting Powers

ARTICLE VII--Determination of Net Asset Value, Net Income and Distributions.16

ARTICLE VIII--Duration; Termination of Trust; Amendment; Mergers, Etc.......16

      Section 8.1.      Duration
      Section 8.2.      Termination of Trust
      Section 8.3.      Amendment Procedure
      Section 8.4.      Merger, Consolidation and Sale of Assets
      Section 8.5.      Incorporation and Reorganization
      Section 8.6.      Conversion
      Section 8.7.      Certain Transactions

ARTICLE IX--Reports to Shareholders.........................................20

ARTICLE X--Miscellaneous....................................................20

      Section 10.1.     Filing
      Section 10.2.     Governing Law
      Section 10.3.     Counterparts
      Section 10.4.     Reliance by Third Parties
      Section 10.5.     Provisions in Conflict with Law
                     or Regulations

SIGNATURE PAGE..............................................................22


<PAGE>



                              AMENDED AND RESTATED
                              DECLARATION OF TRUST

                                       OF

                           MFS MUNICIPAL INCOME TRUST

                         Dated as of ________ __, 2000


     AMENDED AND RESTATED DECLARATION OF TRUST made ________ __, 2000 by the
Trustees:

     WHEREAS, by a Declaration of Trust dated September 18, 1986, as amended
and restated November 13, 1986 (the "Declaration"), the Trustees established a
trust for the investment and reinvestment of funds contributed thereto known as
MFS Municipal Income Trust (the "Trust"); and

     WHEREAS, the Declaration provides that a restated Declaration integrating
into a single instrument all of the provisions of the Declaration which are
then in effect and operative, may be executed from time to time by a majority
of the Trustees; and

     WHEREAS, the Trustees desire to amend and to simultaneously restate the
Declaration so that this Amended and Restated Declaration, on the date of its
filing in the office of the Secretary of the Commonwealth of Massachusetts (the
"Effective Date"), shall contain all of the provisions of the Declaration which
are then in effect and operative;

     NOW THEREFORE, the Trustees hereby amend and restate the Declaration, and,
on the Effective Date, the following provisions shall constitute all of the
provisions of the Declaration which are then in effect and operative.

                                   ARTICLE I

                              NAME AND DEFINITIONS

     Section 1.1 Name. The name of the trust created hereby is the "MFS
Municipal Income Trust."

     Section 1.2 Definitions. Wherever they are used herein, the following
terms have the following respective meanings:

     (a) "By-Laws" means the By-Laws referred to in Section 3.9 hereof, as from
time to time amended.


<PAGE>

     (b) The terms "Commission," "Interested Person," and "Majority Shareholder
Vote," (the 67% or 50% requirement of the third sentence of Section 2(a)(42) of
the 1940 Act, whichever may be applicable) have the meanings given them in the
1940 Act.

     (c) The terms "Class" and "Class of Shares" refer to the division of
Shares into two or more classes as provided in Section 6.1 hereof.

     (d) "Declaration" means this Declaration of Trust as amended and restated
from time to time. Reference in this Declaration of Trust to "Declaration,"
"hereof," "herein" and "hereunder" shall be deemed to refer to this Declaration
rather than the article or section in which such words appear.

     (e) "Effective Date" shall have the meaning set forth in the third
"Whereas" clause herein.

     (f) "Investment Adviser" means a party furnishing services to the Trust
pursuant to any contract described in Section 4.1 hereof.

     (g) The "1940 Act" means the Investment Company Act of 1940 and the Rules
and Regulations thereunder, as amended from time to time.

     (h) "Person" means and includes individuals, corporations, partnerships,
trusts, associations, joint ventures and other entities, whether or not legal
entities, and governments and agencies and political subdivisions thereof,
whether domestic or foreign.

     (i) The terms "Series" and "Series of Shares" refer to the division of
Shares representing any Class into two or more Series as provided in Section
6.1 hereof.

     (j) "Shareholder" means a record owner of outstanding Shares.

     (k) "Shares" means the shares of beneficial interest into which the
beneficial interest in the Trust shall be divided from time to time or, if more
than one Class or Series of Shares is authorized by the Trustees, the shares of
beneficial interest into which each Class or Series of Shares shall be divided
from time to time, and includes fractions of Shares as well as whole Shares.

     (l) "Statement" means a certificate signed by any officer of the Trust
setting forth the resolution or resolutions providing for the issuance of a
Class or Classes of Shares and any Series thereof, as described in Section 6.1
hereof.

     (m) "Transfer Agent" means the party, other than the Trust, to a contract
described in Section 4.3 hereof.

     (n) The "Trust" means the entity specified in Section 1.1 above.


<PAGE>

     (o) The "Trust Property" means any and all property, real or personal,
tangible or intangible, which is owned or held by or for the account of the
Trust or the Trustees.

     (p) The "Trustees" means the persons who have signed the Declaration, so
long as they shall continue in office in accordance with the terms hereof, and
all other persons who may from time to time be duly elected, qualified and
serving as Trustees in accordance with the provisions hereof, and reference
herein to a Trustee or the Trustees shall refer to such person or persons in
their capacity as trustees hereunder.

                                   ARTICLE II

                                    TRUSTEES

     Section 2.1. Number of Trustees. Subject to the voting powers of one or
more Classes or Series of Shares as set forth in this Declaration and in any
Statement, the number of Trustees shall be such number as shall be fixed from
time to time by a written instrument signed by a majority of the Trustees,
provided, however, that the number of Trustees shall in no event be less than
three (3). No reduction in the number of Trustees shall have the effect of
removing any Trustee from office prior to the expiration of his term unless the
Trustee is specifically removed pursuant to Section 2.2 of this Article II at
the time of the decrease.

     Section 2.2. Term of Office of Trustees. The Board of Trustees shall be
divided into three classes. The number of Trustees in each class shall be
determined by resolution of the Board of Trustees. The term of office of all of
the Trustees shall expire on the date of the first annual meeting of
shareholders or special meeting in lieu thereof following the first date of
effectiveness of this Declaration (September 18, 1986). The term of office of
the first class shall expire on the date of the second annual meeting of
shareholders or special meeting in lieu thereof. The term of office of the
second class shall expire on the date of the third annual meeting of
shareholders or special meeting in lieu thereof. The term of office of the
third class shall expire on the date of the fourth annual meeting of
shareholders or special meeting in lieu thereof. Upon expiration of the term of
office of each class as set forth above, the number of Trustees in such class,
as determined by the Board of Trustees, shall be elected for a term expiring on
the date of the third annual meeting of shareholders or special meeting in lieu
thereof following such expiration to succeed the Trustees whose terms of office
expire. The Trustees shall be elected at an annual meeting of the shareholders
or special meeting in lieu thereof called for that purpose, except as provided
in Section 2.3 of this Article; provided, however, if so provided in any
Statement relating to a Class or Classes of Shares and any Series thereof
designated by the Trustees pursuant to Section 6.1 hereof, such Class or
Classes of Shares, voting as a Class at an annual meeting of the Shareholders
or special meeting in lieu thereof called for such purpose, may elect at least
two (2) Trustees at all times, and, provided, further, that under the
conditions enumerated in such Statement, such Class or Classes of Shares voting
as a Class shall be entitled to elect at least a majority of the Trustees
pursuant to the designations and powers, preferences and rights and the
qualifications, limitations and restrictions of such Class or Classes of Shares

<PAGE>

as determined in accordance with the Statement relating to such Class or
Classes of Shares.

Each Trustee elected shall hold office until his successor shall have been
elected and shall have qualified; except (a) that any Trustee may resign his
trust (without need for prior or subsequent accounting) by an instrument in
writing signed by him and delivered to the other Trustees, which shall take
effect upon such delivery or upon such later date as is specified therein; (b)
that any Trustee may be removed (provided the aggregate number of Trustees
after such removal shall not be less than the number required by Section 2.1
hereof) with cause, at any time by written instrument, signed by at least
two-thirds of the remaining Trustees, specifying the date when such removal
shall become effective; (c) that any Trustee who requests in writing to be
retired or who has become incapacitated by illness or injury may be retired by
written instrument signed by a majority of the other Trustees, specifying the
date of his retirement; and (d) subject to the voting powers of one or more
Classes or Series of Shares as set forth in this Declaration and in any
Statement, a Trustee may be removed at any meeting of Shareholders by a vote of
two-thirds of the outstanding Shares of the Classes or Series entitled to vote
for the election of such Trustee. Upon the resignation or removal of a Trustee,
or his otherwise ceasing to be a Trustee, he shall execute and deliver such
documents as the remaining Trustees shall require for the purpose of conveying
to the Trust or the remaining Trustees any Trust property held in the name of
the resigning or removed Trustee. Upon the incapacity or death of any Trustee,
his legal representative shall execute and deliver on his behalf such documents
as the remaining Trustees shall require as provided in the preceding sentence.

     Section 2.3. Resignation and Appointment of Trustees. In case of the
declination, death, resignation, retirement, removal or inability of any of the
Trustees, or in case a vacancy shall, by reason of an increase in number, or
for any other reason, exist, the remaining Trustees shall fill such vacancy by
appointing such other person as they in their discretion shall see fit. Such
appointment shall be evidenced by a written instrument signed by a majority of
the Trustees in office. Any such appointment shall not become effective,
however, until the person named in the written instrument of appointment shall
have accepted in writing such appointment and agreed in writing to be bound by
the terms of the Declaration. Within twelve months of such appointment, the
Trustees shall cause notice of such appointment to be mailed to each
Shareholder at his address as recorded on the books of the Trustees. An
appointment of a Trustee may be made by the Trustees then in office and notice
thereof mailed to Shareholders as aforesaid in anticipation of a vacancy to
occur by reason of retirement, resignation or increase in number of Trustees
effective at a later date, provided that said appointment shall become
effective only at or after the effective date of said retirement, resignation
or increase in number of Trustees. The power of appointment is subject to the
voting power of one or more Classes or Series of Shares as set forth in this
Declaration and in any Statement, and is subject to the provisions of Section
16(a) of the 1940 Act.

     Section 2.4. Vacancies. The death, declination, resignation, retirement,
removal or incapacity of the Trustees, or any one of them, shall not operate to
annul the Trust or to revoke any existing agency created pursuant to the terms

<PAGE>

of this Declaration. Whenever a vacancy in the number of Trustees shall occur,
until such vacancy is filled as provided in Section 2.3, the Trustees in
office, regardless of their number, shall have all the powers granted to the
Trustees and shall discharge all the duties imposed upon the Trustees by the
Declaration. A written instrument certifying the existence of such vacancy
signed by a majority of the Trustees shall be conclusive evidence of the
existence of such vacancy.

     Section 2.5. Delegation of Power to Other Trustees. Any Trustee may, by
power of attorney, delegate his power for a period not exceeding six (6) months
at any one time to any other Trustee or Trustees; provided that in no case
shall less than two (2) Trustees personally exercise the powers granted to the
Trustees under the Declaration except as herein otherwise expressly provided.

                                  ARTICLE III

                               POWERS OF TRUSTEES

     Section 3.1. General. The Trustees shall have exclusive and absolute
control over the Trust Property and over the business of the Trust to the same
extent as if the Trustees were the sole owners of the Trust Property and
business in their own right, but with such powers of delegation as may be
permitted by the Declaration. The Trustees shall have power to conduct the
business of the Trust and carry on its operations in any and all of its
branches and maintain offices both within and without the Commonwealth of
Massachusetts, in any and all states of the United States of America, in the
District of Columbia, and in any and all commonwealths, territories,
dependencies, colonies, possessions, agencies or instrumentalities of the
United States of America and of foreign governments, and to do all such other
things and execute all such instruments as the Trustees deem necessary, proper
or desirable in order to promote the interests of the Trust although such
things are not herein specifically mentioned. Any determination as to what is
in the interests of the Trust made by the Trustees in good faith shall be
conclusive. In construing the provisions of the Declaration, the presumption
shall be in favor of a grant of power to the Trustees.

The enumeration of any specific power herein shall not be construed as limiting
the aforesaid power. Such powers of the Trustees may be exercised without order
of or resort to any court.

     Section 3.2. Investments. (a) The Trustees shall have the power to:

     (i) conduct, operate and carry on the business of an investment company;

     (ii) subscribe for, invest in, reinvest in, purchase or otherwise acquire,
own, hold, pledge, sell, assign, transfer, exchange, distribute, lend or
otherwise deal in or dispose of United States and foreign currencies, any form
of gold and other precious metals, commodity contracts, options, contracts for
the future acquisition or delivery of securities and securities of every nature
and kind, including, without limitation, all types of bonds, debentures,

<PAGE>

stocks, negotiable or non-negotiable instruments, obligations, evidences of
indebtedness, certificates of deposit or indebtedness, commercial paper,
repurchase agreements, bankers' acceptances, and other securities of any kind,
issued, created, guaranteed or sponsored by any and all Persons, including,
without limitation, states, territories and possessions of the United States
and the District of Columbia and any political subdivisions, agencies or
instrumentalities thereof and the United States Government, any foreign
government, any political subdivisions thereof or any agencies or
instrumentalities, or by any bank or savings institution, or by any corporation
or organization organized under the laws of the United States or of any state,
territory or possession thereof, or by any corporation or organization
organized under any foreign law, or in "when issued" contracts for any such
securities, or retain Trust assets in cash and from time to time change the
investments of the assets of the Trust; and to exercise any and all rights,
powers and privileges of ownership or interest in respect of any and all such
investments of every kind and description, including, without limitation, the
right to consent and otherwise act with respect thereto, with power to
designate one or more persons, firms, associations or corporations to exercise
any of said rights, powers and privileges in respect of any of said
instruments.

     (iii) to carry on any other business in connection with or incidental to
any of the foregoing powers, to do everything necessary, suitable or proper for
the accomplishment of any purpose or the attainment of any object or the
furtherance of any power hereinbefore set forth, and to do every other act or
thing incidental or appurtenant to or connected with the aforesaid purposes,
objects or powers.

     (b) The Trustees shall not be limited to investing in obligations maturing
before the possible termination of the Trust, nor shall the Trustees be limited
by any law limiting the investments which may be made by fiduciaries.

     Section 3.3. Legal Title. Legal title to all the Trust Property shall be
vested in the Trustees as joint tenants except that the Trustees shall have
power to cause legal title to any Trust Property to be held by or in the name
of one or more of the Trustees, or in the name of the Trust, or in the name of
any other Person as nominee, on such terms as the Trustees may determine. The
right, title and interest of the Trustees in the Trust Property shall vest
automatically in each Person who may hereafter become a Trustee. Upon the
resignation, removal or death of a Trustee he shall automatically cease to have
any right, title or interest in any of the Trust Property, and the right, title
and interest of such Trustee in the Trust Property shall vest automatically in
the remaining Trustees. Such vesting and cessation of title shall be effective
whether or not conveyancing documents have been executed and delivered.

     Section 3.4. Issuance and Repurchase of Securities. The Trustees shall
have the power to issue, sell, repurchase, retire, cancel, acquire, hold,
resell, reissue, dispose of, transfer, and otherwise deal in Shares and,
subject to the provisions set forth in Articles VII and VIII hereof, to apply
to any such retirement, cancellation or acquisition of Shares any funds or
property of the Trust whether capital or surplus or otherwise, to the full
extent now or hereafter permitted by the laws of the Commonwealth of
Massachusetts governing business corporations.


<PAGE>

     Section 3.5. Borrowing Money; Lending Trust Property. The Trustees shall
have power to borrow money or otherwise obtain credit and to secure the same by
mortgaging, pledging or otherwise subjecting as security the assets of the
Trust, to endorse, guarantee, or undertake the performance of any obligation,
contract or engagement of any other Person and to lend Trust property.

     Section 3.6. Delegation; Committees. The Trustees shall have power to
delegate from time to time to such of their number or to officers, employees or
agents of the Trust the doing of such things and the execution of such
instruments either in the name of the Trust or the names of the Trustees or
otherwise as the Trustees may deem expedient.

     Section 3.7. Collection and Payment. The Trustees shall have power to
collect all property due to the Trust; to pay all claims, including taxes,
against the Trust Property; to prosecute, defend, compromise or abandon any
claims relating to the Trust Property; to foreclose any security interest
securing any obligations by virtue of which any property is owed to the Trust;
and to enter into releases, agreements and other instruments.

     Section 3.8. Expenses. The Trustees shall have the power to incur and pay
any expenses which in the opinion of the Trustees are necessary or incidental
to carry out any of the purposes of the Declaration, and to pay reasonable
compensation from the funds of the Trust to themselves as Trustees. The
Trustees shall fix the compensation of all officers, employees and Trustees.

     Section 3.9. Manner of Acting; By-Laws. Except as otherwise provided
herein or in the By-Laws, any action to be taken by the Trustees may be taken
by a majority of the Trustees present at a meeting of Trustees (a quorum being
present), including any meeting held by means of a conference telephone circuit
or similar communications equipment by means of which all persons participating
in the meeting can hear each other, or by written consents of all the Trustees.
The Trustees may adopt By-Laws not inconsistent with this Declaration to
provide for the conduct of the business of the Trust and may amend or repeal
such By-Laws to the extent such power is not reserved to the Shareholders.

     Section 3.10. Miscellaneous Powers. The Trustees shall have the power to:
(a) employ or contract with such Persons as the Trustees may deem desirable for
the transaction of the business of the Trust; (b) enter into joint ventures,
partnerships and any other combinations or associations; (c) remove Trustees or
fill vacancies in or add to their number, elect and remove such officers and
appoint and terminate such agents or employees as they consider appropriate,
and appoint from their own number, and terminate, any one or more committees
which may exercise some or all of the power and authority of the Trustees as
the Trustees may determine; (d) purchase, and pay for out of Trust Property,
insurance policies insuring the Shareholders, Trustees, officers, employees,
agents, investment advisers, distributors, selected dealers or independent

<PAGE>

contractors of the Trust against all claims arising by reason of holding any
such position or by reason of any action taken or omitted by any such Person in
such capacity, whether or not constituting negligence, or whether or not the
Trust would have the power to indemnify such Person against such liability; (e)
establish pension, profit sharing, share purchase, and other retirement,
incentive and benefit plans for any Trustees, officers, employees and agents of
the Trust; (f) to the extent permitted by law, indemnify any person with whom
the Trust has dealings, including the Investment Adviser, Distributor, Transfer
Agent, and selected dealers, to such extent as the Trustees shall determine;
(g) guarantee indebtedness or contractual obligations of others; (h) determine
and change the fiscal year of the Trust and the method by which its accounts
shall be kept; and (i) adopt a seal for the Trust but the absence of such seal
shall not impair the validity of any instrument executed on behalf of the
Trust.

     Section 3.11. Principal Transactions. Except in transactions permitted by
the 1940 Act, or any order of exemption issued by the Commission, the Trustees
shall not, on behalf of the Trust, buy any securities (other than shares) from
or sell any securities (other than Shares) to, or lend any assets of the Trust
to, any Trustee or officer of the Trust or any firm of which any such Trustee
or officer is a member of the Trust or any firm of which any such Trustee or
officer is a member acting as principal, or have any such dealings with the
Investment Adviser, Distributor, or Transfer Agent or with any Interested
Person of such Person; but the Trust may employ any such Person, or firm or
company in which such Person is an Interested Person, as broker, legal counsel,
registrar, transfer agent, dividend disbursing agent or custodian upon
customary terms.

     Section 3.12. Trustees and Officers as Shareholders. No officer, Trustee
or Member of the Advisory Board of the Trust, and no member, partner, officer,
director or trustee of the Investment Adviser or of the Distributor, and no
Investment Adviser or Distributor of the Trust, shall take a short position in
the securities issued by the Trust.

                                   ARTICLE IV

               INVESTMENT ADVISER, DISTRIBUTOR AND TRANSFER AGENT

     Section 4.1. Investment Adviser. Subject to a Majority Shareholder Vote,
the Trustees may in their discretion from time to time enter into one or more
investment advisory or management contracts whereby a party to such contract
shall undertake to furnish the Trust such management, investment advisory,
statistical and research facilities and services, promotional activities, and
such other facilities and services, if any, as the Trustees shall from time to
time consider desirable and all upon such terms and conditions as the Trustees
may in their discretion determine. Notwithstanding any provisions of the
Declaration, the Trustees may delegate to the Investment Adviser authority
(subject to such general or specific instructions as the Trustees may from time
to time adopt) to effect purchases, sales, loans or exchanges of assets of the
Trust on behalf of the Trustees or may authorize any officer, employee or
Trustee to effect such purchases, sales, loans or exchanges pursuant to
recommendations of the Investment Adviser (and all without further action by
the Trustees). Any such purchases, sales, loans or exchanges shall be deemed to
have been authorized by all the Trustees.


<PAGE>

     Section 4.2. Distributor. The Trustees may in their discretion from time
to time enter into a contract, providing for the sale of Shares whereby the
Trust may either agree to sell the Shares to the other party to the contract or
appoint such other party its sales agent for such Shares. In either case, the
contract shall be on such terms and conditions as the Trustees may in their
discretion determine not inconsistent with the provisions of this Article IV or
the By-Laws; and such contract may also provide for the repurchase or sale of
Shares by such other party as principal or as agent of the Trust and may
provide that such other party may enter into selected dealer agreements with
registered securities dealers to further the purpose of the distribution of the
Shares.

     Section 4.3. Transfer Agent. The Trustees may in their discretion from
time to time enter into a transfer agency and shareholder service contract or
contracts whereby the other party to such contract shall undertake to furnish
transfer agency and/or shareholder services to the Trust. The contract or
contracts shall have such terms and conditions as the Trustees may in their
discretion determine not inconsistent with the Declaration or the By-Laws. Such
services may be provided by one or more Persons.

     Section 4.4. Parties to Contract. Any contract of the character described
in Sections 4.1, 4.2 or 4.3 of this Article IV or any Custodian contract, as
described in the By-Laws, may be entered into with any Person, although one or
more of the Trustees or officers of the Trust may be an officer, partner,
director, trustee, shareholder, or member of such other party to the contract,
and no such contract shall be invalidated or rendered voidable by reason of the
existence of any such relationship; nor shall any Person holding such
relationship be liable merely by reason of such relationship for any loss or
expense to the Trust under or by reason of said contract or accountable for any
profit realized directly or indirectly therefrom, provided that the contract
when entered into was not inconsistent with the provisions of this Article IV
or the By-Laws. The same Person may be the other party to contracts entered
into pursuant to Sections 4.1, 4.2 and 4.3 above or Custodian contracts, and
any individual may be financially interested or otherwise affiliated with
Persons who are parties to any or all of the contracts mentioned in this
Section 4.4.

                                   ARTICLE V

                   LIMITATIONS OF LIABILITY OF SHAREHOLDERS,
                              TRUSTEES AND OTHERS

     Section 5.1. No Personal Liability of Shareholders, Trustees, etc. Subject
to Section 5.3, no Shareholder shall be subject to any personal liability
whatsoever to any Person in connection with Trust Property or the acts,
obligations or affairs of the Trust. No Trustee, officer, employee or agent of
the Trust shall be subject to any personal liability whatsoever to any Person,
other than the Trust or its Shareholders, in connection with Trust Property or
the affairs of the Trust, save only that arising from bad faith, willful
misfeasance, gross negligence or reckless disregard for his duty to such

<PAGE>

Person; and all such Persons shall look solely to the Trust Property for
satisfaction of claims of any nature arising in connection with the affairs of
the Trust. If any Shareholder, Trustee, officer, employee, or agent, as such,
of the Trust, is made a party to any suit or proceeding to enforce any such
liability, he shall not, on account thereof, be held to any personal liability.
The Trust shall indemnify and hold each Shareholder harmless from and against
all claims and liabilities to which such Shareholder may become subject by
reason of his being or having been a Shareholder, and shall reimburse such
Shareholder for all legal and other expenses reasonably incurred by him in
connection with any such claim or liability. The rights accruing to a
Shareholder under this Section 5.1 shall not exclude any other right to which
such Shareholder may be lawfully entitled, nor shall anything herein contained
restrict the right of the Trust to indemnify or reimburse a Shareholder in any
appropriate situation even though not specifically provided herein.

     Section 5.2. Non-Liability of Trustees, etc. Subject to Section 5.3, no
Trustee, officer, employee or agent of the Trust shall be liable to the Trust,
its Shareholders, or to any Shareholder, Trustee, officer, employee, or agent
thereof for any action or failure to act (including without limitation the
failure to compel in any way any former or acting Trustee to redress any breach
of trust) except for his own bad faith, willful misfeasance, gross negligence
or reckless disregard of his duties.

     Section 5.3. Mandatory Indemnification. (a) Subject to the exceptions and
limitations contained in paragraph (b) below:

     (i) every person who is or has been a Trustee or officer of the Trust
shall be indemnified by the Trust against all liability and against all
expenses reasonably incurred or paid by him in connection with any claim,
action, suit or proceeding in which he becomes involved as a party or otherwise
by virtue of his being or having been a Trustee or officer and against amounts
paid or incurred by him in the settlement thereof;

     (ii) the words "claim," "action," "suit," or "proceeding" shall apply to
all claims, actions, suits or proceedings (civil, criminal, or other, including
appeals), actual or threatened; and the words "liability" and "expenses" shall
include, without limitation, attorneys' fees, costs, judgments, amounts paid in
settlement, fines, penalties and other liabilities.

     (b) No indemnification shall be provided hereunder to a Trustee or
officer:

     (i) against any liability to the Trust or the Shareholders by reason of a
final adjudication by the court or other body before which the proceeding was
brought that he engaged in willful misfeasance, bad faith, gross negligence or
reckless disregard of the duties involved in the conduct of his office;

     (ii) with respect to any matter as to which he shall have been finally
adjudicated not to have acted in good faith in the reasonable belief that his
action was in the best interest of the Trust;


<PAGE>

     (iii) in the event of a settlement involving a payment by a Trustee or
officer or other disposition not involving a final adjudication as provided in
paragraph (b) (i) or (b) (ii) above resulting in a payment by a Trustee or
officer, unless there has been either a determination that such Trustee or
officer did not engage in willful misfeasance, bad faith, gross negligence or
reckless disregard of the duties involved in the conduct of his office by the
court or other body approving the settlement or other disposition or by a
reasonable determination, based upon a review of readily available facts (as
opposed to a full trial-type inquiry) that he did not engage in such conduct:

          (A) by vote of a majority of the Disinterested Trustees acting on the
     matter (provided that a majority of the Disinterested Trustees then in
     office act on the matter); or

          (B) by written opinion of independent legal counsel.

     (c) The rights of indemnification herein provided may be insured against
by policies maintained by the Trust, shall be severable, shall not affect any
other rights to which any Trustee or officer may now or hereafter be entitled,
shall continue as to a Person who has ceased to be such Trustee or officer and
shall inure to the benefit of the heirs, executors and administrators of such
Person. Nothing contained herein shall affect any rights to indemnification to
which personnel other than Trustees and officers may be entitled by contract or
otherwise under law.

     (d) Expenses of preparation and presentation of a defense to any claim,
action, suit, or proceeding of the character described in paragraph (a) of this
Section 5.3 shall be advanced by the Trust prior to final disposition thereof
upon receipt of an undertaking by or on behalf of the recipient to repay such
amount if it is ultimately determined that he is not entitled to
indemnification under this Section 5.3, provided that either:

     (i) such undertaking is secured by a surety bond or some other appropriate
security or the Trust shall be insured against losses arising out of any such
advances; or

     (ii) a majority of the Disinterested Trustees acting on the matter
(provided that a majority of the Disinterested Trustees then in office act on
the matter) or an independent legal counsel in a written opinion, shall
determine, based upon a review of readily available facts (as opposed to a full
trial-type inquiry), that there is reason to believe that the recipient
ultimately will be found entitled to indemnification.

     As used in this Section 5.3, a "Disinterested Trustee" is one (i) who is
not an "Interested Person" of the Trust (including anyone who has been exempted
from being an "Interested Person" by any rule, regulation or order of the
Commission), and (ii) against whom none of such actions, suits or other
proceedings or another action, suit or other proceeding on the same or similar
grounds is then or had been pending.

     Section 5.4. No Bond Required of Trustees. No Trustee shall be obligated
to give any bond or other security for the performance of any of his duties
hereunder.


<PAGE>

     Section 5.5. No Duty of Investigation; Notice in Trust Instruments, etc.
No purchaser, lender, transfer agent or other Person dealing with the Trustees
or any officer, employee or agent of the Trust shall be bound to make any
inquiry concerning the validity of any transaction purporting to be made by the
Trustees or by said officer, employee or agent or be liable for the application
of money or property paid, loaned, or delivered to or on the order of the
Trustees or of said officer, employee or agent. Every obligation, contract,
instrument, certificate, Share, other security of the Trust or undertaking, and
every other act or thing whatsoever executed in connection with the Trust shall
be conclusively presumed to have been executed or done by the executors thereof
only in their capacity as Trustees under the Declaration or in their capacity
as officers, employees or agents of the Trust. Every written obligation,
contract, instrument, certificate, Share, other security of the Trust or
undertaking made or issued by the Trustees shall recite that the same is
executed or made by them not individually, but as Trustees under the
Declaration, and that the obligations of any such instrument are not binding
upon any of the Trustees or Shareholders, individually, but bind only the trust
estate, and may contain any further recital which they or he may deem
appropriate, but the omission of such recital shall not operate to bind any of
the Trustees or Shareholders individually. The Trustees shall at all times
maintain insurance for the protection of the Trust Property, its Shareholders,
Trustees, officers, employees and agents in such amount as the Trustees shall
deem adequate to cover possible tort liability, and such other insurance as the
Trustees in their sole judgment shall deem advisable.

     Section 5.6. Reliance on Experts, etc. Each Trustee and officer or
employee of the Trust shall, in the performance of his duties, be fully and
completely justified and protected with regard to any act or any failure to act
resulting from reliance in good faith upon the books of account or other
records of the Trust, upon an opinion of counsel, or upon reports made to the
Trust by any of its officers or employees or by the Investment Adviser, the
Distributor, Transfer Agent, selected dealers, accountants, appraisers or other
experts or consultants selected with reasonable care by the Trustees, officers
or employees of the Trust, regardless of whether such counsel or expert may
also be a Trustee.

                                   ARTICLE VI

                         SHARES OF BENEFICIAL INTEREST

     Section 6.1. Beneficial Interest. The Trustees may, without Shareholder
approval, authorize one or more Classes of Shares with or without par value
(which Classes may be divided into two or more Series), Shares of each such
Class or Series having such preferences, voting powers, terms of redemption, if
any, and special or relative rights or privileges (including conversion rights,
if any) as the Trustees may determine.

As of the Effective Date, the Shares shall be divided into two Classes of
Shares, a Class of an unlimited number of common shares of beneficial interest,

<PAGE>

without par value (the "Common Shares") and a Class of an unlimited number of
preferred shares of beneficial interest, without par value (the "Preferred
Shares"). All Shares outstanding as of the Effective Date shall be designated
as Common Shares.

The designations and powers, preferences and rights, and the qualifications,
limitations and restrictions of the Common Shares are as follows and as set
forth elsewhere in this Declaration.

          (a) Subject to the rights of the holders of the Preferred Shares, in
     the event of the termination of the Trust the holders of the Common Shares
     shall be entitled to receive pro rata the net distributable assets of the
     Trust.

          (b) The holders of the Common Shares shall not, as such holders, have
     any right to acquire, purchase or subscribe for any Common Shares or
     securities of the Trust which it may hereafter issue or sell, other than
     such right, if any, as the Trustees in their discretion may determine.

          (c) Subject to the rights of the holders of the Preferred Shares,
     dividends or other distributions, when, as and if declared by the
     Trustees, shall be shared equally by the holders of Common Shares on a
     share for share basis. The Trustees may direct that any dividends or other
     distributions or any portion thereof as declared and distributed shall be
     paid in cash to the holder, or, alternatively, may direct that any such
     dividends be reinvested in full and fractional Shares of the Trust if such
     holder elects to have them reinvested.

          (d) The Trustees may hold as treasury shares (of the same or some
     other Series), reissue for such consideration and on such terms as they
     may determine, or cancel any Common Shares of any Series reacquired by the
     Trust at their discretion from time to time. Shares shall not entitle the
     Shareholder to any title in or to the whole or any part of the Trust.

The designations and powers, preferences and rights, and the qualifications,
limitations and restrictions of the Preferred Shares shall be as set forth in
the Statement relating to the Preferred Shares.

All Shares issued hereunder including, without limitation, Shares issued in
connection with a dividend in Shares or a split of Shares, shall be fully paid
and non-assessable.

     Section 6.2. Rights of Shareholders. The ownership of the Trust Property
of every description and the right to conduct any business hereinbefore
described are vested exclusively in the Trustees, and the Shareholders shall
have no interest therein other than the beneficial interest conferred by their
Shares, and they shall have no right to call for any partition or division of
any property, profits, rights or interests of the Trust nor can they be called
upon to assume any losses of the Trust or suffer an assessment of any kind by
virtue of their ownership of Shares. The Shares shall be personal property
giving only the rights in the Declaration specifically set forth. The Shares
shall not entitle the holder to preference, preemptive, appraisal, conversion

<PAGE>

or exchange rights, except as the Trustees may determine with respect to any
Class or Series of Shares.

     Section 6.3. Trust Only. It is the intention of the Trustees to create
only the relationship of Trustee and beneficiary between the Trustees and each
Shareholder from time to time. It is not the intention of the Trustees to
create a general partnership, limited partnership, joint stock association,
corporation, bailment or any form of legal relationship other than a trust.
Nothing in the Declaration shall be construed to make the Shareholders, either
by themselves or with the Trustees, partners or members of a joint stock
association.

     Section 6.4. Issuance of Shares. The Trustees, in their discretion may,
from time to time without vote of the Shareholders, issue Shares, in addition
to the then issued and outstanding Shares and Shares held in the treasury, to
such party or parties and for such amount and type of consideration, including
cash or property, at such time or times, and on such terms as the Trustees may
deem best, and may in such manner acquire other assets (including the
acquisition of assets subject to, and in connection with the assumption of
liabilities) and businesses. In connection with any issuance of Shares, the
Trustees may issue fractional Shares. The Trustees may from time to time divide
or combine the Shares into a greater or lesser number without thereby changing
their proportionate beneficial interests in Trust. Contributions to the Trust
may be accepted for whole Shares and/or l/l,000ths of a Share or integral
multiples thereof.

     Section 6.5. Register of Shares. A register shall be kept at the principal
office of the Trust or at an office of the Transfer Agent which shall contain
the names and addresses of the Shareholders and the number of Shares held by
them respectively and a record of all transfers thereof. Such register shall be
conclusive as to who are the holders of each Class and Series of Shares and who
shall be entitled to receive dividends or distributions or otherwise to
exercise or enjoy the rights of Shareholders. No Shareholder shall be entitled
to receive payment of any dividend or distribution, nor to have notice given to
him as herein or in the By-Laws provided, until he has given his address to the
Transfer Agent or such other officer or agent of the Trustees as shall keep the
said register for entry thereon. The Trustees, in their discretion, may
authorize the issuance of Share certificates and promulgate appropriate rules
and regulations as to their use.

     Section 6.6. Transfer of Shares. Shares shall be transferable on the
records of the Trust only by the record holder thereof or by his agent
thereunto duly authorized in writing, upon delivery to the Trustees or the
Transfer Agent of a duly executed instrument of transfer, together with any
certificate or certificates (if issued) for such Shares and such evidence of
the genuineness of each such execution and authorization and of other matters
as may reasonably be required. Upon such delivery the transfer shall be
recorded on the register of the Trust. Until such record is made, the
Shareholder of record shall be deemed to be the holder of such Shares for all
purposes hereunder and neither the Trustees nor any Transfer Agent or registrar
nor any officer, employee or agent of the Trust shall be affected by any notice
of the proposed transfer.


<PAGE>

     Any person becoming entitled to any Shares in consequence of the death,
bankruptcy, or incompetence of any Shareholder, or otherwise by operation of
law, shall be recorded on the register of Shares as the holder of such Shares
upon production of the proper evidence thereof to the Trustees or the Transfer
Agent; but until such record is made, the Shareholder of record shall be deemed
to be the holder of such Shares for all purposes hereunder and neither the
Trustees nor any Transfer Agent or registrar nor any officer or agent of the
Trust shall be affected by any notice of such death, bankruptcy or
incompetence, or other operation of law.

     Section 6.7. Notices. Any and all notices to which any Shareholder may be
entitled and any and all communications shall be deemed duly served or given if
mailed, postage prepaid, addressed to any Shareholder of record at his last
known address as recorded on the register of the Trust.

     Section 6.8. Voting Powers. Subject to the voting power of one or more
Classes or Series of Shares as set forth in this Declaration and in any
Statement, the Shareholders shall have power to vote only (i) for the election
of Trustees or for their removal as provided in Section 2.2 hereof, (ii) with
respect to any investment advisory or management contract as provided in
Section 4.1 hereof, (iii) with respect to termination of the Trust as provided
in Section 8.2, (iv) with respect to any amendment of the Declaration to the
extent and as provided in Section 8.3, (v) with respect to any merger,
consolidation, conversion or sale of assets as provided in Sections 8.4, 8.5
and 8.7, (vi) with respect to incorporation of the Trust to the extent and as
provided in Section 8.5, (vii) to the same extent as the stockholders of a
Massachusetts business corporation as to whether or not a court action,
proceeding or claim should or should not be brought or maintained derivatively
or as a class action on behalf of the Trust or the Shareholders, and (viii)
with respect to such additional matters relating to the Trust as may be
required by the Declaration, the By-Laws, any Statement or any registration of
the Trust with the Commission (or any successor agency) or any state, or as the
Trustees may consider necessary or desirable. Each whole Share shall be
entitled to one vote as to any matter on which it is entitled to vote and each
fractional Share shall be entitled to a proportionate fractional vote, except
as otherwise provided in any Statement and except that Shares held in the
treasury of the Trust shall not be voted. Notwithstanding any other provision
of this Declaration, on any matter submitted to a vote of Shareholders, all
Shares of the Trust then entitled to vote shall, except as otherwise provided
in the By-Laws or any Statement or required by law, be voted in the aggregate
as a single Class without regard to Classes or Series of Shares. There shall be
no cumulative voting in the election of Trustees. Until Shares of a particular
Class or Series are issued, the Trustees may exercise all rights of
Shareholders of such Class or Series and may take any action required by law,
the Declaration, the By-Laws or any Statement to be taken by Shareholders as to
such Class or Series. The By-Laws and any Statement may include further
provisions for Shareholders' votes and meetings and related matters.


<PAGE>

                                  ARTICLE VII

                       DETERMINATION OF NET ASSET VALUE,
                          NET INCOME AND DISTRIBUTIONS

     The Trustees, in their absolute discretion, may prescribe and shall set
forth in the By-Laws, in any Statement, or in a duly adopted vote of the
Trustees such bases and times for determining the per Share net asset value of
the Shares or any Class or Series of Shares or net income, or the declaration
and payment of dividends and distributions, as they may deem necessary or
desirable.

                                  ARTICLE VIII

            DURATION; TERMINATION OF TRUST; AMENDMENT; MERGERS, ETC.

     Section 8.1. Duration. The Trust shall continue without limitation of time
but subject to the provisions of this Article VIII.

     Section 8.2. Termination of Trust. (a) Subject to the voting powers of one
or more Classes or Series of Shares as set forth in this Declaration and in any
Statement, the Trust may be terminated (i) by the affirmative vote of the
holders of not less than two-thirds of the Shares outstanding and entitled to
vote at any meeting of Shareholders, or (ii) by an instrument in writing,
without a meeting, signed by a majority of the Trustees and consented to by the
holders of not less than two-thirds of such Shares. Upon the termination of the
Trust:

     (i) The Trust shall carry on no business except for the purpose of winding
up its affairs;

     (ii) The Trustees shall proceed to wind up the affairs of the Trust and
all the powers of the Trustees under this Declaration shall continue until the
affairs of the Trust shall have been wound up, including the power to fulfill
or discharge the contracts of the Trust, collect its assets, sell, convey,
assign, exchange, transfer or otherwise dispose of all or any part of the
remaining Trust Property to one or more persons at public or private sale for
consideration which may consist in whole or in part of cash, securities or
other property of any kind, discharge or pay its liabilities, and to do all
other acts appropriate to liquidate its business; provided, that any sale,
conveyance, assignment, exchange, transfer or other disposition of all or
substantially all the Trust Property shall require Shareholder approval in
accordance with Section 8.4 hereof; and

     (iii) After paying or adequately providing for the payment of all
liabilities, and upon receipt of such releases, indemnities and refunding
agreements as they deem necessary for their protection, the Trustees may
distribute the remaining Trust Property, in cash or in kind or partly in cash
and partly in kind, among the Shareholders according to their respective rights

<PAGE>

and as required or permitted by the preferences and special or relative rights
and privileges of any Class or Series of Shares.

     (b) After termination of the Trust and distribution to the Shareholders as
herein provided, a majority of the Trustees shall execute and lodge among the
records of the Trust an instrument in writing setting forth the fact of such
termination, and the Trustees shall thereupon be discharged from all further
liabilities and duties hereunder, and the rights and interests of all
Shareholders shall thereupon cease.

     Section 8.3. Amendment Procedure. (a) Except to the extent that any
Statement or applicable law may require a higher vote or the separate vote of
one or more Classes or Series of Shares, and except as provided in paragraph
(c) of this Section 8.3 this Declaration may be amended by a Majority
Shareholder Vote or by an instrument in writing, without a meeting, signed by a
majority of the Trustees and consented to by the holders of not less than a
majority of the Shares outstanding and entitled to vote. The Trustees may also
amend this Declaration without the vote or consent of Shareholders, to change
the name of the Trust, to supply any omission, to cure, correct or supplement
any ambiguous, defective or inconsistent provision hereof, to authorize one or
more Classes or Series of Shares or to make any additions and/or changes deemed
necessary to effectuate the designations and powers, preferences and rights,
and the qualifications, limitations and restrictions adopted by the Trustees
with respect to any Class or Series of Shares so authorized pursuant to Article
VI of this Declaration, or if they deem it necessary to conform this
Declaration to the requirements of applicable federal laws or regulations or
the requirements of the regulated investment company provisions of the Internal
Revenue Code, but the Trustees shall not be liable for failing so to do.

     (b) Except to the extent that any Statement or applicable law may require
a higher vote or the separate vote of one or more Classes or Series of Shares,
no amendment may be made under this Section 8.3 which would change any rights
with respect to any Shares by reducing the amount payable thereon upon
liquidation of the Trust or by diminishing or eliminating any voting rights
pertaining thereto, except with the vote or consent of the holders of
two-thirds of the Shares outstanding and entitled to vote. Nothing contained in
this Declaration shall permit the amendment of this Declaration to impair the
exemption from personal liability of the Shareholders, Trustees, Officers,
employees and agents of the Trust or to permit assessment upon Shareholders.

     (c) No amendment may be made under this Section 8.3 which shall amend,
alter, change or repeal any of the provisions of Sections 8.3, 8.4, 8.6 and 8.7
unless the amendment effecting such amendment, alteration, change or repeal
shall receive the affirmative vote or consent of sixty-six and two-thirds
percent (66 2/3%) of the Shares outstanding and entitled to vote. Such
affirmative vote or consent shall be in addition to the vote or consent of the
holders of Shares otherwise required by law or by the terms of any Class or
Series of preferred stock, whether now or hereafter authorized, or any
agreement between the Trust and any national securities exchange.


<PAGE>

     (d) A certificate signed by a majority of the Trustees setting forth an
amendment and reciting that it was duly adopted by the Shareholders or by the
Trustees as aforesaid or a copy of the Declaration, as amended, and executed by
a majority of the Trustees, shall be conclusive evidence of such amendment when
lodged among the records of the Trust.

     Section 8.4. Merger, Consolidation and Sale of Assets. The Trust may merge
or consolidate with any other corporation, association, trust or other
organization or may sell, lease or exchange all or substantially all of the
Trust Property, including its good will, upon such terms and conditions and for
such consideration when and as authorized at any meeting of Shareholders called
for the purpose by the affirmative vote of the holders of not less than
two-thirds of the Shares outstanding and entitled to vote, or by an instrument
or instruments in writing without a meeting, consented to by the holders of not
less than two-thirds of such Shares, provided, however, that if such merger,
consolidation, sale, lease or exchange is recommended by the Trustees, the vote
or written consent of the holders of a majority of Shares outstanding and
entitled to vote, shall be sufficient authorization; and any such merger,
consolidation, sale, lease or exchange shall be deemed for all purposes to have
been accomplished under and pursuant to the statutes of the Commonwealth of
Massachusetts. Nothing contained herein shall be construed as requiring
approval of shareholder for any sale of assets in the ordinary course of
business of the Trust.

     Section 8.5. Incorporation and Reorganization. With the approval of the
holders of a majority of the Shares outstanding and entitled to vote, the
Trustees may cause to be organized or assist in organizing a corporation or
corporations under the laws of any jurisdiction, or any other trust,
partnership, association or other organization to take over all of the Trust
Property or to carry on any business in which the Trust shall directly or
indirectly have any interest, and to sell, convey and transfer the Trust
Property to any such corporation, trust, partnership, association or
organization in exchange for the shares or securities thereof or otherwise and
to lend money to, subscribe for the shares or securities of, and enter into any
contracts with any such corporation, trust, partnership, association or
organization in which the Trust holds or is about to acquire shares or any
other interest. Subject to Section 8.4 hereof, the Trustees may also cause a
merger or consolidation between the Trust or any successor thereto and any such
corporation, trust, partnership, association or other organization if and to
the extent permitted by law as provided under the law then in effect. Nothing
contained herein shall be construed as requiring approval of Shareholders for
the Trustees to organize or assist in organizing one or more corporations,
trusts, partnerships, associations or other organizations and selling,
conveying or transferring a portion of the Trust Property to such organization
or entities.

     Section 8.6. Conversion. Notwithstanding any other provision of this
Declaration, the conversion of the Trust from a "closed-end company" to an
"open-end company," as those terms are defined in Sections 5(a)(2) and 5(a)(1),
respectively, of the 1940 Act as in effect on June 1, 1986, shall require the
affirmative vote or consent of the holders of sixty-six and two-thirds percent
(66 2/3%) of the Shares of each Class outstanding and entitled to vote. Such
affirmative vote or consent shall be in addition to the vote or consent of the

<PAGE>

holders of the Shares otherwise required by law or by the terms of any Class or
Series of preferred stock, whether now or hereafter authorized, or any
agreement between the Trust and any national securities exchange.

     Section 8.7. Certain Transactions. (a) Notwithstanding any other provision
of this Declaration and subject to the exceptions provided in paragraph (d) of
this Section, the types of transactions described in paragraph (c) of this
Section shall require the affirmative vote or consent of the holders of
sixty-six and two-thirds (66 2/3%) of the Shares outstanding and entitled to
vote, when a Principal Shareholder (as defined in paragraph (b) of this
Section) is a party to the transaction. Such affirmative vote or consent shall
be in addition to the vote or consent of the holders of Shares otherwise
required by law or by the terms of any Class or Series of preferred stock,
whether now or hereafter authorized, or any agreement between the Trust and any
national securities exchange.

     (b) The term "Principal Shareholder" shall mean any corporation, person or
other entity which is the beneficial owner, directly or directly, of more than
five percent (5%) of the outstanding Shares and shall include any affiliate or
associate, as such terms are defined in clause (ii) below, of a Principal
Shareholder. For the purposes of this Section, in addition to the Shares which
a corporation, person or other entity beneficially owns directly, (a) any
corporation, person or other entity shall be deemed to be the beneficial owner
of any Shares (i) which it has the right to acquire pursuant to any agreement
or upon exercise of conversion rights or warrants, or otherwise (but excluding
share options granted by the Trust) or (ii) which are beneficially owned,
directly or indirectly (including Shares deemed owned through application of
clause (i) above), by any other corporation, person or entity with which its
"affiliate" or "associate" (as defined below) has any agreement, arrangement or
understanding for the purpose of acquiring, holding, voting or disposing of
Shares, or which is its "affiliate", or "associate" as those terms are defined
in Rule 12b-2 of the General Rules and Regulations under the Securities
Exchange Act of 1934 as in effect on December 1, 1986, and (b) the outstanding
Shares shall include Shares deemed owned through application of clauses (i) and
(ii) above but shall not include any other Shares which may be issuable
pursuant to any agreement, or upon exercise of conversion rights or warrants,
or otherwise.

     (c)    This Section shall apply to the following transactions:

     (i)    The merger or consolidation of the Trust or any subsidiary of the
            Trust with or into any Principal Shareholder.

     (ii)   The issuance of any securities of the Trust to any Principal
            Shareholder for cash.

     (iii)  The sale, lease or exchange of all or any substantial part of the
            assets of the Trust to any Principal Shareholder (except assets
            having an aggregate fair market value of less than $1,000,000,

<PAGE>

            aggregating for the purpose of such computation all assets sold,
            leased or exchanged in any series of similar transactions within a
            twelve-month period).

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

     (d) The provisions of this Section shall not be applicable to (i) any of
the transactions described in paragraph (c) of this Section if the Board of
Trustees of the Trust shall by resolution have approved a memorandum of
understanding with such Principal Shareholder with respect to and substantially
consistent with such transaction, or (ii) any such transaction with any
corporation of which a majority of the outstanding shares of all classes of
stock normally entitled to vote in elections of directors is owned of record or
beneficially by the Trust and its subsidiaries.

     (e) The Board of Trustees shall have the power and duty to determine for
the purposes of this Section on the basis of information known to the Trust,
whether (i) a corporation, person or entity beneficially owns more than five
percent (5%) of the outstanding Shares, (ii) a corporation, person or entity is
an "affiliate" or "associate" (as defined above) of another, (iii) the assets
being acquired or leased to or by the Trust or any subsidiary thereof,
constitute a substantial part of the assets of the Trust and have an aggregate
fair market value of less than $1,000,000, and (iv) the memorandum of
understanding referred to in paragraph (d) hereof is substantially consistent
with the transaction covered thereby. Any such determination shall be
conclusive and binding for all purposes of this Section.

                                   ARTICLE IX

                            REPORTS TO SHAREHOLDERS

     The Trustees shall at least semi-annually submit to the Shareholders a
written financial report of the transactions of the Trust, including financial
statements which shall at least annually be certified by independent public
accountants.

                                   ARTICLE X

                                 MISCELLANEOUS

     Section 10.1. Filing. This Declaration and any amendment hereto and any
Statement shall be filed in the office of the Secretary of the Commonwealth of
Massachusetts and in such other places as may be required under the laws of
Massachusetts and may also be filed or recorded in such other places as the
Trustees deem appropriate. Each amendment so filed shall be accompanied by a


                                       1
<PAGE>

certificate signed and acknowledged by a Trustee stating that such action was
duly taken in a manner provided herein, and unless such amendment or such
certificate sets forth some later time for the effectiveness of such amendment,
such amendment shall be effective upon its filing. A restated Declaration,
integrating into a single instrument all of the provisions of the Declaration
which are then in effect and operative, may be executed from time to time by a
majority of the Trustees and shall, upon filing with the Secretary of the
Commonwealth of Massachusetts, be conclusive evidence of all amendments
contained therein and may thereafter be referred to in lieu of the original
Declaration and the various amendments thereto.

     Section 10.2. Governing Law. This Declaration is executed by the Trustees
and delivered in the Commonwealth of Massachusetts and with reference to the
laws thereof, and the rights of all parties and the validity and construction
of every provision hereof shall be subject to and construed according to the
laws of said State.

     Section 10.3. Counterparts. This Declaration may be simultaneously
executed in several counterparts, each of which shall be deemed to be an
original, and such counterparts, together, shall constitute one and the same
instrument, which shall be sufficiently evidenced by any such original
counterpart.

     Section 10.4. Reliance by Third Parties. Any certificate executed by an
individual who, according to the records of the Trust appears to be a Trustee
hereunder, certifying to: (a) the number or identity of Trustees or
Shareholders, (b) the due authorization of the execution of any instrument or
writing, (c) the form of any vote passed at a meeting of Trustees or
Shareholders, (d) the fact that the number of Trustees or Shareholders present
at any meeting or executing any written instrument satisfies the requirements
of this Declaration, (e) the form of any By-Laws adopted by or the identity of
any officers elected by the Trustees, or (f) the existence of any fact or facts
which in any manner relate to the affairs of the Trust, shall be conclusive
evidence as to the matters so certified in favor of any Person dealing with the
Trustees and their successors.

     Section 10.5. Provisions in Conflict with Law or Regulations. (a) The
provisions of the Declaration are severable, and if the Trustees shall
determine, with the advice of counsel, that any of such provisions is in
conflict with the 1940 Act, the regulated investment company provisions of the
Internal Revenue Code, or with other applicable laws and regulations, the
conflicting provision shall be deemed never to have constituted a part of the
Declaration; provided however, that such determination shall not affect any of
the remaining provisions of the Declaration or render invalid or improper any
action taken or omitted prior to such determination.

     (b) If any provision of the Declaration shall be held invalid or
unenforceable in any jurisdiction, such invalidity or unenforceability shall
attach only to such provision in such jurisdiction and shall not in any manner
affect such provision in any other jurisdiction or any other provision of the
Declaration in any jurisdiction.

<PAGE>


     IN WITNESS WHEREOF, the undersigned have executed this instrument this
____ day of ________, 2000.



                                          ________________________________
                                          J. Atwood Ives, as
                                          Trustee and not individually

                                          500 Boylston Street
                                          Boston, Massachusetts


                                          ________________________________
                                          Lawrence T. Perera, as
                                          Trustee and not individually

                                          500 Boylston Street
                                          Boston, Massachusetts


                                          ________________________________
                                          Charles W . Schmidt, as
                                          Trustee and not individually

                                          500 Boylston Street
                                          Boston, Massachusetts


                                          ________________________________
                                          Arnold D. Scott, as
                                          Trustee and not individually

                                          500 Boylston Street
                                          Boston, Massachusetts


                                          ________________________________
                                          Jeffrey L. Shames, as
                                          Trustee and not individually

                                          500 Boylston Street
                                          Boston, Massachusetts

<PAGE>

                                          ________________________________
                                          Elaine R. Smith, as
                                          Trustee and not individually

                                          500 Boylston Street
                                          Boston, Massachusetts


                                          ________________________________
                                          William J. Poorvu, as
                                          Trustee and not individually

                                          500 Boylston Street
                                          Boston, Massachusetts


                                          ________________________________
                                          David B. Stone, as
                                          Trustee and not individually

                                          500 Boylston Street
                                          Boston, Massachusetts


<PAGE>





                         COMMONWEALTH OF MASSACHUSETTS

SUFFOLK, SS                                            BOSTON, MASSACHUSETTS
                                                       ________, __, 2000

     Then personally appeared the above-named J. Atwood Ives, Lawrence T.
Perera, William J. Poorvu, Charles W . Schmidt, Arnold D. Scott, Jeffrey L.
Shames, Elaine R. Smith and David B. Stone, and who severally acknowledged the
foregoing instrument to be their free act and deed.

                                        Before me,




                                        ________________________________
                                        Notary Public
                                        My Commission Expires: ________


</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-99.A(2)
<SEQUENCE>3
<FILENAME>0003.txt
<DESCRIPTION>STATEMENT
<TEXT>

                                                                 Exhibit (a)(2)

                           MFS MUNICIPAL INCOME TRUST

                       STATEMENT DATED _________ __, 2000
                             CREATING TWO SERIES OF
                       MUNICIPAL AUCTION RATE CUMULATIVE
                         PREFERRED SHARES ("STATEMENT")

     WHEREAS the Board of Trustees of MFS Municipal Income Trust (the "Trust")
is expressly empowered pursuant to Section 6.1 of the Trust's Declaration of
Trust to authorize the issuance of shares of the Trust in one or more classes
and series, with such preferences, powers, restrictions, limitations or
qualifications as determined by the Board of Trustees and as set forth in the
resolution or resolutions providing for the issuance of such preferred shares;
and

     WHEREAS the Board of Trustees has determined that it is in the best
interests of the Trust to issue one or more series of preferred shares of the
Trust.

     NOW THEREFORE, the Board of Trustees does hereby authorize the issuance of
two series of preferred shares, without par value, liquidation preference
$25,000 per share plus an amount equal to accumulated but unpaid dividends
thereon (whether or not earned or declared), to be designated respectively:
Municipal Auction Rate Cumulative Preferred Shares, Series W and Municipal
Auction Rate Cumulative Preferred Shares, Series F. The preferences, voting
powers, restrictions, limitations as to dividends, qualifications, and terms
and conditions of redemption, of the preferred shares are as follows:

                                     PART I
                                  DESIGNATION

     SERIES W: A series of ______ preferred shares, without par value,
liquidation preference $25,000 per share plus accumulated but unpaid dividends,
if any, thereon (whether or not earned or declared), is hereby designated
"Municipal Auction Rate Cumulative Preferred Shares, Series W" and is referred
to below as "Series W Municipal Preferred." Each share of Series W Municipal
Preferred shall be issued on ________ __, ____; have an Applicable Rate for its
Initial Rate Period equal to [____]% per annum; have an initial Dividend
Payment Date of Wednesday, ________ __, ____; and have such other preferences,
limitations and relative voting and other rights, in addition to those required
by applicable law or set forth in the Trust's Declaration of Trust, as are set
forth in Part I and Part II of this Statement. Series W Municipal Preferred
shall constitute a separate series of Municipal Preferred of the Trust.

     SERIES F: A series of ______ preferred shares, without par value,
liquidation preference $25,000 per share plus accumulated but unpaid dividends,
if any, thereon (whether or not earned or declared), is hereby designated
"Municipal Auction Rate Cumulative Preferred Shares, Series F" and is referred
to below as "Series F Municipal Preferred." Each share of Series F Municipal
Preferred shall be issued on ________ __, ____; have an Applicable Rate for its
Initial Rate Period equal to [____]% per annum; have an initial Dividend
Payment Date of Friday, ________ __, ____; and have such other preferences,
limitations and relative voting and other rights, in addition to those required
by applicable law or set forth in the Trust's Declaration of Trust, as are set
forth in Part I and Part II of this Statement. Series F Municipal Preferred
shall constitute a separate series of Municipal Preferred of the Trust.


<PAGE>

     The Board of Trustees of the Trust may, in their discretion, authorize the
issuance of one or more additional series of Municipal Preferred and may, in
their discretion, increase the number of shares of any series of Municipal
Preferred so long as such issuance is permitted by paragraph 5 of this Part I
of this Statement.

     1. DEFINITIONS. Unless the context or use indicates another or different
meaning or intent, in Part I and Part II of this Statement the following terms
have the following meanings, whether used in the singular or plural:

     "'AA' Composite Commercial Paper Rate," on any date for any Rate Period of
shares of a series of Municipal Preferred, shall mean (i) (A) in the case of
any Minimum Rate Period or any Special Rate Period of fewer than 49 Rate Period
Days, the interest equivalent of the 30-day rate; provided, however, that if
such Rate Period is a Minimum Rate Period and the "AA" Composite Commercial
Paper Rate is being used to determine the Applicable Rate for shares of such
series when all of the Outstanding shares of such series are subject to
Submitted Hold Orders, then the interest equivalent of the seven-day rate, and
(B) in the case of any Special Rate Period of (1) 49 or more but fewer than 70
Rate Period Days, the interest equivalent of the 60-day rate; (2) 70 or more
but fewer than 85 Rate Period Days, the arithmetic average of the interest
equivalent of the 60-day and 90-day rates; (3) 85 or more but fewer than 99
Rate Period Days, the interest equivalent of the 90-day rate; (4) 99 or more
but fewer than 120 Rate Period Days, the arithmetic average of the interest
equivalent of the 90-day and 120-day rates; (5) 120 or more but fewer than 141
Rate Period Days, the interest equivalent of the 120-day rate; (6) 141 or more
but fewer than 162 Rate Period Days, the arithmetic average of the interest
equivalent of the 120-day and 180-day rates; and (7) 162 or more but fewer than
183 Rate Period Days, the interest equivalent of the 180-day rate, in each case
on commercial paper placed on behalf of issuers whose corporate bonds are rated
"AA" by S&P or the equivalent of such rating by S&P or another rating agency,
as made available on a discount basis or otherwise by the Federal Reserve Bank
of New York for the Business Day next preceding such date; or (ii) in the event
that the Federal Reserve Bank of New York does not make available any such
rate, then the arithmetic average of such rates, as quoted on a discount basis
or otherwise, by the Commercial Paper Dealers to the Auction Agent for the
close of business on the Business Day next preceding such date. If any
Commercial Paper Dealer does not quote a rate required to determine the "AA"
Composite Commercial Paper Rate, the "AA" Composite Commercial Paper Rate shall
be determined on the basis of the quotation or quotations furnished by the
remaining Commercial Paper Dealer or Commercial Paper Dealers and any
Substitute Commercial Paper Dealer or Substitute Commercial Paper Dealers
selected by the Trust to provide such rate or rates not being supplied by any
Commercial Paper Dealer or Commercial Paper Dealers, as the case may be, or, if
the Trust does not select any such Substitute Commercial Paper Dealer or
Substitute Commercial Paper Dealers, by the remaining Commercial Paper Dealer
or Commercial Paper Dealers. For purposes of this definition, the "interest
equivalent" of a rate stated on a discount basis (a "discount rate") for
commercial paper of a given days' maturity shall be equal to the quotient
(rounded upwards to the next higher one-thousandth (.001) of 1% of (A) the
discount rate divided by (B) the difference between (x) 1.00 and (y) a fraction
the numerator of which shall be the product of the discount rate times the
number of days in which such commercial paper matures and the denominator of
which shall be 360.

     "Accountant's Confirmation" shall have the meaning specified in paragraph
7(c) of this Part I of this Statement.


<PAGE>

     "Affiliate" shall mean, for purposes of the definition of "Outstanding,"
any Person known to the Auction Agent to be controlled by, in control of or
under common control with the Trust; provided, however, that no Broker-Dealer
controlled by, in control of or under common control with the Trust shall be
deemed to be an Affiliate nor shall any corporation or any Person controlled
by, in control of or under common control with such corporation, one of the
trustees, directors or executive officers of which is a trustee of the Trust be
deemed to be an Affiliate solely because such trustee, director or executive
officer is also a trustee of the Trust.

     "Agent Member" shall mean a member of or participant in the Securities
Depository that will act on behalf of a Bidder.

     "Anticipation Notes" shall mean Tax Anticipation Notes (TANs), Revenue
Anticipation Notes (RANs), Tax and Revenue Anticipation Notes (TRANs), Grant
Anticipation Notes (GANs) that are rated by S&P and Bond Anticipation Notes
(BANs).

     "Applicable Rate" shall have the meaning specified in paragraph 2(e)(i) of
this Part I of this Statement.

     "Auction" shall mean each periodic implementation of the Auction
Procedures.

     "Auction Agency Agreement" shall mean the agreement between the Trust and
the Auction Agent which provides, among other things, that the Auction Agent
will follow the Auction Procedures for purposes of determining the Applicable
Rate for shares of a series of Municipal Preferred so long as the Applicable
Rate for shares of such series is to be based on the results of an Auction.

     "Auction Agent" shall mean the entity appointed as such by a resolution of
the Board of Trustees in accordance with paragraph 6 of Part II of this
Statement.

     "Auction Date," with respect to any Rate Period, shall mean the Business
Day next preceding the first day of such Rate Period.

     "Auction Procedures" shall mean the procedures for conducting Auctions set
forth in Part II of this Statement.

     "Available Municipal Preferred" shall have the meaning specified in
paragraph 3(a) of Part II of this Statement.

     "Benchmark Rate" shall have the meaning specified in paragraph 3(c) of
Part II of this Statement.

     "Beneficial Owner" with respect to shares of a series of Municipal
Preferred, means a customer of a Broker-Dealer who is listed on the records of
that Broker-Dealer (or, if applicable, the Auction Agent) as a holder of shares
of such series.

     "Bid" and "Bids" shall have the respective meanings specified in paragraph
1(a) of Part II of this Statement.


<PAGE>

     "Bidder" and "Bidders" shall have the respective meanings specified in
paragraph 1(a) of Part II of this Statement; provided, however, that neither
the Trust nor any affiliate thereof shall be permitted to be a Bidder in an
Auction, except that any Broker-Dealer that is an affiliate of the Trust may be
a Bidder in an Auction, but only if the Orders placed by such Broker-Dealer are
not for its own account.

     "Board of Trustees" shall mean the Board of Trustees of the Trust or any
duly authorized committee thereof.

     "Broker-Dealer" shall mean any broker-dealer, commercial bank or other
entity permitted by law to perform the functions required of a Broker-Dealer in
Part II of this Statement, that is a member of, or a participant in, the
Securities Depository or is an affiliate of such member or participant, has
been selected by the Trust and has entered into a Broker-Dealer Agreement that
remains effective.

     "Broker-Dealer Agreement" shall mean an agreement among the Trust, the
Auction Agent and a Broker-Dealer pursuant to which such Broker-Dealer agrees
to follow the procedures specified in Part II of this Statement.

     "Business Day" shall mean a day on which the New York Stock Exchange is
open for trading, and which is neither a Saturday, Sunday nor any other day on
which banks in The City of New York, New York are authorized by law to close.

     "By-laws" means the Amended and Restated By-laws of the Trust, as may be
further amended from time to time.

     "Code" means the Internal Revenue Code of 1986, as amended from time to
time.

     "Commercial Paper Dealers" means [Lehman Commercial Paper Incorporated,
Goldman, Sachs & Co. and Merrill Lynch, Pierce, Fenner & Smith Incorporated]
and such other commercial paper dealer or dealers as the Trust may from time to
time appoint, or, in lieu of any thereof, their respective affiliates or
successors.

     "Common Shares" means the common shares of beneficial interest, without
par value, of the Trust.

     "Cure Date" shall have the meaning specified in paragraph 11(b) of this
Part I of this Statement.

     "Date of Original Issue" with respect to shares of a series of Municipal
Preferred, shall mean the date on which the Trust originally issued such
shares.

     "Declaration" shall mean the Amended and Restated Declaration of Trust
dated ________ __, 2000 of the Trust, on file with the Secretary of The
Commonwealth of Massachusetts and as hereafter restated or amended from time to
time.

     "Deposit Securities" shall mean cash and Municipal Obligations rated at
least A-1+ or SP1+ by S&P, except that, for purposes of subparagraph (a)(v) of

<PAGE>

paragraph 11 of Part I of this Statement, such Municipal Obligations shall be
considered "Deposit Securities" only if they are also rated P-1, MIG-1 or
VMIG-1 by Moody's.

     "Discounted Value," as of any Valuation Date, shall mean, (i) with respect
to an S&P Eligible Asset, the quotient of the Market Value thereof divided by
the applicable S&P Discount Factor and (ii) (a) with respect to a Moody's
Eligible Asset that is not currently callable as of such Valuation Date at the
option of the issuer thereof, the quotient of the Market Value thereof divided
by the applicable Moody's Discount Factor, or (b) with respect to a Moody's
Eligible Asset that is currently callable as of such Valuation Date at the
option of the issuer thereof, the quotient of (1) the lesser of the Market
Value or call price thereof, including any call premium, divided by (2) the
applicable Moody's Discount Factor.

     "Dividend Payment Date," with respect to shares of a series of Municipal
Preferred, shall mean any date on which dividends are payable on shares of such
series pursuant to the provisions of paragraph 2(d) of Part I of this
Statement.

     "Dividend Period," with respect to shares of a series of Municipal
Preferred, shall mean the period from and including the Date of Original Issue
of shares of such series to but excluding the initial Dividend Payment Date for
shares of such series and any period thereafter from and including one Dividend
Payment Date for shares of such series to but excluding the next succeeding
Dividend Payment Date for shares of such series; provided, however, that the
Dividend Periods for each of Series W Municipal Preferred and Series F
Municipal Preferred will never be co-extensive with the Dividend Period of the
other series of Municipal Preferred unless the Trust has received an opinion of
tax counsel that having such co-extensive periods will not affect the
deductibility, for federal income tax purposes, of dividends paid on the
different series of Municipal Preferred.

     "Escrowed Bonds" means Municipal Obligations that (i) have been determined
to be legally defeased in accordance with S&P's legal defeasance criteria, (ii)
have been determined to be economically defeased in accordance with S&P's
economic defeasance criteria and assigned a rating of AAA by S&P, (iii) are not
rated by S&P but have been determined to be legally defeased by Moody's, or
(iv) have been determined to be economically defeased by Moody's and assigned a
rating no lower than the rating that is Moody's equivalent of S&P's AAA rating.

     "Existing Holder," with respect to shares of a series of Municipal
Preferred, shall mean a Broker-Dealer (or any such other Person as may be
permitted by the Trust) that is listed on the records of the Auction Agent as a
holder of shares of such series.

     "Failure to Deposit," with respect to shares of a series of Municipal
Preferred, shall mean a failure by the Trust to pay to the Auction Agent, not
later than 12:00 noon, New York City time, (A) on the Business Day next
preceding any Dividend Payment Date for shares of such series, in funds
available on such Dividend Payment Date in The City of New York, New York, the
full amount of any dividend (whether or not earned or declared) to be paid on
such Dividend Payment Date on any share of such series or (B) on the Business
Day next preceding any redemption date in funds available on such redemption
date for shares of such series in The City of New York, New York, the
Redemption Price to be paid on such redemption date for any shares of such
series after notice of redemption is mailed pursuant to paragraph 11(c) of Part
I of this Statement; provided, however, that the foregoing clause (B) shall not
apply to the Trust's failure to pay the Redemption Price in respect of shares
of Municipal Preferred when the related Notice of Redemption provides that

<PAGE>

redemption of such shares is subject to one or more conditions precedent and
any such condition precedent shall not have been satisfied at the time or times
and in the manner specified in such Notice of Redemption.

     "Federal Tax Rate Increase" shall have the meaning specified in the
definition of "Moody's Volatility Factor."

     "Gross-up Payment" in respect of any dividend means payment to a Holder of
shares of a series of Municipal Preferred of an amount which, giving effect to
the Taxable Allocations made with respect to such dividend, would cause such
Holder's after-tax returns (taking into account both the Taxable Allocations
and the Gross-up Payment) to be equal to the after-tax return the Holder would
have received if no such Taxable Allocations had occurred. Such Gross-up
Payment shall be calculated: (i) without consideration being given to the time
value of money; (ii) assuming that no Holder of shares of Municipal Preferred
is subject to the Federal alternative minimum tax with respect to dividends
received from the Trust; and (iii) assuming that each Holder of shares of
Municipal Preferred is taxable at the maximum marginal regular Federal
individual income tax rate applicable to ordinary income or net capital gain,
as applicable, or the maximum marginal regular Federal corporate income tax
rate applicable to ordinary income or net capital gain, as applicable,
whichever is greater, in effect at the time such Gross-up Payment is made.

     "Holder," with respect to shares of a series of Municipal Preferred, shall
mean the Registered Holder of such shares as the same appears on the record
books of the Trust.

     "Hold Order" and "Hold Orders" shall have the respective meanings
specified in paragraph 1(a) of Part II of this Statement.

     "Independent Accountant" shall mean a nationally recognized accountant, or
firm of accountants, that is, with respect to the Trust, an independent public
accountant or firm of independent public accountants under the Securities Act
of 1933, as amended from time to time.

     "Initial Margin" means the amount of cash or securities deposited with a
broker as a margin payment at the time of purchase or sale of a futures
contract.

     "Initial Rate Period," with respect to shares of a series of Municipal
Preferred, shall mean the period from and including the Date of Original Issue
for such series to but excluding the initial Dividend Payment Date for such
series.

     "Interest Equivalent" shall mean a yield on a 360-day basis of a discount
basis security which is equal to the yield on an equivalent interest-bearing
security.

     "Inverse Floater" shall mean trust certificates or other instruments
evidencing interests in one or more municipal securities that qualify as S&P
Eligible Assets (and satisfy the issuer and size requirements of the definition
of S&P Eligible Assets) the interest rates on which are adjusted at short-term
intervals on a basis that is inverse to the simultaneous readjustment of the
interest rates on corresponding floating rate trust certificates or other
instruments issued by the same issuer, provided that the ratio of the aggregate
dollar amount of floating rate instruments to inverse floating rate instruments
issued by the same issuer does not exceed one to one at their time or original

<PAGE>

issuance unless the floating rate instrument has only one reset remaining until
maturity.

     "Kenny Index" shall have the meaning set forth under the definition of
"Taxable Equivalent of the Short-Term Municipal Bond Rate."

     "Late Charge" shall have the meaning specified in paragraph 2(e)(i)(B) of
Part I of this Statement.

     "Liquidation Preference," with respect to a given number of shares of
Municipal Preferred, means $25,000 times that number.

     "Market Value" of any asset of the Trust means the market value thereof
determined by the pricing service designated from time to time by the Board of
Trustees. Market Value of any asset shall include any interest accrued thereon.
The pricing service will use current industry standards to value portfolio
securities. The pricing service may employ electronic data processing
techniques or a matrix system, or both, to determine valuations. Securities for
which quotations are not readily available shall be valued at fair value as
determined by the pricing service using methods which include consideration of
yields or prices of municipal bonds of comparable quality, type of issue,
coupon, maturity and rating; indications as to value from dealers; and general
market conditions. In the event the pricing service is unable to value a
security, the security shall be valued at the lower of two dealer bids obtained
by the Trust from dealers who are nationally recognized members of the National
Association of Securities Dealers, Inc. who are independent of the investment
advisor to the Trust and make a market in the security, at least one of which
shall be in writing. Futures contracts and options are valued at closing prices
for such instruments established by the exchange or board of trade on which
they are traded, or if market quotations are not readily available, are valued
at fair value on a consistent basis using methods determined in good faith by
the Trustees.

     "Maximum Potential Gross-up Payment Liability," as of any Valuation Date,
shall mean the aggregate amount of Gross-up Payments that would be due if the
Trust were to make Taxable Allocations, with respect to any taxable year,
estimated based upon dividends paid and the amount of undistributed realized
net capital gains and other taxable income earned by the Trust, as of the end
of the calendar month immediately preceding such Valuation Date, and assuming
such Gross-up Payments are fully taxable.

     "Maximum Rate," for shares of a series of Municipal Preferred on any
Auction Date for shares of such series, shall mean:

            (i) in the case of any Auction Date which is not the Auction Date
      immediately prior to the first day of any proposed Special Rate Period
      designated by the Trust pursuant to paragraph 4 of Part I of this
      Statement, the product of (A) the Reference Rate on such Auction Date for
      the next Rate Period of shares of such series and (B) the Rate Multiple
      on such Auction Date, unless shares of such series have or had a Special
      Rate Period (other than a Special Rate Period of 28 Rate Period Days or
      fewer) and an Auction at which Sufficient Clearing Bids existed has not
      yet occurred for a Minimum Rate Period of shares of such series after
      such Special Rate Period, in which case the higher of:


<PAGE>

                  (A) the dividend rate on shares of such series for the
            then-ending Rate Period; and

                  (B) the product of (1) the higher of (x) the Reference Rate
            on such Auction Date for a Rate Period equal in length to the
            then-ending Rate Period of shares of such series, if such
            then-ending Rate Period was 364 Rate Period Days or fewer, or the
            Treasury Note Rate on such Auction Date for a Rate Period equal in
            length to the then-ending Rate Period of shares of such series, if
            such then-ending Rate Period was more than 364 Rate Period Days,
            and (y) the Reference Rate on such Auction Date for a Rate Period
            equal in length to such Special Rate Period of shares of such
            series, if such Special Rate Period was 364 Rate Period Days or
            fewer, or the Treasury Note Rate on such Auction Date for a Rate
            Period equal in length to such Special Rate Period, if such Special
            Rate Period was more than 364 Rate Period Days and (2) the Rate
            Multiple on such Auction Date; or

            (ii) in the case of any Auction Date which is the Auction Date
      immediately prior to the first day of any proposed Special Rate Period
      designated by the Trust pursuant to paragraph 4 of Part I of this
      Statement, the product of (A) the highest of (1) the Reference Rate on
      such Auction Date for a Rate Period equal in length to the then-ending
      Rate Period of shares of such series, if such then-ending Rate Period was
      364 Rate Period Days or fewer, or the Treasury Note Rate on such Auction
      Date for a Rate Period equal in length to the then-ending Rate Period of
      shares of such series, if such then-ending Rate Period was more than 364
      Rate Period Days, (2) the Reference Rate on such Auction Date for the
      Special Rate Period for which the Auction is being held if such Special
      Rate Period is 364 Rate Period Days or fewer or the Treasury Note Rate on
      such Auction Date for the Special Rate Period for which the Auction is
      being held if such Special Rate Period is more than 364 Rate Period Days,
      and (3) the Reference Rate on such Auction Date for Minimum Rate Periods
      and (B) the Rate Multiple on such Auction Date.

     "Minimum Rate Period" shall mean any Rate Period consisting of 7 Rate
Period Days.

     "Moody's" shall mean Moody's Investors Service, Inc., a Delaware
corporation, and its successors.

     "Moody's Discount Factor" shall mean, for purposes of determining the
Discounted Value of any Moody's Eligible Asset, the percentage determined by
reference to the rating on such asset and the shortest Exposure Period set
forth opposite such rating that is the same length as or is longer than the
Moody's Exposure Period, in accordance with the table set forth below:

                                Rating Category

<TABLE>
<CAPTION>

<S>                    <C>   <C>   <C>   <C>    <C>     <C>         <C>        <C>
Exposure Period        Aaa*  Aa*   A*    Baa*   Other** (V)MIG-1**  SP-1+****  Unrated*****

7 weeks.............   151%  159%  166%  173%   187%    136%        148%       225%

8 weeks or less but
greater than seven     154   161   168   176    190     137         149        231
weeks...............

<PAGE>

9 weeks or less but
greater than eight
weeks...............   156   163   170   177    192     138         150        240
</TABLE>

   *    Moody's rating.
   **   Municipal Obligations not rated by Moody's but rated BBB by S&P.
   ***  Municipal Obligations rated MIG-1 or VMIG-1, which do not mature or
        have a demand feature at par exercisable in 30 days and which do not
        have a long-term rating.
  ****  Municipal Obligations not rated by Moody's but rated SP-1+ by S&P,
        which do not mature or have a demand feature at par exercisable in
        30 days and which do not have a long-term rating.
 *****  Municipal Obligations rated less than Baa3 by Moody's or less than
        BBB by S&P or not rated by Moody's or S&P.

     Notwithstanding the foregoing, (i) the Moody's Discount Factor for
short-term Municipal Obligations will be 115%, so long as such Municipal
Obligations are rated at least MIG-1, VMIG-1 or P-1 by Moody's and mature or
have a demand feature at par exercisable in 30 days or less or 125% so long as
such Municipal Obligations are rated at least A-1+/AA or SP-1+/AA by S&P and
mature or have a demand feature at par exercisable in 30 days or less and (ii)
no Moody's Discount Factor will be applied to cash or to Receivables for
Municipal Obligations Sold or futures, options and similar instruments (to the
extent such securities are Moody's Eligible Assets); provided, however, that
for purposes of determining the Moody's Discount Factor applicable to a
Municipal Obligation, any Municipal Obligation (excluding any short-term
Municipal Obligation) not rated by Moody's but rated by S&P shall be deemed to
have a Moody's rating which is one full rating category lower than its S&P
rating.

     "Moody's Eligible Asset" shall mean cash, Receivables for Municipal
Obligations Sold, futures, options and similar instruments (other than Inverse
Floaters and index warrants) or a Municipal Obligation that (i) pays interest
in cash, (ii) does not have its Moody's rating, if applicable, suspended by
Moody's, (iii) is part of an issue of Municipal Obligations of at least
$10,000,000, and (iv) is not subject to a covered call or a covered put option
written by the Trust. Municipal Obligations issued by any one issuer and not
rated by Moody's or rated lower than Baa3 by Moody's and not rated by S&P or
rated lower than BBB by S&P ("Unrated Moody's Municipal Obligations") may
comprise no more than 4% of total Moody's Eligible Assets; such Unrated Moody's
Municipal Obligations, if any, together with any Municipal Obligations issued
by the same issuer and rated BBB by S&P may comprise no more than 4% of total
Moody's Eligible Assets; such BBB-rated Municipal Obligations and Unrated
Moody's Municipal Obligations, if any, together with any Municipal Obligations
issued by the same issuer and rated Baa by Moody's or A by S&P may comprise no
more than 6% of total Moody's Eligible Assets; such BBB, Baa and A-rated
Municipal Obligations and Unrated Moody's Municipal Obligations, if any,
together with any Municipal Obligations issued by the same issuer and rated A
by Moody's or AA by S&P, may comprise no more than 10% of total Moody's
Eligible Assets; and such BBB, Baa, A and AA-rated Municipal Obligations and
Unrated Moody's Municipal Obligations, if any, together with any Municipal

<PAGE>

Obligations issued by the same issuer and rated Aa by Moody's or AAA by S&P,
may comprise no more than 20% of total Moody's Eligible Assets. For purposes of
the foregoing sentence, any Municipal Obligation backed by the guaranty, letter
of credit or insurance issued by a third party shall be deemed to be issued by
such third party if the issuance of such third-party credit is the sole
determinant of the rating on such Municipal Obligations. Municipal Obligations
issued by issuers located within a single state or territory and not rated by
Moody's or rated lower than Baa3 by Moody's and not rated by S&P or rated lower
than BBB by S&P may comprise no more than 12% of total Moody's Eligible Assets;
such Unrated Moody's Municipal Obligations, if any, together with any Municipal
Obligations issued by issuers located within the same state or territory and
rated BBB by S&P may comprise no more than 12% of total Moody's Eligible
Assets; such BBB-rated Municipal Obligations and Unrated Moody's Municipal
Obligations, if any, together with any Municipal Obligations issued by issuers
located within the same state or territory and rated Baa by Moody's or A by
S&P, may comprise no more than 20% of total Moody's Eligible Assets; such BBB,
Baa and A-rated Municipal Obligations and Unrated Moody's Municipal
Obligations, if any, together with any Municipal Obligations issued by issuers
located within the same state or territory and rated A by Moody's or AA by S&P,
may comprise no more than 40% of total Moody's Eligible Assets; and such BBB,
Baa, A and AA-rated Municipal Obligations and Unrated Moody's Municipal
Obligations, if any, together with any Municipal Obligations issued by issuers
located within the same state or territory and rated Aa by Moody's or AAA by
S&P, may comprise no more than 60% of total Moody's Eligible Assets. Municipal
Obligations which are not rated by Moody's or S&P may comprise no more than 40%
of the aggregate Market Value of Moody's Eligible Assets; provided, however,
that if the Market Value of such Municipal Obligations exceeds 40% of the
aggregate Market Value of Moody's Eligible Assets, a portion of such Municipal
Obligations (selected by the Trust) shall not be considered Moody's Eligible
Assets, so that the Market Value of such Municipal Obligations (excluding such
portion) does not exceed 40% of the aggregate Market Value of Moody's Eligible
Assets; provided, however, that no such unrated Municipal Obligation shall be
considered a Moody's Eligible Asset if such Municipal Obligation shall be in
"default", which term shall mean for purposes of this definition, either (a)
the nonpayment by the issuer of interest or principal when due or (b) the
notification of the Trust by the trustee under the underlying indenture or
other governing instrument for such Municipal Obligation that the issuer will
fail to pay when due principal or interest on such Municipal Obligation. For
purposes of applying the foregoing requirements, a Municipal Obligation shall
be deemed to be rated BBB by S&P if rated BBB-, BBB or BBB+ by S&P, Moody's
Eligible Assets shall be calculated without including cash, and Municipal
Obligations rated MIG-1, VMIG-1 or P-1 or, if not rated by Moody's, rated
A-1+/Aa or SP-1+/AA by S&P, shall be considered to have a long-term rating of
A. When the Trust sells a Municipal Obligation and agrees to repurchase such
Municipal Obligation at a future day, such Municipal Obligation shall be valued
at its Discounted Value for purposes of determining Moody's Eligible Assets,
and the amount of the repurchase price of such Municipal Obligation shall be
included as a liability for purposes of calculating the Municipal Preferred
Basic Maintenance Amount. When the Trust purchases a Moody's Eligible Asset and
agrees to sell it at a future date, such Eligible Asset shall be valued at the
amount of cash to be received by the Trust upon such future date, provided that
the counterparty to the transaction has a long-term debt rating of at least A2
and a short-term debt rating of at least P1 from Moody's and the transaction
has a term of no more than 30 days; otherwise such Eligible Asset shall be
valued at the Discounted Value of such Eligible Asset. For purposes of
determining the aggregate Discounted Value of Moody's Eligible Assets, such
aggregate amount shall be reduced with respect to any futures contracts as set
forth in paragraph 10(a) of this Part I.

     Notwithstanding the foregoing, an asset will not be considered a Moody's
Eligible Asset to the extent it is (i) subject to any material lien, mortgage,
pledge, security interest or security agreement of any kind (collectively,
"Liens"), except for (a) Liens which are being contested in good faith by
appropriate proceedings and which Moody's has indicated to the Trust will not
affect the status of such asset as a Moody's Eligible Asset, (b) Liens for
taxes that are not then due and payable or that can be paid thereafter without
penalty, (c) Liens to secure payment for services rendered or cash advanced to
the Trust by [Massachusetts Financial Services Company], [The Chase Manhattan
Bank] or the Auction Agent and (d) Liens by virtue of any repurchase agreement

<PAGE>

or futures contract; or (ii) deposited irrevocably for the payment of any
liabilities for purposes of determine the Municipal Preferred Basic Maintenance
Amount.

     "Moody's Exposure Period" shall mean the period commencing on a given
Valuation Date and ending 49 days thereafter.

     "Moody's Volatility Factor" shall mean, as of any Valuation Date, (i) in
the case of any Minimum Rate Period, any Special Rate period of 28 Rate Period
Days or fewer, or any Special Rate Period of 57 Rate Period Days or more, a
multiplicative factor equal to 275%, except as otherwise provided in the last
sentence of this definition; (ii) in the case of any Special Rate Period of
more than 28 but fewer than 36 Rate Period Days, a multiplicative factor equal
to 203%; (iii) in the case of any Special Rate Period of more than 35 but fewer
than 43 Rate Period Days, a multiplicative factor equal to 217%; (iv) in the
case of any Special Rate Period of more than 42 but fewer than 50 Rate Period
Days, a multiplicative factor equal to 226%; and (v) in the case of any Special
Rate Period of more than 49 but fewer than 57 Rate Period Days, a
multiplicative factor equal to 235%. If, as a result of the enactment of
changes to the Code, the greater of the maximum marginal Federal individual
income tax rate applicable to ordinary income and the maximum marginal Federal
corporate income tax rate applicable to ordinary income will increase, such
increase being rounded up to the next five percentage points (the "Federal Tax
Rate Increase"), until the effective date of such increase, the Moody's
Volatility Factor in the case of any Rate Period described in (i) above in this
definition instead shall be determined by reference to the following table:

                  Federal                        Volatility
            Tax Rate Increase                      Factor

                   5%                              295%
                  10%                              317%
                  15%                              341%
                  20%                              369%
                  25%                              400%
                  30%                              436%
                  35%                              477%
                  40%                              525%

     "Municipal Obligations" shall mean "Municipal Obligations" as defined in
the Trust's registration statement on Form N-2 as filed with the Securities and
Exchange Commission on ________ __, 2000 (the "Registration Statement").

     "Municipal Preferred" shall mean the Municipal Auction Rate Cumulative
Preferred Shares, Series W and/or Series F without par value, liquidation
preference $25,000 per share, of the Trust.

     "Municipal Preferred Basic Maintenance Amount," as of any Valuation Date,
shall mean the dollar amount equal to the sum of (i) (A) the product of the
number of shares of Municipal Preferred outstanding on such date multiplied by
$25,000 (plus the product of the number of shares of any other series of
Preferred Shares outstanding on such date multiplied by the liquidation

<PAGE>

preference of such shares), plus any redemption premium applicable to shares of
Municipal Preferred (or other Preferred Shares) then subject to redemption; (B)
the aggregate amount of dividends that will have accumulated at the respective
Applicable Rates (whether or not earned or declared) to (but not including) the
first respective Dividend Payment Dates for shares of Municipal Preferred
outstanding that follow such Valuation Date (plus the aggregate amount of
dividends, whether or not earned or declared, that will have accumulated in
respect of other outstanding Preferred Shares to, but not including, the first
respective dividend payment dates for such other shares that follow such
Valuation Date); (C) the aggregate amount of dividends that would accumulate on
shares of each series of Municipal Preferred outstanding from such first
respective Dividend Payment Date therefor through the 49th day after such
Valuation Date, at the Maximum Rate (calculated as if such Valuation Date were
the Auction Date for the Rate Period commencing on such Dividend Payment Date)
for a Minimum Rate Period of shares of such series to commence on such Dividend
Payment Date, assuming, solely for purposes of the foregoing, that if on such
Valuation Date the Trust shall have delivered a Notice of Special Rate Period
to the Auction Agent pursuant to paragraph 4(d)(i) of this Part I with respect
to shares of such series, such Maximum Rate shall be the higher of (a) the
Maximum Rate for the Special Rate Period of shares of such series to commence
on such Dividend Payment Date and (b) the Maximum Rate for a Minimum Rate
Period of shares of such series to commence on such Dividend Payment Date,
multiplied by the Volatility Factor applicable to a Minimum Rate Period, or, in
the event the Trust shall have delivered a Notice of Special Rate Period to the
Auction Agent pursuant to paragraph 4(d)(i) of this Part I with respect to
shares of such series designating a Special Rate Period consisting of 49 Rate
Period Days or more, the Volatility Factor applicable to a Special Rate Period
of that length (plus the aggregate amount of dividends that would accumulate at
the maximum dividend rate or rates on any other Preferred Shares outstanding
from such respective dividend payment dates through the 49th day after such
Valuation Date, as established by or pursuant to the respective statements
establishing and fixing the rights and preferences of such other Preferred
Shares) (except that (1) if such Valuation Date occurs at a time when a Failure
to Deposit (or, in the case of Preferred Shares other than Municipal Preferred,
a failure similar to a Failure to Deposit) has occurred that has not been
cured, the dividend for purposes of calculation would accumulate at the current
dividend rate then applicable to the shares in respect of which such failure
has occurred and (2) for those days during the period described in this
subparagraph (C) in respect of which the Applicable Rate in effect immediately
prior to such Dividend Payment Date will remain in effect (or, in the case of
the Preferred Shares other than Municipal Preferred, in respect of which the
dividend rate or rates in effect immediately prior to such respective dividend
payment dates will remain in effect), the dividend for purposes of calculation
would accumulate at such Applicable Rate (or other rate or rates, as the case
may be) in respect of those days); (D) the amount of anticipated expenses of
the Trust for the 90 days subsequent to such Valuation Date; (E) the amount of
the Trust's Maximum Potential Gross-up Payment Liability in respect of shares
of Municipal Preferred (and similar amounts payable in respect of other
Preferred Shares pursuant to provisions similar to those contained in paragraph
3 of Part I of this Statement) as of such Valuation Date; and (F) any current
liabilities as of such Valuation Date to the extent not reflected in any of (i)
(A) through (i)(E) (including, without limitation, any payables for Municipal
Obligations purchased as of such Valuation Date and any liabilities incurred
for the purpose of clearing securities transactions) less (ii) the value (i.e.,
for purposes of current Moody's guidelines, the face value of cash, short-term
Municipal Obligations rated MIG-1, VMIG-1 or P-1, and short-term securities
that are the direct obligation of the U.S. government, provided in each case
that such securities mature on or prior to the date upon which any of (i) (A)
through (i)(F) become payable, otherwise the Moody's Discounted Value or for
purposes of current S&P guides, the face value of cash, short-term municipal
securities rated "A-1+" or "SP-1+" and mature or have a demand feature
exercisable in 30 days or less, and short-term securities that are the direct
obligation of the U.S. government, provided in each case that such securities
mature on or prior to the date upon which any of (i)(A) through (i)(F) become

<PAGE>

payable, otherwise S&P's Discounted Value) of any of the Trust's assets
irrevocably deposited by the Trust for the payment of any of (i) (A) through
(i)(F).

     "Municipal Preferred Basic Maintenance Cure Date," with respect to the
failure by the Trust to satisfy the Municipal Preferred Basic Maintenance
Amount (as required by paragraph 7(a) of Part I of this Statement) as of a
given Valuation Date, shall mean the second Business Day following such
Valuation Date.

     "Municipal Preferred Basic Maintenance Report" shall mean a report signed
by the President, Treasurer, Controller, Secretary or any Senior Vice President
or Vice President of the Trust which sets forth, as of the related Valuation
Date, the assets of the Trust, the Market Value and the Discounted Value
thereof (seriatim and in aggregate), and the Municipal Preferred Basic
Maintenance Amount.

     "1940 Act" shall mean the Investment Company Act of 1940, as amended from
time to time.

     "1940 Act Cure Date," with respect to the failure by the Trust to maintain
the 1940 Act Municipal Preferred Asset Coverage (as required by paragraph 6 of
this Part I of this Statement) as of the last Business Day of each month, shall
mean the last Business Day of the following month.

     "1940 Act Municipal Preferred Asset Coverage" shall mean asset coverage,
as defined in Section 18(h) of the 1940 Act, of at least 200% with respect to
all outstanding senior securities of the Trust which are shares of beneficial
interest, including all outstanding shares of Municipal Preferred (or such
other asset coverage as may in the future be specified in or under the 1940 Act
as the minimum asset coverage for senior securities which are shares or stock
of a closed-end investment company as a condition of declaring dividends on its
common shares or stock).

     "Notice of Redemption" shall mean any notice with respect to the
redemption of shares of Municipal Preferred pursuant to paragraph 11(c) of this
Part I of this Statement.

     "Notice of Special Rate Period" shall mean any notice with respect to a
Special Rate Period of shares of Municipal Preferred pursuant to paragraph
4(d)(i) of this Part I of this Statement.

     "Order" and "Orders" shall have the respective meanings specified in
paragraph 1(a) of Part II of this Statement.

     "Outstanding" shall mean, as of any Auction Date with respect to shares of
any series of Municipal Preferred, the number of shares of such series
theretofore issued by the Trust except, without duplication, (i) any shares of
such series theretofore canceled or delivered to the Auction Agent for
cancellation or redeemed by the Trust, (ii) any shares of such series as to
which the Trust or any Affiliate thereof shall be an Existing Holder and (iii)
any shares of such series represented by any certificate in lieu of which a new
certificate has been executed and delivered by the Trust.

     "Persons" shall mean and include an individual, a partnership, a
corporation, a trust, an unincorporated association, a joint venture or other
entity or a government or any agency or political subdivision thereof.


<PAGE>

     "Potential Beneficial Owner," with respect to shares of a series of
Municipal Preferred, shall mean a customer of a Broker-Dealer that is not a
Beneficial Owner of shares of such series but that wishes to purchase shares of
such series, or that is a Beneficial Owner of shares of such series that wishes
to purchase additional shares of such series.

     "Potential Holder," with respect to shares of a series of Municipal
Preferred, shall mean a Broker-Dealer (or any such other person as may be
permitted by the Trust) that is not an Existing Holder of shares of such series
or that is an Existing Holder of shares of such series that wishes to become
the Existing Holder of additional shares of such series.

     "Preferred Shares" shall mean the preferred shares, without par value, of
the Trust, and includes the shares of Municipal Preferred.

     "Quarterly Valuation Date" shall mean the last Business Day of each
[________, ________ and ________] of each year, commencing on ________ __,
____with respect to Series W Municipal Preferred and Series F Municipal
Preferred.

     "Rate Multiple," for shares of a series of Municipal Preferred on any
Auction Date for shares of such series, shall mean the percentage, determined
as set forth below, based on the prevailing rating of shares of such series in
effect at the close of business on the Business Day next preceding such Auction
Date:

      Prevailing Rating                               Percentage
      "aa3"/AA- or higher.............................  110%
      "a3"/A-.........................................  125%
      "baa3"/BBB-.....................................  150%
      "ba3"/BB-.......................................  200%
      Below "ba3"/BB-.................................  250%

provided, however, that in the event the Trust has notified the Auction Agent
of its intent to allocate income taxable for Federal income tax purposes to
shares of such series prior to the Auction establishing the Applicable Rate for
shares of such series, the applicable percentage in the foregoing table shall
be divided by the quantity 1 minus the maximum marginal regular Federal
individual income tax rate applicable to ordinary income or the maximum
marginal regular Federal corporate income tax rate applicable to ordinary
income, whichever is greater.

     For purposes of this definition, the "prevailing rating" of shares of a
series of Municipal Preferred shall be (i) "aa3"/AA- or higher if such shares
have a rating of "aa3" or better by Moody's and AA- or better by S&P or the
equivalent of such ratings by such agencies or a substitute rating agency or
substitute rating agencies selected as provided below, (ii) if not "aa3"/AA- or
higher, then "a3"/A- if such shares have a rating of "a3" or better by Moody's
and A- or better by S&P or the equivalent of such ratings by such agencies or a
substitute rating agency or substitute rating agencies selected as provided
below, (iii) if not "aa3"/AA- or higher or "a3"/A-, then "baa3"/BBB- if such

<PAGE>

shares have a rating of "baa3" or better by Moody's and BBB- or better by S&P
or the equivalent of such ratings by such agencies or a substitute rating
agency or substitute rating agencies selected as provided below, (iv) if not
"aa3"/AA- or higher, "a3"/A- or "baa3"/BBB-, then "ba3"/BB- if such shares have
a rating of "ba3" or better by Moody's and BB- or better by S&P or the
equivalent of such ratings by such agencies or a substitute rating agency or
substitute rating agencies selected as provided below, and (v) if not "aa3"/AA-
or higher, "a3"/A-, "baa3"/BBB-, or "ba3"/BB-, then below "ba3"/BB-; provided,
however, that if such shares are rated by only one rating agency, the
prevailing rating will be determined without reference to the rating of any
other rating agency. The Trust shall take all reasonable action necessary to
enable either S&P or Moody's to provide a rating for shares of Municipal
Preferred. If neither S&P nor Moody's shall make such a rating available,
Salomon Smith Barney Inc. or its successor shall select at least one nationally
recognized statistical rating organization (as that term is used in the rules
and regulations of the Securities and Exchange Commission under the Securities
Exchange Act of 1934, as amended from time to time) to act as a substitute
rating agency in respect of shares of such series of Municipal Preferred, and
the Trust shall take all reasonable action to enable such rating agency to
provide a rating for such shares.

     "Rate Period," with respect to shares of a series of Municipal Preferred,
shall mean the Initial Rate Period of shares of such series and any Subsequent
Rate Period, including any Special Rate Period, of shares of such series.

     "Rate Period Days," for any Rate Period or Dividend Period, means the
number of days that would constitute such Rate Period or Dividend Period but
for the application of paragraph 2(d) of Part I of this Statement or paragraph
4(b) of Part I of this Statement.

     "Receivables for Municipal Obligations Sold" shall mean (A) for purposes
of calculating Moody's Eligible Assets as of any Valuation Date, no more than
the aggregate of the following: (i) the book value of receivables for Municipal
Obligations sold as of or prior to such Valuation Date if such receivables are
due within five business days of such Valuation Date, and if the trades which
generated such receivables are (x) settled through clearing house firms with
respect to which the Trust has received prior written authorization from
Moody's or (y) with counterparties having a Moody's long-term debt rating of at
least Baa3; and (ii) the Moody's Discounted Value of Municipal Obligations sold
as of or prior to such Valuation Date which generated receivables, if such
receivables are due within five business days of such Valuation Date but do not
comply with either of the conditions specified in (i) above, and (B) for
purposes of calculating S&P Eligible Assets as of any Valuation Date, the book
value of receivables for Municipal Obligations sold as of or prior to such
Valuation Date if such receivables are due within five business days of such
Valuation Date.

     "Redemption Price" shall mean the applicable redemption price specified in
paragraph 11(a) or (b) of Part I of this Statement.

     "Reference Rate" shall mean (i) the higher of the Taxable Equivalent of
the Short-Term Municipal Bond Rate and the "AA" Composite Commercial Paper Rate
in the case of Minimum Rate Periods and Special Rate Periods of 28 Rate Period
Days or fewer; (ii) the "AA" Composite Commercial Paper Rate in the case of
Special Rate Periods of more than 28 Rate Period Days but fewer than 183 Rate
Period Days; and (iii) the Treasury Bill Rate in the case of Special Rate
Periods of more than 182 Rate Period Days but fewer than 365 Rate Period Days.

     "Registration Statement" has the meaning specified in the definition of
"Municipal Obligations."


<PAGE>

     "S&P" means Standard & Poor's Ratings Services, a division of The
McGraw-Hill Companies, Inc., and its successors.

     "S&P Discount Factor" shall mean, for purposes of determining the
Discounted Value of any S&P Eligible Asset, the percentage determined by
reference to the rating on such asset and the shortest S&P Exposure Period set
forth opposite such rating that is the same length as or is longer than the S&P
Exposure Period, in accordance with the table set forth below:

<PAGE>



                                              Rating Category
Exposure Period                                AAA*   AA*   A*   BBB* Unrated**

45 Business Days............................   190%  195%  210%  250%  220%
25 Business Days............................   170   175   190   230   220
10 Business Days............................   155   160   175   215   220
  7 Business Days...........................   150   155   170   210   220
  3 Business Days...........................   130   135   150   190   220
- --------------
*    S&P rating.

**   S&P Eligible Assets not rated by S&P or rated less than BBB by S&P and not
     rated at least the equivalent of an "A" rating by another nationally
     recognized credit rating agency.

     Notwithstanding the foregoing, (i) the S&P Discount Factor for short-term
Municipal Obligations will be 115%, so long as such Municipal Obligations are
rated A-1+ or SP-1+ by S&P and mature or have a demand feature exercisable
within 30 days or less, 120% if such Municipal Obligations are rated A-1 or
SP-1- by S&P and mature or have a demand feature exercisable within 30 days or
less, or 125% if such Municipal Obligations are not rated by S&P but are rated
VMIG-1, P-1 or MIG-1 by Moody's; provided, however, that any such Moody's-rated
short-term Municipal Obligations which have demand features exercisable within
30 days or less must be backed by a letter of credit, liquidity facility or
guarantee from a bank or other financial institution with a short-term rating
of at least A-1+ from S&P; and further provided that such Moody's-rated
short-term Municipal Obligations may comprise no more than 50% of short-term
Municipal Obligations that qualify as S&P Eligible Assets; (ii) no S&P Discount
Factor will be applied to cash, futures, options, Inverse Floaters and similar
instruments or to Receivables for Municipal Obligations Sold; and (iii) except
as set forth in clause (i) above, in the case of any Municipal Obligation that
is not rated by S&P but qualifies as an S&P Eligible Asset pursuant to clause
(iii) of that definition, such Municipal Obligation will be deemed to have an
S&P rating one full rating category lower than the S&P rating category that is
the equivalent of the rating category in which such Municipal Obligation is
placed by such other nationally recognized credit rating agency. For purposes
of the foregoing, Anticipation Notes rated SP-1+ or, if not rated by S&P, rated
MIG-1 or VMIG-1 by Moody's, which do not mature or have a demand feature at par
exercisable in 30 days and which do not have a long-term rating, shall be
considered to be short-term Municipal Obligations.

     "S&P Eligible Asset" shall mean cash (excluding any cash irrevocably
deposited by the Trust for the payment of any liabilities within the meaning of
Municipal Preferred Basic Maintenance Amount), Receivables for Municipal
Obligations Sold, futures, options, Inverse Floaters and similar instruments or
a Municipal Obligation owned by the Trust that (i) is interest bearing and pays
interest at least semi-annually; (ii) is payable with respect to principal and
interest in U.S. Dollars; (iii) is publicly rated BBB or higher by S&P or,
except in the case of Anticipation Notes that are Grant Anticipation Notes or
Bond Anticipation Notes which must be rated by S&P to be included in S&P
Eligible Assets, if not rated by S&P but rated by another nationally recognized
credit rating agency, is rated at least A by such agency; (iv) is not part of a
private placement of Municipal Obligations (except in the case of Inverse
Floaters); (v) is part of an issue of Municipal Obligations with an original
issue size of at least $20 million or, if of an issue with an original issue
size below $20 million (but in no event below $10 million), is issued by an
issuer with a total of at least $50 million of securities outstanding; and (vi)
is not subject to a covered call or covered put option written by the Trust.
Solely for purposes of this definition, the term "Municipal Obligation" means
any obligation the interest on which is exempt from regular Federal income
taxation and which is issued by any of the fifty United States, the District of

<PAGE>

Columbia or any of the territories of the United States, their subdivisions,
counties, cities, towns, villages, school districts and agencies (including
authorities and special districts created by the states), and federally
sponsored agencies such as local housing authorities. Notwithstanding the
foregoing limitations:

            (1) Municipal Obligations (excluding Escrowed Bonds) of any one
      issuer or guarantor (excluding bond insurers) shall be considered S&P
      Eligible Assets only to the extent the Market Value of such Municipal
      Obligations does not exceed 10% of the aggregate Market Value of S&P
      Eligible Assets, provided that 2% is added to the applicable S&P Discount
      Factor for every 1% by which the Market Value of such Municipal
      Obligations exceeds 5% of the aggregate Market Value of S&P Eligible
      Assets, and provided that Municipal Obligations (excluding Escrowed
      Bonds) not rated by S&P or rated less than BBB by S&P and not rated at
      least A by another nationally recognized credit rating agency of any one
      issuer or guarantor (excluding bond insurers) shall constitute S&P
      Eligible Assets only to the extent the Market Value of such Municipal
      Obligations does not exceed 5% of the aggregate Market Value of S&P
      Eligible Assets;

            (2) Municipal Obligations not rated at least BBB or not rated by
      S&P or not rated at least A by another nationally recognized credit
      rating agency shall be considered S&P Eligible Assets only to the extent
      the Market Value of such Municipal Obligations does not exceed 50% of the
      aggregate Market Value of S&P Eligible Assets; provided, however, that if
      the Market Value of such Municipal Obligations exceeds 50% of the
      aggregate Market Value of S&P Eligible Assets, a portion of such
      Municipal Obligations (selected by the Trust) shall not be considered S&P
      Eligible Assets, so that the Market Value of such Municipal Obligations
      (excluding such portion) does not exceed 50% of the aggregate Market
      Value of S&P Eligible Assets;

            (3) Long-term Municipal Obligations (excluding Escrowed Bonds)
      issued by issuers in any one state or territory shall be considered S&P
      Eligible Assets only to the extent that the Market Value of such
      Municipal Obligations does not exceed 25% of the aggregate Market Value
      of S&P Eligible Assets; and

            (4) Municipal Obligations which are not interest bearing or do not
      pay interest at least semi-annually shall be considered S&P Eligible
      Assets if rated AAA by S&P.

     For purposes of determining the aggregate Discounted Value of S&P's
Eligible Assets, such aggregate amount shall be reduced with respect to any
futures contracts as set forth in paragraph 10(a) of this Part I.

     "S&P Exposure Period" shall mean the period commencing on a given
Valuation Date and ending three business days thereafter.


<PAGE>

     "S&P Volatility Factor" shall mean, as of any Valuation Date, a
multiplicative factor equal to (i) 305% in the case of any Minimum Rate Period
or any Special Rate Period of 28 Rate Period Days or fewer; (ii) 268% in the
case of any Special Rate Period of more than 28 Rate Period Days but fewer than
183 Rate Period Days; and (iii) 204% in the case of any Special Rate Period of
more than 182 Rate Period Days.

     "Securities Depository" shall mean The Depository Trust Company and its
successors and assigns or any other securities depository selected by the Trust
which agrees to follow the procedures required to be followed by such
securities depository in connection with shares of Municipal Preferred.

     "Sell Order" and "Sell Orders" shall have the respective meanings
specified in paragraph 1(a) of Part II of this Statement.

     "Special Rate Period," with respect to shares of a series of Municipal
Preferred, shall have the meaning specified in paragraph 4(a) of Part I of this
Statement.

     "Special Redemption Provisions" shall have the meaning specified in
paragraph 11(a)(i) of Part I of this Statement.

     "Submission Deadline" shall mean 1:30 P.M., New York City time, on any
Auction Date or such other time on any Auction Date by which Broker-Dealers are
required to submit Orders to the Auction Agent as specified by the Auction
Agent from time to time.

     "Submitted Bid" and "Submitted Bids" shall have the respective meanings
specified in paragraph 3(a) of Part II of this Statement.

     "Submitted Hold Order" and "Submitted Hold Orders" shall have the
respective meanings specified in paragraph 3(a) of Part II of this Statement.

     "Submitted Order" and "Submitted Orders" shall have the respective
meanings specified in paragraph 3(a) of Part II of this Statement.

     "Submitted Sell Order" and "Submitted Sell Orders" shall have the
respective meanings specified in paragraph 3(a) of Part II of this Statement.

     "Subsequent Rate Period," with respect to shares of a series of Municipal
Preferred, shall mean the period from and including the first day following the
Initial Rate Period of shares of such series to but excluding the next Dividend
Payment Date for shares of such series and any period thereafter from and
including one Dividend Payment Date for shares of such series to but excluding
the next succeeding Dividend Payment Date for shares of such series; provided,
however, that if any Subsequent Rate Period is also a Special Rate Period, such
term shall mean the period commencing on the first day of such Special Rate
Period and ending on the last day of the last Dividend Period thereof.

     "Substitute Commercial Paper Dealer" shall mean [CS First Boston or Morgan
Stanley & Co. Incorporated] or their respective affiliates or successors, if
such entity is a commercial paper dealer; provided, however, that none of such
entities shall be a Commercial Paper Dealer.


<PAGE>

     "Substitute U.S. Government Securities Dealer" shall mean [CS First Boston
and Merrill Lynch, Pierce, Fenner & Smith Incorporated] or their respective
affiliates or successors, if such entity is a U.S. Government securities
dealer; provided, however, that none of such entities shall be a U.S.
Government Securities Dealer.

     "Sufficient Clearing Bids" shall have the meaning specified in paragraph
3(a) of Part II of this Statement.

     "Taxable Allocation" shall have the meaning specified in paragraph 3 of
Part I of this Statement.

     "Taxable Equivalent of the Short-Term Municipal Bond Rate," on any date
for any Minimum Rate Period or Special Rate Period of 28 Rate Period Days or
fewer, shall mean 90% of the quotient of (A) the per annum rate expressed on an
interest equivalent basis equal to the S&P Kenny 30 day High Grade Index or any
successor index (the "Kenny Index") (provided, however, that any such successor
index must be approved by Moody's (if Moody's is then rating the shares of
Municipal Preferred) and S&P (if S&P is then rating the shares of Municipal
Preferred)), made available for the Business Day immediately preceding such
date but in any event not later than 8:30 A.M., New York City time, on such
date by S&P J.J. Kenny Evaluation Services or any successor thereto, based upon
30-day yield evaluations at par of short-term bonds the interest on which is
excludable for regular Federal income tax purposes under the Code, of "high
grade" component issuers selected by S&P J.J. Kenny Evaluation Services or any
such successor from time to time in its discretion, which component issuers
shall include, without limitation, issuers of general obligation bonds, but
shall exclude any bonds the interest on which constitutes an item of tax
preference under Section 57(a)(5) of the Code, or successor provisions, for
purposes of the "alternative minimum tax," divided by (B) 1.00 minus the
maximum marginal regular Federal individual income tax rate applicable to
ordinary income or the maximum marginal regular Federal corporate income tax
rate applicable to ordinary income (in each case expressed as a decimal),
whichever is greater; provided, however, that if the Kenny Index is not made so
available by 8:30 A.M., New York City time, on such date by S&P J.J. Kenny
Evaluation Services or any successor, the Taxable Equivalent of the Short-Term
Municipal Bond Rate shall mean the quotient of (A) the per annum rate expressed
on an interest equivalent basis equal to the most recent Kenny Index so made
available for any preceding Business Day, divided by (B) 1.00 minus the maximum
marginal regular Federal individual income tax rate applicable to ordinary
income or the maximum marginal regular Federal corporate income tax rate
applicable to ordinary income (in each case expressed as a decimal), whichever
is greater.

     "Taxable Income" shall have the meaning specified in paragraph 3(c) of
Part II of this Statement.

     "Treasury Bill" shall mean a direct obligation of the U.S. Government
having a maturity at the time of issuance of 364 days or less.

     "Treasury Bill Rate," on any date for any Rate Period, shall mean (i) the
bond equivalent yield, calculated in accordance with prevailing industry
convention, of the rate on the most recently auctioned Treasury Bill with a
remaining maturity closest to the length of such Rate Period, as quoted in The
Wall Street Journal on such date for the Business Day next preceding such date;
or (ii) in the event that any such rate is not published in The Wall Street
Journal, then the bond equivalent yield, calculated in accordance with
prevailing industry convention, as calculated by reference to the arithmetic
average of the bid price quotations of the most recently auctioned Treasury

<PAGE>

Bill with a remaining maturity closest to the length of such Rate Period, as
determined by bid price quotations as of the close of business on the Business
Day immediately preceding such date obtained from the U.S. Government
Securities Dealers to the Auction Agent.

     "Treasury Note" shall mean a direct obligation of the U.S. Government
having a maturity at the time of issuance of five years or less but more than
364 days.

     "Treasury Note Rate," on any date for any Rate Period, shall mean (i) the
yield on the most recently auctioned Treasury Note with a remaining maturity
closest to the length of such Rate Period, as quoted in The Wall Street Journal
on such date for the Business Day next preceding such date; or (ii) in the
event that any such rate is not published in The Wall Street Journal, then the
yield as calculated by reference to the arithmetic average of the bid price
quotations of the most recently auctioned Treasury Note with a remaining
maturity closest to the length of such Rate Period, as determined by bid price
quotations as of the close of business on the Business Day immediately
preceding such date obtained from the U.S. Government Securities Dealers to the
Auction Agent. If any U.S. Government Securities Dealer does not quote a rate
required to determine the Treasury Bill Rate of the Treasury Note Rate, the
Treasury Bill Rate or the Treasury Note Rate shall be determined on the basis
of the quotation or quotations furnished by the remaining U.S. Government
Securities Dealer or U.S. Government Securities Dealers and any Substitute U.S.
Government Securities Dealers selected by the Trust to provide such rate or
rates not being supplied by any U.S. Government Securities Dealer or U.S.
Government Securities Dealers, as the case may be, or, if the Trust does not
select any such Substitute U.S. Government Securities Dealer or Substitute U.S.
Government Securities Dealers, by the remaining U.S. Government Securities
Dealer or U.S. Government Securities Dealers.

     "U.S. Government Securities Dealer" shall mean [Lehman Government
Securities Incorporated, Goldman, Sachs & Co., Salomon Smith Barney Inc. and
Morgan Guaranty Trust Company of New York] or their respective affiliates or
successors, if such entity is a U.S. government securities dealer.

     "Valuation Date" shall mean, for purposes of determining whether the Trust
is maintaining the Municipal Preferred Basic Maintenance Amount, each Business
Day.

     "Variation Margin" means, in connection with an outstanding futures
contract owned or sold by the Trust, the amount of cash or securities paid to
or received from a broker (subsequent to the Initial Margin payment) from time
to time as the price of such futures contract fluctuates.

     "Volatility Factor" shall mean, as of any Valuation Date, the greater of
the Moody's Volatility Factor and the S&P Volatility Factor.

     "Voting Period" shall have the meaning specified in paragraph 5(b) of this
Part I of this Statement.

     "Winning Bid Rate" shall have the meaning specified in paragraph 3(a) of
Part II of this Statement.


<PAGE>

     2. DIVIDENDS.

     (a) RANKING. The shares of a series of Municipal Preferred shall rank on a
parity with each other, with shares of any other series of Municipal Preferred
and with shares of any other series of Preferred Shares as to the payment of
dividends by the Trust.

     (b) CUMULATIVE CASH DIVIDENDS. The Holders of shares of Municipal
Preferred of any series shall be entitled to receive, when, as and if declared
by the Board of Trustees, out of funds legally available therefor in accordance
with the Declaration, this Statement and applicable law, cumulative cash
dividends at the Applicable Rate for shares of such series, determined as set
forth in subparagraph (e) of this paragraph 2, and no more (except to the
extent set forth in paragraph 3 of this Part I), payable on the Dividend
Payment Dates with respect to shares of such series determined pursuant to
subparagraph (d) of this paragraph 2. Holders of shares of Municipal Preferred
shall not be entitled to any dividend, whether payable in cash, property or
shares, in excess of full cumulative dividends, as herein provided, on shares
of Municipal Preferred. No interest, or sum of money in lieu of interest, shall
be payable in respect of any dividend payment or payments on shares of
Municipal Preferred which may be in arrears, and, except to the extent set
forth in subparagraph (e)(i) of this paragraph 2, no additional sum of money
shall be payable in respect of any such arrearage.

     (c) DIVIDENDS CUMULATIVE FROM DATE OF ORIGINAL ISSUE. Dividends on shares
of Municipal Preferred of any series shall accumulate at the Applicable Rate
for shares of such series from the Date of Original Issue thereof.

     (d) DIVIDEND PAYMENT DATES AND ADJUSTMENTS THEREOF. The Dividend Payment
Dates with respect to shares of a series of Municipal Preferred shall be
Wednesday, ________ __, ____ and each Wednesday thereafter with respect to
shares of Series W Municipal Preferred and Friday, ________ __, ____ and each
Friday thereafter with respect to shares of Series F Municipal Preferred;
provided, however, that

            (i) if the Wednesday or Friday, as the case may be, on which
      dividends would otherwise be payable on shares of such series is not a
      Business Day, then such dividends shall be payable on shares of such
      series on the first Business Day that falls after such Wednesday or
      Friday, as the case may be; and

            (ii) notwithstanding the foregoing provisions of this paragraph
      2(d), the Trust in its discretion may establish the Dividend Payment
      Dates in respect of any Special Rate Period of shares of a series of
      Municipal Preferred consisting of more than 28 Rate Period Days;
      provided, however, that such dates shall be set forth in the Notice of
      Special Rate Period relating to such Special Rate Period, as delivered to
      the Auction Agent, which Notice of Special Rate Period shall be filed
      with the Secretary of the Trust; and further provided that (1) any such
      Dividend Payment Date shall be a Business Day and (2) the last Dividend
      Payment Date in respect of such Special Rate Period shall be the Business
      Day immediately following the last day thereof, as such last day is
      determined in accordance with subparagraph (b) of paragraph 4 of Part I
      of this Statement.


<PAGE>

     (e) DIVIDEND RATES AND CALCULATION OF DIVIDENDS.

            (i) DIVIDEND RATES. The dividend rate on shares of Municipal
      Preferred of any series during the period from and after the Date of
      Original Issue of shares of such series to and including the last day of
      the Initial Rate Period of shares of such series shall be equal to the
      rate per annum set forth with respect to shares of such series under
      "Designation" in this Part I. For each Subsequent Rate Period of shares
      of such series thereafter, the dividend rate on shares of such series
      shall be equal to the rate per annum that results from an Auction for
      shares of such series on the Auction Date next preceding such Subsequent
      Rate Period; provided, however, that if:

                  (A) an Auction for any such Subsequent Rate Period is not
            held for any reason other than as described below, the dividend
            rate on shares of such series for such Subsequent Rate Period will
            be the Maximum Rate for shares of such series on the Auction Date
            therefor;

                  (B) any Failure to Deposit shall have occurred with respect
            to shares of such series during any Rate Period thereof (other than
            any Special Rate Period consisting of more than 364 Rate Period
            Days or any Rate Period succeeding any Special Rate Period
            consisting of more than 364 Rate Period Days during which a Failure
            to Deposit occurred that has not been cured), but, prior to 12:00
            Noon, New York City time, on the third Business Day next succeeding
            the date on which such Failure to Deposit occurred, such Failure to
            Deposit shall have been cured in accordance with subparagraph (f)
            of this paragraph 2 and the Trust shall have paid to the Auction
            Agent a late charge ("Late Charge") equal to the sum of (1) if such
            Failure to Deposit consisted of the failure timely to pay to the
            Auction Agent the full amount of dividends with respect to any
            Dividend Period of the shares of such series, an amount computed by
            multiplying (x) 200% of the Reference Rate for the Rate Period
            during which such Failure to Deposit occurs on the Dividend Payment
            Date for such Dividend Period by (y) a fraction, the numerator of
            which shall be the number of days for which such Failure to Deposit
            has not been cured in accordance with subparagraph (f) of this
            paragraph 2 (including the day such Failure to Deposit occurs and
            excluding the day such Failure to Deposit is cured) and the
            denominator of which shall be 360, and applying the rate obtained
            against the aggregate Liquidation Preference of the outstanding
            shares of such series and (2) if such Failure to Deposit consisted
            of the failure timely to pay to the Auction Agent the Redemption
            Price of the shares, if any, of such series for which Notice of
            Redemption has been mailed by the Trust pursuant to paragraph 11(c)
            of this Part I, an amount computed by multiplying (x) 200% of the
            Reference Rate for the Rate Period during which such Failure to
            Deposit occurs on the redemption date by (y) a fraction, the
            numerator of which shall be the number of days for which such
            Failure to Deposit is not cured in accordance with subparagraph (f)
            of this paragraph 2 (including the day such Failure to Deposit
            occurs and excluding the day such Failure to Deposit is cured) and
            the denominator of which shall be 360, and applying the rate
            obtained against the aggregate Liquidation Preference of the
            outstanding shares of such series to be redeemed, no Auction will
            be held in respect of shares of such series for the Subsequent Rate
            Period thereof and the dividend rate for shares of such series for

<PAGE>

            such Subsequent Rate Period will be the Maximum Rate for shares of
            such series on the Auction Date for such Subsequent Rate Period;

                  (C) any Failure to Deposit shall have occurred with respect
            to shares of such series during any Rate Period thereof (other than
            any Special Rate Period consisting of more than 364 Rate Period
            Days or any Rate Period succeeding any Special Rate Period
            consisting of more than 364 Rate Period Days during which a Failure
            to Deposit occurred that has not been cured), and, prior to 12:00
            Noon, New York City time, on the third Business Day next succeeding
            the date on which such Failure to Deposit occurred, such Failure to
            Deposit shall not have been cured in accordance with subparagraph
            (f) of this paragraph 2 or the Trust shall not have paid the
            applicable Late Charge to the Auction Agent, no Auction will be
            held in respect of shares of such series for the first Subsequent
            Rate Period thereof thereafter (or for any Rate Period thereof
            thereafter to and including the Rate Period during which (1) such
            Failure to Deposit is cured in accordance with subparagraph (f) of
            this paragraph 2 and (2) the Trust pays the applicable Late Charge
            to the Auction Agent (the condition set forth in this clause (2) to
            apply only in the event Moody's is rating such shares at the time
            the Trust cures such Failure to Deposit), in each case no later
            than 12:00 Noon, New York City time, on the fourth Business Day
            prior to the end of such Rate Period), and the dividend rate for
            shares of such series for each such Subsequent Rate Period shall be
            a rate per annum equal to the Maximum Rate for shares of such
            series on the Auction Date for such Subsequent Rate Period (but
            with the prevailing rating for shares of such series, for purposes
            of determining such Maximum Rate, being deemed to be "Below
            'ba3'/BB-"); or

                  (D) any Failure to Deposit shall have occurred with respect
            to shares of such series during a Special Rate Period thereof
            consisting of more than 364 Rate Period Days, or during any Rate
            Period thereof succeeding any Special Rate Period consisting of
            more than 364 Rate Period Days during which a Failure to Deposit
            occurred that has not been cured, and, prior to 12:00 Noon, New
            York City time, on the fourth Business Day preceding the Auction
            Date for the Rate Period subsequent to such Rate Period, such
            Failure to Deposit shall not have been cured in accordance with
            subparagraph (f) of this paragraph 2 or, in the event Moody's is
            then rating such shares, the Trust shall not have paid the
            applicable Late Charge to the Auction Agent (such Late Charge, for
            purposes of this subparagraph (D), to be calculated by using, as
            the Reference Rate, the Reference Rate applicable to a Rate Period
            (x) consisting of more than 182 Rate Period Days but fewer than 365
            Rate Period Days and (y) commencing on the date on which the Rate
            Period during which Failure to Deposit occurs commenced), no
            Auction will be held in respect of shares of such series for such
            Subsequent Rate Period (or for any Rate Period thereof thereafter
            to and including the Rate Period during which (1) such Failure to
            Deposit is cured in accordance with subparagraph (f) of this
            paragraph 2 and (2) the Trust pays the applicable Late Charge to
            the Auction Agent (the condition set forth in this clause (2) to
            apply only in the event Moody's is rating such shares at the time
            the Trust cures such Failure to Deposit), in each case no later
            than 12:00 Noon, New York City time, on the fourth Business Day
            prior to the end of such Rate Period), and the dividend rate for
            shares of such series for each such Subsequent Rate Period shall be
            a rate per annum equal to the Maximum Rate for shares of such
            series on the Auction Date for such Subsequent Rate Period (but
            with the prevailing rating for shares of such series, for purposes

<PAGE>

            of determining such Maximum Rate, being deemed to be "Below
            'ba3'/BB-") (the rate per annum of which dividends are payable on
            shares of a series of Municipal Preferred for any Rate Period
            thereof being herein referred to as the "Applicable Rate" for
            shares of such series).

            (ii) CALCULATION OF DIVIDENDS. The amount of dividends per share
      payable on shares of a series of Municipal Preferred on any date on which
      dividends shall be payable on shares of such series shall be computed by
      multiplying the Applicable Rate for shares of such series in effect for
      such Dividend Period or Dividend Periods or part thereof for which
      dividends have not been paid by a fraction, the numerator of which shall
      be the number of days in such Dividend Period or Dividend Periods or part
      thereof and the denominator of which shall be 365 if such Dividend Period
      consists of 7 Rate Period Days and 360 for all other Dividend Periods,
      and applying the rate obtained against $25,000.

     (f) CURING A FAILURE TO DEPOSIT. A Failure to Deposit with respect to
shares of a series of Municipal Preferred shall have been cured (if such
Failure to Deposit is not solely due to the willful failure of the Trust to
make the required payments to the Auction Agent) with respect to any Rate
Period of shares of such series if, within the respective time periods
described in subparagraph (e)(i) of this paragraph 2, the Trust shall have paid
to the Auction Agent (A) all accumulated and unpaid dividends on shares of such
series and (B) without duplication, the Redemption Price for shares, if any, of
such series for which Notice of Redemption has been mailed by the Trust
pursuant to paragraph 11(c) of Part I of this Statement; provided, however,
that the foregoing clause (B) shall not apply to the Trust's failure to pay the
Redemption Price in respect of shares of Municipal Preferred when the related
Redemption Notice provides that redemption of such shares is subject to one or
more conditions precedent and any such condition precedent shall not have been
satisfied at the time or times and in the manner specified in such Notice of
Redemption.

     (g) DIVIDEND PAYMENTS BY TRUST TO AUCTION AGENT. The Trust shall pay to
the Auction Agent, not later than 12:00 Noon, New York City time, on the
Business Day next preceding each Dividend Payment Date for shares of a series
of Municipal Preferred, an aggregate amount of funds available on the next
Business Day in The City of New York, New York, equal to the dividends to be
paid to all Holders of shares of such series on such Dividend Payment Date.

     (h) AUCTION AGENT AS TRUSTEE OF DIVIDEND PAYMENTS BY TRUST. All moneys
paid to the Auction Agent for the payment of dividends (or for the payment of
any Late Charge) shall be held in trust for the payment of such dividends (and
any such Late Charge) by the Auction Agent for the benefit of the Holders
specified in subparagraph (i) of this paragraph 2. Any moneys paid to the
Auction Agent in accordance with the foregoing but not applied by the Auction
Agent to the payment of dividends (and any such Late Charge) will, to the
extent permitted by law, be repaid to the Trust at the end of 90 days from the
date on which such moneys were so to have been applied.

     (i) DIVIDENDS PAID TO HOLDERS. Each dividend on shares of Municipal
Preferred shall be paid on the Dividend Payment Date therefor to the Holders
thereof as their names appear on the record books of the Trust on the Business
Day next preceding such Dividend Payment Date.


<PAGE>

     (j) DIVIDENDS CREDITED AGAINST EARLIEST ACCUMULATED BUT UNPAID DIVIDENDS.
Any dividend payment made on shares of Municipal Preferred shall first be
credited against the earliest accumulated but unpaid dividends due with respect
to such shares. Dividends in arrears for any past Dividend Period may be
declared and paid at any time, without reference to any regular Dividend
Payment Date, to the Holders as their names appear on the record books of the
Trust on such date, not exceeding 15 days preceding the payment date thereof,
as may be fixed by the Board of Trustees.

     (k) DIVIDENDS DESIGNATED AS EXEMPT-INTEREST DIVIDENDS. Dividends on shares
of Municipal Preferred shall be designated as exempt-interest dividends up to
the amount of tax-exempt income of the Trust, to the extent permitted by, and
for purposes of, Section 852 of the Code.

     3. GROSS-UP PAYMENTS.

     Holders of shares of Municipal Preferred shall be entitled to receive,
when, as and if declared by the Board of Trustees, out of funds legally
available therefor in accordance with the Declaration, this Statement and
applicable law, dividends in an amount equal to the aggregate Gross-up Payments
as follows:

     (a) MINIMUM RATE PERIODS AND SPECIAL RATE PERIODS OF 28 RATE PERIOD DAYS
OR FEWER. If, in the case of any Minimum Rate Period or any Special Rate Period
of 28 Rate Period Days or fewer, the Trust allocates any net capital gain or
other income taxable for Federal income tax purposes to a dividend paid on
shares of Municipal Preferred without having given advance notice thereof to
the Auction Agent as provided in paragraph 5 of Part II of this Statement (such
allocation being referred to herein as a "Taxable Allocation") solely by reason
of the fact that such allocation is made retroactively as a result of the
redemption of all or a portion of the outstanding shares of Municipal Preferred
or the liquidation of the Trust, the Trust shall, prior to the end of the
calendar year in which such dividend was paid, provide notice thereof to the
Auction Agent and direct the Trust's dividend disbursing agent to send such
notice with a Gross-up Payment to each Holder of such shares that was entitled
to such dividend payment during such calendar year at such Holder's address as
the same appears or last appeared on the record books of the Trust.

     (b) SPECIAL RATE PERIODS OF MORE THAN 28 RATE PERIOD DAYS. If, in the case
of any Special Rate Period of more than 28 Rate Period Days, the Trust makes a
Taxable Allocation to a dividend paid on shares of Municipal Preferred, the
Trust shall, prior to the end of the calendar year in which such dividend was
paid, provide notice thereof to the Auction Agent and direct the Trust's
dividend disbursing agent to send such notice with a Gross-up Payment to each
Holder of shares that was entitled to such dividend payment during such
calendar year at such Holder's address as the same appears or last appeared on
the record books of the Trust.

     (c) NO GROSS-UP PAYMENTS IN THE EVENT OF A REALLOCATION. The Trust shall
not be required to make Gross-up Payments with respect to any net capital gain
or other taxable income determined by the Internal Revenue Service to be
allocable in a manner different from that allocated by the Trust.


<PAGE>

     4. DESIGNATION OF SPECIAL RATE PERIODS.

     (a) LENGTH OF AND PRECONDITIONS FOR SPECIAL RATE PERIOD. The Trust, at its
option, may designate any succeeding Subsequent Rate Period of shares of a
series of Municipal Preferred as a Special Rate Period consisting of a
specified number of Rate Period Days evenly divisible by seven and not more
than 1,820, subject to adjustment as provided in subparagraph (b) of this
paragraph 4. A designation of a Special Rate Period shall be effective only if
(A) notice thereof shall have been given in accordance with subparagraphs (c)
and (d)(i) of this paragraph 4, (B) an Auction for shares of such series shall
have been held on the Auction Date immediately preceding the first day of such
proposed Special Rate Period and Sufficient Clearing Bids for shares of such
series shall have existed in such Auction, and (C) if any Notice of Redemption
shall have been mailed by the Trust pursuant to paragraph 11(c) of this Part I
with respect to any shares of such series, the Redemption Price with respect to
such shares shall have been deposited with the Auction Agent. In the event the
Trust wishes to designate any succeeding Subsequent Rate Period for shares of a
series of Municipal Preferred as a Special Rate Period consisting of more than
28 Rate Period Days, the Trust shall notify S&P (if S&P is then rating such
series) and Moody's (if Moody's is then rating such series) in advance of the
commencement of such Subsequent Rate Period that the Trust wishes to designate
such Subsequent Rate Period as a Special Rate Period and shall provide S&P (if
S&P is then rating such series) and Moody's (if Moody's is then rating such
series) with such documents as either may request.

     (b) ADJUSTMENT OF LENGTH OF SPECIAL RATE PERIOD. In the event the Trust
wishes to designate a Subsequent Rate Period as a Special Rate Period, but the
day following what would otherwise be the last day of such Special Rate Period
is not (a) a Wednesday that is a Business Day in the case of a series of
Municipal Preferred designated as "Series W Municipal Preferred" in this Part
I, or (b) a Friday that is a Business Day in the case of a series of Municipal
Preferred designated as "Series F Municipal Preferred" in this Part I, then the
Trust shall designate such Subsequent Rate Period as a Special Rate Period
consisting of the period commencing on the first day following the end of the
immediately preceding Rate Period and ending (a) on the first Tuesday that is
followed by a Wednesday that is a Business Day proceeding what would otherwise
be such last day, in the case of Series W Municipal Preferred, or (b) on the
first Thursday that is followed by a Friday that is a Business Day proceeding
what would otherwise be such last day in the case of Series F Municipal
Preferred.

     (c) NOTICE OF PROPOSED SPECIAL RATE PERIOD. If the Trust proposes to
designate any succeeding Subsequent Rate Period of shares of a series of
Municipal Preferred as a Special Rate Period pursuant to subparagraph (a) of
this paragraph 4, not less than 20 (or such lesser number of days as may be
agreed to from time to time by the Auction Agent) nor more than 30 days prior
to the date the Trust proposes to designate as the first day of such Special
Rate Period (which shall be such day that would otherwise be the first day of a
Minimum Rate Period), notice shall be (i) published or caused to be published
by the Trust in a newspaper of general circulation to the financial community
in The City of New York, New York, which carries financial news, and (ii)
mailed by the Trust by first-class mail, postage prepaid, to the Holders of
shares of such series. Each such notice shall state (A) that the Trust may
exercise its option to designate a succeeding Subsequent Rate Period of shares
of such series as a Special Rate Period, specifying the first day thereof and
(B) that the Trust will, by 11:00 A.M., New York City time, on the second
Business Day next preceding such date (or by such later time or date, or both,
as may be agreed to by the Auction Agent) notify the Auction Agent of either
(x) its determination, subject to certain conditions, to exercise such option,

<PAGE>

in which case the Trust shall specify the Special Rate Period designated, or
(y) its determination not to exercise such option.

     (d) NOTICE OF SPECIAL RATE PERIOD. No later than 11:00 A.M., New York City
time, on the second Business Day next preceding the first day of any proposed
Special Rate Period of shares of a series of Municipal Preferred as to which
notice has been given as set forth in subparagraph (c) of this paragraph 4 (or
such later time or date, or both, as may be agreed to by the Auction Agent),
the Trust shall deliver to the Auction Agent either:

            (i) a notice ("Notice of Special Rate Period") stating (A) that the
      Trust has determined to designate the next succeeding Rate Period of
      shares of such series as a Special Rate Period, specifying the same and
      the first day thereof, (B) the Auction Date immediately prior to the
      first day of such Special Rate Period, (C) that such Special Rate Period
      shall not commence if (1) an Auction for shares of such series shall not
      be held on such Auction Date for any reason or (2) an Auction for shares
      of such series shall be held on such Auction Date but Sufficient Clearing
      Bids for shares of such series shall not exist in such Auction, (D) the
      scheduled Dividend Payment Dates for shares of such series during such
      Special Rate Period and (E) the Special Redemption Provisions, if any,
      applicable to shares of such series in respect of such Special Rate
      Period; such notice to be accompanied by a Municipal Preferred Basic
      Maintenance Report showing that, as of the third Business Day next
      preceding such proposed Special Rate Period, Moody's Eligible Assets (if
      Moody's is then rating such series) and S&P Eligible Assets (if S&P is
      then rating such series) each have an aggregate Discounted Value at least
      equal to the Municipal Preferred Basic Maintenance Amount as of such
      Business Day (assuming for purposes of the foregoing calculation that (a)
      the Maximum Rate is the Maximum Rate on such Business Day as if such
      Business Day were the Auction Date for the proposed Special Rate Period,
      and (b) the Moody's Discount Factors applicable to Moody's Eligible
      Assets are determined by reference to the first Exposure Period longer
      than the Exposure Period then applicable to the Trust, as described in
      the definition of Moody's Discount Factor herein); or

            (ii) a notice stating that the Trust has determined not to exercise
      its option to designate a Special Rate Period of shares of such series
      and that the next succeeding Rate Period of shares of such series shall
      be a Minimum Rate Period.

     (e) FAILURE TO DELIVER NOTICE OF SPECIAL RATE PERIOD. If the Trust fails
to deliver either of the notices described in subparagraphs (d)(i) or (d)(ii)
of this paragraph 4 (and, in the case of the notice described in subparagraph
(d)(i) of this paragraph 4, a Municipal Preferred Basic Maintenance Report to
the effect set forth in such subparagraph (if either Moody's or S&P is then
rating the series in question)) with respect to any designation of any proposed
Special Rate Period to the Auction Agent by 11:00 A.M., New York City time, on
the second Business Day next preceding the first day of such proposed Special
Rate Period (or by such later time or date, or both, as may be agreed to by the
Auction Agent), the Trust shall be deemed to have delivered a notice to the
Auction Agent with respect to such Special Rate Period to the effect set forth
in subparagraph (d)(ii) of this paragraph 4. In the event the Trust delivers to
the Auction Agent a notice described in subparagraph (d)(i) of this paragraph
4, it shall file a copy of such notice with the Secretary of the Trust, and the
contents of such notice shall be binding on the Trust. In the event the Trust
delivers to the Auction Agent a notice described in subparagraph (d)(ii) of
this paragraph 4, the Trust will provide Moody's (if Moody's is then rating the

<PAGE>

series in question) and S&P (if S&P is then rating the series in question) a
copy of such notice.

     5. VOTING RIGHTS.

     (a) ONE VOTE PER SHARE OF MUNICIPAL PREFERRED. Except as otherwise
provided in the Declaration, this paragraph 5 or as otherwise required by law,
(i) each Holder of shares of Municipal Preferred shall be entitled to one vote
for each share of Municipal Preferred held by such Holder on each matter
submitted to a vote of shareholders of the Trust, and (ii) the holders of
outstanding Preferred Shares, including each share of Municipal Preferred, and
of Common Shares shall vote together as a single class; provided, however,
that, at any meeting of the shareholders of the Trust held for the election of
trustees, the holders of outstanding Preferred Shares, including Municipal
Preferred, represented in person or by proxy at said meeting, shall be
entitled, as a class, to the exclusion of the holders of all other securities
and classes of shares of beneficial interest of the Trust, to elect two
trustees of the Trust, each Preferred Share, including each share of Municipal
Preferred, entitling the holder thereof to one vote. Subject to subparagraph
(b) of this paragraph 5, the holders of outstanding Common Shares and Preferred
Shares, including Municipal Preferred, voting together as a single class, shall
elect the balance of the trustees.

     (b) VOTING FOR ADDITIONAL TRUSTEES.

            (i) VOTING PERIOD. During any period in which any one or more of
      the conditions described in subparagraphs (A) or (B) of this subparagraph
      (b)(i) shall exist (such period being referred to herein as a "Voting
      Period"), the number of trustees constituting the Board of Trustees shall
      be automatically increased by the smallest number that, when added to the
      two trustees elected exclusively by the holders of Preferred Shares,
      including shares of Municipal Preferred, would constitute a majority of
      the Board of Trustees as so increased by such smallest number; and the
      holders of Preferred Shares, including Municipal Preferred, shall be
      entitled, voting as a class on a one-vote-per-share basis (to the
      exclusion of the holders of all other securities and classes of shares of
      beneficial interest of the Trust), to elect such smallest number of
      additional trustees, together with the two trustees that such holders are
      in any event entitled to elect. A Voting Period shall commence:

                  (A) if at the close of business on any dividend payment date
            accumulated dividends (whether or not earned or declared) on any
            outstanding Preferred Share, including Municipal Preferred, equal
            to at least two full years' dividends shall be due and unpaid and
            sufficient cash or specified securities shall not have been
            deposited with the Auction Agent for the payment of such
            accumulated dividends; or

                  (B) if at any time holders of Preferred Shares are entitled
            under the 1940 Act to elect a majority of the trustees of the
            Trust.

Upon the termination of a Voting Period, the voting rights described in this
subparagraph (b)(i) shall cease, subject always, however, to the revesting of
such voting rights in the Holders upon the further occurrence of any of the
events described in this subparagraph (b)(i).


<PAGE>

            (ii) NOTICE OF SPECIAL MEETING. As soon as practicable after the
      accrual of any right of the holders of Preferred Shares to elect
      additional trustees as described in subparagraph (b)(i) of this paragraph
      5, the Trust shall notify the Auction Agent and the Auction Agent shall
      call a special meeting of such holders, by mailing a notice of such
      special meeting to such holders, such meeting to be held not less than 10
      nor more than 20 days after the date of mailing of such notice. If the
      Trust fails to send such notice to the Auction Agent or if the Auction
      Agent does not call such a special meeting, it may be called by any such
      holder on like notice. The record date for determining the holders
      entitled to notice of and to vote at such special meeting shall be the
      close of business on the fifth Business Day preceding the day on which
      such notice is mailed. At any such special meeting and at each meeting of
      holders of Preferred Shares held during a Voting Period at which trustees
      are to be elected, such holders, voting together as a class (to the
      exclusion of the holders of all other securities and classes of shares of
      beneficial interest of the Trust), shall be entitled to elect the number
      of trustees prescribed in subparagraph (b)(i) of this paragraph 5 on a
      one-vote-per-share basis.

            (iii) TERMS OF OFFICE OF EXISTING TRUSTEES. The terms of office of
      all persons who are trustees of the Trust at the time of a special
      meeting of Holders and holders of other Preferred Shares to elect
      trustees shall continue, notwithstanding the election at such meeting by
      the Holders and such other holders of the number of trustees that they
      are entitled to elect, and the persons so elected by the Holders and such
      other holders, together with the two incumbent trustees elected by the
      Holders and such other holders of Preferred Shares and the remaining
      incumbent trustees elected by the Holders of the Common Shares and
      Preferred Shares, shall constitute the duly elected trustees of the
      Trust.

            (iv) TERMS OF OFFICE OF CERTAIN TRUSTEES TO TERMINATE UPON
      TERMINATION OF VOTING PERIOD. Simultaneously with the termination of a
      Voting Period, the term of office of the additional trustees elected by
      the Holders and holders of other Preferred Shares pursuant to
      subparagraph (b)(i) of this paragraph 5 shall terminate, the remaining
      trustees shall constitute the trustees of the Trust and the voting rights
      of the Holders and such other holders to elect additional trustees
      pursuant to subparagraph (b)(i) of this paragraph 5 shall cease, subject
      to the provisions of the last sentence of subparagraph (b)(i) of this
      paragraph 5.

     (c) HOLDERS OF MUNICIPAL PREFERRED TO VOTE ON CERTAIN OTHER MATTERS.

            (i) INCREASES IN CAPITALIZATION. So long as any shares of Municipal
      Preferred are outstanding, the Trust shall not, without the affirmative
      vote or consent of the Holders of at least a majority of the shares of
      Municipal Preferred outstanding at the time, in person or by proxy,
      either in writing or at a meeting, voting as a separate class: (a)
      authorize, create or issue any class or series of shares ranking prior to
      or on a parity with shares of Municipal Preferred with respect to the
      payment of dividends or the distribution of assets upon dissolution,
      liquidation or winding up of the affairs of the Trust, or authorize,
      create or issue additional shares of any series of Municipal Preferred

<PAGE>

      (except that, notwithstanding the foregoing, but subject to the
      provisions of paragraph 10(c) of this Part I, the Board of Trustees,
      without the vote or consent of the Holders of Municipal Preferred, may
      from time to time authorize and create, and the Trust may from time to
      time issue, additional shares of any series of Municipal Preferred or
      classes or series of Preferred Shares ranking on a parity with shares of
      Municipal Preferred with respect to the payment of dividends and the
      distribution of assets upon dissolution, liquidation or winding up of the
      affairs of the Trust; provided, however, that if Moody's or S&P is not
      then rating the shares of Municipal Preferred, the aggregate liquidation
      preference of all Preferred Shares of the Trust outstanding after any
      such issuance, exclusive of accumulated and unpaid dividends, may not
      exceed $[__________]) or (b) amend, alter or repeal the provisions of the
      Declaration, the By-laws, or this Statement, whether by merger,
      consolidation or otherwise, so as to materially affect any preference,
      right or power of such shares of Municipal Preferred or the Holders
      thereof; provided, however, that (i) none of the actions permitted by the
      exception to (a) above will be deemed to affect such preferences, rights
      or powers, (ii) a division of a share of Municipal Preferred will be
      deemed to affect such preferences, rights or powers only if the terms of
      such division adversely affect the Holders of shares of Municipal
      Preferred and (iii) the authorization, creation and issuance of classes
      or series of shares ranking junior to shares of Municipal Preferred with
      respect to the payment of dividends and the distribution of assets upon
      dissolution, liquidation or winding up of the affairs of the Trust, will
      be deemed to affect such preferences, rights or powers only if Moody's or
      S&P is then rating shares of Municipal Preferred and such issuance would,
      at the time thereof, cause the Trust not to satisfy the 1940 Act
      Municipal Preferred Asset Coverage or the Municipal Preferred Basic
      Maintenance Amount. So long as any shares of Municipal Preferred are
      outstanding, the Trust shall not, without the affirmative vote or consent
      of the Holders of at least 66 2/3% of the shares of Municipal Preferred
      outstanding at the time, in person or by proxy, either in writing or at a
      meeting, voting as a separate class, file a voluntary application for
      relief under Federal bankruptcy law or any similar application under
      state law for so long as the Trust is solvent and does not foresee
      becoming insolvent. If any action set forth above would adversely affect
      the rights of one or more series (the "Affected Series") of Municipal
      Preferred in a manner different from any other series of Municipal
      Preferred, the Trust will not approve any such action without the
      affirmative vote or consent of the Holders of at least a majority of the
      shares of each such Affected Series outstanding at the time, in person or
      by proxy, either in writing or at a meeting (each such Affected Series
      voting at a separate class).

            (ii) 1940 ACT MATTERS. Unless a higher percentage is provided for
      in the Declaration or this Statement, (A) the affirmative vote of the
      Holders of at least a majority of the Preferred Shares, including
      Municipal Preferred, outstanding at the time, voting as a separate class,
      shall be required to approve any conversion of the Trust from a
      closed-end to an open-end investment company and (B) the affirmative vote
      of the Holders of a "majority of the outstanding Preferred Shares,"
      including Municipal Preferred, voting as a separate class, shall be
      required to approve any plan of reorganization (as such term is used in
      the 1940 Act) adversely affecting such shares. The affirmative vote of
      the Holders of a "majority of the outstanding Preferred Shares,"
      including Municipal Preferred, voting as a separate class, shall be
      required to approve any action not described in the first sentence of
      this paragraph 5(c)(ii) requiring a vote of security holders of the Trust
      under Section 13(a) of the 1940 Act. For purposes of the foregoing,
      "majority of the outstanding Preferred Shares" 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. In the event a vote of Holders of Municipal
      Preferred is required pursuant to the provisions of Section 13(a) of the
      1940 Act, the Trust shall, not later than ten Business Days prior to the
      date on which such vote is to be taken, notify Moody's (if Moody's is

<PAGE>

      then rating the shares of Municipal Preferred) and S&P (if S&P is then
      rating the shares of Municipal Preferred) that such vote is to be taken
      and the nature of the action with respect to which such vote is to be
      taken. The Trust shall, not later than ten Business Days after the date
      on which such vote is taken, notify Moody's (if Moody's is then rating
      the shares of Municipal Preferred) and S&P (if S&P is then rating the
      shares of Municipal Preferred) of the results of such vote.

     (d) BOARD MAY TAKE CERTAIN ACTIONS WITHOUT SHAREHOLDER APPROVAL. The Board
of Trustees, without the vote or consent of the shareholders of the Trust, may
from time to time amend, alter or repeal any or all of the definitions of the
terms listed below, or any provision of this Statement viewed by Moody's or S&P
as a predicate for any such definition, and any such amendment, alteration or
repeal will not be deemed to affect the preferences, rights or powers of shares
of Municipal Preferred or the Holders thereof; provided, however, that the
Board of Trustees receives written confirmation from Moody's (such confirmation
being required to be obtained only in the event Moody's is rating the shares of
Municipal Preferred and in no event being required to be obtained in the case
of the definitions of (x) Deposit Securities, Discounted Value, Receivables for
Municipal Obligations Sold and Other Issues as such terms apply to S&P Eligible
Asset and (y) S&P Discount Factor, S&P Eligible Asset, S&P Exposure Period, S&P
Volatility Factor) and S&P (such confirmation being required to be obtained
only in the event S&P is rating the shares of Municipal Preferred and in no
event being required to be obtained in the case of the definitions of (x)
Discounted Value, Receivables for Municipal Obligations Sold and Other Issues
as such terms apply to Moody's Eligible Asset, and (y) Moody's Discount Factor,
Moody's Eligible Asset, Moody's Exposure Period and Moody's Volatility Factor)
that any such amendment, alteration or repeal would not impair the ratings then
assigned by Moody's or S&P, as the case may be, to shares of Municipal
Preferred:

     Deposit Securities            Escrowed Bonds
     Discounted Value              Market Value
     Maximum Potential Gross-up    Moody's Exposure Period
       Payment Liability           Moody's Volatility Factor
     Municipal Preferred Basic     1940 Act Cure Date
       Maintenance Amount
     Municipal Preferred Basic     1940 Act Municipal Preferred
       Maintenance Cure Date          Asset Coverage
     Municipal Preferred Basic     Other Issues
       Maintenance Report          Quarterly Valuation Date
     Moody's Discount Factor       Receivables for Municipal
     Moody's Eligible Asset           Obligations Sold
                                   S&P Discount Factor
                                   S&P Eligible Asset
                                   S&P Exposure Period
                                   S&P Volatility Factor
                                   Valuation Date
                                   Volatility Factor


<PAGE>

     (e) VOTING RIGHTS SET FORTH HEREIN ARE SOLE VOTING RIGHTS. Unless
otherwise required by law, the By-laws, this Statement or by the Declaration,
the Holders of shares of Municipal Preferred shall not have any relative rights
or preferences or other special rights other than those specifically set forth
herein.

     (f) NO PREEMPTIVE RIGHTS OR CUMULATIVE VOTING. The Holders of shares of
Municipal Preferred shall have no preemptive rights or rights to cumulative
voting.

     (g) VOTING FOR TRUSTEES SOLE REMEDY FOR TRUST'S FAILURE TO PAY DIVIDENDS.
In the event that the Trust fails to pay any dividends on the shares of
Municipal Preferred, the exclusive remedy of the Holders shall be the right to
vote for Trustees pursuant to the provisions of this paragraph 5.

     (h) HOLDERS ENTITLED TO VOTE. For purposes of determining any rights of
the Holders to vote on any matter, whether such right is created by the
By-laws, this Statement, by the other provisions of this Statement or the
Declaration, by statute or otherwise, no Holder shall be entitled to vote any
share of Municipal Preferred and no share of Municipal Preferred shall be
deemed to be "outstanding" for the purpose of voting or determining the number
of shares required to constitute a quorum if, prior to or concurrently with the
time of determination of shares entitled to vote or shares deemed outstanding
for quorum purposes, as the case may be, the requisite Notice of Redemption
with respect to such shares shall have been mailed as provided in paragraph
11(c) of this Part I and the Redemption Price for the redemption of such shares
shall have been deposited in trust with the Auction Agent for that purpose. No
shares of Municipal Preferred held by the Trust or any affiliate of the Trust
(except for shares held by a Broker-Dealer that is an affiliate of the Trust
for the account of its customers) shall have any voting rights or be deemed to
be outstanding for voting or other purposes.

     6. 1940 ACT MUNICIPAL PREFERRED ASSET COVERAGE.

     The Trust shall maintain, as of the last Business Day of each month in
which any share of Municipal Preferred is outstanding, the 1940 Act Municipal
Preferred Asset Coverage.

     7. MUNICIPAL PREFERRED BASIC MAINTENANCE AMOUNT.

     (a) So long as shares of Municipal Preferred are outstanding, the Trust
shall maintain, on each Valuation Date, and shall verify to its satisfaction
that it is maintaining on such Valuation Date, (i) S&P Eligible Assets having
an aggregate Discounted Value equal to or greater than the Municipal Preferred
Basic Maintenance Amount (if S&P is then rating the shares of Municipal
Preferred) and (ii) Moody's Eligible Assets having an aggregate Discounted
Value equal to or greater than the Municipal Preferred Basic Maintenance Amount
(if Moody's is then rating the shares of Municipal Preferred).

     (b) On or before 5:00 P.M., New York City time, on the third Business Day
after a Valuation Date on which the Trust fails to satisfy the Municipal
Preferred Basic Maintenance Amount, and on the third Business Day after the
Municipal Preferred Basic Maintenance Cure Date with respect to such Valuation
Date, the Trust shall complete and deliver to S&P (if S&P is then rating the
shares of Municipal Preferred), Moody's (if Moody's is then rating the shares

<PAGE>

of Municipal Preferred) and the Auction Agent (if either S&P or Moody's is then
rating the shares of Municipal Preferred) a Municipal Preferred Basic
Maintenance Report as of the date of such failure or such Municipal Preferred
Basic Maintenance Cure Date, as the case may be, which will be deemed to have
been delivered to the Auction Agent if the Auction Agent receives a copy of
telecopy, telex or other electronic transcription thereof and on the same day
the Trust mails to the Auction Agent for delivery on the next Business Day the
full Municipal Preferred Basic Maintenance Report.

     The Trust shall also deliver a Municipal Preferred Basic Maintenance
Report to (i) the Auction Agent (if either Moody's or S&P is then rating the
shares of Municipal Preferred) as of (A) the fifteenth day of each month (or,
if such day is not a Business Day, the next succeeding Business Day) and (B)
the last Business Day of each month, (ii) Moody's (if Moody's is then rating
the shares of Municipal Preferred) and S&P (if S&P is then rating the shares of
Municipal Preferred) as of any Quarterly Valuation Date, in each case on or
before the third Business Day after such day, and (iii) S&P, if and when
requested for any Valuation Date, on or before the third Business Day after
such request. A failure by the Trust to deliver a Municipal Preferred Basic
Maintenance Report pursuant to the preceding sentence shall be deemed to be
delivery of a Municipal Preferred Basic Maintenance Report indicating the
Discounted Value for all assets of the Trust is less than the Municipal
Preferred Basic Maintenance Amount, as of the relevant Valuation Date.

     (c) Within ten Business Days after the date of delivery of a Municipal
Preferred Basic Maintenance Report in accordance with subparagraph (b) of this
paragraph 7 relating to a Quarterly Valuation Date, the Trust shall cause the
Independent Accountant to confirm in writing to S&P (if S&P is then rating the
shares of Municipal Preferred), Moody's (if Moody's is then rating the shares
of Municipal Preferred) and the Auction Agent (if either S&P or Moody's is then
rating the shares of Municipal Preferred) (i) the mathematical accuracy of the
calculations reflected in such Report (and in any other Municipal Preferred
Basic Maintenance Report, randomly selected by the Independent Accountant, that
was delivered by the Trust during the quarter ending on such Quarterly
Valuation Date) and (ii) that, in such Report (and in such randomly selected
Report), the Trust determined in accordance with this paragraph whether the
Trust had, at such Quarterly Valuation Date (and at the Valuation Date
addressed in such randomly-selected Report), S&P Eligible Assets (if S&P is
then rating the shares of Municipal Preferred) of an aggregate Discounted Value
at least equal to the Municipal Preferred Basic Maintenance Amount and Moody's
Eligible Assets (if Moody's is then rating the shares of Municipal Preferred)
of an aggregate Discounted Value at least equal to the Municipal Preferred
Basic Maintenance Amount (such confirmation being herein called the
"Accountant's Confirmation").

     (d) Within ten Business Days after the date of delivery of a Municipal
Preferred Basic Maintenance Report in accordance with subparagraph (b) of this
paragraph 7 relating to any Valuation Date on which the Trust failed to satisfy
the Municipal Preferred Basic Maintenance Amount, and relating to the Municipal
Preferred Basic Maintenance Cure Date with respect to such failure to satisfy
the Municipal Preferred Basic Maintenance Amount, the Trust shall cause the
Independent Accountant to provide to S&P (if S&P is then rating the shares of
Municipal Preferred), Moody's (if Moody's is then rating the shares of
Municipal Preferred) and the Auction Agent (if either S&P or Moody's is then
rating the shares of Municipal Preferred) an Accountant's Confirmation as to
such Municipal Preferred Basic Maintenance Report.

     (e) If any Accountant's Confirmation delivered pursuant to subparagraph
(c) or (d) of this paragraph 7 shows that an error was made in the Municipal

<PAGE>

Preferred Basic Maintenance Report for a particular Valuation Date for which
such Accountant's Confirmation was required to be delivered, or shows that a
lower aggregate Discounted Value for the aggregate of all S&P Eligible Assets
(if S&P is then rating the shares of Municipal Preferred) or Moody's Eligible
Assets (if Moody's is then rating the shares of Municipal Preferred), as the
case may be, of the Trust was determined by the Independent Accountant, the
calculation or determination made by such Independent Accountant shall be final
and conclusive and shall be binding on the Trust, and the Trust shall
accordingly amend and deliver the Municipal Preferred Basic Maintenance Report
to S&P (if S&P is then rating the shares of Municipal Preferred), Moody's (if
Moody's is then rating the shares of Municipal Preferred) and the Auction Agent
(if either S&P or Moody's is then rating the shares of Municipal Preferred)
promptly following receipt by the Trust of such Accountant's Confirmation.

     (f) On or before 5:00 p.m., New York City time, on the first Business Day
after the Date of Original Issue of any shares of Municipal Preferred, the
Trust shall complete and deliver to S&P (if S&P is then rating the shares of
Municipal Preferred) and Moody's (if Moody's is then rating the shares of
Municipal Preferred) a Municipal Preferred Basic Maintenance Report as of the
close of business on such Date of Original Issue. Within five Business Days of
such Date of Original Issue, the Trust shall cause the Independent Accountant
to confirm in writing to S&P (if S&P is then rating the shares of Municipal
Preferred) (i) the mathematical accuracy of the calculations reflected in such
Report and (ii) that the Discounted Value of S&P Eligible Assets reflected
thereon equals or exceeds the Municipal Preferred Basic Maintenance Amount
reflected thereon.

     (g) On or before 5:00 p.m., New York City time, on the third Business Day
after either (i) the Trust shall have redeemed Common Shares or (ii) the ratio
of the Discounted Value of S&P Eligible Assets or the Discounted Value of
Moody's Eligible Assets to the Municipal Preferred Basic Maintenance Amount is
less than or equal to 105%, the Trust shall complete and deliver to S&P (if S&P
is then rating the shares of Municipal Preferred) or Moody's (if Moody's is
then rating the shares of Municipal Preferred), as the case may be, a Municipal
Preferred Basic Maintenance Report as of the date of either such event.


<PAGE>

     8. [RESERVED].

     9. RESTRICTIONS ON DIVIDENDS AND OTHER DISTRIBUTIONS.

     (a) DIVIDENDS ON PREFERRED SHARES OTHER THAN MUNICIPAL PREFERRED. Except
as set forth in the next sentence, no dividends shall be declared or paid or
set apart for payment on the shares of any class or series of shares of
beneficial interest of the Trust ranking, as to the payment of dividends, on a
parity with shares of Municipal Preferred for any period unless full cumulative
dividends have been or contemporaneously are declared and paid on the shares of
each series of Municipal Preferred through its most recent Dividend Payment
Date. When dividends are not paid in full upon the shares of each series of
Municipal Preferred through its most recent Dividend Payment Date or upon the
shares of any other class or series of shares of beneficial interest of the
Trust ranking on a parity as to the payment of dividends with shares of
Municipal Preferred through their most recent respective dividend payment
dates, all dividends declared upon shares of Municipal Preferred and any other
such class or series of shares of beneficial interest ranking on a parity as to
the payment of dividends with shares of Municipal Preferred shall be declared
pro rata so that the amount of dividends declared per share on shares of
Municipal Preferred and such other class or series of shares of beneficial
interest shall in all cases bear to each other the same ratio that accumulated
dividends per share on the shares of Municipal Preferred and such other class
or series of shares of beneficial interest bear to each other (for purposes of
this sentence, the amount of dividends declared per share of Municipal
Preferred shall be based on the Applicable Rate for such shares for the
Dividend Periods during which dividends were not paid in full).

     (b) DIVIDENDS AND OTHER DISTRIBUTIONS WITH RESPECT TO COMMON SHARES UNDER
THE 1940 ACT. The Board of Trustees shall not declare any dividend (except a
dividend payable in Common Shares), or declare any other distribution, upon the
Common Shares, or purchase Common Shares, unless in every such case the
Preferred Shares have, at the time of any such declaration or purchase, an
asset coverage (as defined in and determined pursuant to the 1940 Act) of at
least 200% (or such other asset coverage as may in the future be specified in
or under the 1940 Act as the minimum asset coverage for senior securities which
are shares or stock of a closed-end investment company as a condition of
declaring dividends on its common shares or stock) after deducting the amount
of such dividend, distribution or purchase price, as the case may be.

     (c) OTHER RESTRICTIONS ON DIVIDENDS AND OTHER DISTRIBUTIONS. For so long
as any share of Municipal Preferred is outstanding, and except as set forth in
subparagraph (a) of this paragraph 9 and paragraph 12(c) of this Part I, (A)
the Trust shall not declare, pay or set apart for payment any dividend or other
distribution (other than a dividend or distribution paid in shares of, or in
options, warrants or rights to subscribe for or purchase, Common Shares or
other shares, if any, ranking junior to the shares of Municipal Preferred as to
the payment of dividends and the distribution of assets upon dissolution,
liquidation or winding up) in respect of the Common Shares or any other shares
of the Trust ranking junior to or on a parity with the shares of Municipal
Preferred as to the payment of dividends or the distribution of assets upon
dissolution, liquidation or winding up, or call for redemption, redeem,
purchase or otherwise acquire for consideration any Common Shares or any other
such junior shares (except by conversion into or exchange for shares of the

<PAGE>

Trust ranking junior to the shares of Municipal Preferred as to the payment of
dividends and the distribution of assets upon dissolution, liquidation or
winding up), or any such parity shares (except by conversion into or exchange
for shares of the Trust ranking junior to or on a parity with Municipal
Preferred as to the payment of dividends and the distribution of assets upon
dissolution, liquidation or winding up), unless (i) full cumulative dividends
on shares of each series of Municipal Preferred through its most recently ended
Dividend Period shall have been paid or shall have been declared and sufficient
funds for the payment thereof deposited with the Auction Agent and (ii) the
Trust has redeemed the full number of shares of Municipal Preferred required to
be redeemed by any provision for mandatory redemption pertaining thereto, and
(B) the Trust shall not declare, pay or set apart for payment any dividend or
other distribution (other than a dividend or distribution paid in shares of, or
in options, warrants or rights to subscribe for or purchase, Common Shares or
other shares, if any, ranking junior to shares of Municipal Preferred as to the
payment of dividends and the distribution of assets upon dissolution,
liquidation or winding up) in respect of Common Shares or any other shares of
the Trust ranking junior to shares of Municipal Preferred as to the payment of
dividends or the distribution of assets upon dissolution, liquidation or
winding up, or call for redemption, redeem, purchase or otherwise acquire for
consideration any Common Shares or any other such junior shares (except by
conversion into or exchange for shares of the Trust ranking junior to shares of
Municipal Preferred as to the payment of dividends and the distribution of
assets upon dissolution, liquidation or winding up), unless immediately after
such transaction the Discounted Value of Moody's Eligible Assets (if Moody's is
then rating the shares of Municipal Preferred) and S&P Eligible Assets (if S&P
is then rating the shares of Municipal Preferred) would each at least equal the
Municipal Preferred Basic Maintenance Amount.

     10. RATING AGENCY RESTRICTIONS.

     For so long as any shares of Municipal Preferred are outstanding and
Moody's or S&P, or both, are rating such shares, the Trust will not, unless it
has received written confirmation from Moody's or S&P, or both, as appropriate,
that any such action would not impair the ratings then assigned by such rating
agency to such shares, engage in any one or more of the following transactions:

     (a) purchase or sell futures contracts, write, purchase or sell options on
futures contracts or write put options (except covered put options) or call
options (except covered call options) on portfolio securities except that the
Trust may purchase or sell futures contracts based on the Bond Buyer Municipal
Bond Index (the "Municipal Index") or United States Treasury Bonds or Notes
("Treasury Bonds") and write, purchase or sell put and call options on such
contracts (collectively, "Hedging Transactions"), subject to the following
limitations:

            (i) the Trust will not engage in any Hedging Transaction based on
      the Municipal Index (other than transactions which terminate a futures
      contract or option held by the Trust by the Trust's taking an opposite
      position thereto ("Closing Transactions")), which would cause the Trust
      at the time of such transaction to own or have sold the least of (A) more
      than 1,000 outstanding futures contracts based on the Municipal Index,
      (B) outstanding futures contracts based on the Municipal Index exceeding
      in number 25% of the quotient of the Market Value of the Trust's total
      assets divided by $1,000 or (C) outstanding futures contracts based on
      the Municipal Index exceeding in number 10% of the average number of
      daily open interest futures contracts based on the Municipal Index in the
      30 days preceding the time of effecting such transaction as reported by
      The Wall Street Journal;


<PAGE>

            (ii) the Trust will not engage in any Hedging Transaction based on
      Treasury Bonds (other than Closing Transactions) which would cause the
      Trust at the time of such transaction to own or have sold the lesser of
      (A) outstanding futures contracts based on Treasury Bonds exceeding in
      number 50% of the quotient of the Market Value of the Trust's total
      assets divided by $100,000 ($200,000 in the case of the two-year United
      States Treasury Note) or (B) outstanding futures contracts based on
      Treasury Bonds exceeding in number 10% of the average number of daily
      traded futures contracts based on Treasury Bonds in the 30 days preceding
      the time of effecting such transaction as reported by The Wall Street
      Journal;

            (iii) the Trust will engage in Closing Transactions to close out
      any outstanding futures contract which the Trust owns or has sold or any
      outstanding option thereon owned by the Trust in the event (A) the Trust
      does not have S&P Eligible Assets or Moody's Eligible Assets, as the case
      may be, with an aggregate Discounted Value equal to or greater than the
      Municipal Preferred Basic Maintenance Amount on two consecutive Valuation
      Dates and (B) the Trust is required to pay Variation Margin on the second
      such Valuation Date;

            (iv) the Trust will engage in a Closing Transaction to close out
      any outstanding futures contract or option thereon in the month prior to
      the delivery month under the terms of such futures contract or option
      thereon unless the Trust holds the securities deliverable under such
      terms; and

            (v) when the Trust writes a futures contract or option thereon, it
      will either maintain an amount of cash, cash equivalents or high grade
      (rated A or better by S&P or Moody's, as the case may be), fixed-income
      securities in a segregated account with the Trust's custodian, so that
      the amount so segregated plus the amount of Initial Margin and Variation
      Margin held in the account of or on behalf of the Trust's broker with
      respect to such futures contract or option equals the Market Value of the
      futures contract or option, or, in the event the Trust writes a futures
      contract or option thereon which requires delivery of an underlying
      security, it shall hold such underlying security in its portfolio.

     For purposes of determining whether the Trust has S&P Eligible Assets or
Moody's Eligible Assets, as the case may be, with a Discounted Value that
equals or exceeds the Municipal Preferred Basic Maintenance Amount, the
Discounted Value of cash or securities held for the payment of Initial Margin
or Variation Margin shall be zero and the aggregate Discounted Value of S&P
Eligible Assets or Moody's Eligible Assets, as the case may be, shall be
reduced by an amount equal to (I) 30% of the aggregate settlement value, as
marked to market, of any outstanding futures contracts based on the Municipal
Index which are owned by the Trust plus (II) 25% of the aggregate settlement
value, as marked to market, of any outstanding futures contracts based on
Treasury Bonds which contracts are owned by the Trust;

     (b) borrow money, except that the Trust may, without obtaining the written
confirmation described above, borrow money for the purpose of clearing
securities transactions if (i) the Municipal Preferred Basic Maintenance Amount
would continue to be satisfied after giving effect to such borrowing (which
shall mean, for purposes of the calculation of the Municipal Preferred Basic
Maintenance Amount, adding the amount of the liability for such borrowing to
the calculation of the Municipal Preferred Basic Maintenance Amount under
subparagraph (F) under the definition of that term in Part I of this Statement)
and (ii) such borrowing (A) is privately arranged with a bank or other person
and is evidenced by a promissory note or other evidence of indebtedness that is
not intended to be publicly distributed or (B) is for "temporary purposes," is

<PAGE>

evidenced by a promissory note or other evidence of indebtedness and is an
amount not exceeding 5 per centum of the value of the total assets of the Trust
at the time of the borrowing; for purposes of the foregoing, "temporary
purposes" means that the borrowing is to be repaid within sixty days and is not
to be extended or renewed;

     (c) issue additional shares of any series of Municipal Preferred or any
class or series of shares ranking prior to or on a parity with shares of
Municipal Preferred with respect to the payment of dividends or the
distribution of assets upon dissolution, liquidation or winding up of the
Trust, or reissue any shares of Municipal Preferred previously purchased or
redeemed by the Trust;

     (d) engage in any short sales of securities;

     (e) lend securities;

     (f) merge or consolidate into or with any corporation;

     (g) change the pricing service (currently both Muller Data Corporation and
Standard & Poor's J.J. Kenny Evaluation Services are used by the Trust)
referred to in the definition of Market Value to a pricing service other than
Muller Data Corporation or Standard & Poor's J.J. Kenny Evaluation Services; or

     (h) enter into reverse repurchase agreements.

     11. REDEMPTION.

     (a) OPTIONAL REDEMPTION.

            (i) Subject to the provisions of subparagraph (v) of this
      subparagraph (a), shares of Municipal Preferred of any series may be
      redeemed, at the option of the Trust, as a whole or from time to time in
      part, on the second Business Day preceding any Dividend Payment Date for
      shares of such series, out of funds legally available therefor, at a
      redemption price per share equal to the sum of $25,000 plus an amount
      equal to accumulated but unpaid dividends thereon (whether or not earned
      or declared) to (but not including) the date fixed for redemption;
      provided, however, that (1) shares of a series of Municipal Preferred may
      not be redeemed in part if after such partial redemption fewer than 500
      shares of such series remain outstanding; (2) unless otherwise provided
      herein, shares of a series of Municipal Preferred are redeemable by the
      Trust during the Initial Rate Period thereof only on the second Business
      Day next preceding the last Dividend Payment Date for such Initial Rate
      Period; and (3) subject to subparagraph (ii) of this paragraph, (a) the
      Notice of Special Rate Period relating to a Special Rate Period of shares
      of a series of Municipal Preferred, as delivered to the Auction Agent and
      filed with the Secretary of the Trust, may provide that shares of such
      series shall not be redeemable during the whole or any part of such
      Special Rate Period (except as provided in subparagraph (iv) of this
      subparagraph (a)) or shall be redeemable during the whole or any part of
      such Special Rate Period only upon payment of such redemption premium or
      premiums as shall be specified therein ("Special Redemption Provisions").


<PAGE>

            (ii) A Notice of Special Rate Period relating to shares of a series
      of Municipal Preferred for a Special Rate Period thereof may contain
      Special Redemption Provisions only if the Trust's Board of Trustees,
      after consultation with the Broker-Dealer or Broker-Dealers for such
      Special Rate Period of shares of such series, determines that such
      Special Redemption Provisions are in the best interest of the Trust.

            (iii) If fewer than all of the outstanding shares of a series of
      Municipal Preferred are to be redeemed pursuant to subparagraph (i) of
      this subparagraph (a), the number of shares of such series to be redeemed
      shall be determined by the Board of Trustees, and such shares shall be
      redeemed pro rata from the Holders of shares of such series in proportion
      to the number of shares of such series held by such Holders.

            (iv) Subject to the provisions of subparagraph (v) of this
      subparagraph (a), shares of any series of Municipal Preferred may be
      redeemed, at the option of the Trust, as a whole but not in part, out of
      funds legally available therefor, on the first day following any Dividend
      Period thereof included in a Rate Period consisting of more than 364 Rate
      Period Days if, on the date of determination of the Applicable Rate for
      shares of such series for such Rate Period, such Applicable Rate equaled
      or exceeded on such date of determination the Treasury Note Rate for such
      Rate Period, at a redemption price per share equal to the sum of $25,000
      plus an amount equal to accumulated but unpaid dividends thereon (whether
      or not earned or declared) to (but not including) to the date fixed for
      redemption.

            (v) The Trust may not on any date mail a Notice of Redemption
      pursuant to subparagraph (c) of this paragraph 11 in respect of a
      redemption contemplated to be effected pursuant to this subparagraph (a)
      unless on such date (a) the Trust has available Deposit Securities with
      maturity or tender dates not later than the day preceding the applicable
      redemption date and having a value not less than the amount (including
      any applicable premium) due to Holders of shares of Municipal Preferred
      by reason of the redemption of such shares on such redemption date and
      (b) the Discounted Value of Moody's Eligible Assets (if Moody's is then
      rating the shares of Municipal Preferred) and the Discounted Value of S&P
      Eligible Assets (if S&P is then rating the shares of Municipal Preferred)
      each at least equal the Municipal Preferred Basic Maintenance Amount, and
      would at least equal the Municipal Preferred Basic Maintenance Amount
      immediately subsequent to such redemption if such redemption were to
      occur on such date. For purposes of determining in clause (b) of the
      preceding sentence whether the Discounted Value of Moody's Eligible
      Assets at least equals the Municipal Preferred Basic Maintenance Amount,
      the Moody's Discount Factors applicable to Moody's Eligible Assets shall
      be determined by reference to the first Exposure Period longer than the
      Exposure Period then applicable to the Trust, as described in the
      definition of Moody's Discount Factor herein.

     (b) MANDATORY REDEMPTION. The Trust shall redeem, at a redemption price
equal to $25,000 per share plus accumulated but unpaid dividends thereon
(whether or not earned or declared) to (but not including) the date fixed by
the Board of Trustees for redemption, certain of the shares of Municipal
Preferred, if the Trust fails to have either Moody's Eligible Assets with a
Discounted Value, or S&P Eligible Assets with a Discounted Value, greater than

<PAGE>

or equal to the Municipal Preferred Basic Maintenance Amount or fails to
maintain the 1940 Act Municipal Preferred Asset Coverage, in accordance with
the requirements of the rating agency or agencies then rating the shares of
Municipal Preferred, and such failure is not cured on or before the Municipal
Preferred Basic Maintenance Cure Date or the 1940 Act Cure Date, as the case
may be (the "Cure Date"). The number of shares of Municipal Preferred to be
redeemed shall be equal to the lesser of (i) the minimum number of shares of
Municipal Preferred, together with all other Preferred Shares subject to
redemption or retirement, the redemption of which, if deemed to have occurred
immediately prior to the opening of business on the Cure Date, would have
resulted in the Trust's having both Moody's Eligible Assets with a Discounted
Value, and S&P Eligible Assets with a Discounted Value, greater than or equal
to the Municipal Preferred Basic Maintenance Amount or maintaining the 1940 Act
Municipal Preferred Asset Coverage, as the case may be, on such Cure Date
(provided, however, that if there is no such minimum number of shares of
Municipal Preferred and other Preferred Shares the redemption or retirement of
which would have had such result, all shares of Municipal Preferred and
Preferred Shares then outstanding shall be redeemed), and (ii) the maximum
number of shares of Municipal Preferred, together with all other Preferred
Shares subject to redemption or retirement, that can be redeemed out of funds
expected to be legally available therefor in accordance with the Declaration,
the By-laws, this Statement and applicable law. In determining the shares of
Municipal Preferred required to be redeemed in accordance with the foregoing,
the Trust shall allocate the number required to be redeemed to satisfy the
Municipal Preferred Basic Maintenance Amount or the 1940 Act Municipal
Preferred Asset Coverage, as the case may be, pro rata among shares of
Municipal Preferred and other Preferred Shares (and, then pro rata among each
series of Municipal Preferred) subject to redemption or retirement. The Trust
shall effect such redemption on the date fixed by the Trust therefor, which
date shall not be earlier than 20 days nor later than 40 days after such Cure
Date, except that if the Trust does not have funds legally available for the
redemption of all of the required number of shares of Municipal Preferred and
other Preferred Shares which are subject to redemption or retirement or the
Trust otherwise is unable to effect such redemption on or prior to 40 days
after such Cure Date, the Trust shall redeem those shares of Municipal
Preferred and other Preferred Shares which it was unable to redeem on the
earliest practicable date on which it is able to effect such redemption. If
fewer than all of the outstanding shares of a series of Municipal Preferred are
to be redeemed pursuant to this subparagraph (b), the number of shares of such
series to be redeemed shall be redeemed pro rata from the Holders of shares of
such series in proportion to the number of shares of such series held by such
Holders.

     (c) NOTICE OF REDEMPTION. If the Trust shall determine or be required to
redeem shares of a series of Municipal Preferred pursuant to subparagraph (a)
or (b) of this paragraph 11, it shall mail a Notice of Redemption with respect
to such redemption by first class mail, postage prepaid, to each Holder of the
shares of such series to be redeemed, at such Holder's address as the same
appears on the record books of the Trust on the record date established by the
Board of Trustees. Such Notice of Redemption shall be so mailed not less than
20 nor more than 45 days prior to the date fixed for redemption. Each such
Notice of Redemption shall state: (i) the redemption date; (ii) the number of
shares of Municipal Preferred to be redeemed and the series thereof; (iii) the
CUSIP number for shares of such series; (iv) the Redemption Price; (v) the
place or places where the certificate(s) for such shares (properly endorsed or
assigned for transfer, if the Board of Trustees shall so require and the Notice
of Redemption shall so state) are to be surrendered for payment of the
Redemption Price; (vi) that dividends on the shares to be redeemed will cease
to accumulate on such redemption date; and (vii) the provisions of this
paragraph 11 under which such redemption is made. If fewer than all shares of a
series of Municipal Preferred held by any Holder are to be redeemed, the Notice
of Redemption mailed to such Holder shall also specify the number of shares of
such series to be redeemed from such Holder. The Trust may provide in any
Notice of Redemption relating to an optional redemption contemplated to be

<PAGE>

effected pursuant to subparagraph (a) of this paragraph 11 that such redemption
is subject to one or more conditions precedent and that the Trust shall not be
required to make such redemption unless each such condition shall have been
satisfied at the time or times and in the manner specified in such Notice of
Redemption.

     (d) NO REDEMPTION UNDER CERTAIN CIRCUMSTANCES. Notwithstanding the
provisions of subparagraphs (a) or (b) of this paragraph 11, if any dividends
on shares of a series of Municipal Preferred (whether or not earned or
declared) are in arrears, no shares of such series shall be redeemed unless all
outstanding shares of such series are simultaneously redeemed, and the Trust
shall not purchase or otherwise acquire any shares of such series; provided,
however, that the foregoing shall not prevent the purchase or acquisition of
all outstanding shares of such series pursuant to the successful completion of
an otherwise lawful purchase or exchange offer made on the same terms to, and
accepted by, Holders of all outstanding shares of such series.

     (e) ABSENCE OF FUNDS AVAILABLE FOR REDEMPTION. To the extent that any
redemption for which Notice of Redemption has been mailed is not made by reason
of the absence of legally available funds therefor in accordance with the
Declaration, the By-laws, this Statement and applicable law, such redemption
shall be made as soon as practicable to the extent such funds become available.
Failure to redeem shares of Municipal Preferred shall be deemed to exist at any
time after the date specified for redemption in a Notice of Redemption when the
Trust shall have failed, for any reason whatsoever, to deposit in trust with
the Auction Agent the Redemption Price with respect to any shares of which such
Notice of Redemption has been mailed; provided, however, that the foregoing
shall not apply in the case of the Trust's failure to deposit in trust with the
Auction Agent the Redemption Price with respect to any shares where (1) the
Notice of Redemption relating to such redemption provided that such redemption
was subject to one or more conditions precedent and (2) any such condition
precedent shall not have been satisfied at the time or times and in the manner
specified in such Notice of Redemption. Notwithstanding the fact that the Trust
may not have redeemed shares of Municipal Preferred for which a Notice of
Redemption has been mailed, dividends may be declared and paid on shares of
Municipal Preferred and shall include those shares of Municipal Preferred for
which a Notice of Redemption has been mailed.

     (f) AUCTION AGENT AS TRUSTEE OF REDEMPTION PAYMENTS BY TRUST. All moneys
paid to the Auction Agent for payment of the Redemption Price of shares of
Municipal Preferred called for redemption shall be held in trust by the Auction
Agent for the benefit of Holders of shares so to be redeemed.

     (g) SHARES FOR WHICH NOTICE OF REDEMPTION HAS BEEN GIVEN ARE NO LONGER
OUTSTANDING. Provided a Notice of Redemption has been mailed pursuant to
subparagraph (c) of this paragraph 11, upon the deposit with the Auction Agent
(on the Business Day next preceding the date fixed for redemption thereby, in
funds available on the next Business Day in The City of New York, New York) of
funds sufficient to redeem the shares of Municipal Preferred that are the
subject of such notice, dividends on such shares shall cease to accumulate and
such shares shall no longer be deemed to be outstanding for any purpose, and
all rights of the Holders of the shares so called for redemption shall cease

<PAGE>

and terminate, except the right of such Holders to receive the Redemption
Price, but without any interest or other additional amount, except as provided
in paragraphs 2(e)(i) and 3 of this Part I. Upon surrender in accordance with
the Notice of Redemption of the certificates for any shares so redeemed
(properly endorsed or assigned for transfer, if the Board of Trustees shall so
require and the Notice of Redemption shall so state), the Redemption Price
shall be paid by the Auction Agent to the Holders of shares of Municipal
Preferred subject to redemption. In the case that fewer than all of the shares
represented by any such certificate are redeemed, a new certificate shall be
issued, representing the unredeemed shares, without cost to the Holder thereof.
The Trust shall be entitled to receive from the Auction Agent, promptly after
the date fixed for redemption, any cash deposited with the Auction Agent in
excess of (i) the aggregate Redemption Price of the shares of Municipal
Preferred called for redemption on such date and (ii) all other amounts to
which Holders of shares of Municipal Preferred called for redemption may be
entitled. Any funds so deposited that are unclaimed at the end of 90 days from
such redemption date shall, to the extent permitted by law, be repaid to the
Trust, after which time the Holders of shares of Municipal Preferred so called
for redemption may look only to the Trust for payment of the Redemption Price
and all other amounts to which they may be entitled. The Trust shall be
entitled to receive, from time to time after the date fixed for redemption, any
interest on the funds so deposited.

     (h) COMPLIANCE WITH APPLICABLE LAW. In effecting any redemption pursuant
to this paragraph 11, the Trust shall use its best efforts to comply with all
applicable conditions precedent to effecting such redemption under the 1940 Act
and any applicable Massachusetts law, but shall effect no redemption except in
accordance with the 1940 Act and any applicable Massachusetts law.

     (i) ONLY WHOLE SHARES OF MUNICIPAL PREFERRED MAY BE REDEEMED. In the case
of any redemption pursuant to this paragraph 11, only whole shares of Municipal
Preferred shall be redeemed, and in the event that any provision of the
Declaration, the By-laws or this Statement would require redemption of a
fractional share, the Auction Agent shall be authorized to round up so that
only whole shares are redeemed.

     12. LIQUIDATION RIGHTS.

     (a) RANKING. The shares of a series of Municipal Preferred shall rank on a
parity with each other, with shares of any other series of Municipal Preferred
and with shares of any other series of Preferred Shares as to the distribution
of assets upon dissolution, liquidation or winding up of the affairs of the
Trust.

     (b) DISTRIBUTIONS UPON LIQUIDATION. Upon the dissolution, liquidation or
winding up of the affairs of the Trust, whether voluntary or involuntary, the
Holders of shares of Municipal Preferred then outstanding shall be entitled to
receive and to be paid out of the assets of the Trust available for
distribution to its shareholders, before any payment or distribution shall be
made on the Common Shares or on any other class of shares of the Trust ranking
junior to the Municipal Preferred upon dissolution, liquidation or winding up,
an amount equal to the Liquidation Preference with respect to such shares plus
an amount equal to all dividends thereon (whether or not earned or declared)
accumulated but unpaid to (but not including) the date of final distributions
in same-day funds, together with any payments required to be made pursuant to
paragraph 3 of this Part I in connection with the liquidation of the Trust.
After the payment to the Holders of the shares of Municipal Preferred of the
full preferential amounts provided for in this subparagraph (b), the holders of
Municipal Preferred as such shall have no right or claim to any of the
remaining assets of the Trust.


<PAGE>

     (c) PRO RATA DISTRIBUTIONS. In the event the assets of the Trust available
for distribution to the Holders of shares of Municipal Preferred upon any
dissolution, liquidation, or winding up of the affairs of the Trust, whether
voluntary or involuntary, shall be insufficient to pay in full all amounts to
which such Holders are entitled pursuant to subparagraph (b) of this paragraph
12, no such distribution shall be made on account of any shares of any other
class or series of Preferred Shares ranking on a parity with the shares of
Municipal Preferred with respect to the distribution of assets upon such
dissolution, liquidation or winding up unless proportionate distributive
amounts shall be paid on account of the shares of Municipal Preferred, ratably,
in proportion to the full distributable amounts for which holders of all such
parity shares are respectively entitled upon such dissolution, liquidation or
winding up.

     (d) RIGHTS OF JUNIOR SHARES. Subject to the rights of the holders of
shares of any series or class or classes of shares ranking on a parity with the
shares of Municipal Preferred with respect to the distribution of assets upon
dissolution, liquidation or winding up of the affairs of the Trust, after
payment shall have been made in full to the Holders of the shares of Municipal
Preferred as provided in subparagraph (b) of this paragraph 12, but not prior
thereto, any other series or class or classes of shares ranking junior to the
shares of Municipal Preferred with respect to the distribution of assets upon
dissolution, liquidation or winding up of the affairs of the Trust shall,
subject to the respective terms and provisions (if any) applying thereto, be
entitled to receive any and all assets remaining to be paid or distributed, and
the Holders of the shares of Municipal Preferred shall not be entitled to share
therein.

     (e) CERTAIN EVENTS NOT CONSTITUTING LIQUIDATION. Neither the sale of all
or substantially all of the property or business of the Trust, nor the merger
or consolidation of the Trust into or with any trust, corporation or other
entity nor the merger or consolidation of any trust, corporation or other
entity into or with the Trust shall be a dissolution, liquidation or winding
up, whether voluntary or involuntary, for the purposes of this paragraph 12.

     13. MISCELLANEOUS.

     (a) AMENDMENT OF THIS STATEMENT TO ADD ADDITIONAL SERIES. Subject to the
provisions of subparagraph (c) of paragraph 10 of this Part I, the Board of
Trustees may, by resolution duly adopted, without shareholder approval (except
as otherwise provided by this Statement or required by applicable law), amend
this Statement to (1) reflect any amendment hereto which the Board of Trustees
is entitled to adopt pursuant to the terms of this Statement without
shareholder approval or (2) add additional series of Municipal Preferred or
additional shares of a series of Municipal Preferred (and terms relating
thereto) to the series and shares of Municipal Preferred theretofore described
thereon. Each such additional series and all such additional shares shall be
governed by the terms of this Statement.

     (b) [RESERVED]

     (c) NO FRACTIONAL SHARES. No fractional shares of Municipal Preferred
shall be issued.

     (d) STATUS OF SHARES OF MUNICIPAL PREFERRED REDEEMED, EXCHANGED OR
OTHERWISE ACQUIRED BY THE TRUST. Shares of Municipal Preferred which are
redeemed, exchanged or otherwise acquired by the Trust shall return to the

<PAGE>

status of authorized and unissued Preferred Shares without designation as to
series.

     (e) BOARD MAY RESOLVE AMBIGUITIES. To the extent permitted by applicable
law, the Board of Trustees may interpret, adjust or amend the provisions of
this Statement to resolve any inconsistency or ambiguity or to remedy any
formal defect, and may amend this Statement with respect to any series of
Municipal Preferred prior to this issuance of shares of such series.

     (f) HEADINGS NOT DETERMINATIVE. The headings contained in this Statement
are for convenience of reference only and shall not affect the meaning or
interpretation of this Statement.

     (g) NOTICES. All notices or communications, unless otherwise specified in
this Statement, shall be sufficiently given if in writing and delivered in
person or mailed by first-class mail, postage prepaid.

                                    PART II

     1. ORDERS.

     (a) Prior to the Submission Deadline on each Auction Date for shares of a
series of Municipal Preferred:

            (i) each Beneficial Owner of shares of such series may submit to
      its Broker-Dealer by telephone or otherwise information as to:

                  (A) the number of Outstanding shares, if any, of such series
            held by such Beneficial Owner which such Beneficial Owner desires
            to continue to hold without regard to the Applicable Rate for
            shares of such series for the next succeeding Rate Period of such
            shares;

                  (B) the number of Outstanding shares, if any, of such series
            held by such Beneficial Owner which such Beneficial Owner offers to
            sell if the Applicable Rate for shares of such series for the next
            succeeding Rate Period of shares of such series shall be less than
            the rate per annum specified by such Beneficial Owner; and/or

                  (C) the number of Outstanding shares, if any, of such series
            held by such Beneficial Owner which such Beneficial Owner offers to
            sell without regard to the Applicable Rate for shares of such
            series for the next succeeding Rate Period of shares of such
            series; and

            (ii) one or more Broker-Dealers, using lists of Potential
      Beneficial Owners, shall in good faith for the purpose of conducting a
      competitive Auction in a commercially reasonable manner, contact
      Potential Beneficial Owners (by telephone or otherwise), including
      Persons that are not Beneficial Owners, on such lists to determine the

<PAGE>

      number of shares, if any, of such series which each such Potential
      Beneficial Owner offers to purchase if the Applicable Rate for shares of
      such series for the next succeeding Rate Period of shares of such series
      shall not be less than the rate per annum specified by such Potential
      Beneficial Owner.

For purposes hereof, the communication by a Beneficial Owner or Potential
Beneficial Owner to a Broker-Dealer, or by a Broker-Dealer to the Auction
Agent, of information referred to in clause (i)(A), (i)(B), (i)(C), or (ii) of
this subparagraph (a) is hereinafter referred to as an "Order" and collectively
as "Orders" and each Beneficial Owner and each Potential Beneficial Owner
placing an Order with a Broker-Dealer, and such Broker-Dealer placing an Order
with the Auction Agent, is hereinafter referred to as a "Bidder" and
collectively as "Bidders"; an Order containing the information referred to in
clause (i)(A) of this subparagraph (a) is hereinafter referred to as a "Hold
Order" and collectively as "Hold Orders"; an Order containing the information
referred to in clause (i)(B) or (ii) of this subparagraph (a) is hereinafter
referred to as a "Bid" and collectively as "Bids"; and an Order containing the
information referred to in clause (i)(C) of this subparagraph (a) is
hereinafter referred to as a "Sell Order" and collectively as "Sell Orders."

      (b) (i) A Bid by a Beneficial Owner or an Existing Holder of shares of a
      series of Municipal Preferred subject to an Auction on any Auction Date
      shall constitute an irrevocable offer to sell:

                  (A) the number of Outstanding shares of such series specified
            in such Bid if the Applicable Rate for shares of such series
            determined on such Auction Date shall be less than the rate
            specified therein;

                  (B) such number or a lesser number of Outstanding shares of
            such series to be determined as set forth in paragraph 4(a)(iv) of
            this Part II if the Applicable Rate for shares of such series
            determined on such Auction Date shall be equal to the rate
            specified therein; or

                  (C) the number of Outstanding shares of such series specified
            in such Bid if the rate specified therein shall be higher than the
            Maximum Rate for shares of such series, or such number or a lesser
            number of Outstanding shares of such series to be determined as set
            forth in paragraph 4(b)(iii) of this Part II if the rate specified
            therein shall be higher than the Maximum Rate for shares of such
            series and Sufficient Clearing Bids for shares of such series do
            not exist.

            (ii) Sell Order by a Beneficial Owner or an Existing Holder of
      shares of a series of Municipal Preferred subject to an Auction on any
      Auction Date shall constitute an irrevocable offer to sell:

                  (A) the number of Outstanding shares of such series specified
            in such Sell Order; or

                  (B) such number or a lesser number of Outstanding shares of
            such series as set forth in paragraph 4(b)(iii) of this Part II if
            Sufficient Clearing Bids for shares of such series do not exist;


<PAGE>

      provided, however, that a Broker-Dealer that is an Existing Holder with
      respect to shares of a series of Municipal Preferred shall not be liable
      to any Person for failing to sell such shares pursuant to a Sell Order
      described in the proviso to paragraph 2(c) of this Part II if (1) such
      shares were transferred by the Beneficial Owner thereof without
      compliance by such Beneficial Owner or its transferee Broker-Dealer (or
      other transferee person, if permitted by the Trust) with the provisions
      of paragraph 7 of this Part II or (2) such Broker-Dealer has informed the
      Auction Agent pursuant to the terms of its Broker-Dealer Agreement that,
      according to such Broker-Dealer's records, such Broker-Dealer believes it
      is not the Existing Holder of such shares.

            (iii) A Bid by a Potential Beneficial Holder or a Potential Holder
      of shares of a series of Municipal Preferred subject to an Auction on any
      Auction Date shall constitute an irrevocable offer to purchase:

                  (A) the number of Outstanding shares of such series specified
            in such Bid if the Applicable Rate for shares of such series
            determined on such Auction Date shall be higher than the rate
            specified therein; or

                  (B) such number or a lesser number of Outstanding shares of
            such series as set forth in paragraph 4(a)(v) of this Part II if
            the Applicable Rate for shares of such series determined on such
            Auction Date shall be equal to the rate specified therein.

     (c) No Order for any number of shares of Municipal Preferred other than
whole shares shall be valid.

     2. SUBMISSION OF ORDERS BY BROKER-DEALERS TO AUCTION AGENT.

     (a) Each Broker-Dealer shall submit in writing to the Auction Agent prior
to the Submission Deadline on each Auction Date all Orders for shares of
Municipal Preferred of a series subject to an Auction on such Auction Date
obtained by such Broker-Dealer, designating itself (unless otherwise permitted
by the Trust) as an Existing Holder in respect of shares subject to Orders
submitted or deemed submitted to it by Beneficial Owners and as a Potential
Holder in respect of shares subject to Orders submitted to it by Potential
Beneficial Owners, and shall specify with respect to each Order for such
shares:

            (i) the name of the Bidder placing such Order (which shall be the
      Broker-Dealer unless otherwise permitted by the Trust);

            (ii) the aggregate number of shares of such series that are the
      subject of such Order;

            (iii) to the extent that such Bidder is an Existing Holder of
      shares of such series:

                  (A) the number of shares, if any, of such series subject to
            any Hold Order of such Existing Holder;

                  (B) the number of shares, if any, of such series subject to
            any Bid of such Existing Holder and the rate specified in such Bid;
            and


<PAGE>

                  (C) the number of shares, if any, of such series subject to
            any Sell Order of such Existing Holder; and

            (iv) to the extent such Bidder is a Potential Holder of shares of
      such series, the rate and number of shares of such series specified in
      such Potential Holder's Bid.

     (b) If any rate specified in any Bid contains more than three figures to
the right of the decimal point, the Auction Agent shall round such rate up to
the next highest one thousandth (.001) of 1%.

     (c) If an Order or Orders covering all of the Outstanding shares of
Municipal Preferred of a series held by any Existing Holder is not submitted to
the Auction Agent prior to the Submission Deadline, the Auction Agent shall
deem a Hold Order to have been submitted by or on behalf of such Existing
Holder covering the number of Outstanding shares of such series held by such
Existing Holder and not subject to Orders submitted to the Auction Agent;
provided, however, that if an Order or Orders covering all of the Outstanding
shares of such series held by any Existing Holder is not submitted to the
Auction Agent prior to the Submission Deadline for an Auction relating to a
Special Rate Period consisting of more than 28 Rate Period Days, the Auction
Agent shall deem a Sell Order to have been submitted by or on behalf of such
Existing Holder covering the number of outstanding shares of such series held
by such Existing Holder and not subject to Orders submitted to the Auction
Agent.

     (d) If one or more Orders of an Existing Holder is submitted to the
Auction Agent covering in the aggregate more than the number of Outstanding
shares of Municipal Preferred of a series subject to an Auction held by such
Existing Holder, such Orders shall be considered valid in the following order
of priority:

            (i) all Hold Orders for shares of such series shall be considered
      valid, but only up to and including in the aggregate the number of
      Outstanding shares of such series held by such Existing Holder, and if
      the number of shares of such series subject to such Hold Orders exceeds
      the number of Outstanding shares of such series held by such Existing
      Holder, the number of shares subject to each such Hold Order shall be
      reduced pro rata to cover the number of Outstanding shares of such series
      held by such Existing Holder;

            (ii) (A) any Bid for shares of such series shall be considered
            valid up to and including the excess of the number of Outstanding
            shares of such series held by such Existing Holder over the number
            of shares of such series subject to any Hold Orders referred to in
            clause (i) above;

                  (B) subject to subclause (A), if more than one Bid of an
            Existing Holder for shares of such series is submitted to the
            Auction Agent with the same rate and the number of Outstanding
            shares of such series subject to such Bids is greater than such
            excess, such Bids shall be considered valid up to and including the
            amount of such excess, and the number of shares of such series
            subject to each Bid with the same rate shall be reduced pro rata to
            cover the number of shares of such series equal to such excess;


<PAGE>

                  (C) subject to subclauses (A) and (B), if more than one Bid
            of an Existing Holder for shares of such series is submitted to the
            Auction Agent with different rates, such Bids shall be considered
            valid in the ascending order of their respective rates up to and
            including the amount of such excess; and

                  (D) in any such event, the number, if any, of such
            Outstanding shares of such series subject to any portion of Bids
            considered not valid in whole or in part under this clause (ii)
            shall be treated as the subject of a Bid for shares of such series
            by or on behalf of a Potential Holder at the rate therein
            specified; and

            (iii) all Sell Orders for shares of such series shall be considered
      valid up to and including the excess of the number of Outstanding shares
      of such series held by such Existing Holder over the sum of shares of
      such series subject to valid Hold Orders referred to in clause (i) above
      and valid Bids referred to in clause (ii) above.

      (e) If more than one Bid for one or more shares of a series of Municipal
Preferred is submitted to the Auction Agent by or on behalf of any Potential
Holder, each such Bid submitted shall be a separate Bid with the rate and
number of shares therein specified.

      (f) Any Order submitted by a Beneficial Owner or a Potential Beneficial
Owner to its Broker-Dealer, or by a Broker-Dealer to the Auction Agent, prior
to the Submission Deadline on any Auction Date, shall be irrevocable.

      3. DETERMINATION OF SUFFICIENT CLEARING BIDS, WINNING BID RATE AND
APPLICABLE RATE.

      (a) Not earlier than the Submission Deadline on each Auction Date for
shares of a series of Municipal Preferred, the Auction Agent shall assemble all
valid Orders submitted or deemed submitted to it by the Broker-Dealers in
respect of shares of such series (each such Order as submitted or deemed
submitted by a Broker-Dealer being hereinafter referred to individually as a
"Submitted Hold Order," a "Submitted Bid" or a "Submitted Sell Order," as the
case may be, or as a "Submitted Order," and collectively as "Submitted Hold
Orders," "Submitted Bids" or "Submitted Sell Orders," as the case may be, or as
"Submitted Orders") and shall determine for such series:

            (i) the excess of the number of Outstanding shares of such series
      over the number of Outstanding shares of such series subject to Submitted
      Hold Orders (such excess being hereinafter referred to as the "Available
      Municipal Preferred" of such series);

            (ii) from the Submitted Orders for shares of such series whether:

                  (A) the number of Outstanding shares of such series subject
            to Submitted Bids of Potential Holders specifying one or more rates
            equal to or lower than the Maximum Rate for shares of such series;

            exceeds or is equal to the sum of:


<PAGE>

                  (B) the number of Outstanding shares of such series subject
            to Submitted Bids of Existing Holders specifying one or more rates
            higher than the Maximum Rate for shares of such series; and

                  (C) the number of Outstanding shares of such series subject
            to Submitted Sell Orders

            (in the event such excess or such equality exists (other than
            because the number of shares of such series in subclauses (B) and
            (C) above is zero because all of the Outstanding shares of such
            series are subject to Submitted Hold Orders), such Submitted Bids
            in subclause (A) above being hereinafter referred to collectively
            as "Sufficient Clearing Bids" for shares of such series); and

            (iii) if Sufficient Clearing Bids for shares of such series exist,
      the lowest rate specified in such Submitted Bids (the "Winning Bid Rate"
      for shares of such series) which if:

                  (A) (I) each such Submitted Bid of Existing Holders
            specifying such lowest rate and (II) all other such Submitted Bids
            of Existing Holders specifying lower rates were rejected, thus
            entitling such Existing Holders to continue to hold the shares of
            such series that are subject to such Submitted Bids; and

                  (B) (I) each such Submitted Bid of Potential Holders
            specifying such lowest rate and (II) all other such Submitted Bids
            of Potential Holders specifying lower rates were accepted;

      would result in such Existing Holders described in subclause (A) above
      continuing to hold an aggregate number of Outstanding shares of such
      series which, when added to the number of Outstanding shares of such
      series to be purchased by such Potential Holders described in subclause
      (B) above, would equal not less than the Available Municipal Preferred of
      such series.

      (b) Promptly after the Auction Agent has made the determinations pursuant
to subparagraph (a) of this paragraph 3, the Auction Agent shall advise the
Trust of the Maximum Rate for shares of the series of Municipal Preferred for
which an Auction is being held on the Auction Date and, based on such
determination, the Applicable Rate for shares of such series for the next
succeeding Rate Period thereof as follows:

            (i) if Sufficient Clearing Bids for shares of such series exist,
      that the Applicable Rate for all shares of such series for the next
      succeeding Rate Period thereof shall be equal to the Winning Bid Rate for
      shares of such series so determined;

            (ii) if Sufficient Clearing Bids for shares of such series do not
      exist (other than because all of the Outstanding shares of such series
      are subject to Submitted Hold Orders), that the Applicable Rate for all
      shares of such series for the next succeeding Rate Period thereof shall
      be equal to the Maximum Rate for shares of such series; or


<PAGE>

            (iii) if all of the Outstanding shares of such series are subject
      to Submitted Hold Orders, that the Applicable Rate for all shares of such
      series for the next succeeding Rate Period thereof shall be as set forth
      in subparagraph (c) of this paragraph 3.

     (c) For purposes of subparagraph (b)(iii) of this paragraph 3, the
Applicable Rate for shares of such series for the next succeeding Rate Period
of shares of such series shall be equal to the lesser of the Kenny Index (if
such Rate Period consists of fewer than 183 Rate Period Days) or the product of
(A) (I) the "AA" Composite Commercial Paper Rate on such Auction Date for such
Rate Period, if such Rate Period consists of fewer than 183 Rate Period Days;
(II) the Treasury Bill Rate on such Auction Date for such Rate Period, if such
Rate Period consists of more than 182 but fewer than 365 Rate Period Days; or
(III) the Treasury Note Rate on such Auction Date for such Rate Period, if such
Rate Period is more than 364 Rate Period Days (the rate described in the
foregoing clause (A)(I), (II) or (III), as applicable, being referred to herein
as the "Benchmark Rate") and (B) 1 minus the maximum marginal regular Federal
individual income tax rate applicable to ordinary income or the maximum
marginal regular Federal corporate income tax rate applicable to ordinary
income, whichever is greater; provided, however, that if the Trust has notified
the Auction Agent of its intent to allocate to shares of such series in such
Rate Period any net capital gains or other income taxable for Federal income
tax purposes ("Taxable Income"), the Applicable Rate for shares of such series
for such Rate Period will be (i) if the Taxable Yield Rate (as defined below)
is greater than the Benchmark Rate, then the Benchmark Rate, or (ii) if the
Taxable Yield Rate is less than or equal to the Benchmark Rate, then the rate
equal to the sum of (x) the lesser of the Kenny Index (if such Rate Period
consists of fewer than 183 Rate Period Days) or the product of the Benchmark
Rate multiplied by the factor set forth in the preceding clause (B) and (y) the
product of the maximum marginal regular Federal individual income tax rate
applicable to ordinary income or the maximum marginal regular Federal corporate
income tax applicable to ordinary income, whichever is greater, multiplied by
the Taxable Yield Rate. For purposes of the foregoing, "Taxable Yield Rate"
means the rate determined by (a) dividing the amount of Taxable Income
available for distribution per such share of Municipal Preferred by the number
of days in the Dividend Period in respect of which such Taxable Income is
contemplated to be distributed, (b) multiplying the amount determined in (a)
above by 365 (in the case of a Dividend Period of 7 Rate Period Days) or 360
(in the case of any other Dividend Period), and (c) dividing the amount
determined in (b) above by $25,000.

     4. ACCEPTANCE AND REJECTION OF SUBMITTED BIDS AND SUBMITTED SELL ORDERS
AND ALLOCATION OF SHARES. Existing Holders shall continue to hold the shares of
Municipal Preferred that are subject to Submitted Hold Orders, and, based on
the determinations made pursuant to subparagraph (a) of paragraph 3 of this
Part II, the Submitted Bids and Submitted Sell Orders shall be accepted or
rejected by the Auction Agent and the Auction Agent shall take such other
action as set forth below:

     (a) If Sufficient Clearing Bids for shares of a series of Municipal
Preferred have been made, all Submitted Sell Orders with respect to shares of
such series shall be accepted and, subject to the provisions of subparagraphs
(d) and (e) of this paragraph 4, Submitted Bids with respect to shares of such
series shall be accepted or rejected as follows in the following order of
priority and all other Submitted Bids with respect to shares of such series
shall be rejected:

            (i) Existing Holders' Submitted Bids for shares of such series
      specifying any rate that is higher than the Winning Bid Rate for shares

<PAGE>

      of such series shall be accepted, thus requiring each such Existing
      Holder to sell the shares of Municipal Preferred subject to such
      Submitted Bids;

            (ii) Existing Holders' Submitted Bids for shares of such series
      specifying any rate that is lower than the Winning Bid Rate for shares of
      such series shall be rejected, thus entitling each such Existing Holder
      to continue to hold the shares of Municipal Preferred subject to such
      Submitted Bids;

            (iii) Potential Holders' Submitted Bids for shares of such series
      specifying any rate that is lower than the Winning Bid Rate for shares of
      such series shall be accepted;

            (iv) each Existing Holders' Submitted Bid for shares of such series
      specifying a rate that is equal to the Winning Bid Rate for shares of
      such series shall be rejected, thus entitling such Existing Holder to
      continue to hold the share of Municipal Preferred subject to such
      Submitted Bid, unless the number of Outstanding shares of Municipal
      Preferred subject to all such Submitted Bids shall be greater than the
      number of shares of Municipal Preferred ("remaining shares") in the
      excess of the Available Municipal Preferred of such series over the
      number of shares of Municipal Preferred subject to Submitted Bids
      described in clauses (ii) and (iii) of this subparagraph (a), in which
      event such Submitted Bid of such Existing Holder shall be rejected in
      part, and such Existing Holder shall be entitled to continue to hold
      shares of Municipal Preferred subject to such Submitted Bid, but only in
      an amount equal to the number of shares of Municipal Preferred of such
      series obtained by multiplying the number of remaining shares by a
      fraction, the numerator of which shall be the number of Outstanding
      shares of Municipal Preferred held by such Existing Holder subject to
      such Submitted Bid and the denominator of which shall be the aggregate
      number of Outstanding shares of Municipal Preferred subject to such
      Submitted Bids made by all such Existing Holders that specified a rate
      equal to the Winning Bid Rate for shares of such series; and

            (v) each Potential Holder's Submitted Bid for shares of such series
      specifying a rate that is equal to the Winning Bid Rate of Shares of such
      series shall be accepted but only in an amount equal to the number of
      shares of such series obtained by multiplying the number of shares in the
      excess of the Available Municipal Preferred of such series over the
      number of shares of Municipal Preferred subject to Submitted Bids
      described in clauses (ii) through (iv) of this subparagraph (a) by a
      fraction, the numerator of which shall be the number of Outstanding
      shares of Municipal Preferred subject to such Submitted Bids and the
      denominator of which shall be the aggregate number of Outstanding shares
      of Municipal Preferred subject to such Submitted Bids made by all such
      Potential Holders that specified a rate equal to the Winning Bid Rate for
      shares of such series.

      (b) If Sufficient Clearing Bids for shares of a series of Municipal
Preferred have not been made (other than because all of the Outstanding shares
of such series are subject to Submitted Hold Orders), subject to the provisions
of subparagraph (d) of this paragraph 4, Submitted Orders for shares of such
series shall be accepted or rejected as follows in the following order of
priority and all other Submitted Bids for shares of such series shall be
rejected:


<PAGE>

            (i) Existing Holders' Submitted Bids for shares of such series
      specifying any rate that is equal to or lower than the Maximum Rate for
      shares of such series shall be rejected, thus entitling such Existing
      Holders to continue to hold the shares of Municipal Preferred subject to
      such Submitted Bids;

            (ii) Potential Holders' Submitted Bids for shares of such series
      specifying any rate that is equal to or lower than the Maximum Rate for
      shares of such series shall be accepted; and

            (iii) Each Existing Holder's Submitted Bid for shares of such
      series specifying any rate that is higher than the Maximum Rate for
      shares of such series and the Submitted Sell Orders for shares of such
      series of each Existing Holder shall be accepted, thus entitling each
      Existing Holder that submitted or on whose behalf was submitted any such
      Submitted Bid or Submitted Sell Order to sell the shares of such series
      subject to such Submitted Bid or Submitted Sell Order, but in both cases
      only in an amount equal to the number of shares of such series obtained
      by multiplying the number of shares of such series subject to Submitted
      Bids described in clause (ii) of this subparagraph (b) by a fraction, the
      numerator of which shall be the number of Outstanding shares of such
      series held by such Existing Holder subject to such Submitted Bid or
      Submitted Sell Order and the denominator of which shall be the aggregate
      number of Outstanding shares of such series subject to all such Submitted
      Bids and Submitted Sell Orders.

     (c) If all of the Outstanding shares of a series of Municipal Preferred
are subject to Submitted Hold Orders, all Submitted Bids for shares of such
series shall be rejected.

     (d) If, as a result of the procedures described in clause (iv) or (v) of
subparagraph (a) or clause (iii) of subparagraph (b) of this paragraph 4, any
Existing Holder would be entitled or required to sell, or any Potential Holder
would be entitled or required to purchase, a fraction of a share of a series of
Municipal Preferred on any Auction Date, the Auction Agent shall, in such
manner as it shall determine in its sole discretion, round up or down the
number of shares of Municipal Preferred of such series to be purchased or sold
by any Existing Holder or Potential Holder on such Auction Date as a result of
such procedures so that the number of shares so purchased or sold by each
Existing Holder or Potential Holder on such Auction Date shall be whole shares
of Municipal Preferred.

     (e) If, as a result of the procedures described in clause (v) of paragraph
(a) of this paragraph 4, any Potential Holder would be entitled or required to
purchase less than a whole share of series of Municipal Preferred on any
Auction Date, the Auction Agent shall, in such manner as it shall determine in
its sole discretion, allocate shares of Municipal Preferred of such series for
purchase among Potential Holders so that only whole shares of Municipal
Preferred of such series are purchased on such Auction Date as a result of such
procedures by any Potential Holder, even if such allocation results in one or
more Potential Holders not purchasing shares of Municipal Preferred of such
series on such Auction Date.

     (f) Based on the results of each Auction for shares of a series of
Municipal Preferred, the Auction Agent shall determine the aggregate number of
shares of such series to be purchased and the aggregate number of shares of
such series to be sold by Potential Holders and Existing Holders and, with
respect to each Potential Holder and Existing Holder, to the extent that such

<PAGE>

aggregate number of shares to be purchased and such aggregate number of shares
to be sold differ, determine to which other Potential Holder(s) or Existing
Holder(s) they shall deliver, or from which other Potential Holder(s) or
Existing Holder(s) they shall receive, as the case may be, shares of Municipal
Preferred of such series. Notwithstanding any provision of the Auction
Procedures or the Settlement Procedures to the contrary, in the event an
Existing Holder or Beneficial Owner of shares of a series of Municipal
Preferred with respect to whom a Broker-Dealer submitted a Bid to the Auction
Agent for such shares that was accepted in whole or in part, or submitted or is
deemed to have submitted a Sell Order for such shares that was accepted in
whole or in part, fails to instruct its Agent Member to deliver such shares
against payment therefor, partial deliveries of shares of Municipal Preferred
that have been made in respect of Potential Holders' or Potential Beneficial
Owners' Submitted Bids for shares of such series that have been accepted in
whole or in part shall constitute good delivery to such Potential Holders and
Potential Beneficial Owners.

     (g) Neither the Trust nor the Auction Agent nor any affiliate of either
shall have any responsibility or liability with respect to the failure of an
Existing Holder, a Potential Holder, a Beneficial Owner, a Potential Beneficial
Owner or its respective Agent Member to deliver shares of Municipal Preferred
of any series or to pay for shares of Municipal Preferred of any series sold or
purchased pursuant to the Auction Procedures or otherwise.

     5. NOTIFICATION OF ALLOCATIONS. Whenever the Trust intends to include any
net capital gain or other income taxable for Federal income tax purposes in any
dividend on shares of Municipal Preferred, the Trust shall, in the case of a
Minimum Rate Period or a Special Rate Period of 28 Rate Period Days or fewer,
and may, in the case of any other Special Rate Period, notify the Auction Agent
of the amount to be so included not later than the Dividend Payment Date next
preceding the Auction Date on which the Applicable Rate for such dividend is to
be established. Whenever the Auction Agent receives such notice from the Trust,
it will be required in turn to notify each Broker-Dealer, who, on or prior to
such Auction Date, in accordance with its Broker-Dealer Agreement, will be
required to notify its Beneficial Owners and Potential Beneficial Owners of
shares of Municipal Preferred believed by it to be interested in submitting an
Order in the Auction to be held on such Auction Date.

     6. AUCTION AGENT. For so long as any shares of Municipal Preferred are
outstanding, the Auction Agent, duly appointed by the Trust to so act, shall be
in each case a commercial bank, trust company or other financial institution
independent of the Trust and its affiliates (which however, may engage or have
engaged in business transactions with the Trust or its affiliates) and at no
time shall the Trust or any of its affiliates act as the Auction Agent in
connection with the Auction Procedures. If the Auction Agent resigns or for any
reason its appointment is terminated during any period that any shares of
Municipal Preferred are outstanding, the Board of Trustees shall use its best
efforts promptly thereafter to appoint another qualified commercial bank, trust
company or financial institution to act as the Auction Agent. The Auction
Agent's registry of Existing Holders of shares of a series of Municipal
Preferred shall be conclusive and binding on the Broker-Dealers. A
Broker-Dealer may inquire of the Auction Agent between 3:00 p.m. on the
Business Day preceding an Auction for shares of a series of Municipal Preferred
and 9:30 a.m. on the Auction Date for such Auction to ascertain the number of
shares of a series in respect of which the Auction Agent has determined such
Broker-Dealer to be an Existing Holder. If such Broker-Dealer believes it is
the Existing Holder of fewer shares of such series than specified by the
Auction Agent in response to such Broker-Dealer's inquiry, such Broker-Dealer
may so inform the Auction Agent of that belief. Such Broker-Dealer shall not,
in its capacity as Existing Holder of shares of such series, submit Orders in
such Auction in respect of shares of such series covering in the aggregate more

<PAGE>

than the number of shares of such series specified by the Auction Agent in
response to such Broker-Dealer's inquiry.

     7. TRANSFER OF SHARES OF MUNICIPAL PREFERRED. Unless otherwise permitted
by the Trust, a Beneficial Owner or an Existing Holder may sell, transfer or
otherwise dispose of shares of Municipal Preferred only in whole shares and
only pursuant to a Bid or Sell Order placed with the Auction Agent in
accordance with the procedures described in this Part II or to a Broker-Dealer;
provided, however, that (a) a sale, transfer or other disposition of shares of
Municipal Preferred from a customer of a Broker-Dealer who is listed on the
records of that Broker-Dealer as the holder of such shares to that
Broker-Dealer or another customer of that Broker-Dealer shall not be deemed to
be a sale, transfer or other disposition for purposes of this paragraph 7 if
such Broker-Dealer remains the Existing Holder of the shares so sold,
transferred or disposed of immediately after such sale, transfer or disposition
and (b) in the case of all transfers other than pursuant to Auctions, the
Broker-Dealer (or other Person, if permitted by the Trust) to whom such
transfer is made shall advise the Auction Agent of such transfer.

     8. GLOBAL CERTIFICATE. Prior to the commencement of a Voting Period, (i)
all of the shares of a series of Municipal Preferred outstanding from time to
time shall be represented by one global certificate registered in the name of
the Securities Depository or its nominee and (ii) no registration of transfer
of shares of a series of Municipal Preferred shall be made on the books of the
Trust to any Person other than the Securities Depository or its nominee.


<PAGE>



                           MFS MUNICIPAL INCOME TRUST

                                  CERTIFICATE

     The undersigned hereby certifies that [s]he is the __________ of MFS
Municipal Income Trust, a business trust organized and existing under the laws
of The Commonwealth of Massachusetts (the "Trust"), that annexed hereto is the
Statement creating two series of municipal auction rate cumulative preferred
shares, dated ________ __, 2000, and establishing the powers, qualifications,
rights and preferences of the Municipal Auction Rate Cumulative Preferred
Shares, Series W and Series F of the Trust, which Statement has been adopted by
the Board of Trustees of the Trust in a manner provided in the Trust's
Declaration of Trust.

Dated this ___ day of ________, 2000.


                                          [Name of Officer]
[Title]

</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-99.D(2)
<SEQUENCE>4
<FILENAME>0004.txt
<DESCRIPTION>FORMS OF SHARE CERTIFICATES
<TEXT>

                                                                 Exhibit (d)(2)

          Municipal Auction Rate Cumulative Preferred Shares, Series W

NUMBER 1                                                    SHARES

                           MFS MUNICIPAL INCOME TRUST

ORGANIZED AS A BUSINESS TRUST UNDER THE LAWS                SEE REVERSE FOR
OF THE COMMONWEALTH OF MASSACHUSETTS                        CERTAIN DEFINITIONS

THIS CERTIFICATE IS TRANSFERABLE IN NEW YORK, NY            CUSIP #

THIS CERTIFIES THAT

                                   CEDE & CO.

IS THE OWNER OF

FULLY PAID AND NON-ASSESSABLE MUNICIPAL AUCTION RATE CUMULATIVE PREFERRED
SHARES OF BENEFICIAL INTEREST, WITHOUT PAR VALUE, LIQUIDATION PREFERENCE
$25,000 PER SHARE PLUS AN AMOUNT EQUAL TO ACCUMULATED BUT UNPAID DIVIDENDS
THEREON (WHETHER OR NOT EARNED OR DECLARED) OF

                           MFS MUNICIPAL INCOME TRUST

TRANSFERABLE ON THE BOOKS OF SAID TRUST IN PERSON OR BY DULY AUTHORIZED
ATTORNEY UPON SURRENDER OF THIS CERTIFICATE PROPERLY ENDORSED.

THIS CERTIFICATE IS NOT VALID UNTIL COUNTERSIGNED BY THE TRANSFER AGENT AND
REGISTERED BY THE REGISTRAR.

This certificate and the shares represented hereby are issued and shall be held
subject to all provisions of the Amended and Restated Declaration of Trust,
dated ________ __, 2000 (a copy of which has been filed with the Secretary of
State of the Commonwealth of Massachusetts), and of the By-Laws of the Trust
and of all the amendments from time to time made thereto. The Amended and
Restated Declaration of Trust provides that the name MFS Municipal Income Trust
refers to the Trustees under the Declaration collectively as Trustees and not
as individuals or personally, and no Trustee, shareholder, officer, employee or
agent of the Trust may be held to any personal liability, nor may resort be had
to their private property for the satisfaction of any obligation or claim
otherwise in connection with the affairs of the Trust but the Trust property
only shall be liable.

IN WITNESS WHEREOF, MFS MUNICIPAL INCOME TRUST HAS CAUSED ITS SEAL TO BE HERETO
AFFIXED AND THIS CERTIFICATE TO BE EXECUTED IN ITS NAME AND BEHALF BY ITS DULY
AUTHORIZED OFFICERS.

Dated:      ________ __, 200_

Countersigned and Registered:
      BANKERS TRUST COMPANY                           ________________________
      (New York) Transfer Agent                       Vice President


By:   ______________________________                  ________________________
      Authorized Signature                            Secretary


THE TRANSFER OF THE MUNICIPAL AUCTION RATE CUMULATIVE PREFERRED SHARES
REPRESENTED HEREBY IS SUBJECT TO THE RESTRICTIONS CONTAINED IN THE STATEMENT
CREATING THE MUNICIPAL PREFERRED SHARES OF THE TRUST. THE TRUST WILL FURNISH
INFORMATION ABOUT SUCH RESTRICTIONS TO ANY SHAREHOLDER, WITHOUT CHARGE, UPON
REQUEST TO THE SECRETARY OF THE TRUST.


<PAGE>

                           MFS MUNICIPAL INCOME TRUST

     A full statement of the designations and any preferences, conversion and
other rights, voting powers, restrictions, limitations as to dividends,
qualifications, and terms and conditions of redemption of the shares of each
class and series of shares of beneficial interest which the Trust is authorized
to issue and the differences in the relative rights and preferences between the
shares of each class and series to the extent that they have been set, and the
authority of the Board of Trustees to set the relative rights and preferences
of subsequent classes and series, will be furnished by the Trust to any
shareholder, without charge, upon request to the Secretary of the Trust at its
principal office.

     The following abbreviations, when used in the inscription on the face of
this certificate, shall be construed as though they were written out in full
according to applicable laws or regulations:

<TABLE>
<CAPTION>

<S>                                          <C>                              <C>
TEN COM -- as tenants in common              UNIF GIFT MIN ACT--_______       Custodian____
TEN ENT -- as tenants by the entireties                        (Cust)             (Minor)
JT TEN --  as joint tenants with right       under Uniform Gifts to
           of survivorship and not as        Minors Act __________
           tenants in common                              (State)
</TABLE>


     Additional abbreviations also may be used though not in the above list.

For value received, _______________________ hereby sell, assign and transfer
unto

Please insert social securities or other identifying number of assignee


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

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

_______________________________________________________________________________
(Please Print or Typewrite Name and Address, Including Zip Code, of Assignee)



_______________________________________________________________________________

_______________________________________________________________________________

________________________________________________________________________shares
of the shares of beneficial interest represented by the within Certificate, and
do hereby irrevocably constitute and appoint


_______________________________________________________________________________
Attorney to transfer the said shares on the books of the within named Trust
with full power of substitution in the premises.

Dated:________________________

      NOTICE:   The Signature to this assignment must correspond with the name
                as written upon the face of the Certificate in every
                particular, without alteration or enlargement or any change
                whatsoever.

<PAGE>


          Municipal Auction Rate Cumulative Preferred Shares, Series F

NUMBER 1                                                    SHARES

                           MFS MUNICIPAL INCOME TRUST

ORGANIZED AS A BUSINESS TRUST UNDER THE LAWS                SEE REVERSE FOR
OF THE COMMONWEALTH OF MASSACHUSETTS                        CERTAIN DEFINITIONS

THIS CERTIFICATE IS TRANSFERABLE IN NEW YORK, NY            CUSIP #

THIS CERTIFIES THAT

                                   CEDE & CO.

IS THE OWNER OF

FULLY PAID AND NON-ASSESSABLE MUNICIPAL AUCTION RATE CUMULATIVE PREFERRED
SHARES OF BENEFICIAL INTEREST, WITHOUT PAR VALUE, LIQUIDATION PREFERENCE
$25,000 PER SHARE PLUS AN AMOUNT EQUAL TO ACCUMULATED BUT UNPAID DIVIDENDS
THEREON (WHETHER OR NOT EARNED OR DECLARED) OF

                           MFS MUNICIPAL INCOME TRUST

TRANSFERABLE ON THE BOOKS OF SAID TRUST IN PERSON OR BY DULY AUTHORIZED
ATTORNEY UPON SURRENDER OF THIS CERTIFICATE PROPERLY ENDORSED.

THIS CERTIFICATE IS NOT VALID UNTIL COUNTERSIGNED BY THE TRANSFER AGENT AND
REGISTERED BY THE REGISTRAR.

This certificate and the shares represented hereby are issued and shall be held
subject to all provisions of the Amended and Restated Declaration of Trust,
dated ________ __, 2000 (a copy of which has been filed with the Secretary of
State of the Commonwealth of Massachusetts), and of the By-Laws of the Trust
and of all the amendments from time to time made thereto. The Amended and
Restated Declaration of Trust provides that the name MFS Municipal Income Trust
refers to the Trustees under the Declaration collectively as Trustees and not
as individuals or personally, and no Trustee, shareholder, officer, employee or
agent of the Trust may be held to any personal liability, nor may resort be had
to their private property for the satisfaction of any obligation or claim
otherwise in connection with the affairs of the Trust but the Trust property
only shall be liable.

IN WITNESS WHEREOF, MFS MUNICIPAL INCOME TRUST HAS CAUSED ITS SEAL TO BE HERETO
AFFIXED AND THIS CERTIFICATE TO BE EXECUTED IN ITS NAME AND BEHALF BY ITS DULY
AUTHORIZED OFFICERS.

Dated:      ________ __, 200_

Countersigned and Registered:
      BANKERS TRUST COMPANY                           ________________________
      (New York) Transfer Agent                       Vice President


By:   ______________________________                  ________________________
      Authorized Signature                            Secretary


THE TRANSFER OF THE MUNICIPAL AUCTION RATE CUMULATIVE PREFERRED SHARES
REPRESENTED HEREBY IS SUBJECT TO THE RESTRICTIONS CONTAINED IN THE STATEMENT
CREATING THE MUNICIPAL PREFERRED SHARES OF THE TRUST. THE TRUST WILL FURNISH
INFORMATION ABOUT SUCH RESTRICTIONS TO ANY SHAREHOLDER, WITHOUT CHARGE, UPON
REQUEST TO THE SECRETARY OF THE TRUST.


<PAGE>

                           MFS MUNICIPAL INCOME TRUST

     A full statement of the designations and any preferences, conversion and
other rights, voting powers, restrictions, limitations as to dividends,
qualifications, and terms and conditions of redemption of the shares of each
class and series of shares of beneficial interest which the Trust is authorized
to issue and the differences in the relative rights and preferences between the
shares of each class and series to the extent that they have been set, and the
authority of the Board of Trustees to set the relative rights and preferences
of subsequent classes and series, will be furnished by the Trust to any
shareholder, without charge, upon request to the Secretary of the Trust at its
principal office.

      The following abbreviations, when used in the inscription on the face of
this certificate, shall be construed as though they were written out in full
according to applicable laws or regulations:

<TABLE>
<CAPTION>

<S>                                          <C>                              <C>
TEN COM -- as tenants in common              UNIF GIFT MIN ACT--_______       Custodian____
TEN ENT -- as tenants by the entireties                        (Cust)             (Minor)
JT TEN --  as joint tenants with right       under Uniform Gifts to
           of survivorship and not as        Minors Act __________
           tenants in common                              (State)
</TABLE>


     Additional abbreviations also may be used though not in the above list.

For value received, _______________________ hereby sell, assign and transfer
unto

Please insert social securities or other identifying number of assignee


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

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


_______________________________________________________________________________
(Please Print or Typewrite Name and Address, Including Zip Code, of Assignee)



_______________________________________________________________________________

_______________________________________________________________________________

_______________________________________________________________________shares
of the shares of beneficial interest represented by the within Certificate, and
do hereby irrevocably constitute and appoint


_______________________________________________________________________________
Attorney to transfer the said shares on the books of the within named Trust
with full power of substitution in the premises.

Dated:________________________

      NOTICE:  The Signature to this assignment must correspond with the name
               as written upon the face of the Certificate in every particular,
               without alteration or enlargement or any change whatsoever.

</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-99.N
<SEQUENCE>5
<FILENAME>0005.txt
<DESCRIPTION>AUDITOR'S CONSENT
<TEXT>


                                                                    Exhibit (n)



                         INDEPENDENT AUDITORS' CONSENT



We consent to the incorporation by reference in this Post-Effective Amendment
No. 10 to Registration No. 811-4841 of MFS Municipal Income Trust, of our
report appearing in the annual report to shareholders for the year ended
October 31, 1999, dated December 9, 1999, of MFS Municipal Income Trust, and to
the references to us under the headings "Financial Highlights" and "Experts" in
the Prospectus and "Independent Accountants" in the Statement of Additional
Information, both of which are part of such Registration Statement.



Deloitte & Touche LLP
- ---------------------
Deloitte & Touche LLP


Boston, Massachusetts
July 26, 2000





</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-99.S
<SEQUENCE>6
<FILENAME>0006.txt
<DESCRIPTION>POWER OF ATTORNEY
<TEXT>

                                                                    Exhibit (s)

                               POWER OF ATTORNEY
                           MFS Municipal Income Trust

     The undersigned, Trustees and officers of MFS Municipal Income Trust (the
"Registrant"), hereby severally constitute and appoint Jeffrey L. Shames,
Arnold D. Scott, Stephen E. Cavan, James O. Yost and James R. Bordewick, Jr.,
and each of them singly, as true and lawful attorneys, with full power to them
and each of them to sign for each of the undersigned, in the names of, and in
the capacities indicated below, any Registration Statement and any and all
amendments thereto and to file the same with all exhibits thereto, and other
documents in connection therewith, with the Securities and Exchange Commission
for the purpose of registering the Registrant as a management investment
company under the Investment Company Act of 1940 and/or the shares issued by
the Registrant under the Securities Act of 1933 granting unto our said
attorneys, and each of them, acting alone, full power and authority to do and
perform each and every act and thing requisite or necessary or desirable to be
done in the premises, as fully to all intents and purposes as he or she might
or could do in person, hereby ratifying and confirming all that said attorneys
or any of them may lawfully do or cause to be done by virtue thereof.


     IN WITNESS WHEREOF, the undersigned have hereunto set their hand on this
1st day of July, 2000.



JEFFREY L. SHAMES
____________________________        Chairman of the Board; Trustee;
Jeffrey L. Shames                   and Principal Executive Officer


JAMES O. YOST
____________________________        Principal Financial and Accounting Officer
James O. Yost


J. ATWOOD IVES
____________________________        Trustee
J. Atwood Ives


<PAGE>


LAWRENCE T. PERERA
____________________________        Trustee
Lawrence T. Perera


WILLIAM J. POORVU
____________________________        Trustee
William J. Poorvu


CHARLES W. SCHMIDT
____________________________        Trustee
Charles W. Schmidt


ARNOLD D. SCOTT
_____________________________       Trustee
Arnold D. Scott


ELAINE R. SMITH
_____________________________       Trustee
Elaine R. Smith


DAVID B. STONE
_____________________________       Trustee
David B. Stone


</TEXT>
</DOCUMENT>
</SEC-DOCUMENT>
-----END PRIVACY-ENHANCED MESSAGE-----
