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<SEC-DOCUMENT>0000927016-02-004189.txt : 20020816
<SEC-HEADER>0000927016-02-004189.hdr.sgml : 20020816
<ACCEPTANCE-DATETIME>20020816122151
ACCESSION NUMBER:		0000927016-02-004189
CONFORMED SUBMISSION TYPE:	N-2/A
PUBLIC DOCUMENT COUNT:		5
FILED AS OF DATE:		20020816

FILER:

	COMPANY DATA:	
		COMPANY CONFORMED NAME:			PIMCO NEW YORK MUNICIPAL INCOME FUND II
		CENTRAL INDEX KEY:			0001170311
		STATE OF INCORPORATION:			MA
		FISCAL YEAR END:			0430

	FILING VALUES:
		FORM TYPE:		N-2/A
		SEC ACT:		1933 Act
		SEC FILE NUMBER:	333-91740
		FILM NUMBER:		02740803

	BUSINESS ADDRESS:	
		STREET 1:		1345 AVENUE OF THE AMERICAS, 47TH FL
		CITY:			NEW YORK
		STATE:			NY
		ZIP:			10105

FILER:

	COMPANY DATA:	
		COMPANY CONFORMED NAME:			PIMCO NEW YORK MUNICIPAL INCOME FUND II
		CENTRAL INDEX KEY:			0001170311
		STATE OF INCORPORATION:			MA
		FISCAL YEAR END:			0430

	FILING VALUES:
		FORM TYPE:		N-2/A
		SEC ACT:		1940 Act
		SEC FILE NUMBER:	811-21078
		FILM NUMBER:		02740804

	BUSINESS ADDRESS:	
		STREET 1:		1345 AVENUE OF THE AMERICAS, 47TH FL
		CITY:			NEW YORK
		STATE:			NY
		ZIP:			10105
</SEC-HEADER>
<DOCUMENT>
<TYPE>N-2/A
<SEQUENCE>1
<FILENAME>dn2a.txt
<DESCRIPTION>PIMCO NY INCOME FUND II  AMENDMENT 2
<TEXT>
<PAGE>




    As filed with the Securities and Exchange Commission on August 16, 2002



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

                                                     1933 Act File No. 333-91740
                                                     1940 Act File No. 811-21078


                     U.S. SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549
                                    Form N-2


[X]      REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
[X]      Pre-Effective Amendment No. 2
[_]      Post-Effective Amendment No. _____________
                  and
[X]      REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
[X]      Amendment No. 6



                      PIMCO New York Municipal Income Fund II
        (Exact Name of Registrant as Specified in Declaration of Trust)


                          c/o PIMCO Funds Advisors LLC
                          1345 Avenue of the Americas
                           New York, New York 10105
                   (Address of Principal Executive Offices)
                    (Number, Street, City, State, Zip Code)


                                (212) 739-3502
             (Registrant's Telephone Number, including Area Code)

                              Stephen J. Treadway
                       c/o PIMCO Funds Distributors LLC
                             2187 Atlantic Street
                          Stamford, Connecticut 06902
(Name and Address (Number, Street, City, State, Zip Code) of Agent for Service)

                         Copies of Communications to:
Joseph B. Kittredge, Jr., Esq.                    Thomas A. Hale
        Ropes & Gray                  Skadden, Arps, Slate, Meagher & Flom LLP
  One International Place               333 West Wacker Drive, Suite 2100
Boston, Massachusetts 02110                     Chicago, IL 60606



                  Approximate Date of Proposed Public Offering:

As soon as practicable after the effective date of this Registration Statement
                           ---------------------------

<PAGE>

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

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

     [X]  when declared effective pursuant to section 8(c)

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


<TABLE>
<CAPTION>

                           CALCULATION OF REGISTRATION FEE UNDER THE SECURITIES ACT OF 1933
- --------------------------------------------------------------------------------------------------------------------------
                                                              Proposed Maximum     Proposed Maximum
                                         Amount Being        Offering Price Per       Aggregate             Amount of
Title of Securities Being Registered      Registered                Unit           Offering Price/1/   Registration Fee/2/
- ------------------------------------     ------------        ------------------    ----------------    -------------------
<S>                                      <C>                 <C>                   <C>                 <C>
Preferred Shares, par value $0.00001     3,600 Shares              $25,000            $90,000,000           $8,280.00
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>




/1/ Estimated solely for the purpose of calculating the registration fee.



/2/ $23.00 of which has previously been paid.



    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 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 dates as the Commission, acting pursuant to said Section 8(a),
may determine.
================================================================================


<PAGE>


                          PROSPECTUS  August 16, 2002
                          ---------------------------


$90,000,000

[LOGO] PIMCO
FUNDS
[LOGO] PIMCO New York Municipal Income Fund II

1,800 Shares Series A
1,800 Shares Series B
Auction Preferred Shares
Liquidation Preference $25,000 Per Share

- --------------------------------------------------------------------------------
Investment Objective.  The Fund is a recently organized, non-diversified,
closed-end management investment company. The Fund's investment objective is to
provide current income exempt from federal, New York State and New York City
income tax. In pursuing this objective, the portfolio manager also seeks to
preserve and enhance the value of the Fund's holdings relative to the municipal
bond market generally, using proprietary analytical models that test and
evaluate the sensitivity of those holdings to changes in interest rates and
yield relationships.

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

Certain capitalized terms used in this Prospectus are defined in the Glossary
that appears at the end of this Prospectus.

Before buying any preferred shares you should read the discussion of the
material risks of investing in the Fund in "Risks" beginning on page 18.
Certain of these risks are summarized in "Prospectus summary--Special Risk
Considerations" beginning on page 3.

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.


<TABLE>
<CAPTION>
                              Price to                Proceeds
                                Public Sales Load to Fund /(1)/
                 ----------------------------------------------
                 <S>       <C>         <C>        <C>
                 Per Share $    25,000  $    250  $    24,750
                 ----------------------------------------------
                 Total     $90,000,000  $900,000  $89,100,000
                 ----------------------------------------------
</TABLE>

(1) Plus accumulated dividends, if any, from the date the Auction Preferred
    Shares are issued, but before offering expenses payable by the Fund
    estimated to be $175,000.


Auction Preferred Shares, Series A and Auction Preferred Shares, Series B
(together, "APS") are being offered by the underwriters subject to certain
conditions. The underwriters reserve the right to withdraw, cancel or modify
the offering in whole or in part. It is expected that the APS will be delivered
to the nominee of The Depository Trust Company on or about August 20, 2002.


UBS Warburg                                 Merrill Lynch & Co.
A.G. Edwards & Sons, Inc.                           Prudential Securities

<PAGE>

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

(continued from previous page)


Investors in APS 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 A APS for the initial period from and including the date of
issue to, but excluding, August 29, 2002 will be       % per year. The dividend
rate on the Series B APS for the initial period from and including the date of
issue to, but excluding, September 3, 2002 will be       % per year. For each
subsequent period, the auction agent will determine the dividend rate for a
particular period by an auction conducted in accordance with the procedures
described in this Prospectus and, in further detail, in Appendix A to the
Statement of Additional Information (each, an "Auction").


The APS, which have no history of public trading, will not be listed on an
exchange or automated quotation system. Broker-Dealers may maintain a secondary
trading market in the APS outside of Auctions; however, they have no obligation
to do so, and there can be no assurance that a secondary market for the APS
will develop or, if it does develop, that it will provide holders with a liquid
trading market (i.e., trading will depend on the presence of willing buyers and
sellers and the trading price will be subject to variables to be determined at
the time of the trade by such Broker-Dealers). A general increase in the level
of interest rates may have an adverse effect on the secondary market price of
the APS, and a selling shareholder that sells APS between Auctions may receive
a price per share of less than $25,000. The Fund may redeem APS as described
under "Description of APS--Redemption."

The APS will be senior in liquidation and distribution rights to the Fund's
outstanding common shares. The Fund's common shares are traded on the New York
Stock Exchange under the symbol "PNI." This offering is conditioned upon the
APS receiving a rating of "Aaa" from Moody's Investors Service ("Moody's").


You should read this Prospectus, which contains important information about the
Fund, before deciding whether to invest and retain it for future reference. A
Statement of Additional Information, dated August 16, 2002, containing
additional information about the Fund, has been filed with the Securities and
Exchange Commission and is incorporated by reference in its entirety into this
Prospectus, which means that it is part of the Prospectus for legal purposes.
You can review the table of contents of the Statement of Additional Information
on page 63 of this Prospectus. You may request a free copy of the Statement of
Additional Information by calling (877) 819-2224 or by writing to the Fund, or
obtain a copy (and other information regarding the Fund) from the Securities
and Exchange Commission web site (http://www.sec.gov).


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

You should rely only on the information contained or incorporated by reference
in this Prospectus. The Fund has not, and the underwriters have not, authorized
anyone to provide you with different information. If anyone provides you with
different or inconsistent information, you should not rely on it. The Fund is
not, and the underwriters are not, making an offer of the APS in any state
where the offer is not permitted. You should not assume that the information
contained in this Prospectus is accurate as of any date other than the date on
the front of this Prospectus. The Fund's business, financial condition, results
of operations and prospects may have changed since that date.

TABLE OF CONTENTS
- --------------------------------------------------------------------------------
<TABLE>
<S>                                 <C> <C>                                    <C>
Prospectus summary.................  1  Description of capital structure......  57
The Fund........................... 12  Anti-takeover and other provisions
Use of proceeds.................... 12    in the Declaration of Trust.........  59
Capitalization..................... 12  Repurchase of Common Shares;
Portfolio composition.............. 13    conversion to open-end fund.........  60
The Fund's investments............. 14  Underwriting..........................  61
Risks.............................. 18  Shareholder servicing agent,
How the Fund manages risk.......... 25    custodian and transfer agents.......  61
Rating agency guidelines........... 27  Legal matters.........................  62
Description of APS................. 28  Table of contents for the Statement of
Management of the Fund............. 51    Additional Information..............  63
Net asset value.................... 53  Glossary..............................  64
Taxes.............................. 53
</TABLE>

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

<PAGE>

Prospectus summary

This is only a summary. You should review the more detailed information
contained in this Prospectus and in the Statement of Additional Information.
Certain capitalized terms used in this Prospectus are defined in the Glossary
that appears at the end of this Prospectus.

THE FUND

PIMCO New York Municipal Income Fund II (the "Fund") is a recently organized,
non-diversified, closed-end management investment company registered under the
Investment Company Act of 1940, as amended (the "1940 Act"). The Fund is
designed to provide tax benefits to investors who are residents of New York.
See "The Fund." The Fund's common shares ("Common Shares") are traded on the
New York Stock Exchange under the symbol "PNI." As of August 7, 2002, the Fund
had 10,301,814 Common Shares outstanding and net assets of $149,144,442.

THE OFFERING

The Fund is offering an aggregate of 1,800 Series A APS and 1,800 Series B APS,
each at a purchase price of $25,000 per share plus accumulated dividends, if
any, from the date of original issue. The APS are being offered through a group
of underwriters led by UBS Warburg LLC and Merrill Lynch, Pierce, Fenner &
Smith Incorporated (collectively, the "Underwriters"). See "Underwriting."

The APS will entitle their holders to receive cash dividends at an annual rate
that may vary for successive Dividend Periods. In general, except as described
under "Description of APS--Dividends," each Dividend Period will be seven days.
The Auction Agent will determine the Applicable Rate for a particular period by
an Auction conducted on the Business Day immediately prior to the start of that
Dividend Period.


The APS are not listed on an exchange. Instead, investors may buy or sell APS
at an auction that normally is held weekly, by submitting orders to
Broker-Dealers that have entered into an agreement with the Auction Agent and
the Fund or to certain other Broker-Dealers. Deutsche Bank Trust Company
Americas, the Auction Agent, reviews orders from Broker-Dealers on behalf of
Existing Holders that wish to sell, or hold at the auction rate, or hold only
at a specified Applicable Rate, and on behalf of Potential Holders that wish to
buy, APS. The Auction Agent then determines the lowest Applicable Rate that
will result in all of the outstanding APS continuing to be held. The first
Auction Date for Series A APS will be August 28, 2002 and for Series B APS will
be August 30, 2002, each being the Business Day before the Initial Dividend
Payment Date for the Initial Dividend Period for the relevant series of APS
(August 29, 2002 for Series A and September 3, 2002 for Series B). The auction
day for Series A APS generally will be Wednesday and for Series B APS generally
will be Friday, unless the then-current Dividend Period is a Special Dividend
Period, or the day that normally would be the Auction Date or the first day of
the subsequent Dividend Period is not a Business Day.


INVESTMENT OBJECTIVE AND POLICIES

The Fund's investment objective is to provide current income exempt from
federal, New York State and New York City income tax. In pursuing this
objective, the portfolio manager also seeks to preserve and enhance the value
of the Fund's holdings relative to the municipal bond market generally, using
proprietary analytical models that test and evaluate the sensitivity of those
holdings to changes in interest rates and yield relationships. Under normal
market conditions, the Fund will invest substantially all (at least 90%) of its
total assets in municipal bonds which pay interest that, in the opinion of bond
counsel to the issuer (or on the basis of other authority believed by the
Fund's portfolio manager to be reliable) is exempt from federal, New York State
and New York City income taxes ("New York Municipal

                                                                             1

<PAGE>

Bonds"). The Fund will invest at least 80% of its net assets in municipal bonds
that at the time of investment are investment grade quality. Investment grade
quality bonds are bonds rated, at the time of investment, within the four
highest grades (Baa or BBB or better by Moody's, Standard & Poor's ("S&P") or
Fitch, Inc. ("Fitch")), or bonds that are unrated but judged to be of
comparable quality by the Fund's portfolio manager. The Fund may invest up to
20% of its net assets in municipal bonds that, at the time of investment, are
rated Ba/BB or B by Moody's, S&P or Fitch, or bonds that are unrated but judged
to be of comparable quality by the Fund's portfolio manager. Bonds of below
investment grade quality are regarded as having predominantly speculative
characteristics with respect to capacity to pay interest and repay principal,
and are commonly referred to as "junk bonds." Bonds in the lowest investment
grade category may also be considered to possess some speculative
characteristics by certain rating agencies. The Fund will at all times seek to
avoid bonds generating interest potentially subjecting individuals to the
alternative minimum tax.

The Fund may invest in "structured" notes, which are privately negotiated debt
obligations where the principal and/or interest is determined by reference to
the performance of a benchmark asset, market or interest rate, such as selected
securities, an index of securities or specified interest rates, or the
differential performance of two assets or markets, such as indices reflecting
taxable and tax-exempt bonds. The Fund currently intends that any use of
structured notes will be for the purpose of reducing the interest rate
sensitivity of the Fund's portfolio (and thereby decreasing the Fund's exposure
to interest rate risk) and, in any event, that the interest income on the notes
will normally be exempt from federal, New York State and New York City income
tax. The Fund may utilize a variety of other derivative instruments, including
residual interest municipal bonds ("RIBS"), to add leverage to the portfolio or
for investment or risk management purposes. See "Risks--Leverage Risk" and
"Risks--Derivatives Risk."

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

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

INVESTMENT MANAGER

PIMCO Funds Advisors LLC (the "Manager") serves as the investment manager of
the Fund. Subject to the supervision of the Board of Trustees, the Manager is
responsible for managing, either directly or through others selected by it, the
investment activities of the Fund and the Fund's business affairs and other
administrative matters. The Manager is located at 1345 Avenue of the Americas,
New York, New York 10105. Organized in 2000, the Manager provides investment
management and advisory services to several closed-end and open-end investment
company clients. As of June 30, 2002, the Manager had approximately $7 billion
in assets under management. Allianz Dresdner Asset Management of America L.P.
is the direct parent company of PIMCO Advisory Services Holdings LLC, of which
the Manager is a wholly-owned subsidiary. As of June 30, 2002, Allianz Dresdner
Asset Management of America L.P. and its subsidiary partnerships, including
Pacific Investment Management Company LLC ("PIMCO"), had approximately $346
billion in assets under management.

The Manager has retained its affiliate, PIMCO, as a sub-adviser to manage the
Fund's portfolio investments. See "--Portfolio Manager" below.

PORTFOLIO MANAGER

PIMCO serves as the Fund's sub-adviser responsible for managing the Fund's
portfolio investments and is sometimes referred to herein as the "portfolio
manager." Subject to the supervision of the Manager,

2

<PAGE>

PIMCO has full investment discretion and makes all determinations with respect
to the investment of the Fund's assets.

PIMCO is located at 840 Newport Center Drive, Newport Beach, California 92660.
Organized in 1971, PIMCO provides investment management and advisory services
to private accounts of institutional and individual clients and to mutual
funds. As of June 30, 2002, PIMCO had approximately $275 billion in assets
under management.

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

LEVERAGE

The Fund expects to utilize financial leverage on an ongoing basis for
investment purposes. After completion of the offering of APS, the Fund
anticipates its total leverage from the issuance of APS will be approximately
38%. This amount may change, but total leverage will not exceed 50% of the
Fund's total assets. Although the Fund may in the future offer other Preferred
Shares, the Fund does not currently intend to offer Preferred Shares other than
Series A APS and Series B APS. The Fund may also invest in RIBS and other
derivative instruments, each of which may amplify the effects of leverage in
the Fund's portfolio.

The Fund generally will not utilize leverage if it anticipates that it would
result in a lower return to Common Shareholders over time. Use of financial
leverage creates an opportunity for increased income for Common Shareholders
but, at the same time, creates the possibility for greater loss (including the
likelihood of greater volatility of net asset value and market price of the
shares and of dividends), and there can be no assurance that a leveraging
strategy will be successful during any period in which it is employed. Because
the fees paid to the Manager and PIMCO will be calculated on the basis of the
Fund's managed assets, the fees will be higher when leverage (including the
APS) is utilized, giving the Manager and PIMCO an incentive to utilize
leverage. See "Risks--Leverage Risk."

SPECIAL RISK CONSIDERATIONS

Risks of investing in APS include:

Auction Risk
You may not be able to sell your APS at an Auction if the Auction fails, that
is, if there are more APS offered for sale than there are buyers for those
shares. As a result, your investment in APS may be illiquid. Neither the
Broker-Dealers nor the Fund are obligated to purchase APS in an Auction or
otherwise, nor is the Fund required to redeem APS in the event of a failed
Auction.

Ratings and Asset Coverage Risk
A Rating Agency could downgrade the APS, which could affect their liquidity and
value. In addition, the Fund may be forced to redeem your APS to meet
regulatory or Rating Agency requirements. The Fund may also voluntarily redeem
APS under certain circumstances.

Secondary Market Risk
You could receive less than the price you paid for your APS if you sell them
outside of an Auction, especially when market interest rates are rising.
Although the Broker-Dealers may maintain a secondary trading market in the APS
outside of Auctions, they are not obligated to do so, and no secondary market
may develop or exist at any time for the APS.

                                                                             3

<PAGE>

General risks of investing in the Fund include:

Limited Operating History
The Fund is a recently organized, non-diversified, closed-end management
investment company which has been operational for less than two months.

Market Discount Risk
Shares of closed-end management investment companies like the Fund frequently
trade at a discount from their net asset value.

Interest Rate Risk
Interest rate risk is the risk that the municipal bonds in the Fund's portfolio
will decline in value because of increases in market interest rates. The prices
of longer-term bonds generally fluctuate more than prices of shorter-term bonds
as interest rates change. Because the Fund will invest primarily in long-term
bonds, the Fund's net asset value will fluctuate more in response to changes in
market interest rates than if the Fund invested primarily in short-term bonds.
If long-term rates rise, the value of the Fund's investment portfolio may
decline, reducing asset coverage on the APS. See "Risks--Interest Rate Risk"
for additional information.

Credit Risk
Credit risk is the risk that one or more debt obligations in the Fund's
portfolio will decline in price, or fail to pay interest or principal when due,
because the issuer of the obligation experiences a decline in its financial
status. Any default by an issuer of a debt obligation could have a negative
impact on the Fund's ability to pay dividends on the APS and could result in
the redemption of some or all of the APS.

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

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

Reinvestment Risk
Income from the Fund's municipal bond portfolio will decline if and when the
Fund invests the proceeds from matured, traded or called bonds at market
interest rates that are below the portfolio's then-current earnings rate. This
could impact the Fund's net asset value and reduce asset coverage on the APS.

Leverage Risk
The Fund utilizes financial leverage for investment purposes. Leverage risk
includes the risk associated with the issuance of APS to leverage the Fund's
Common Shares. The Fund may also invest in RIBS and other derivative
instruments, which will amplify the effects of leverage. If the dividend rate
on the APS exceeds the net rate of return on the Fund's portfolio, the leverage
will result in a lower net asset value than if the Fund were not leveraged, and
the Fund's ability to pay dividends and to meet its asset coverage requirements
on the APS would be reduced.


4

<PAGE>

Because the fees received by the Manager and PIMCO are based on the Fund's
managed assets, the fees will be higher when leverage (including the APS) is
utilized, giving the Manager and PIMCO an incentive to utilize leverage.

Inflation Risk
Inflation risk is the risk that the value of assets or income from the Fund's
investments will be worth less in the future as inflation decreases the present
value of payments at future dates. As inflation increases, the real value of
the APS and distributions, as well as the value of the Fund's portfolio, could
decline.

Liquidity Risk
The Fund may invest up to 20% of its net assets in securities which are
illiquid at the time of investment, which means a security that cannot be sold
within seven days at a price which approximates fair value. Illiquid securities
may trade at a discount from comparable, more liquid investments and may be
subject to wide fluctuations in market value. Also, the Fund may not be able to
dispose of illiquid securities when that would be beneficial at a favorable
time or price.

Derivatives Risk

The Fund may utilize a variety of derivative instruments for investment or risk
management purposes, such as RIBS, structured notes, options contracts, futures
contracts, options on futures contracts, swap agreements, short sales and
delayed delivery and forward commitment transactions. Derivatives are subject
to a number of risks described elsewhere in this Prospectus, such as liquidity
risk, interest rate risk, credit risk and management risk. In addition,
investment by the Fund in RIBS and other derivative instruments may increase
the Fund's leverage. Derivatives also involve the risk of mispricing or
improper valuation, the risk of ambiguous documentation and physical custody
and the risk that changes in the value of a derivative may not correlate
perfectly with an underlying asset, interest rate or index. Suitable derivative
transactions may not be available in all circumstances and there can be no
assurance that the Fund will engage in these transactions to reduce exposure to
other risks when that would be beneficial.


Management Risk
The Fund is subject to management risk because it is an actively managed
investment portfolio. PIMCO and the individual portfolio manager will apply
investment techniques and risk analyses in making investment decisions for the
Fund, but there can be no guarantee that these will produce the desired results.

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

Anti-Takeover Provisions
The Fund's Amended and Restated Agreement and Declaration of Trust (as amended
to date, the "Declaration") and Amended By-Laws include provisions that could
have the effect of limiting the ability of other entities or persons to acquire
control of the Fund, to convert the Fund to open-end status or to change the
composition of the Board of Trustees.

Certain Affiliations
Because certain broker-dealers may be considered affiliated persons of the
Fund, the Manager and/or PIMCO, the Fund's ability to utilize such
broker-dealers is subject to restrictions and, in some cases, is prohibited.
This could limit the Fund's ability to engage in securities transactions and
take advantage of market opportunities.

For additional information about the risks of investing in APS and in the Fund,
see "Risks."

                                                                             5

<PAGE>

DIVIDENDS ON APS

The APS will entitle their holders to receive cash dividends at a rate per
annum that may vary for the successive Dividend Periods for such shares. In
general, except as described below, each Dividend Period for each series of APS
subsequent to the Initial Dividend Period will be seven days in length. The
Applicable Rate for a particular Dividend Period will be determined by an
Auction conducted on the Business Day next preceding the start of such Dividend
Period.

Through their Broker-Dealers, Beneficial Owners and Potential Beneficial Owners
of APS may participate in Auctions, although, except in the case of Special
Dividend Periods of longer than 91 days, Beneficial Owners desiring to continue
to hold all of their APS regardless of the Applicable Rate resulting from
Auctions need not participate. For an explanation of Auctions and the method of
determining the Applicable Rate, see "Description of APS--The Auction."

Except as described herein, investors in APS will not receive certificates
representing ownership of their shares. Ownership of APS will be maintained in
book-entry form by the Securities Depository or its nominee for the account of
the investor's Agent Member. The investor's Agent Member, in turn, will
maintain records of such investor's beneficial ownership of APS. Accordingly,
references herein to an investor's investment in or purchase, sale or ownership
of APS are to purchases, sales or ownership of those shares by Beneficial
Owners.

After the Initial Dividend Period, each Subsequent Dividend Period for each
series of APS will generally consist of seven days (a "7-Day Dividend Period");
provided, however, that prior to any Auction, the Fund may elect, subject to
certain limitations described herein, upon giving notice to holders thereof, a
Special Dividend Period for any or all series. A "Special Dividend Period" is a
Dividend Period consisting of a specified number of days, evenly divisible by
seven and not fewer than 14 nor more than 364 (a "Short Term Dividend Period")
or a Dividend Period consisting of a specified period of one whole year or more
but not greater than five years (a "Long Term Dividend Period"). Dividends on
the APS offered hereby are cumulative from the Date of Original Issue and are
payable when, as and if declared by the Board of Trustees of the Fund, out of
funds legally available therefor, commencing on the Initial Dividend Payment
Date. In the case of Dividend Periods that are not Special Dividend Periods,
dividends will be payable generally on each succeeding Thursday for Series A
APS and on each succeeding Monday for Series B APS, subject to certain
exceptions.

Dividends for the APS will be paid through the Securities Depository on each
Dividend Payment Date. The Securities Depository's normal procedures provide
for it to distribute dividends in same-day funds to Agent Members, who are in
turn expected to distribute such dividends to the person for whom they are
acting as agent in accordance with the instructions of such person. See
"Description of APS--Dividends."

For each Subsequent Dividend Period, the cash dividend rate on each series of
APS will be the Applicable Rate that the Auction Agent advises the Fund has
resulted from an Auction. See "Description of APS--Dividends." The first
Auction for each series of the APS is scheduled to be held on the ending date
for the Initial Dividend Period as set forth above.

The Amended By-Laws provide that until the Fund gives a Request for Special
Dividend Period and the related Notice of Special Dividend Period, only 7-Day
Dividend Periods will be applicable to each series of APS. While the Fund does
not currently intend to give a Request for Special Dividend Period with respect
to any series of APS, it may so elect in the future subject to, and on, the
conditions discussed under "Description of the APS--Dividends--Notification of
Dividend Period."

6

<PAGE>

A Special Dividend Period will not be effective for a series of APS unless
Sufficient Clearing Bids exist at the Auction in respect of such Special
Dividend Period. If Sufficient Clearing Bids do not exist at such Auction, the
Dividend Period commencing on the Business Day succeeding such Auction will be
a 7-Day Dividend Period, and the holders of the APS outstanding immediately
prior to such Auction will be required to continue to hold some or all of such
shares for such Dividend Period. In addition, the Fund may not give a Notice of
Special Dividend Period with respect to the APS, or if the Fund has given a
Notice of Special Dividend Period for the APS, the Fund will be required to
give a Notice of Revocation in respect thereof, if (i) either the 1940 Act APS
Asset Coverage is not satisfied or the Fund fails to maintain Moody's Eligible
Assets with an aggregate Discounted Value at least equal to the APS Basic
Maintenance Amount, in each case on each of the two Valuation Dates immediately
preceding the Business Day prior to the related Auction Date for the APS, or
(ii) sufficient funds for the payment of dividends payable on the immediately
succeeding Dividend Payment Date have not been irrevocably deposited with the
Auction Agent by the close of business on the third Business Day preceding the
related Auction Date. In such event, the next succeeding Dividend Period will
be a 7-Day Dividend Period.

ADVANCE NOTICE OF ALLOCATION OF TAXABLE INCOME; INCLUSION OF TAXABLE INCOME IN
DIVIDENDS

Dividends paid by the Fund, to the extent paid from tax-exempt income earned on
municipal bonds, will be exempt from federal income tax, although a portion of
those dividends may be a tax preference item for individuals for purposes of
the federal alternative minimum tax. In addition, for corporations, interest on
all tax-exempt obligations is taken into account in the computation of income
subject to the federal alternative minimum tax. Although the Fund will at all
times seek to avoid portfolio investments that pay interest that is taxable to
individuals under the federal alternative minimum tax, the Fund may not succeed
in this regard. The Fund is required to allocate net capital gains and other
income subject to federal income tax, if any, proportionately among the Common
Shares and APS. Except as noted below and under "Description of APS--Auction
Procedures," whenever the Fund is aware that it will include any net capital
gains or other income that is subject to federal income tax, but not including
for this purpose income that is exempt for regular federal income tax purposes
but subject to the alternative minimum tax ("Taxable Income"), in any dividend
on the APS, the Fund will notify the Auction Agent prior to the Auction
establishing the Applicable Rate for such dividend. The Auction Agent in turn
will notify each Broker-Dealer whenever it receives any such notice from the
Fund, and each Broker-Dealer will notify its Beneficial Owners and Potential
Beneficial Owners, as provided in its Broker-Dealer Agreement. In the
alternative, the Fund also may include such Taxable Income in a dividend on the
APS without giving advance notice thereof if it increases the dividend by an
amount sufficient to offset substantially the tax effect thereof or, in certain
circumstances, makes a Gross-up Dividend, as described in the next section. The
amount of Taxable Income otherwise allocable to the APS will depend upon the
amount of such income realized by the Fund and other factors but generally is
not expected to be significant. See "Taxes" and "Description of APS--Auction
Procedures--Auction Date; Advance Notice of Allocation of Taxable Income;
Inclusion of Taxable Income in Dividends."

GROSS-UP DIVIDENDS

The Fund may retroactively allocate any net capital gains or other Taxable
Income to the APS without giving the advance notice described in the preceding
section. If the Fund does so solely by reason of the fact that such allocation
is made as a result of the redemption of all or a portion of the outstanding
APS or the liquidation of the Fund, the Fund will make certain payments to
holders of the APS to which such allocation was made to offset substantially
the tax effect thereof. Otherwise, the Fund does not expect to make payments to
holders of the APS to offset the tax effect of any reallocation of net capital
gains or other taxable income. See "Description of APS--Dividends--Gross-up
Dividends" and "Taxes."

                                                                             7

<PAGE>

DETERMINATION OF MAXIMUM APPLICABLE RATES

Except during a Non-Payment Period, the Applicable Rate for any Dividend Period
for APS will not be more than the Maximum Applicable Rate applicable to such
shares. The Maximum Applicable Rate for each series of APS will depend on the
credit rating assigned to such series and on the duration of the Dividend
Period. The Maximum Applicable Rate will be the Applicable Percentage of the
Reference Rate. The Reference Rate is (i) with respect to any 7-Day Dividend
Period or any Short Term Dividend Period having 28 or fewer days, the higher of
the applicable "AA" Composite Commercial Paper Rate and the Taxable Equivalent
of the Short-Term Municipal Obligation Rate, (ii) with respect to any Short
Term Dividend Period having more than 28 but fewer than 183 days, the
applicable "AA" Composite Commercial Paper Rate, (iii) with respect to any
Short Term Dividend Period having 183 or more but fewer than 364 days, the
applicable U.S. Treasury Bill Rate and (iv) with respect to any Long Term
Dividend Period, the applicable U.S. Treasury Note Rate. The Applicable
Percentage will be determined based on (i) the credit rating assigned on such
date to the APS by Moody's (or, if Moody's shall not make such rating
available, the equivalent of such rating by a Substitute Rating Agency) and
(ii) whether the Fund has provided notification to the Auction Agent prior to
the Auction establishing the Applicable Rate for any dividend that net capital
gains or other taxable income will be included in such dividend on the APS, as
follows:

<TABLE>
<CAPTION>
                                           Applicable        Applicable
                                        Percentage of     Percentage of
                                     Reference Rate--  Reference Rate--
       Moody's Credit Ratings on APS  No Notification      Notification
       -----------------------------------------------------------------
       <S>                           <C>               <C>
               Aa3 or higher........              110%              150%
               A....................              125               160
               Baa..................              150               250
               Below Baa............              200               275
</TABLE>

There is no minimum Applicable Rate in respect of any Dividend Period. The
Applicable Rate for any Dividend Period commencing during any Non-Payment
Period, and the rate used to calculate the late charge described under
"Description of APS--Dividends--Non-Payment Period; Late Charge," initially
will be 200% of the Reference Rate (or 275% of such rate if the Fund has
provided notification to the Auction Agent prior to the Auction establishing
the Applicable Rate for any dividend that net capital gains or other taxable
income will be included in such dividend on APS).

AUCTION PROCEDURES

Separate Auctions will be conducted for each series of APS. Unless otherwise
permitted by the Fund, Beneficial Owners and Potential Beneficial Owners of APS
may only participate in Auctions through their Broker-Dealers. Broker-Dealers
will submit the Orders of their respective customers who are Beneficial Owners
and Potential Beneficial Owners to the Auction Agent, designating themselves 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. On
or prior to each Auction Date for the APS (the Business Day next preceding the
first day of each Dividend Period), each Beneficial Owner may submit Orders to
its Broker-Dealer as follows:

..  Hold Order--indicating its desire to hold the APS without regard to the
   Applicable Rate for the next Dividend Period for such shares.

..  Bid--indicating its desire to hold the APS, provided that the Applicable
   Rate for the next Dividend Period for such shares is not less than the rate
   per annum specified in such Bid.

..  Sell Order--indicating its desire to sell the APS without regard to the
   Applicable Rate for the next Dividend Period for such shares.


8

<PAGE>

A Beneficial Owner may submit different types of Orders to its Broker-Dealer
with respect to the APS then held by such Beneficial Owner, provided that the
total number of APS covered by such Orders does not exceed the number of APS
held by such Beneficial Owner. If, however, a Beneficial Owner offers through
its Broker-Dealer to purchase additional APS in such Auction, such Beneficial
Owner, for purposes of such offer to purchase additional shares, will be
treated as a Potential Beneficial Owner as described below. Bids by Beneficial
Owners through their Broker-Dealers with rates per annum higher than the
Maximum Applicable Rate will be treated as Sell Orders. A Hold Order (in the
case of an Auction relating to a Dividend Period of 91 days or less) or a Sell
Order (in the case of an Auction relating to a Special Dividend Period of
longer than 91 days) shall be deemed to have been submitted on behalf of a
Beneficial Owner if an Order with respect to the APS then held by such
Beneficial Owner is not submitted on behalf of such Beneficial Owner for any
reason, including the failure of a Broker-Dealer to submit such Beneficial
Owner's Order to the Auction Agent.

Potential Beneficial Owners of APS may submit Bids through their Broker-Dealers
in which they offer to purchase APS, provided that the Applicable Rate for the
next Dividend Period for such shares is not less than the rate per annum
specified in such Bid. A Bid by a Potential Beneficial Owner with a rate per
annum higher than the Maximum Applicable Rate will not be considered.

Neither the Fund nor the Auction Agent will be responsible for a
Broker-Dealer's failure to act in accordance with the instructions of
Beneficial Owners or Potential Beneficial Owners or failure to comply with any
of the foregoing.

A Broker-Dealer also may hold APS for its own account as a Beneficial Owner. A
Broker-Dealer thus may submit Orders to the Auction Agent as a Beneficial Owner
or a Potential Beneficial Owner and therefore participate in an Auction as an
Existing Holder or Potential Holder on behalf of both itself and its customers.
Any Order placed with the Auction Agent by a Broker-Dealer as or on behalf of a
Beneficial Owner or a Potential Beneficial Owner will be treated in the same
manner as an Order placed with a Broker-Dealer by a Beneficial Owner or a
Potential Beneficial Owner. Similarly, any failure by a Broker-Dealer to submit
to the Auction Agent an Order in respect of any APS 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 APS held
by it, as described above. Inasmuch as a Broker-Dealer participates in an
Auction as an Existing Holder or a Potential Holder only to represent the
interests of a Beneficial Owner or Potential Beneficial Owner, whether it be a
customer or itself, all discussion herein relating to the consequences of an
Auction for Existing Holders and Potential Holders also applies to the
underlying beneficial ownership interests represented thereby.

If Sufficient Clearing Bids exist in an Auction for a series of APS (that is,
in general, the number of APS subject to Bids by Potential Holders with rates
equal to or lower than the Maximum Applicable Rate is at least equal to the
number of APS subject to Sell Orders by Existing Holders), the Applicable Rate
will be the lowest rate per annum specified in the Submitted Bids which, taking
into account such rate per annum and all lower rates per annum bid by Existing
Holders and Potential Holders, would result in Existing Holders and Potential
Holders owning all of the APS available for purchase in the Auction. If
Sufficient Clearing Bids do not exist, the Dividend Period next following the
Auction automatically will be a 7-Day Dividend Period and the Applicable Rate
will be the Maximum Applicable Rate, and in such event, Existing Holders that
have submitted Sell Orders will not be able to sell in the Auction all, and may
not be able to sell any, APS subject to such Sell Orders. Thus, in certain
circumstances, Existing Holders and, thus, the Beneficial Owners they represent
may not have liquidity of investment. If all Existing Holders submit (or are
deemed to have submitted) Hold Orders in an Auction, the Dividend Period next
following the Auction automatically shall be the same length as the immediately
preceding

                                                                             9

<PAGE>

Dividend Period, and the Applicable Rate will be 40% of the Reference Rate (as
defined under "Determination of Maximum Applicable Rates" above) in effect on
the date of the Auction (or 60% of such rate if the Fund has provided
notification to the Auction Agent prior to the Auction establishing the
Applicable Rate for any dividend that net capital gains or other taxable income
will be included in such dividend on APS).

The Auction Procedures include a pro rata allocation of shares for purchase and
sale, which may result in an Existing Holder selling or holding, or a Potential
Holder purchasing, a number of APS that is less than the number of APS
specified in its Order. To the extent the allocation has this result, a
Broker-Dealer will be required to make appropriate pro rata allocations among
its customers and itself.

A Sell Order by an Existing Holder will constitute an irrevocable offer to sell
the APS subject thereto, and a Bid placed by an Existing Holder also will
constitute an irrevocable offer to sell the APS subject thereto if the rate per
annum specified in the Bid is higher than the Applicable Rate determined in the
Auction, in each case at a price per share equal to $25,000. A Bid placed by a
Potential Holder will constitute an irrevocable offer to purchase the APS
subject thereto at a price per share equal to $25,000 if the rate per annum
specified in such Bid is less than or equal to the Applicable Rate determined
in the Auction. Settlement of purchases and sales 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 by book-entry
to their Agent Members. 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 in same-day funds. See "Description
of APS--The Auction."

ASSET MAINTENANCE

Under the Amended By-Laws, the Fund must maintain (i) Moody's Eligible Assets
having, in the aggregate, a Discounted Value at least equal to the APS Basic
Maintenance Amount and (ii) 1940 Act APS Asset Coverage of at least 200%. See
"Description of APS--Asset Maintenance."

The Fund estimates that, based on the composition of its portfolio at August 7,
2002, 1940 Act APS Asset Coverage with respect to APS would be approximately
265% immediately after the issuance of the APS offered hereby in an amount
representing approximately 38% of the Fund's capital (including the capital
attributable to the APS).

The Discount Factors and guidelines for calculating the Discounted Value of the
Fund's portfolio for purposes of determining whether the APS Basic Maintenance
Amount has been satisfied have been established by Moody's in connection with
the Fund's receipt of a rating of "Aaa" on the APS on their Date of Original
Issue. See "Rating Agency Guidelines."

MANDATORY REDEMPTION

If the APS Basic Maintenance Amount or the 1940 Act APS Asset Coverage is not
maintained or restored as specified herein, the APS will be subject to
mandatory redemption, out of funds legally available therefor, at the Mandatory
Redemption Price of $25,000 per share plus an amount equal to dividends thereon
(whether or not earned or declared) accumulated but unpaid to the date fixed
for redemption. In addition, holders of APS may be entitled to receive Gross-up
Dividends in the event of redemption of such APS as described herein. See
"Description of APS--Dividends--Gross-up Dividends." Any such redemption will
be limited to the minimum number of APS necessary to restore the APS Basic
Maintenance Amount or the 1940 Act APS Asset Coverage, as the case may be. The
Fund's ability to

10

<PAGE>

make such a mandatory redemption may be restricted by the provisions of the
1940 Act. See "Description of APS--Redemption--Mandatory Redemption."

OPTIONAL REDEMPTION

The APS are redeemable at the option of the Fund, as a whole or in part, on any
Dividend Payment Date (except during the Initial Dividend Period or a Non-Call
Period) at the Optional Redemption Price of $25,000 per share, plus an amount
equal to dividends thereon (whether or not earned or declared) accumulated but
unpaid to the date fixed for redemption plus the premium, if any, resulting
from the designation of a Premium Call Period. See "Description of
APS--Redemption--Optional Redemption." In addition, holders of APS may be
entitled to receive Gross-up Dividends in the event of redemption of such APS
as described herein. See "Description of APS--Dividends--Gross-up Dividends."

LIQUIDATION PREFERENCE

The liquidation preference of the APS will be $25,000 per share, plus an amount
equal to accumulated but unpaid dividends (whether or not earned or declared).
See "Description of APS--Liquidation Rights." In addition, holders of APS may
be entitled to receive Gross-up Dividends in the event of the liquidation of
the Fund as provided herein. See "Description of APS--Dividends--Gross-up
Dividends."

RATING

It is a condition to their issuance that the APS be issued with a credit
quality rating of "Aaa" from Moody's. The Fund may at some future time seek to
have the APS rated by an additional or Substitute Rating Agency. See "Rating
Agency Guidelines."

VOTING RIGHTS

The 1940 Act requires that the holders of APS and any other Preferred Shares,
voting as a class, have the right to elect at least two Trustees at all times
and to elect a majority of the Trustees at any time when two years' dividends
on the APS or any other Preferred Shares are unpaid. The holders of APS and any
other Preferred Shares will vote as a separate class on certain other matters
as required under the Declaration and Amended By-Laws and under the 1940 Act.
See "Description of APS--Voting Rights," "Description of capital structure" and
"Anti-takeover and other provisions in the Declaration of Trust."

TAX CONSIDERATIONS

Interest on certain "private activity" municipal bonds is treated as a tax
preference item for individuals for purposes of the federal alternative minimum
tax. In addition, for corporations, interest on all tax-exempt obligations is
taken into account in the computation of income subject to the federal
alternative minimum tax. The Fund will at all times seek to avoid portfolio
investments that pay interest that is taxable to individuals under the federal
alternative minimum tax. Nonetheless, the Fund may not be successful in this
regard. Therefore, if your goal is to avoid or limit your receipt of income
that is taxable under the federal alternative minimum tax, you should discuss
with your tax advisor whether the Fund is an appropriate investment for you.
Moreover, distributions of any taxable net investment income and net short-term
capital gain are taxable as ordinary income. See "Taxes."

                                                                             11

<PAGE>

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


The Fund

The Fund is a recently organized, non-diversified, closed-end management
investment company registered under the 1940 Act. The Fund was organized as a
Massachusetts business trust on March 29, 2002 pursuant to the Declaration,
which is governed by the laws of The Commonwealth of Massachusetts. The Fund's
principal office is located at 1345 Avenue of the Americas, New York, New York
10105, and its telephone number is (212) 739-3369. The Fund is designed to
provide tax benefits to investors who are residents of New York.

The Fund commenced operations on June 28, 2002 upon the closing of an initial
public offering of 9,000,000 of its Common Shares. The proceeds of such
offering were approximately $128,655,000 after the payment of organizational
and offering expenses. In connection with the initial public offering of Common
Shares, the underwriters were granted an option to purchase up to 1,350,000
additional Common Shares to cover over-allotments. On July 15, 2002 and August
7, 2002, the underwriters purchased, at a price of $14.325 per Common Share, an
additional 1,000,000 and 294,833 Common Shares, respectively, pursuant to the
over-allotment option.

Use of proceeds

The net proceeds of the offering of APS will be approximately $88,925,000 after
payment of the estimated offering costs (not expected to exceed $175,000). The
Fund will invest the net proceeds of the offering in accordance with the Fund's
investment objective and policies discussed below under "The Fund's
investments." It is presently anticipated that the Fund will be able to invest
substantially all of the net proceeds in municipal bonds that meet the
investment objective and policies within three months after the completion of
the offering. Pending such investment, it is anticipated that the proceeds will
be invested in high quality, short-term, tax-exempt securities, although the
Fund may, if necessary, also invest in other high quality, short-term
securities, including mortgage-backed and corporate debt securities, that may
be either tax-exempt or taxable.

Capitalization

The following table sets forth the unaudited capitalization of the Fund as of
August 7, 2002 and as adjusted to give effect to the issuance of the APS
offered hereby (including estimated offering expenses and sales load of
$1,075,000).


<TABLE>
<CAPTION>
                                                                      As of August 7, 2002
                                                                       Actual    As Adjusted
- ---------------------------------------------------------------------------------------------
<S>                                                                 <C>          <C>
Auction Preferred Shares, par value $0.00001 per share (no shares
  issued; 3,600 shares issued, as adjusted, at $25,000 per share
  liquidation preference).......................................... $          0 $ 90,000,000
Common Shares, par value $0.00001 per share, 10,301,814 shares
  outstanding...................................................... $147,264,641 $146,189,641
Undistributed net investment income................................ $    308,904 $    308,904
Net realized gain on investments................................... $     49,728 $     49,728
Net unrealized appreciation of investments......................... $  1,521,169 $  1,521,169
Net assets applicable to Common Shares and Auction Preferred Shares $149,144,442 $238,069,442
</TABLE>


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

12

<PAGE>

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


Portfolio composition

As of August 7, 2002, approximately 91.4% of the market value of the Fund's
portfolio was invested in long-term municipal bonds, and approximately 8.6% of
the market value of the Fund's portfolio was invested in cash. The following
table sets forth certain information with respect to the composition of the
Fund's investment portfolio as of August 7, 2002.

                                 Number
                                     of          Value
                  S&P*  Moody's* Issues (in Thousands) Percent
                  --------------------------------------------
                  AAA   Aaa         6     $  33,047      19.1%
                  AA    Aa1, Aa     5        66,700      38.4
                  A     A1         11        52,604      30.3
                  BBB   Baa1        0             0       0.0
                  BB    Ba1         0             0       0.0
                  B     B1          0             0       0.0
                  NR+   NR+         2         6,250       3.6
                  Cash                       14,862       8.6
                  -----            --     ---------     -----
                  Total            24       173,463     100.0%
- --------
*  Ratings: Using the higher of S&P's or Moody's ratings on the Fund's
   municipal bonds. S&P rating categories may be modified further by a plus (+)
   or minus (-) in AA, A, BBB, BB, B and C ratings. Moody's rating categories
   may be modified further by a 1, 2, or 3 in Aa, A, Baa, Ba and B ratings.

+  Securities that are not rated by S&P or Moody's. Such municipal bonds may be
   rated by Rating Agencies other than S&P or Moody's or may not be rated by
   any such Rating Agency. With respect to the percentage of the Fund's assets
   invested in such securities, PIMCO believes that these are of comparable
   quality to municipal bonds rated investment grade (that is, rated within the
   four highest grades by Moody's, S&P or Fitch). This determination is based
   on PIMCO's own internal evaluation and does not necessarily reflect how such
   securities would be rated by Moody's, S&P or Fitch if they were to rate the
   securities.

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

                                                                             13

<PAGE>

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


The Fund's investments

INVESTMENT OBJECTIVE AND POLICIES

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

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

Under normal market conditions, the Fund will invest substantially all (at
least 90%) of its total assets in New York Municipal Bonds.

Under normal market conditions, the Fund will invest at least 80% of its net
assets in municipal bonds which are of investment grade quality at the time of
investment, including bonds that are unrated but judged to be of investment
grade quality by PIMCO. Investment grade quality means that such bonds are
rated, at the time of investment, within the four highest grades (Baa or BBB or
better by Moody's, S&P or Fitch) or are unrated but judged to be of comparable
quality by PIMCO. The Fund may invest up to 20% of its net assets in municipal
bonds that are rated, at the time of investment, Ba/BB or B by Moody's, S&P or
Fitch or bonds that are unrated but judged to be of comparable quality by
PIMCO. Bonds of below investment grade quality (Ba/BB or below) are commonly
referred to as "junk bonds." Bonds of below investment grade quality are
regarded as having predominantly speculative characteristics with respect to
capacity to pay interest and repay principal. Bonds in the lowest investment
grade category may also be considered to possess some speculative
characteristics by certain rating agencies. The foregoing credit quality
policies apply only at the time a security is purchased, and the Fund is not
required to dispose of a security in the event that a rating agency or PIMCO
downgrades its assessment of the credit characteristics of a particular issue.
In determining whether to retain or sell such a security, PIMCO may consider
such factors as PIMCO's assessment of the credit quality of the issuer of such
security, the price at which such security could be sold and the rating, if
any, assigned to such security by other rating agencies. A general description
of Moody's, S&P's and Fitch's ratings of municipal bonds is set forth in
Appendix A to the Statement of Additional Information. See "--Municipal Bonds"
below for a general description of the economic and credit characteristics of
municipal issuers in New York. The Fund may also invest up to 10% of its net
assets in securities of

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other open- or closed-end investment companies that invest primarily in
municipal bonds of the types in which the Fund may invest directly. As a
stockholder in an investment company, the Fund would bear its ratable share of
that investment company's expenses in addition to the Fund's own expenses.
See "--Other Investment Companies" below.

The Fund may purchase municipal bonds that are additionally secured by
insurance, bank credit agreements or escrow accounts. The credit quality of
companies which provide such credit enhancements will affect the value of those
securities. Although the insurance feature reduces certain financial risks, the
premiums for insurance and the higher market price paid for insured obligations
may reduce the Fund's income. Insurance generally will be obtained from
insurers with a claims-paying ability rated Aaa by Moody's or AAA by S&P or
Fitch. The insurance feature does not guarantee the market value of the insured
obligations or the net asset value of the APS or the Common Shares.

Upon PIMCO's recommendation, for temporary defensive purposes, the Fund may
invest up to 100% of its net assets in high quality, short-term investments,
including mortgage-backed and corporate debt securities, that may be either
tax-exempt or taxable. The Fund may also invest without limit in these
securities temporarily in order to keep the Fund's cash fully invested,
including during the period in which the net proceeds of this offering are
being invested. The Fund intends to invest in taxable short-term investments
only in the event that suitable tax-exempt short-term investments are not
available at reasonable prices and yields. Investment in taxable short-term
investments would result in a portion of your dividends being subject to
federal, New York State and New York City income taxes. However, as discussed
below under "Description of APS--Auction Procedures--Auction Date; Advance
Notice of Allocation of Taxable Income; Inclusion of Taxable Income in
Dividends," dividends on APS will generally increase if Taxable Income is
included in a dividend.

The Fund cannot change its investment objective without the approval of the
holders of a "majority of the outstanding" Common Shares and any Preferred
Shares (including the APS) voting together as a single class and of the holders
of a "majority of the outstanding" Preferred Shares (including the APS) voting
as a separate class. A "majority of the outstanding" shares (whether voting
together as a single class or voting as a separate class) means (i) 67% or more
of such shares present at a meeting, if the holders of more than 50% of those
shares are present or represented by proxy, or (ii) more than 50% of such
shares, whichever is less. See "Description of APS--Voting Rights" for
additional information with respect to the voting rights of holders of APS.

The Fund will at all times seek to avoid bonds generating interest potentially
subjecting individuals to the federal alternative minimum tax. Nonetheless, the
Fund may not be successful in this regard and if you are, or as a result of an
investment in the Fund would become, subject to the federal alternative minimum
tax, the APS may not be a suitable investment for you. Special alternative
minimum tax rules apply to corporate holders. In addition, capital gain
dividends will be subject to capital gains taxes. See "Tax Matters."

The following provides additional information regarding the types of securities
and other instruments in which the Fund will ordinarily invest. A more detailed
discussion of these and other instruments and investment techniques that may be
used by the Fund is provided under "Investment Objective and Policies" in the
Statement of Additional Information.

MUNICIPAL BONDS

Municipal bonds are either general obligation or revenue bonds and typically
are issued to finance public projects (such as roads or public buildings), to
pay general operating expenses or to refinance

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

The New York Municipal Bonds in which the Fund will invest are generally issued
by the State of New York, a city in New York or a political subdivision, agency
or instrumentality of such state or city.

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

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

WHEN-ISSUED, DELAYED DELIVERY AND FORWARD COMMITMENT TRANSACTIONS

The Fund may purchase securities which it is eligible to purchase on a
when-issued basis, may purchase and sell such securities for delayed delivery
and may make contracts to purchase such securities for a fixed price at a
future date beyond normal settlement time (forward commitments). When-issued
transactions, delayed delivery purchases and forward commitments involve a risk
of loss if the value of the securities declines prior to the settlement date.
The risk is in addition to the risk that the Fund's other assets will decline
in value. Therefore, these transactions may result in a form of leverage and
increase the Fund's overall investment exposure. Typically, no income accrues
on securities the Fund has committed to purchase prior to the time delivery of
the securities is made, although the Fund may earn income on securities it has
segregated to cover these positions.

STRUCTURED NOTES

The Fund may invest in "structured" notes, which are privately negotiated debt
obligations where the principal and/or interest is determined by reference to
the performance of a benchmark asset, market or interest rate, such as selected
securities, an index of securities or specified interest rates, or the
differential performance of two assets or markets, such as indices reflecting
taxable and tax-exempt bonds. Depending on the terms of the note, the Fund may
forgo all or part of the interest and principal that would be payable on a
comparable conventional note. The rate of return on structured notes may be
determined by applying a multiplier to the performance or differential
performance of the referenced index(es) or other asset(s). Application of a
multiplier involves leverage that will serve to magnify the potential for gain
and the risk of loss.

The Fund currently intends that any use of structured notes will be for the
purpose of reducing the interest rate sensitivity of the Fund's portfolio (and
thereby decreasing the Fund's exposure to interest rate risk) and, in any
event, that the interest income on the notes will normally be exempt from
federal, New York State and New York City income tax. The Fund will only invest
in structured notes if it has received an opinion of counsel for the issuer (or
the advice of another authority believed by PIMCO to be

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reliable) that the interest income on the notes will be exempt from federal,
New York State and New York City income tax. Like other sophisticated
strategies, the Fund's use of structured notes may not work as intended; for
example, the change in value of the structured notes may not match very closely
the change in the value of bonds that the structured notes were purchased to
hedge.

VARIABLE AND FLOATING RATE SECURITIES

Variable and floating rate securities provide for a periodic adjustment in the
interest rate paid on the obligations. The Fund may invest in floating rate
debt instruments ("floaters") and engage in credit spread trades. While
floaters provide a certain degree of protection against rising interest rates,
the Fund will participate in any decline in interest rates as well, although
this is no guarantee that the interest rates earned by the Fund on its
investments will be greater than the dividend rate payable with respect to the
APS. A credit spread trade is an investment position relating to a difference
in the prices or interest rates of two bonds or other securities, where the
value of the investment position is determined by changes in the difference
between such prices or interest rates, as the case may be, of the respective
securities.

RESIDUAL INTEREST MUNICIPAL BONDS (RIBS)

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

OTHER INVESTMENT COMPANIES

The Fund may invest up to 10% of its net assets in securities of other open- or
closed-end investment companies that invest primarily in municipal bonds of the
types in which the Fund may invest directly. The Fund may invest in other
investment companies either during periods when it has large amounts of
uninvested cash, such as the period shortly after the Fund receives the
proceeds of the offering of the APS, during periods when there is a shortage of
attractive, high-yielding municipal bonds available in the market, or when
PIMCO believes share prices of other investment companies offer attractive
values. The Fund may invest in investment companies that are advised by PIMCO
or its affiliates to the extent permitted by applicable law and/or pursuant to
exemptive relief from the Securities and Exchange Commission. As a stockholder
in an investment company, the Fund will bear its ratable share of that
investment company's expenses and would remain subject to payment of the Fund's
management fees and other expenses with respect to assets so invested. PIMCO
will take expenses into account when

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evaluating the investment merits of an investment in an investment company
relative to available municipal bond investments. In addition, the securities
of other investment companies may also be leveraged and will therefore be
subject to the risks associated with leverage. The net asset value and market
value of leveraged shares will be more volatile, and the yield to shareholders
will tend to fluctuate more than the yield generated by unleveraged shares.

DERIVATIVES


The Fund may, but is not required to, use a variety of derivative instruments
to add leverage to the portfolio, for risk management purposes or as part of
its investment strategies. Generally, derivatives are financial contracts whose
value depends upon, or is derived from, the value of an underlying asset,
reference rate or index and may relate to individual debt instruments, interest
rates and related indexes. Examples of derivative instruments that the Fund may
use include RIBS, structured notes, options contracts, futures contracts,
options on futures contracts, swap agreements, short sales and delayed delivery
and forward commitment transactions. The Fund's use of derivative instruments
involves risks different from, or possibly greater than, the risks associated
with investments directly in securities and other more traditional investments.
See "Risks--Derivatives Risk." Certain types of derivative instruments that the
Fund may utilize with some frequency are described elsewhere in this section,
including those described under "--Structured Notes" and "--Residual Interest
Municipal Bonds (RIBS)" above. Please see "Investment Objective and
Policies--Derivative Instruments" in the Statement of Additional Information
for additional information about these and other derivative instruments that
the Fund may use and the risks associated with such instruments. Income earned
by the Fund from many derivatives transactions will be treated as capital gain
and, if not offset by net realized capital loss, will be distributed to
shareholders in taxable distributions. There is no assurance that derivative
strategies will be available at any time or that PIMCO will determine to use
them for the Fund or, if used, that the strategies will be successful. In
addition, the Fund's use of derivative instruments will be limited by the
Rating Agency guidelines described below. See "Rating agency guidelines."


Please see "Investment Objective and Policies" in the Statement of Additional
Information for additional information regarding the investments of the Fund
and their related risks.

Risks

Risk is inherent in all investing. Investing in any investment company security
involves risk, including the risk that you may receive little or no return on
your investment or even that you may lose part or all of your investment.
Therefore, before purchasing APS, you should consider carefully the following
risks that you assume when you invest in the Fund.

AUCTION RISK

You may not be able to sell your APS at an Auction if the Auction fails; that
is, if there are more APS offered for sale than there are buyers for those
shares. If Sufficient Clearing Bids do not exist in an Auction, the Applicable
Rate will be the Maximum Applicable Rate, and in such event, owners of APS
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, your investment in APS may be
illiquid. Neither the Broker-Dealers nor the Fund is obligated to purchase APS
in an Auction or otherwise, nor is the Fund required to redeem APS in the event
of a failed Auction. Also, if you place bid orders (orders to retain APS) at an
Auction only at a specified rate and that bid rate exceeds the Applicable Rate
set at the Auction, you will not retain your APS. Finally, if you elect to
retain APS without specifying a rate below which you would not wish to continue
to hold those APS and the Auction sets a below-market rate, you may receive a
lower rate of return on your APS than the market rate. See "Description of
APS--The Auction" and "Description of APS--Auction Procedures."

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RATINGS AND ASSET COVERAGE RISK

While Moody's is expected to assign a rating of "Aaa" to the APS, the ratings
would not eliminate or necessarily mitigate the risks of investing in the APS.
A Rating Agency could downgrade the APS, which may make your shares less liquid
at an Auction or in the secondary market. In addition, the Fund may be forced
to redeem your APS to meet regulatory or Rating Agency requirements. The Fund
may also voluntarily redeem APS under certain circumstances. See "Description
of APS--Redemption." The Fund may not redeem APS if such a redemption would
cause the Fund to fail to meet regulatory or Rating Agency asset coverage
requirements, and the Fund may not declare, pay or set apart for payment any
dividend or other distribution if immediately thereafter the Fund would fail to
meet regulatory asset coverage requirements. In addition, as a condition to its
receipt of an "Aaa" rating on the APS, the Fund has agreed to certain
investment limitations, which may restrict the Fund from making investments
that PIMCO believes would benefit the Fund. See "Rating Agency Guidelines" for
descriptions of the significance and limitations of the ratings on the APS and
of the asset maintenance and other tests the Fund must meet.

SECONDARY MARKET RISK

The Broker-Dealers may maintain a secondary trading market in the APS outside
of Auctions; however, they have no obligation to do so, and there can be no
assurance that a secondary market for the APS will develop or, if it does
develop, that it will provide holders with a liquid trading market (i.e.,
trading will depend on the presence of willing buyers and sellers and the
trading price is subject to variables to be determined at the time of the trade
by the Broker-Dealers). The APS will not be registered on any stock exchange or
on any automated quotation system. If you try to sell your APS between
Auctions, you may not be able to sell any or all of your shares, or you may
receive a purchase price of less than $25,000 per share. An increase in the
level of interest rates, particularly during any Long Term Dividend Period,
likely will have an adverse effect on the secondary market price of the APS.

LIMITED OPERATING HISTORY

The Fund is a recently organized, non-diversified, closed-end management
investment company which has been operational for less than two months.

INTEREST RATE RISK

Interest rate risk is the risk that bonds (and the Fund's net assets) will
decline in value because of changes in interest rates. Generally, municipal
bonds will decrease in value when interest rates rise and increase in value
when interest rates decline. The value of the longer-term bonds in which the
Fund generally invests normally fluctuates more in response to changes in
interest rates than does the value of shorter-term bonds. Because the Fund will
invest primarily in long-term bonds, the Fund's net asset value will fluctuate
more in response to changes in market interest rates than if the Fund invested
primarily in shorter-term bonds. The Fund may invest up to 10% of its total
assets in RIBS. Compared to similar fixed rate municipal obligations, the value
of RIBS will fluctuate to a greater extent in response to changes in prevailing
long-term interest rates. Moreover, the income earned on RIBS will fluctuate in
response to changes in prevailing short-term interest rates. Thus, when RIBS
are held by the Fund, an increase in short- or long-term market interest rates
will adversely affect the income received from such bonds or the net asset
value of the Fund's shares.

The APS pay dividends based on short-term interest rates. The Fund will use the
proceeds from the issuance of APS to buy municipal bonds, which generally pay
interest based on longer-term yields. Long-term municipal bond yields are
typically, although not always, higher than short-term interest

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rates. If short-term interest rates rise, the dividend rate on the APS may rise
so that the amount of dividends payable to APS shareholders exceeds the income
from the portfolio securities purchased with the proceeds from the APS. Because
income from the Fund's entire investment portfolio (not just the portion of the
portfolio purchased with the proceeds of the APS offering) is available to pay
APS dividends, however, APS dividend rates would need to greatly exceed the
Fund's net portfolio income before the Fund's ability to pay APS dividends
would be jeopardized. If long-term rates rise, the value of the Fund's
investment portfolio will decline, reducing the amount of assets serving as
asset coverage for the APS.

The Fund may utilize certain strategies, including investments in structured
notes, for the purpose of reducing the interest rate sensitivity of the
portfolio and decreasing the Fund's exposure to interest rate risk, although
there is no assurance that it will do so or that such strategies will be
successful. See "How the Fund manages risk--Hedging and Related Strategies."

CREDIT RISK

The Fund could lose money if the issuer of a municipal bond, or the
counterparty to a derivatives contract or other obligation, is unable or
unwilling to make timely principal and/or interest payments, or to otherwise
honor its obligations. Because the primary source of income for the Fund is the
interest and principal payments on the municipal bonds in which it invests, any
default by an issuer of a municipal bond could have a negative impact on the
Fund's ability to pay dividends on the APS and could result in the redemption
of some or all of the APS. In general, lower-rated municipal bonds carry a
greater degree of risk that the issuer will lose its ability to make interest
and principal payments, which could have a negative impact on the Fund's net
asset value or dividends. The Fund may invest up to 20% of its net assets in
municipal bonds that are rated Ba/BB or B by Moody's, S&P or Fitch or bonds
that are unrated but judged to be of comparable quality by PIMCO. Bonds rated
Ba/BB or B are regarded as having predominantly speculative characteristics
with respect to capacity to pay interest and repay principal, and these bonds
are commonly referred to as "junk bonds." The prices of these lower-grade bonds
are more sensitive to negative developments, such as a decline in the issuer's
revenues or a general economic downturn, than are the prices of higher-grade
securities. Municipal bonds in the lowest investment grade category may also be
considered to possess some speculative characteristics by certain Rating
Agencies.

STATE-SPECIFIC RISK

As described above, under normal market conditions, the Fund will invest
substantially all of its net assets in New York Municipal Bonds. The Fund is
therefore susceptible to political, economic or regulatory factors affecting
issuers of New York State (the "State") and New York City (the "City")
municipal bonds. The following information provides only a brief summary of the
complex factors affecting the financial situation in the State and is derived
from sources that are generally available to investors. The information is
intended to give a recent historical description and is not intended to
indicate future or continuing trends in the financial or other positions of the
State and the City. It should be noted that the creditworthiness of obligations
issued by local New York issuers may be unrelated to the creditworthiness of
obligations issued by the State and the City and that there is no obligation on
the part of the State to make payment on such local obligations in the event of
default.

The events of September 11, 2001 had a significant impact upon the State
economy generally and more directly on that of the City. The City and State
expect, based on actions of the U.S. Congress and the President, that they will
be fully reimbursed for the cost to recover from, clean up and repair the
consequences of the World Trade Center attack. However, prior to September 11,
the nation's and the State's economies had been weakening, and the loss of over
70,000 jobs in the City as a direct result of the events of September 11 has
produced material budgetary pressures including increases to later year


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budget gaps for the City and reductions to State surpluses. The City of New
York Executive Budget Fiscal Year 2003 released by the Mayor of the City on
April 17, 2002 (the "City Executive Budget") projects that total revenue lost
to the City as a result of the events of September 11 during the 2002-2006
fiscal years will be $3.9 billion and that expenses over the same period have
increased by $6.1 billion from projections prepared prior to September 11. On
June 19, 2002, the Mayor and the City Council announced a budget agreement
which, while it restored some of the funds cut in the City Executive Budget,
adopted the City Executive Budget with no material changes.

New York State has historically been one of the wealthiest states in the
nation. For decades, however, the State's economy grew more slowly than that of
the nation as a whole, gradually eroding the State's relative economic
affluence, as urban centers lost the more affluent to the suburbs and people
and business migrated to the South and West. However, since 1999, prior to the
impact of the events of September 11, the growth of the State's economy has
equaled or exceeded national trends. The State has for many years had a very
high state and local tax burden relative to other states. The burden of state
and local taxation, in combination with the many other causes of regional
economic dislocation, has contributed to the decisions of some businesses and
individuals to relocate outside, or not locate within, the State and remains an
impediment to growth and job creation. The State's and the City's economies
remain more reliant on the securities industry than is the national economy. As
a result, the downturn in that industry prior to September 11 resulted in
adverse changes in wage and employment levels.

The State ended its 2000-2001 fiscal year with a cash surplus of approximately
$1.1 billion. In its January 22, 2002 quarterly update, in part as a result of
the events of September 11, the State projected a decline in economic growth
and lower employment levels in 2002. As a result of declines in State
employment, Wall Street bonuses and non-wage income levels, personal income is
expected to decline in 2001-2002 and increase minimally in 2002-2003. In the
quarterly update, the State Division of the Budget projected a closing balance
in the General Fund of $2.1 billion in 2001-2002. The State noted that there
are significant risk factors that could result in a reduction in economic
activity statewide such as greater job losses, weaker financial markets and
smaller bonus payments by Wall Street firms.

The Governor presented his 2002-03 Executive Budget (the "State Executive
Budget") to the Legislature on January 22, 2002, which contained financial
projections for the State's 2001-02 through 2004-05 fiscal years. The State
Executive Budget projected a total budget gap of $6.8 billion in the 2001-02
and 2002-03 fiscal years.

On May 15, 2002, the Governor and legislative leaders announced that they had
come to an agreement on a final balanced 2002-03 State Budget (the "State
Budget"). The agreement includes actions to close the budget gap previously
identified in the State Executive Budget plus an additional $1.4 billion gap
identified in March and April 2002. Under the State Budget, taxpayer-supported
General Fund spending falls by nearly $1 billion, or 2.6 percent. General Fund
spending will total $40.2 billion. All funds spending will increase by less
than 1 percent (0.8%) from that proposed in the State Executive Budget and will
total $89.6 billion.

The State Budget includes a series of one-time actions to close this budget
gap. These actions included using $1.2 billion of available cash reserves and
other fund balances; implementing a tax amnesty program; offering early
retirement to state workers; and converting hard dollar capital financing to
bonding while reducing overall capital authorizations. The State's Tax
Stabilization Reserve Fund, a fund to address unforeseen budget needs, will be
maintained at $710 million.

On April 17, 2002, the Mayor of the City released the City Executive Budget for
fiscal year 2003 (July 1, 2002 to June 30, 2003), which includes a financial
plan for fiscal years 2003 through 2006. At that time, the City Executive
Budget incorporated a number of steps to close a projected $5.0 billion budget
gap, including city agency cuts ranging up to 36%, staffing changes requiring
union consent, stretching out

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some elements of the City's four year construction plan to five years, debt
restructuring and asset sales and proposed State and federal initiatives to
generate up to $2.2 billion of gap closing actions in fiscal year 2003 and an
aggregate of $5.5 billion in fiscal years 2004 through 2006. The Mayor also
proposed that the City issue $1.5 billion of its general obligation bonds in
fiscal year 2003 to help close the budget gap. As a result of extraordinary
actions to address the impact of September 11, the City Executive Budget
projected a budget surplus of $322 million in the 2002 fiscal year and budget
gaps of $5.2 billion, $5.6 billion and $6.0 billion, respectively, for the
2004, 2005 and 2006 fiscal years prior to any gap closing actions. Some of the
gap closing measures proposed in the City Executive Budget for fiscal year 2003
were to have recurring effects and were projected at that time to reduce the
fiscal year 2004, 2005 and 2006 budget gaps to $2.7 billion, $3.1 billion and
$3.6 billion, respectively. The Mayor proposed to close these outyear gaps
through unspecified additional City agency cuts, federal and State initiatives
and other actions. As noted above, the City Council and the Mayor reached a
budget agreement which adopted the City Executive Budget with no material
changes.

In July 2002, the Mayor announced that the City would have to cut an additional
$1 billion of expenses from the 2003 fiscal year budget in order to deal with
an increase in the 2003 budget gap. The Mayor has instructed City agencies to
provide him by September 4, 2002 with proposals for cuts of 7.5% in their
budgets for fiscal 2003.

The City depends on aid from the State and federal government to both enable
the City to balance its budget and to meet its cash requirements. The city
financial plan provides for an additional $800 million in State and federal aid
in fiscal year 2003 alone. If State or federal aid for fiscal year 2003 or
thereafter is less than the level projected in the Mayor's proposal, projected
savings may be negatively impacted, and the Mayor may be required to propose
significant additional spending reductions or tax increases to balance the
City's budget. If the State, the State agencies, the City, other municipalities
or school districts were to suffer serious financial difficulties jeopardizing
their respective access to the public credit markets, or increasing the risk of
a default, the market price of municipal bonds issued by such entities could be
adversely affected.

As of May 23, 2002, Moody's rated the City's outstanding general obligation
bonds A2, S&P rated such bonds A and Fitch rated such bonds A+. There can be no
assurance that, after review of the State Budget and the agreement between the
Mayor and the City Council regarding the City Executive Budget, their ratings
of the City's general obligation bonds will remain unchanged. Such ratings
reflect only the view of Moody's, S&P's and Fitch, from which an explanation of
the significance of such ratings may be obtained. There is no assurance that
such ratings will continue for any given period of time or that they will not
be revised downward or withdrawn entirely. Any such downward revision or
withdrawal could have an adverse effect on the market prices of City bonds and
could increase the City's borrowing costs. Moody's has given the State's
general obligation bonds a rating of A2, S&P had given the bonds a rating of AA
and Fitch had given the bonds a rating of AA. These ratings reflect the City's
and the State's credit quality only and do not indicate the creditworthiness of
tax-exempt securities of other issuers in which the Fund may invest.
Furthermore, it cannot be assumed that the City or the State will maintain
their current credit ratings.

The foregoing information constitutes only a brief summary of some of the
general factors that may impact certain issuers of New York Municipal Bonds and
does not purport to be a complete or exhaustive description of all adverse
conditions to which the issuers of such bonds held by the Fund are subject.
Additionally, many factors including national economic, social and
environmental policies and conditions, which are not within the control of the
issuers of New York Municipal Bonds, could affect or could have an adverse
impact on the financial condition of the issuers. The Fund is unable to predict
whether or to what extent such factors or other factors may affect the issuers
of New York Municipal Bonds, the market value or marketability of such bonds or
the ability of the respective issuers of the bonds acquired by the Fund to pay
interest on or principal of such bonds.


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Risks
- --------------------------------------------------------------------------------


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

MUNICIPAL BOND MARKET RISK

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

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

REINVESTMENT RISK

Reinvestment risk is the risk that income from the Fund's municipal bond
portfolio will decline if and when the Fund invests the proceeds from matured,
traded or called bonds at market interest rates that are below the portfolio's
then-current earnings rate. A decline in income could affect the Fund's net
asset value or reduce asset coverage on the APS.

LEVERAGE RISK

The Fund expects to utilize financial leverage on an ongoing basis for
investment purposes. Leverage risk includes the risk associated with the
issuance of APS to leverage the Common Shares. If the dividend rate on the APS
exceeds the net rate of return on the Fund's portfolio, the leverage will
result in a lower net asset value than if the Fund were not leveraged, and the
Fund's ability to pay dividends and meet its asset coverage requirements on the
APS would be reduced. Because the long-term bonds included in the Fund's
portfolio will typically pay fixed rates of interest while the dividend rate on
the APS will be adjusted periodically, this could occur even when both
long-term and short-term municipal rates rise. Similarly, any decline in the
net asset value of the Fund's investments could result in the Fund being in
danger of failing to meet its asset coverage requirements or of losing its
expected "Aaa" rating on the APS or, in an extreme case, the Fund's current
investment income might not be sufficient to meet the dividend requirements on
the APS. In order to counteract such an event, the Fund might need to liquidate
investments in order to fund a redemption of some or all of the APS.

While the Fund may from time to time consider reducing leverage in response to
actual or anticipated changes in interest rates in an effort to mitigate the
increased volatility of current income and net asset value associated with
leverage, there can be no assurance that the Fund will actually reduce leverage
in

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

                                                                             23

<PAGE>

Risks
- --------------------------------------------------------------------------------

the future or that any reduction, if undertaken, will be effective. Changes in
the future direction of interest rates are very difficult to predict
accurately. If the Fund were to reduce leverage based on a prediction about
future changes to interest rates and that prediction turned out to be
incorrect, the reduction in leverage would likely operate to reduce the Fund's
net asset value relative to the circumstance where the Fund had not reduced
leverage. The Fund may decide that this risk outweighs the likelihood of
achieving the desired reduction to volatility in income and net asset value if
the prediction were to turn out to be correct, and determine not to reduce
leverage as described above.

The Fund may invest in securities of other investment companies. Such
securities may also be leveraged and will therefore be subject to the leverage
risks described above.


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


Because the fees paid to the Manager and PIMCO will be calculated on the basis
of the Fund's managed assets, the fees will be higher when leverage is
utilized, giving the Manager and PIMCO an incentive to utilize leverage.

INFLATION RISK

Inflation risk is the risk that the value of assets or income from the Fund's
investments will be worth less in the future as inflation decreases the value
of money. As inflation increases, the real, or inflation-adjusted, value of the
APS and distributions can decline. However, during any periods of rising
inflation, APS dividend payments, if any, may increase, which would tend to
offset this risk.

LIQUIDITY RISK

The Fund may invest up to 20% of its net assets in securities which are
illiquid at the time of investment. The term "illiquid securities" for this
purpose means securities that cannot be disposed of within seven days in the
ordinary course of business at approximately the value at which the Fund has
valued the securities. Illiquid securities may be subject to wide fluctuations
in market value. The Fund may be subject to significant delays in disposing of
illiquid securities. Accordingly, the Fund may be forced to sell these
securities at less than fair market value or may not be able to sell them when
PIMCO believes it is desirable to do so. Illiquid securities also may entail
registration expenses and other transaction costs that are higher than those
for liquid securities. Restricted securities, i.e., securities subject to legal
or contractual restrictions on resale, may be illiquid. However, some
restricted securities (such as securities issued pursuant to Rule 144A under
the Securities Act of 1933, as amended, and certain commercial paper) may be
treated as liquid for these purposes.

DERIVATIVES RISK

Derivatives are financial contracts whose value depends on, or is derived from,
the value of an underlying asset, reference rate or index (or relationship
between two indices). The Fund may invest in a variety of derivative
instruments, such as RIBS, structured notes, options contracts, futures
contracts, options on futures contracts, swap agreements, short sales and
delayed delivery and forward commitment transactions. The Fund may use
derivatives as a substitute for taking a position in an underlying portfolio
security or other asset and/or as part of a strategy designed to reduce
exposure to other risks, such as interest rate risk. The Fund also may use
derivatives to add leverage to the portfolio. The Fund's use of derivative
instruments involves risks different from, and possibly greater than, the risks
associated with investing directly in securities and other traditional
investments. Derivatives are subject to a number of risks described elsewhere
in this Prospectus, such as liquidity risk, interest rate risk, credit risk,


- --------------------------------------------------------------------------------
24

<PAGE>

Risks
- --------------------------------------------------------------------------------


leveraging risk and management risk, and are also subject to the risk of
ambiguous documentation and physical custody. They also involve the risk of
mispricing or improper valuation and the risk that changes in the value of the
derivative may not correlate perfectly with the underlying asset, rate or
index. If the Fund invests in a derivative instrument, it could lose more than
the principal amount invested. Also, suitable derivative transactions may not
be available in all circumstances, and there can be no assurance that the Fund
will engage in these transactions to reduce exposure to other risks when that
would be beneficial. Income earned by the Fund from many derivatives
transactions will be treated as capital gain and, if not offset by net realized
capital loss, will be distributed to shareholders in taxable distributions.
There is no assurance that derivative strategies will be available at any time
or that PIMCO will determine to use them for the Fund or, if used, that the
strategies will be successful. In addition, the Fund's use of derivative
instruments will be limited by the Rating Agency guidelines described below.
See "Rating agency guidelines."


MANAGEMENT RISK

The Fund is subject to management risk because it is an actively managed
investment portfolio. PIMCO and the individual portfolio manager will apply
investment techniques and risk analyses in making investment decisions for the
Fund, but there can be no guarantee that these will produce the desired results.

NON-DIVERSIFICATION RISK

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

ANTI-TAKEOVER PROVISIONS

The Declaration and Amended By-Laws include provisions that could have the
effect of limiting the ability of other entities or persons to acquire control
of the Fund, to convert the Fund to open-end status or to change the
composition of the Board of Trustees. See "Anti-takeover and other provisions
in the Declaration of Trust."

CERTAIN AFFILIATIONS

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

How the Fund manages risk

INVESTMENT LIMITATIONS

The Fund has adopted certain investment limitations designed to limit
investment risk. These limitations (one of which is listed below) are
fundamental and may not be changed without the approval of the holders of a
majority of the outstanding Common Shares and any Preferred Shares (including
APS) voting together as a single class, and the approval of the holders of a
majority of any Preferred Shares

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

                                                                             25

<PAGE>

How the Fund manages risk
- --------------------------------------------------------------------------------

(including APS) voting as a separate class. Among other restrictions, the Fund
may not concentrate its investments in a particular "industry", as that term is
used in the 1940 Act and as interpreted, modified, or otherwise permitted by
regulatory authority having jurisdiction, from time to time.

The Fund would be deemed to "concentrate" its investments in a particular
industry if it invested 25% or more of its net assets in that industry.

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

The Fund is subject to guidelines that are more limiting than the investment
restrictions set forth above and other restrictions set forth in the Statement
of Additional Information in order to obtain and maintain a rating of "Aaa"
from Moody's on the APS and may become subject to additional guidelines in the
future. The Fund does not anticipate that such guidelines will have a material
adverse effect on the Fund's ability to achieve its investment objective. See
"Rating agency guidelines," "Investment Objective and Policies" and "Investment
Restrictions" in the Statement of Additional Information for information about
these guidelines and a complete list of the fundamental investment policies of
the Fund.

QUALITY OF INVESTMENTS

The Fund will invest at least 80% of its net assets in municipal bonds that at
the time of investment are of investment grade quality. Investment grade
quality means that such bonds are rated, at the time of investment, by Rating
Agencies within the four highest grades (Baa or BBB or better by Moody's, S&P
or Fitch) or bonds that are unrated but judged to be of comparable quality by
PIMCO. Bonds in the lowest investment grade category may be considered to
possess some speculative characteristics by certain Rating Agencies.

MANAGEMENT OF INVESTMENT PORTFOLIO AND CAPITAL STRUCTURE TO LIMIT LEVERAGE RISK

The Fund may take certain actions if short-term interest rates increase or
market conditions otherwise change (or the Fund anticipates such an increase or
change) and the Fund's leverage begins (or is expected) to adversely affect
Common Shareholders. In order to attempt to offset such a negative impact of
leverage on Common Shareholders, the Fund may shorten the average maturity or
duration of its investment portfolio (by investing in short-term, high-quality
securities or implementing certain hedging strategies) or may extend the
maturity of outstanding Preferred Shares (including the APS). The Fund also may
attempt to reduce leverage by redeeming or otherwise purchasing Preferred
Shares (subject to any restrictions discussed under "Description of
APS--Redemption") or by reducing any holdings in RIBS or other instruments that
create leverage. The success of any such attempt to limit leverage risk depends
on PIMCO's ability to accurately predict interest rate or other market changes.
Because of the difficulty of making such predictions, the Fund may not be
successful in managing its interest rate exposure in the manner described above.

If market conditions suggest that additional leverage would be beneficial, the
Fund may issue additional Preferred Shares or utilize other forms of leverage,
such as RIBS and other derivative instruments.

HEDGING AND RELATED STRATEGIES

The Fund may use various investment strategies designed to limit the risk of
price fluctuations of its portfolio securities and to preserve capital. For
instance, the Fund may invest in structured notes for the


- --------------------------------------------------------------------------------
26

<PAGE>

How the Fund manages risk
- --------------------------------------------------------------------------------


purpose of reducing the interest rate sensitivity of the Fund's portfolio,
thereby decreasing the Fund's exposure to interest rate risk. The Fund
currently intends that the income from structured notes will normally be exempt
from federal, New York State and New York City income tax. See "The Fund's
investments--Structured Notes." Other hedging strategies that the Fund may use
include: financial futures contracts; short sales; swap agreements or options
thereon; options on financial futures; and options based on either an index of
municipal securities or on taxable debt securities whose prices, PIMCO
believes, correlate with the prices of the Fund's investments. Income earned by
the Fund from many hedging activities will be treated as capital gain and, if
not offset by net realized capital loss, will be distributed to shareholders in
taxable distributions. If effectively used, hedging strategies will offset in
varying percentages losses incurred on the Fund's investments due to adverse
interest rate changes. There is no assurance that these hedging strategies will
be available at any time or that PIMCO will determine to use them for the Fund
or, if used, that the strategies will be successful. In addition, the Fund's
use of hedging transactions is restricted in accordance with the Rating Agency
guidelines described below and further specified in the Amended By-Laws. For
instance, the Fund's use of the types of instruments and transactions defined
as "Moody's Hedging Transactions" in the Glossary is limited as specified in
that definition. From time to time, certain restrictions in the definition of
"Moody's Hedging Transactions" may be changed with the approval of Moody's.


Rating agency guidelines

The Fund is required under Moody's guidelines to maintain assets having in the
aggregate a Discounted Value at least equal to the APS Basic Maintenance
Amount. Moody's has established guidelines for determining Discounted Value. To
the extent any particular portfolio holding does not satisfy Moody's
guidelines, all or a portion of such holding's value will not be included in
the calculation of Discounted Value (as defined by Moody's). 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, although it is not anticipated that in the normal
course of business the value of such assets would exceed 20% of the Fund's
total assets. The Moody's guidelines also impose limitations on the Fund's
investments.

The Fund is also required under the 1940 Act and Rating Agency guidelines to
maintain, with respect to shares of APS, asset coverage of at least 200% with
respect to senior securities that are stock (as that term is used in the 1940
Act), including APS (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 that are stock (as used in the 1940 Act) of a closed-end investment
company as a condition of declaring dividends on its common shares) ("1940 Act
APS Asset Coverage").

In the event the Fund does not timely cure a failure to maintain (a) a
Discounted Value of its portfolio equal to the APS Basic Maintenance Amount or
(b) the 1940 Act APS Asset Coverage, in each case in accordance with the
requirements of the Rating Agency or Agencies then rating the shares of APS,
the Fund will be required by the Amended By-Laws to redeem shares of APS as
described under "Description of APS--Redemption--Mandatory Redemption."


The Moody's guidelines restrict the Fund's use of some types of investment
strategies. For example, the guidelines, among other restrictions, limit the
Fund's use of futures, options and other derivative transactions for hedging,
leveraging or investment purposes, restrict the use of forward commitments and
similar transactions and limit the percentage of the Fund's assets that may be
invested in any one issuer or type or class of issuer.


The Moody's guidelines also prohibit the Fund from taking certain types of
actions unless it has received written confirmation from Moody's that such
actions would not impair the ratings then assigned to the

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

                                                                             27

<PAGE>

Rating agency guidelines
- --------------------------------------------------------------------------------

APS. These include restrictions on borrowing money, engaging in short sales,
lending portfolio securities, issuing any class or series of shares ranking
prior to or on a parity with the APS with respect to the payment of dividends
or the distribution of assets upon dissolution, liquidation or winding up of
the Fund or merging or consolidating into or with any other entity.

The restrictions in the Moody's guidelines may limit the Fund's ability to make
investments that PIMCO believes would benefit the Fund. The descriptions of the
Moody's guidelines in this section and in "Description of APS--Asset
Maintenance" are summaries only and are not complete. The Moody's guidelines
are set forth in their entirety in the Amended By-Laws, which have been filed
as an exhibit to the Registration Statement of which this Prospectus is a part.

The Fund may, but is not required to, adopt any modifications to the guidelines
that may hereafter be established by Moody'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 APS may, at any time, change or withdraw any such rating. The
Board may, without shareholder approval, amend, alter or repeal certain of the
definitions and related provisions which have been adopted by the Fund in the
Amended By-Laws pursuant to the Rating Agency guidelines only in the event the
Fund receives written confirmation from such Rating Agency or Agencies that any
such amendment, alteration or repeal would not impair the ratings then assigned
by such Rating Agency or Agencies to the APS.

As described by Moody's, a preferred stock rating is an assessment of the
capacity and willingness of an issuer to pay preferred stock obligations. The
ratings on the APS are not recommendations to purchase, hold or sell those
shares, 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 APS will be able to
sell such shares in an Auction or otherwise. The ratings are based on current
information furnished to Moody's by the Fund and/or the Manager and its
affiliates 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. The Common Shares have not been rated by a
Rating Agency.

A Rating Agency's guidelines will apply to the APS only so long as such Rating
Agency is rating such shares. The Fund will pay certain fees to Moody's for
rating the APS. The Fund may at some future time seek to have the APS rated by
an additional or Substitute Rating Agency.

Description of APS

The following is a brief description of the terms of the APS. This description
does not purport to be complete and is subject to, and qualified in its
entirety by reference to, the Declaration and Amended By-Laws, including the
provisions thereof establishing the APS. The Declaration and the Amended
By-Laws establishing the terms of the APS have been filed as exhibits to the
Registration Statement of which this Prospectus is a part.

Each series of APS will be Preferred Shares that entitle their holders to
receive dividends when, as and if declared by the Board of Trustees, out of
funds legally available therefor, at a rate per annum that may vary for the
successive Dividend Periods for each such series. After the Initial Dividend
Period, each Subsequent Dividend Period for each series of APS generally will
be a 7-Day Dividend Period; provided, however, that prior to any Auction, the
Fund may elect, subject to certain limitations described herein,

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

28

<PAGE>

Description of APS
- --------------------------------------------------------------------------------

upon giving notice to holders thereof, a Special Dividend Period. The
Applicable Rate for a particular Dividend Period for a series of APS will be
determined by an Auction conducted on the Business Day before the start of such
Dividend Period. Beneficial Owners and Potential Beneficial Owners of APS may
participate in Auctions therefor, although, except in the case of Special
Dividend Periods of longer than 91 days, Beneficial Owners desiring to continue
to hold all of their APS regardless of the Applicable Rate resulting from
Auctions need not participate. For an explanation of Auctions and the method of
determining the Applicable Rate, see "--The Auction."

The nominee of the Securities Depository is expected to be the sole holder of
record of each series of APS. Accordingly, each purchaser of APS must rely on
(i) the procedures of the Securities Depository and, if such purchaser is not a
member of the Securities Depository, such purchaser's Agent Member, to receive
dividends, distributions and notices and to exercise voting rights (if and when
applicable) and (ii) the records of the Securities Depository and, if such
purchaser is not a member of the Securities Depository, such purchaser's Agent
Member, to evidence its beneficial ownership of the APS.

When issued and sold, the APS of each series will have a liquidation preference
of $25,000 per share plus an amount equal to accumulated but unpaid dividends
(whether or not earned or declared) and will be fully paid and, except as
discussed under "Anti-takeover and other provisions in the Declaration of
Trust," non-assessable. See "Liquidation Rights." The APS will not be
convertible into Common Shares or other shares of beneficial interest of the
Fund, and the holders thereof will have no preemptive rights. The APS will not
be subject to any sinking fund but will be subject to redemption at the option
of the Fund at the Optional Redemption Price on any Dividend Payment Date for
such series (except during the Initial Dividend Period and during a Non-Call
Period) and, in certain circumstances, will be subject to mandatory redemption
by the Fund at the Mandatory Redemption Price stated herein. See "--Redemption."

In addition to serving as the Auction Agent in connection with the Auction
Procedures described below, Deutsche Bank Trust Company Americas will be the
transfer agent, registrar, dividend paying agent and redemption agent for each
series of APS. The Auction Agent, however, will serve merely as the agent of
the Fund, acting in accordance with the Fund's instructions, and will not be
responsible for any evaluation or verification of any matters certified to it.

Except in an Auction, the Fund will have the right (to the extent permitted by
applicable law) to purchase or otherwise acquire any APS so long as the Fund is
current in the payment of dividends on APS and on any other shares of
beneficial interest of the Fund ranking on a parity with the APS with respect
to the payment of dividends or upon liquidation.

THE AUCTION

General
Holders of the APS of each series will be entitled to receive cumulative cash
dividends on their shares when, as and if declared by the Board of Trustees,
out of the funds legally available therefor, on the Initial Dividend Payment
Date with respect to the Initial Dividend Period for each series and,
thereafter, on each Dividend Payment Date with respect to a Subsequent Dividend
Period for each series (generally a period of seven days subject to certain
exceptions set forth under "--Dividends--General") at the rate per annum equal
to the Applicable Rate for each such Dividend Period.

The provisions of the Amended By-Laws establishing the terms of the APS offered
hereby will provide that the Applicable Rate for each Dividend Period after the
Initial Dividend Period for each series will be equal to the rate per annum
that the Auction Agent advises has resulted on the Business Day preceding the
first day of such Dividend Period due to implementation of the Auction
Procedures set forth in the

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                                                                             29

<PAGE>

Description of APS
- --------------------------------------------------------------------------------

Amended By-Laws in which persons determine to hold or offer to purchase or sell
the APS. The Auction Procedures are attached as Appendix C to the Statement of
Additional Information. Each periodic operation of such procedures with respect
to the APS is referred to herein as an "Auction." If, however, the Fund should
fail to pay or duly provide for the full amount of any dividend on or the
redemption price of the APS called for redemption, the Applicable Rate for the
APS will be determined as set forth under "--Dividends--Non-Payment Period;
Late Charge."

Auction Agency Agreement
The Fund will enter into the Auction Agency Agreement with the Auction Agent,
which provides, among other things, that the Auction Agent will follow the
Auction Procedures for the purpose of determining the Applicable Rate for each
series of APS. The Fund will pay the Auction Agent compensation for its
services under the Auction Agency Agreement.

The Auction Agent will act as agent for the Fund 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 shall have been negligent in ascertaining the
pertinent facts. Pursuant to the Auction Agency Agreement, the Fund is required
to indemnify the Auction Agent for certain losses and liabilities incurred by
the Auction Agent without negligence or bad faith on its part in connection
with the performance of its duties under such agreement.

The Auction Agent may terminate the Auction Agency Agreement upon notice to the
Fund, which termination may be no earlier than 60 days following delivery of
such notice. If the Auction Agent resigns, the Fund 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 Fund may terminate the Auction Agency Agreement, provided that prior to
such termination the Fund shall have entered into such an agreement with
respect thereto with a successor Auction Agent.

Broker-Dealer Agreements
The Auctions require the participation of one or more broker-dealers. The
Auction Agent will enter into agreements (collectively, the "Broker-Dealer
Agreements") with one or more broker-dealers, or other entities permitted by
law to perform the functions required of a Broker-Dealer in the Auction
Procedures (collectively, the "Broker-Dealers"), selected by the Fund, which
provide for the participation of such Broker-Dealers in Auctions and pursuant
to which such Broker-Dealers agree to follow the Auction Procedures. A
Broker-Dealer Agreement may be terminated by the Auction Agent or a
Broker-Dealer on five days' notice to the other party, provided that neither
the Broker-Dealer Agreement with UBS Warburg LLC nor the Broker-Dealer
Agreement with Merrill Lynch, Pierce, Fenner & Smith Incorporated may be
terminated without the prior written consent of the Fund, which consent may not
be unreasonably withheld.

Securities Depository
The Depository Trust Company initially will act as the Securities Depository
for the Agent Members with respect to the APS. All of the shares of each series
of APS initially will be registered in the name of Cede & Co., as nominee of
the Securities Depository. Such shares will be subject to the provisions
restricting transfers of the APS contained in the Amended By-Laws. Cede & Co.
initially will be the holder of record of all shares of APS, and Beneficial
Owners will not be entitled to receive certificates representing their
ownership interest in such shares. See Appendix C (Auction Procedures) to the
Statement of Additional Information. The Securities Depository will maintain
lists of its participants and will maintain the positions (ownership interests)
of the APS held by each Agent Member, whether as the

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30

<PAGE>

Description of APS
- --------------------------------------------------------------------------------

Beneficial Owner thereof for its own account or as nominee for the Beneficial
Owner thereof. Payments made by the Fund to holders of APS will be duly made by
making payments to the nominee of the Securities Depository.

AUCTION PROCEDURES

The following is a brief summary of the procedures to be used in conducting
Auctions. This summary is qualified by reference to the Auction Procedures set
forth in Appendix C to the Statement of Additional Information. The Settlement
Procedures to be used with respect to Auctions are set forth in Appendix B to
the Statement of Additional Information.

Auction Date; Advance Notice of Allocation of Taxable Income; Inclusion of
Taxable Income in Dividends


An Auction to determine the Applicable Rate for the APS offered hereby for each
Dividend Period for such shares (other than the Initial Dividend Period
therefor) will be held on the last Business Day preceding the first day of such
Dividend Period, which first day is also the Dividend Payment Date for the
preceding Dividend Period (the date of each Auction being referred to herein as
an "Auction Date"). The initial Auction Date will be August 28, 2002 for Series
A APS and August 30, 2002 for Series B APS. Auctions for the APS for Dividend
Periods after the Initial Dividend Period normally will be held every Wednesday
after the preceding Dividend Payment Date for Series A APS and every such
Friday for Series B APS; and each subsequent Dividend Period normally will
begin on the following Thursday for Series A APS and on the following Monday
for Series B APS (also a Dividend Payment Date). The Auction Date and the first
day of the related Dividend Period for a series of APS (both of which must be
Business Days) need not be consecutive calendar days. See "--Dividends" for
information concerning the circumstances under which a Dividend Payment Date
may fall on a date other than the days specified above, which may affect the
Auction Date.


Except as noted below and under "--Dividends--Gross-up Dividends," whenever the
Fund is aware that it will include any net capital gain or other income subject
to federal income tax in any dividend on the APS, the Fund will notify the
Auction Agent of the amount to be so included at least five Business Days prior
to the Auction Date on which the Applicable Rate for such dividend is to be
established. Whenever the Auction Agent receives such notice from the Fund, it
will in turn notify each Broker-Dealer, who, on or prior to such Auction Date,
in accordance with its Broker-Dealer Agreement, will notify its customers who
are Beneficial Owners and Potential Beneficial Owners believed to be interested
in submitting an Order in the Auction to be held on such Auction Date. The Fund
also may include such income in a dividend on the APS without giving advance
notice thereof if it increases the dividend by an additional amount calculated
as if such income were a Retroactive Taxable Allocation and the additional
amount were a Gross-up Dividend; provided that the Fund will notify the Auction
Agent of the additional amounts to be included in such dividend at least five
Business Days prior to the applicable Dividend Payment Date. See
"--Dividends--Gross-up Dividends."

Orders by Beneficial Owners, Potential Beneficial Owners, Existing Holders and
Potential Holders
On or prior to the Submission Deadline on each Auction Date for a series of APS:

(a) each Beneficial Owner may submit to its Broker-Dealer by telephone a:

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

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

                                                                             31

<PAGE>

Description of APS
- --------------------------------------------------------------------------------


  (ii) "Bid"--indicating the number of outstanding APS, if any, such Beneficial
       Owner desires to continue to hold, provided that the Applicable Rate for
       the next Dividend Period for such shares is not less than the rate per
       annum then specified by such Beneficial Owner; and/or

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

(b) Broker-Dealers will contact customers who are Potential Beneficial Owners
    of APS to determine whether such Potential Beneficial Owners desire to
    submit Bids indicating the number of APS which they offer to purchase
    provided that the Applicable Rate for the next Dividend Period is not less
    than the rates per annum specified in such Bids.

The communication by a Beneficial Owner or Potential Beneficial Owner to a
Broker-Dealer and the communication by a Broker-Dealer, whether or not acting
for its own account, to the Auction Agent of the foregoing information is
hereinafter referred to as an "Order" and collectively as "Orders." A
Beneficial Owner or a Potential Beneficial Owner placing an Order, including a
Broker-Dealer acting in such capacity for its own account, is hereinafter
referred to as a "Bidder" and collectively as "Bidders." 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.

In an Auction, a Beneficial Owner may submit different types of Orders with
respect to APS then held by such Beneficial Owner, as well as Bids for
additional APS. If, however, a Beneficial Owner offers through its
Broker-Dealer to purchase additional APS in such Auction, such Beneficial
Owner, for purposes of such offer to purchase additional shares, will be
treated as a Potential Beneficial Owner as described below. For information
concerning the priority given to different types of Orders placed by Beneficial
Owners, see "--Submission of Orders by Broker-Dealers to Auction Agent" below.

The "Maximum Applicable Rate" for a series of APS will be the Applicable
Percentage of the Reference Rate. The Auction Agent will round each applicable
Maximum Applicable Rate to the nearest one-thousandth (0.001) of one percent
per annum, with any such number ending in five ten-thousandths of one percent
being rounded upwards to the nearest one-thousandth (0.001) of one percent. The
Auction Agent will not round the applicable Reference Rate as part of its
calculation of the Maximum Applicable Rate.

The Maximum Applicable Rate for a series of APS will depend on the credit
rating assigned to such series. The "Applicable Percentage" will be determined
based on (i) the credit rating assigned on such date to such shares by Moody's
(or if Moody's shall not make such rating available, the equivalent of such
rating by a Substitute Rating Agency), and (ii) whether the Fund has provided
notification to the Auction Agent prior to the Auction establishing the
Applicable Rate for any dividend that net capital gains or other taxable income
will be included in such dividend on the APS as follows:

<TABLE>
<CAPTION>
                                           Applicable        Applicable
                                        Percentage of     Percentage of
                                     Reference Rate--  Reference Rate--
       Moody's Credit Ratings on APS  No Notification      Notification
       -----------------------------------------------------------------
       <S>                           <C>               <C>
               Aa3 or higher........              110%              150%
               A....................              125               160
               Baa..................              150               250
               Below Baa............              200               275
</TABLE>

There is no minimum Applicable Rate in respect of any Dividend Period.


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32

<PAGE>

Description of APS
- --------------------------------------------------------------------------------


The Fund will take all reasonable action necessary to enable Moody's to provide
a rating for each series of APS. If Moody's does not make such a rating
available, the Underwriters or their affiliates and successors, after
consultation with the Fund, will select another Rating Agency to act as a
Substitute Rating Agency.

Any Bid by a Beneficial Owner specifying a rate per annum higher than the
Maximum Applicable Rate will be treated as a Sell Order, and any Bid by a
Potential Beneficial Owner specifying a rate per annum higher than the Maximum
Applicable Rate will not be considered. 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."

A Broker-Dealer also may hold APS in its own account as a Beneficial Owner. A
Broker-Dealer thus may submit Orders to the Auction Agent as a Beneficial Owner
or a Potential Beneficial Owner and therefore participate in an Auction as an
Existing Holder or Potential Holder on behalf of both itself and its customers.
Any Order placed with the Auction Agent by a Broker-Dealer as or on behalf of a
Beneficial Owner or a Potential Beneficial Owner will be treated in the same
manner as an Order placed with a Broker-Dealer by a Beneficial Owner or a
Potential Beneficial Owner. Similarly, any failure by a Broker-Dealer to submit
to the Auction Agent an Order in respect of any APS 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 APS held
by it, as described in the next paragraph. If a Broker-Dealer participates in
an Auction as an Existing Holder or a Potential Holder only to represent the
interests of a Beneficial Owner or Potential Beneficial Owner, whether it be
its customers or itself, all discussion herein relating to the consequences of
an Auction for Existing Holders and Potential Holders also applies to the
underlying beneficial ownership interests represented thereby. 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." Each
purchase or sale in an Auction will be settled on the Business Day next
succeeding the Auction Date at a price per share equal to $25,000. See
"--Notification of Results; Settlement."

If one or more Orders covering in the aggregate all of the outstanding APS held
by a Beneficial Owner are not submitted to the Auction Agent prior to the
Submission Deadline, either because a Broker-Dealer failed to contact such
Beneficial Owner or otherwise, the Auction Agent will deem a Hold Order (in the
case of an Auction relating to a Special Dividend Period of 91 days or less) or
a Sell Order (in the case of an Auction relating to a Special Dividend Period
of longer than 91 days) to have been submitted on behalf of such Beneficial
Owner covering the number of outstanding APS held by such Beneficial Owner and
not subject to Orders submitted to the Auction Agent.

If all of the outstanding APS are subject to Submitted Hold Orders, the
Dividend Period next succeeding the Auction automatically will be the same
length as the immediately preceding Dividend Period, and the Applicable Rate
for the next Dividend Period for all the APS will be 40% of the Reference Rate
on the date of the applicable Auction (or 60% of such rate if the Fund has
provided notification to the Auction Agent prior to the Auction establishing
the Applicable Rate for any dividend that net capital gains or other taxable
income will be included in such dividend on the APS).

For the purposes of an Auction, the APS for which the Fund shall have given
notice of redemption and deposited moneys therefor with the Auction Agent in
trust or segregated in an account at the Fund's custodian bank for the benefit
of the Auction Agent, as set forth under "--Redemption," will not be considered
as outstanding and will not be included in such Auction. The Fund may not
submit an Order in any Auction.


- --------------------------------------------------------------------------------
                                                                             33

<PAGE>

Description of APS
- --------------------------------------------------------------------------------


Neither the Fund nor the Auction Agent will be responsible for a
Broker-Dealer's failure to act in accordance with the instructions of
Beneficial Owners or Potential Beneficial Owners or failure to comply with the
foregoing.

Submission of Orders by Broker-Dealers to Auction Agent
Prior to 1:00 p.m., New York City time, on each Auction Date, or such other
time on the Auction Date as may be specified by the Auction Agent (the
"Submission Deadline"), each Broker-Dealer will submit to the Auction Agent in
writing or through the Auction Agent's auction processing system all Orders
obtained by it for the Auction for a series of APS to be conducted on such
Auction Date, designating itself (unless otherwise permitted by the Fund) as
the Existing Holder or Potential Holder in respect of the APS 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 for any Auction Date, shall be irrevocable.

If the rate per annum specified in any Bid contains more than three figures to
the right of the decimal point, the Auction Agent will round such rate per
annum up to the next highest one-thousandth (.001) of one-percent. If one or
more Orders of an Existing Holder are submitted to the Auction Agent and such
Orders cover in the aggregate more than the number of outstanding shares of APS
held by such Existing Holder, such Orders will be considered valid in the
following order of priority:

(i) any Hold Order will be considered valid up to and including the number of
    outstanding APS held by such Existing Holder, provided that if more than
    one Hold Order is submitted by such Existing Holder and the number of APS
    subject to such Hold Orders exceeds the number of outstanding APS held by
    such Existing Holder, the number of APS subject to each of such Hold Orders
    will be reduced pro rata so that such Hold Orders, in the aggregate, will
    cover exactly the number of outstanding APS held by such Existing Holder;

(ii) any Bids will be considered valid, in the ascending order of their
     respective rates per annum if more than one Bid is submitted by such
     Existing Holder, up to and including the excess of the number of
     outstanding APS held by such Existing Holder over the number of
     outstanding APS subject to any Hold Order referred to in clause (i) above
     (and if more than one Bid submitted by such Existing Holder specifies the
     same rate per annum and together they cover more than the remaining number
     of shares that can be the subject of valid Bids after application of
     clause (i) above and of the foregoing portion of this clause (ii) to any
     Bid or Bids specifying a lower rate or rates per annum, the number of
     shares subject to each of such Bids will be reduced pro rata so that such
     Bids, in the aggregate, cover exactly such remaining number of outstanding
     shares); and the number of outstanding shares, if any, subject to Bids not
     valid under this clause (ii) shall be treated as the subject of a Bid by a
     Potential Holder; and

(iii) any Sell Order will be considered valid up to and including the excess of
      the number of outstanding APS held by such Existing Holder over the sum
      of the number of APS subject to Hold Orders referred to in clause (i)
      above and the number of APS subject to valid Bids by such Existing Holder
      referred to in clause (ii) above; provided that, if more than one Sell
      Order is submitted by any Existing Holder and the number of APS subject
      to such Sell Orders is greater than such excess, the number of APS
      subject to each of such Sell Orders will be reduced pro rata so that such
      Sell Orders, in the aggregate, will cover exactly the number of APS equal
      to such excess.

If more than one Bid of any Potential Holder is submitted in any Auction, each
Bid submitted in such Auction will be considered a separate Bid with the rate
per annum and number of APS therein specified.


- --------------------------------------------------------------------------------
34

<PAGE>

Description of APS
- --------------------------------------------------------------------------------


Determination of Sufficient Clearing Bids, Winning Bid Rate and Applicable Rate
Not earlier than the Submission Deadline for each Auction, the Auction Agent
will assemble all 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 hereinafter being referred to as a
"Submitted Hold Order," a "Submitted Bid" or a "Submitted Sell Order," as the
case may be, or as a "Submitted Order") and will determine the excess of the
number of outstanding APS over the number of outstanding APS subject to
Submitted Hold Orders (such excess being referred to as the "Available APS")
and whether Sufficient Clearing Bids have been made in such Auction. Sufficient
Clearing Bids will have been made if the number of outstanding APS that are the
subject of Submitted Bids of Potential Holders with rates per annum not higher
than the Maximum Applicable Rate equals or exceeds the number of outstanding
shares that are the subject of Submitted Sell Orders (including the number of
shares subject to Bids of Existing Holders specifying rates per annum higher
than the Maximum Applicable Rate). If Sufficient Clearing Bids have been made,
the Auction Agent will determine the lowest rate per annum specified in the
Submitted Bids (the "Winning Bid Rate") which would result in the number of
shares subject to Submitted Bids specifying such rate per annum or a lower rate
per annum being at least equal to the Available APS. If Sufficient Clearing
Bids have been made, the Winning Bid Rate will be the Applicable Rate for the
next Dividend Period for the APS then outstanding. If Sufficient Clearing Bids
have not been made (other than because all outstanding APS are the subject of
Submitted Hold Orders), the Dividend Period next following the Auction
automatically will be a 7-Day Dividend Period, and the Applicable Rate for such
Dividend Period will be equal to the Maximum Applicable Rate.

If Sufficient Clearing Bids have not been made, Beneficial Owners that have
Submitted Sell Orders will not be able to sell in the Auction all, and may not
be able to sell any, of their APS subject to such Submitted Sell Orders. See
"--Acceptance and Rejection of Submitted Bids and Submitted Sell Orders and
Allocation of Shares." Thus, under some circumstances, Beneficial Owners may
not have liquidity of investment.

Acceptance and Rejection of Submitted Bids and Submitted Sell Orders and
Allocation of Shares
Based on the determinations described under "--Determination of Sufficient
Clearing Bids, Winning Bid Rate and Applicable Rate" and subject to the
discretion of the Auction Agent to round 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 a series of APS will sell, continue to hold and/or
purchase APS as set forth below. Existing Holders that submit or are deemed to
have submitted Hold Orders will continue to hold the APS subject to such Hold
Orders.

If Sufficient Clearing Bids have been made:

(a) each Existing Holder that placed a Submitted Bid specifying a rate per
    annum higher than the Winning Bid Rate or a Submitted Sell Order will sell
    the outstanding APS subject to such Submitted Bid or Submitted Sell Order;

(b) each Existing Holder that placed a Submitted Bid specifying a rate per
    annum lower than the Winning Bid Rate will continue to hold the outstanding
    APS subject to such Submitted Bid;

(c) each Potential Holder that placed a Submitted Bid specifying a rate per
    annum lower than the Winning Bid Rate will purchase the number of APS
    subject to such Submitted Bid;

(d) each Existing Holder that placed a Submitted Bid specifying a rate per
    annum equal to the Winning Bid Rate will continue to hold the outstanding
    shares of APS subject to such Submitted Bids, unless


- --------------------------------------------------------------------------------
                                                                             35

<PAGE>

Description of APS
- --------------------------------------------------------------------------------

   the number of outstanding APS subject to all such Submitted Bids of Existing
   Holders is greater than the excess of the Available APS over the number of
   APS accounted for in clauses (b) and (c) above, in which event each Existing
   Holder with such a Submitted Bid will sell a number of outstanding APS
   determined on a pro rata basis based on the number of outstanding APS
   subject to all such Submitted Bids of such Existing Holders; and

(e) each Potential Holder that placed a Submitted Bid specifying a rate per
    annum equal to the Winning Bid Rate will purchase any Available APS not
    accounted for in clause (b), (c) or (d) above on a pro rata basis based on
    the APS subject to all such Submitted Bids of Potential Holders.

If Sufficient Clearing Bids have not been made (other than because all
outstanding APS are the subject of Submitted Hold Orders):

(a) each Existing Holder that placed a Submitted Bid specifying a rate per
    annum equal to or lower than the Maximum Applicable Rate will continue to
    hold the outstanding APS subject to such Submitted Bid;

(b) each Potential Holder that placed a Submitted Bid specifying a rate per
    annum equal to or lower than the Maximum Applicable Rate will purchase the
    number of APS subject to such Submitted Bid; and

(c) each Existing Holder that placed a Submitted Bid specifying a rate per
    annum higher than the Maximum Applicable Rate or a Submitted Sell Order
    will sell a number of outstanding APS determined on a pro rata basis based
    on the outstanding APS subject to all such Submitted Bids and Submitted
    Sell Orders.

If as a result of the Auction Procedures described above any Existing Holder
would be entitled or required to sell, or any Potential Holder would be
entitled or required to purchase, a fraction of APS, the Auction Agent, in such
manner as, in its sole discretion, it shall determine, will round up or down
the number of APS being sold or purchased on such Auction Date so that each
share sold or purchased by each Existing Holder or Potential Holder will be a
whole APS. If any Potential Holder would be entitled or required to purchase
less than a whole APS, the Auction Agent, in such manner as, in its sole
discretion, it shall determine, will allocate APS for purchase among Potential
Holders so that only whole APS are purchased by any such Potential Holder, even
if such allocation results in one or more of such Potential Holders not
purchasing any APS.

Notification of Results; Settlement
The Auction Agent will advise each Broker-Dealer who submitted a Bid or Sell
Order in an Auction whether such Bid or Sell Order was accepted or rejected in
whole or in part and of the Applicable Rate for the next Dividend Period for
the related APS by telephone or through the Auction Agent's auction processing
system at approximately 3:00 p.m., New York City time, on the Auction Date for
such Auction. Each such Broker-Dealer that submitted an Order for the account
of a customer then will advise such customer whether such Bid or Sell Order was
accepted or rejected, will confirm purchases and sales with each customer
purchasing or selling APS as a result of the Auction and will advise each
customer purchasing or selling APS 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. If a
customer selling APS as a result of an Auction fails to instruct its Agent
Member to deliver such shares, the Broker-Dealer that submitted such customer's
Bid or Sell Order will instruct such Agent Member to deliver such shares
against payment therefor. Each Broker-Dealer that submitted a Hold Order in an
Auction on behalf of a customer also will advise such customer of the
Applicable Rate


- --------------------------------------------------------------------------------
36

<PAGE>

Description of APS
- --------------------------------------------------------------------------------

for the next Dividend Period for the APS. The Auction Agent will record each
transfer of APS on the record book of Existing Holders to be maintained by the
Auction Agent.

In accordance with the Securities Depository's normal procedures, on the day
after each 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 as necessary
to effect the purchases and sales of APS as determined in such 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 in same-day funds. If the procedures
of the Securities Depository applicable to APS shall be changed to provide for
payment in next-day funds, then purchasers may be required to make payment in
next-day funds. If the certificates for the APS are not held by the Securities
Depository or its nominee, payment will be made in same-day funds to the
Auction Agent against delivery of such certificates.

If any Existing Holder selling APS in an Auction fails to deliver such shares,
the Broker-Dealer of any person that was to have purchased APS in such Auction
may deliver to such person a number of whole APS that is less than the number
of shares that otherwise was to be purchased by such person. In such event, the
number of APS to be so delivered will be determined by such Broker-Dealer.
Delivery of such lesser number of shares will constitute good delivery. Each
Broker-Dealer Agreement also will provide that neither the Fund nor the Auction
Agent will have responsibility or liability with respect to the failure of a
Potential Beneficial Owner, Potential Beneficial Owner or their respective
Agent Members to deliver APS or to pay for APS purchased or sold pursuant to an
Auction or otherwise.

BROKER-DEALERS

General
The Auction Agent after each Auction will pay a service charge from funds
provided by the Fund to each Broker-Dealer on the basis of the purchase price
of APS placed by such Broker-Dealer at such Auction. The service charge (i) for
any 7-Day Dividend Period shall be payable at the annual rate of 0.25% of the
purchase price of the APS placed by such Broker-Dealer in any such Auction and
(ii) for any Special Dividend Period shall be determined by mutual consent of
the Fund and any such Broker-Dealer or Broker-Dealers and shall be based upon a
selling concession that would be applicable to an underwriting of fixed or
variable rate preferred shares with a similar final maturity or variable rate
dividend period, respectively, at the commencement of the Dividend Period with
respect to such Auction. For the purposes of the preceding sentence, the APS
will be placed by a Broker-Dealer if such shares were (i) the subject of Hold
Orders deemed to have been made by Beneficial Owners that were acquired by such
Beneficial Owners through such Broker-Dealer or (ii) the subject of the
following Orders submitted by such Broker-Dealer: (A) a Submitted Bid of a
Beneficial Owner that resulted in such Beneficial Owner continuing to hold such
shares as a result of the Auction, (B) a Submitted Bid of a Potential
Beneficial Owner that resulted in such Potential Beneficial Owner purchasing
such shares as a result of the Auction or (C) a Submitted Hold Order.

The Broker-Dealer Agreements provide that a Broker-Dealer may submit Orders in
Auctions for its own account, unless the Fund notifies all Broker-Dealers that
they no longer may do so; provided that Broker-Dealers may continue to submit
Hold Orders and Sell Orders. If a Broker-Dealer submits an Order for its own
account in any Auction of APS, it may have knowledge of Orders placed through
it in that Auction and therefore have an advantage over other Bidders, but such
Broker-Dealer would not have knowledge of Orders submitted by other
Broker-Dealers in that Auction.


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                                                                             37

<PAGE>

Description of APS
- --------------------------------------------------------------------------------


Secondary Market Trading and Transfers of APS
The Broker-Dealers may maintain a secondary trading market in the APS outside
of Auctions; however, they have no obligation to do so, and may discontinue
such activity at any time. There can be no assurance that a secondary market
for the APS will develop or, if it does develop, that it will provide holders
with a liquid trading market (i.e., trading will depend on the presence of
willing buyers and sellers and the trading price is subject to variables to be
determined at the time of the trade by the Broker-Dealers). The APS will not be
registered on any stock exchange or on any automated quotation system. An
increase in the level of interest rates, particularly during any Long Term
Dividend Period for a series of APS, likely will have an adverse effect on the
secondary market price of such APS, and a selling shareholder may sell APS
between Auctions at a price per share of less than $25,000.

A Beneficial Owner or an Existing Holder may sell, transfer or otherwise
dispose of APS 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
Fund; provided, however, that (a) a sale, transfer or other disposition of
shares of APS 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, such Beneficial Owner or
Existing Holder, its Broker-Dealer, if applicable, or its Agent Member advises
the Auction Agent of such transfer.

DIVIDENDS

General
The holders of APS of each series will be entitled to receive, when, as and if
declared by the Board of Trustees, out of funds legally available therefor,
cumulative cash dividends on their shares, at the Applicable Rate determined as
set forth below under "--Determination of Dividend Rate," payable on the dates
set forth below. Dividends on the APS so declared and payable will be paid (i)
in preference to and in priority over any dividends so declared and payable on
the Common Shares and (ii) to the extent permitted under the Code and to the
extent available, out of net tax-exempt income earned on the Fund's
investments. Dividends on the APS, to the extent that they are derived from
municipal bonds, generally will be exempt from federal income tax, although all
of those dividends will be a tax preference item for corporate taxpayers and a
portion of those dividends may be a tax preference item for purposes of the
federal alternative minimum tax for individuals ("Preference Item"). See
"Taxes."

Dividends on each series of APS will accumulate from the date on which the Fund
originally issues the APS (the "Date of Original Issue") and will be payable on
the APS on the dates described below. Dividends on a series of APS with respect
to the Initial Dividend Period shall be payable on the Initial Dividend Payment
Date for that series. Following the Initial Dividend Payment Date, dividends on
each series of APS will be payable, at the option of the Fund, either (i) with
respect to any 7-Day Dividend Period and any Short Term Dividend Period of 35
or fewer days, on the day next succeeding the last day thereof or (ii) with
respect to any Short Term Dividend Period of more than 35 days and with respect
to any Long Term Dividend Period, monthly on the first Business Day of each
calendar month during such Short Term Dividend Period or Long Term Dividend
Period and on the day next succeeding the last day thereof (each such date
referred to in clause (i) or (ii) being referred to herein as a "Normal
Dividend Payment Date"), except that if such Normal Dividend Payment Date is
not a Business Day, the Dividend Payment Date will be the first Business Day
next succeeding such Normal Dividend Payment Date. Although any particular
Dividend Payment Date may not occur on the originally scheduled date because of
the exceptions discussed above, the next succeeding Dividend Payment Date,
subject to such


- --------------------------------------------------------------------------------
38

<PAGE>

Description of APS
- --------------------------------------------------------------------------------

exceptions, will nonetheless occur on the next following originally scheduled
date. If for any reason a Dividend Period for a series of APS is scheduled to
begin on the same day and end on the same day as a Dividend Period for another
series of APS, then the last day of the Dividend Period for such other series
of APS shall be the second Business Day next succeeding such scheduled day
unless the Fund obtains the opinion of tax counsel referred to below. Subject
to the limitation in the next sentence, if for any reason a Dividend Payment
Date cannot be fixed as described above, then the Board of Trustees will fix
the Dividend Payment Date. However, Dividend Periods of any series of APS shall
not be co-extensive with the Dividend Period of any other series of APS unless
the Fund 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 APS. The Board of Trustees before
authorization of a dividend may change a Dividend Payment Date if such change
does not adversely affect the contract rights of the holders of APS set forth
in the Declaration or Amended By-Laws. The Initial Dividend Period, 7-Day
Dividend Periods and Special Dividend Periods are hereinafter sometimes
referred to as "Dividend Periods." Each dividend payment date determined as
provided above is hereinafter referred to as a "Dividend Payment Date."

Prior to each Dividend Payment Date, the Fund is required to deposit with the
Auction Agent sufficient funds for the payment of declared dividends. The Fund
does not intend to establish any reserves for the payment of dividends.

Each dividend will be paid to the record holder of the APS as of 12:00 noon,
New York City time, on the Business Day preceding the Dividend Payment Date,
which holder is expected to be the nominee of the Securities Depository. See
"--The Auction--Securities Depository." The Securities Depository will credit
the accounts of the Agent Members of the Existing Holders in accordance with
the Securities Depository's normal procedures, which provide for payment in
same-day funds. The Agent Member of an Existing Holder will be responsible for
holding or disbursing such payments on the applicable Dividend Payment Date to
such Existing Holder in accordance with the instructions of such Existing
Holder. 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 nominee of the Securities Depository. Any dividend payment made on the APS
first shall be credited against the earliest declared but unpaid dividends
accumulated with respect to such shares.

Holders of the APS will not be entitled to any dividends, whether payable in
cash, property or stock, in excess of full cumulative dividends except as
described under "--Gross-up Dividends" and "--Non-Payment Period; Late Charge"
below. No interest will be payable in respect of any dividend payment or
payments on the APS which may be in arrears.

The amount of cash dividends per share of APS of each series payable (if
declared) on the Initial Dividend Payment Date, each 7-Day Dividend Period and
each Dividend Payment Date of each Short Term Dividend Period will be computed
by multiplying the Applicable Rate for such Dividend Period by a fraction, the
numerator of which will be the number of days in such Dividend Period or part
thereof that such share was outstanding and for which dividends are payable on
such Dividend Payment Date and the denominator of which will be 365,
multiplying the amount so obtained by $25,000, and rounding the amount so
obtained to the nearest cent. During any Long Term Dividend Period, the amount
of cash dividends per share of APS payable (if declared) on any Dividend
Payment Date will be computed by multiplying the Applicable Rate for such
Dividend Period by a fraction, the numerator of which will be such number of
days in such part of such Dividend Period that such share was outstanding and
for which dividends are payable on such Dividend Payment Date and the
denominator of which will be 360, multiplying the amount so obtained by
$25,000, and rounding the amount so obtained to the nearest cent.


- --------------------------------------------------------------------------------
                                                                             39

<PAGE>

Description of APS
- --------------------------------------------------------------------------------


Notification of Dividend Period
The Fund, at its sole option and to the extent permitted by law, by telephonic
and written notice (a "Request for Special Dividend Period") to the Auction
Agent and to each Broker-Dealer, may request that the next succeeding Dividend
Period for a series of APS will be a number of days (other than seven), evenly
divisible by seven, and not fewer than fourteen nor more than 364 in the case
of a Short Term Dividend Period or one whole year or more but not greater than
five years in the case of a Long Term Dividend Period, specified in such
notice, provided that the Fund may not give a Request for Special Dividend
Period for a Dividend Period of greater than 28 days (and any such request will
be null and void) unless, for any Auction occurring after the initial Auction,
Sufficient Clearing Bids were made in the last occurring Auction and unless
full cumulative dividends, any amounts due with respect to redemptions, and any
Gross-up Dividends payable prior to such date have been paid in full. Such
Request for Special Dividend Period, in the case of a Short Term Dividend
Period, shall be given on or prior to the second Business Day but not more than
seven Business Days prior to an Auction Date for the APS of that series and, in
the case of a Long Term Dividend Period, shall be given on or prior to the
second Business Day but not more than 28 days prior to an Auction Date for the
APS of that series. Upon receiving such Request for Special Dividend Period,
the Broker-Dealers jointly shall determine the Optional Redemption Price of the
APS of that series during such Special Dividend Period and the Specific
Redemption Provisions and shall give the Fund and the Auction Agent written
notice (a "Response") of such determination by no later than the second
Business Day prior to such Auction Date. In making such determination, the
Broker-Dealers will consider (i) existing short-term and long-term market rates
and indices of such short-term and long-term rates, (ii) existing market supply
and demand for short-term and long-term securities, (iii) existing yield curves
for short-term and long-term securities comparable to the APS, (iv) industry
and financial conditions which may affect the APS of that series, (v) the
investment objective of the Fund and (vi) the Dividend Periods and dividend
rates at which current and potential beneficial holders of the APS would remain
or become beneficial holders.

After providing the Request for Special Dividend Period to the Auction Agent
and each Broker-Dealer as set forth above, the Fund, by no later than the
second Business Day prior to such Auction Date, may give a notice (a "Notice of
Special Dividend Period") to the Auction Agent, the Securities Depository and
each Broker-Dealer, which notice will specify (i) the duration of the Special
Dividend Period, (ii) the Optional Redemption Price, if any, as specified in
the related Response and (iii) the Specific Redemption Provisions, if any, as
specified in the related Response. The Fund has agreed to provide a copy of
such Notice of Special Dividend Period to Moody's. The Fund will not give a
Notice of Special Dividend Period and, if such Notice of Special Dividend
Period was given already, will give telephonic and written notice of its
revocation (a "Notice of Revocation") to the Auction Agent, each Broker-Dealer
and the Securities Depository on or prior to the Business Day prior to the
relevant Auction Date if (x) either the 1940 Act APS Asset Coverage is not
satisfied or the Fund fails to maintain Moody's Eligible Assets with an
aggregate Discounted Value at least equal to the APS Basic Maintenance Amount,
on each of the two Valuation Dates immediately preceding the Business Day prior
to the relevant Auction Date on an actual basis and on a pro forma basis giving
effect to the proposed Special Dividend Period (using as a pro forma dividend
rate with respect to such Special Dividend Period the dividend rate which the
Broker-Dealers shall advise the Fund is an approximately equal rate for
securities similar to the APS with an equal dividend period) or (y) sufficient
funds for the payment of dividends payable on the immediately succeeding
Dividend Payment Date have not been irrevocably deposited with the Auction
Agent by the close of business on the third Business Day preceding the Auction
Date immediately preceding such Dividend Payment Date. The Fund also shall
provide a copy of such Notice of Revocation to Moody's. If the Fund is
prohibited from giving a Notice of Special Dividend Period as a result of the
factors enumerated in clause (x) or (y) above or if the Fund gives a Notice of
Revocation with respect to a Notice of Special Dividend Period, the next
succeeding Dividend Period for that series will be a 7-Day Dividend Period. In
addition, in the event Sufficient Clearing Bids are not made in an Auction, or
if an Auction is not held for any reason, the next succeeding Dividend Period
will be a 7-Day Dividend Period,


- --------------------------------------------------------------------------------
40

<PAGE>

Description of APS
- --------------------------------------------------------------------------------

and the Fund may not again give a Notice of Special Dividend Period (and any
such attempted notice will be null and void) until Sufficient Clearing Bids
have been made in an Auction with respect to a 7-Day Dividend Period. If an
Auction is not held because an unforeseen event or unforeseen events cause a
day that otherwise would have been a Dividend Payment Date or an Auction Date
not to be a Business Day, then the length of the Dividend Period relating to
such Dividend Payment Date shall be extended by seven days (or a multiple
thereof if necessary because of such unforeseen event or events) (an "Extension
Period"), the Applicable Rate for such Extension Period shall be the Applicable
Rate for the Dividend Period so extended and the Dividend Payment Date for such
Dividend Period shall be the first Business Day next succeeding the end of such
Extension Period. Solely for purposes of (1) the foregoing sentence, (2) the
proviso in clause (i) of the definition of "Non-Payment Period" under
"--Non-Payment Period; Late Charge" below and (3) the second parenthetical in
the fifth sentence of the same paragraph in which "Non-Payment Period" is
defined, any day on which banks in New York City generally are closed, for any
reason, while the New York Stock Exchange remains open for trading and any day
which otherwise would be a Business Day as defined in the Amended By-laws on
which the Auction Agent is closed for business, for any reason, shall not be
considered a Business Day.

Determination of Dividend Rate
The dividend rate on a series of APS during the period from and including the
Date of Original Issue for the APS to but excluding the Initial Dividend
Payment Date for that series of APS (the "Initial Dividend Period") will be the
rate per annum set forth on the inside cover page hereof. Commencing on the
Initial Dividend Payment Date for a series of APS, the Applicable Rate on that
series of APS for each Subsequent Dividend Period, which Subsequent Dividend
Period shall be a period commencing on and including a Dividend Payment Date
and ending on and including the calendar day prior to the next Dividend Payment
Date (or last Dividend Payment Date in a Dividend Period if there is more than
one Dividend Payment Date), shall be equal to the rate per annum that results
from the Auction with respect to such Subsequent Dividend Period. Cash
dividends shall be calculated as set forth above under "--Dividends--General."

Non-Payment Period; Late Charge
A "Non-Payment Period" for a series of APS will commence if the Fund fails to
(i) declare, prior to the close of business on the second Business Day
preceding any Dividend Payment Date, for payment on or (to the extent permitted
as described below) within three Business Days after such Dividend Payment Date
to the persons who held such shares as of 12:00 noon, New York City time, on
the Business Day preceding such Dividend Payment Date, the full amount of any
dividend on the APS payable on such Dividend Payment Date, provided, however,
that if the Fund is not able to make such declaration in compliance with the
foregoing because an unforeseen event or unforeseen events causes or cause a
day that otherwise would have been a Business Day not to be a Business Day,
then the Fund may make such declaration on the Business Day immediately
preceding the Dividend Payment Date, if possible, or, if not possible, on the
Dividend Payment Date, and in such case the Fund shall not be deemed to have
failed to declare a dividend otherwise required to be declared, or (ii)
deposit, irrevocably in trust, in same-day funds, with the Auction Agent by
12:00 noon, New York City time, (A) on such Dividend Payment Date the full
amount of any cash dividend on such shares payable (if declared) on such
Dividend Payment Date or (B) on any redemption date for any APS called for
redemption, the Mandatory Redemption Price per share of such APS or, in the
case of an optional redemption, the Optional Redemption Price per share. Such
Non-Payment Period will consist of the period commencing on and including the
aforementioned Dividend Payment Date or redemption date, as the case may be,
and ending on and including the Business Day on which, by 12:00 noon, New York
City time, all unpaid cash dividends and unpaid redemption prices shall have
been so deposited or otherwise shall have been made available to the applicable
holders in same-day funds, provided that a Non-Payment Period for the APS will
not end unless the Fund shall have given at least five days' but no more than
30 days' written notice of such


- --------------------------------------------------------------------------------
                                                                             41

<PAGE>

Description of APS
- --------------------------------------------------------------------------------

deposit or availability to the Auction Agent, the Securities Depository and all
holders of the APS of such series. Notwithstanding the foregoing, the failure
by the Fund to deposit funds as provided for by clauses (ii) (A) or (ii) (B)
above within three Business Days after any Dividend Payment Date or redemption
date, as the case may be, in each case to the extent contemplated below, shall
not constitute a "Non-Payment Period." The Applicable Rate for each Dividend
Period for the APS of any series, commencing during a Non-Payment Period, will
be equal to the Non-Payment Period Rate; and each Dividend Period commencing
after the first day of, and during, but not after the end of, a Non-Payment
Period shall be a 7-Day Dividend Period. Any dividend on the APS due on any
Dividend Payment Date for such shares (if, prior to the close of business on
the second Business Day preceding such Dividend Payment Date, the Fund has
declared such dividend payable on such Dividend Payment Date to the persons who
held such shares as of 12:00 noon, New York City time, on the Business Day
preceding such Dividend Payment Date) or redemption price with respect to such
shares not paid to such persons when due may be paid to such persons in the
same form of funds by 12:00 noon, New York City time, on any of the first three
Business Days after such Dividend Payment Date or due date, as the case may be,
provided that such amount is accompanied by a late charge calculated for such
period of non-payment at the Non-Payment Period Rate applied to the amount of
such non-payment based on the actual number of days comprising such period
(excluding any days that would have been Business Days but for the occurrence
of any unforeseen event or unforeseen events that caused such days not to be
Business Days) divided by 365, and in such case such period shall not
constitute a Non-Payment Period; provided, however, that the Fund shall not be
required to pay any late charge if it declares a dividend on the Dividend
Payment Date or the Business Day immediately preceding such Dividend Payment
Date in accordance with clause (i) of the definition of "Non-Payment Period"
and deposits payment for such dividend as contemplated by clause (ii)(A) of the
definition of "Non-Payment Period" on or before the second Business Day
succeeding the day on which the dividend was declared. In the case of a willful
failure of the Fund to pay a dividend on a Dividend Payment Date or to redeem
any APS on the date set for such redemption, the preceding sentence shall not
apply and the Applicable Rate for the Dividend Period commencing during the
Non-Payment Period resulting from such failure shall be the Non-Payment Period
Rate. For the purposes of the foregoing, payment to a person in same-day funds
on any Business Day at any time will be considered equivalent to payment to
that person in New York Clearing House (next-day) funds at the same time on the
preceding Business Day, and any payment made after 12:00 noon, New York City
time, on any Business Day shall be considered to have been made instead in the
same form of funds and to the same person before 12:00 noon, New York City
time, on the next Business Day. The "Non-Payment Period Rate" initially will be
200% of the applicable Reference Rate (or 275% of such rate if the Fund has
provided notification to the Auction Agent prior to the Auction establishing
the Applicable Rate for any dividend that net capital gains or other taxable
income will be included in such dividend on the APS), provided that the Board
of Trustees shall have the authority to adjust, modify, alter or change from
time to time the initial Non-Payment Period Rate if the Board of Trustees
determines and Moody's (or any Substitute Rating Agency in lieu of Moody's in
the event Moody's shall not rate the APS) advises the Fund in writing that such
adjustment, modification, alteration or change will not adversely affect its
then-current rating on the APS.

Restrictions on Dividends and Other Payments
Under the 1940 Act, the Fund may not declare dividends or make other
distributions on Common Shares or purchase any such shares if, at the time of
the declaration, distribution or purchase, as applicable (and after giving
effect thereto), asset coverage (as defined in the 1940 Act) with respect to
the outstanding APS would be less than 200% (or such other percentage as in the
future may be required by law). The foregoing limitations on dividends, other
distributions and purchases in certain circumstances may impair the Fund's
ability to maintain its qualification as a regulated investment company under
the Code. See "Taxes." Upon any failure to pay dividends on the APS for two
years or more, the holders of the APS will acquire certain additional voting
rights. See "--Voting Rights" below.


- --------------------------------------------------------------------------------
42

<PAGE>

Description of APS
- --------------------------------------------------------------------------------


For so long as any APS are outstanding, the Fund will not declare, pay or set
apart for payment any dividend or other distribution (other than a dividend or
distribution paid in shares of, or options, warrants or rights to subscribe for
or purchase, Common Shares or other shares, if any, ranking junior to the APS
as to dividends or upon liquidation) in respect of Common Shares or any other
shares of the Fund ranking junior to or on a parity with the APS as to
dividends or upon liquidation, 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 Fund ranking
junior to APS as to dividends and upon liquidation) or any such parity stock
(except by conversion into or exchange for shares of the Fund ranking junior to
or on a parity with APS as to dividends and upon liquidation), unless (A)
immediately after such transaction, the Fund would have Moody's Eligible Assets
with an aggregate Discounted Value equal to or greater than the APS Basic
Maintenance Amount, and the 1940 Act APS Asset Coverage (see "--Asset
Maintenance" and "--Redemption" below) would be satisfied, (B) full cumulative
dividends on the APS due on or prior to the date of the transaction have been
declared and paid or shall have been declared and sufficient funds for the
payment thereof deposited with the Auction Agent, (C) any Gross-up Dividend
required to be paid on or before the date of such declaration or payment has
been paid and (D) the Fund has redeemed the full number of APS required to be
redeemed by any provision for mandatory redemption contained in the Amended
By-Laws.

Inclusion of Taxable Income in Dividends
Where the Fund is aware that it will include any net capital gains or other
taxable income in any dividend on APS, the Fund will notify the Auction Agent
of the amount to be so included prior to the Auction Date on which the
Applicable Rate for the dividend is to be established. The Fund may also
include such income in a dividend on shares of APS without giving notice in
advance of the Auction Date if it increases the dividend by an additional
amount calculated as if such income were the subject of a Retroactive Taxable
Allocation and the additional amount were a Gross-up Dividend (as described
immediately below) and notifies the Auction Agent of such inclusion at least
five days prior to the applicable Dividend Payment Date.

Gross-up Dividends
The Fund may retroactively allocate net capital gains or other Taxable Income
to the APS without giving the advance notice to the Auction Agent described
above under "--The Auction--Auction Date; Advance Notice of Allocation of
Taxable Income; Inclusion of Taxable Income in Dividends." If the Fund does so
solely by reason of the fact that such allocation is made as a result of the
redemption of all or a portion of the outstanding shares of APS or the
liquidation of the Fund (a "Retroactive Taxable Allocation"), the Fund, within
90 days (and generally within 60 days) after the end of the Fund's fiscal year
for which a Retroactive Taxable Allocation is made, will provide notice thereof
to the Auction Agent and to each holder of APS (initially Cede & Co. as nominee
of the Securities Depository) during such fiscal year at such holder's address
as the same appears or last appeared on the share books of the Fund. Within 30
days after such notice is given to the Auction Agent, the Fund will pay to the
Auction Agent (who then will distribute to such holders of the APS), out of
funds legally available therefor, an amount equal to the aggregate Gross-up
Dividend (as defined below) with respect to all Retroactive Taxable Allocations
made to such holders during the fiscal year in question. The Fund will not
otherwise compensate the holders of the APS for any tax liability caused by the
retroactive allocation of net capital gains or other taxable income to the APS.
See "Taxes."

A "Gross-up Dividend" means a payment to a present or former holder of the APS
of an amount which, when giving effect to the Retroactive Taxable Allocation
made to such holder with respect to the fiscal year in question, would cause
such holder's after-tax return (taking into account both the Retroactive
Taxable Allocation and the Gross-up Dividend) to be equal to the after-tax
return the holder would have


- --------------------------------------------------------------------------------
                                                                             43

<PAGE>

Description of APS
- --------------------------------------------------------------------------------

received if there had been no Retroactive Taxable Allocation. A Gross-up
Dividend shall be calculated (i) without consideration being given to the time
value of money, (ii) assuming that none of the dividends received from the Fund
is a Preference Item and (iii) assuming that each Retroactive Taxable
Allocation would be taxable to each holder of APS at the maximum combined
effective marginal federal, New York State and New York City income tax rate
(including any surtax) applicable to the taxable character of the distribution
(i.e., ordinary income or net capital gain) in the hands of an individual or a
corporation, whichever is greater (disregarding the effect of any other local
taxes and the phase out of, or provision limiting, personal exemptions,
itemized deductions or the benefit of lower tax brackets). The Fund generally
intends to designate any Gross-up Dividend as an "exempt-interest" dividend to
the extent permitted by applicable law. However, a portion or all of any
Gross-up Dividend will be taxable to the recipient thereof. See "Taxes." The
Fund will not pay a further Gross-up Dividend with respect to any taxable
portion of a Gross-up Dividend. The Fund shall not be required to pay Gross-up
Dividends with respect to any net capital gain or other taxable income
determined by the IRS to be allocable in a manner different from that allocated
by the Fund.

ASSET MAINTENANCE

The Fund will be required to satisfy two separate asset maintenance
requirements under the terms of the Amended By-Laws. These requirements are
summarized below.

1940 Act APS Asset Coverage
The Fund will be required under the Amended By-Laws to maintain, with respect
to the APS, as of the last Business Day of each month in which any APS are
outstanding, asset coverage of at least 200% with respect to senior securities
which are shares of beneficial interest in the Fund, including the APS (or such
other asset coverage as in the future may be specified in or under the 1940 Act
as the minimum asset coverage for senior securities which are shares of
beneficial interest of a closed-end investment company as a condition of paying
dividends on its common stock) ("1940 Act APS Asset Coverage"). If the Fund
fails to maintain 1940 Act APS Asset Coverage and such failure is not cured as
of the last Business Day of the following month (the "1940 Act Cure Date"), the
Fund will be required under certain circumstances to redeem certain of the APS.
See "--Redemption" below.

The 1940 Act APS Asset Coverage immediately following the issuance of APS
offered hereby (after giving effect to the deduction of the sales load and
offering expenses for the APS), computed using the Fund's net assets as of
August 7, 2002, and assuming the APS had been issued as of such date, will be
as follows:

<TABLE>
<S>                                                     <C> <C>          <C> <C>
   Value of Fund assets less liabilities not
         constituting senior securities                     $238,069,442
       _________________________________________        =                =   265%
                                                            -------------
Senior securities representing indebtedness plus            $ 90,000,000
     liquidation value of the shares of APS
</TABLE>

APS Basic Maintenance Amount
So long as the APS are outstanding, the Fund will be required under the Amended
By-Laws to maintain as of each Business Day (a "Valuation Date") Moody's
Eligible Assets having in the aggregate a Discounted Value at least equal to
the APS Basic Maintenance Amount. If the Fund fails to meet such requirement as
of any Valuation Date and such failure is not cured on or before the sixth
Business Day after such Valuation Date (the "APS Basic Maintenance Cure Date"),
the Fund will be required in certain circumstances to redeem certain of the
APS. Upon any failure to maintain the required Discounted Value, the Fund will
use its best efforts to alter the composition of its portfolio to retain a
Discounted Value at least equal to the APS Basic Maintenance Amount on or prior
to the APS Basic Maintenance Cure Date. See "--Redemption."



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44

<PAGE>

Description of APS
- --------------------------------------------------------------------------------

The "APS Basic Maintenance Amount" as of any Valuation Date is defined as the
dollar amount equal to the sum of (i)(A) the product of the number of shares of
APS 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 APS (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 APS 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 APS outstanding from such first
respective Dividend Payment Date therefor through the 49th day after such
Valuation Date, at the Maximum Applicable Rate (calculated as if such Valuation
Date were the Auction Date for the Dividend Period commencing on such Dividend
Payment Date) for a 7-Day Dividend 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 Fund shall have delivered a Notice of
Special Dividend Period to the Auction Agent with respect to shares of such
series, such Maximum Applicable Rate shall be the higher of (a) the Maximum
Applicable Rate for the Special Dividend Period of shares of such series to
commence on such Dividend Payment Date and (b) the Maximum Applicable Rate for
a 7-Day Rate Period of shares of such series to commence on such Dividend
Payment Date, multiplied by the Moody's Volatility Factor applicable to a 7-Day
Dividend Period, or, in the event the Fund shall have delivered a Notice of
Special Dividend Period to the Auction Agent with respect to shares of such
series designating a Special Dividend Period consisting of 49 days or more, the
Moody's Volatility Factor applicable to a Special Dividend 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 during a Non-Payment
Period (or, in the case of Preferred Shares other than APS, a period similar to
a Non-Payment Period), the dividend for purposes of calculation would
accumulate at the current dividend rate then applicable to the shares in
respect of which such Non-Payment Period is applicable 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 Preferred Shares other than APS, 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 Fund for the 90 days subsequent to such Valuation
Date; (E) the amount of the Fund's Maximum Potential Gross-up Dividend
Liability in respect of shares of APS (and similar amounts payable in respect
of other Preferred Shares) 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., 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) of any of the Fund's assets irrevocably
deposited by the Fund for the payment of any of (i)(A) through (i)(F). For
purposes of the foregoing, "Maximum Potential Gross-up Dividend Liability"
means, as of any Valuation Date, the aggregate amount of Gross-up Dividends
that would be due if the Fund were to make Retroactive Taxable Allocations,
with respect to any fiscal year,


- --------------------------------------------------------------------------------
                                                                             45

<PAGE>

Description of APS
- --------------------------------------------------------------------------------

estimated based upon dividends paid and the amount of undistributed realized
net capital gains and other taxable income earned by the Fund, as of the end of
the calendar month immediately preceding such Valuation Date and assuming such
Gross-up Dividends are fully taxable.

For purposes of determining whether the Fund has Moody's Eligible Assets with
an aggregate Discounted Value that equals or exceeds the APS Basic Maintenance
Amount, the Discounted Value of Moody's Eligible Assets that the Fund is
obligated to deliver or receive pursuant to an outstanding futures contract or
option shall be as follows: (i) assets subject to call options written by the
Fund that are either exchange-traded and "readily reversible" or that expire
within 49 days after the date as of which such valuation is made shall be
valued at the lesser of (A) Discounted Value and (B) the exercise price of the
call option written by the Fund; (ii) assets subject to call options written by
the Fund not meeting the requirements of clause (i) of this sentence shall have
no value; (iii) assets subject to put options written by the Fund shall be
valued at the lesser of (A) the exercise price and (B) the Discounted Value of
the assets subject to the option; (iv) futures contracts shall be valued at the
lesser of (A) settlement price and (B) the Discounted Value of the assets
subject to the futures contract, provided that, if a contract matures within 49
days after the date as of which such valuation is made, where the Fund is the
seller the contract may be valued at the settlement price and where the Fund is
the buyer the contract may be valued at the Discounted Value of the assets
subject to the futures contract; and (v) where delivery may be made to the Fund
with any security of a class of securities, the Fund shall assume that it will
take delivery of the security with the lowest Discounted Value.

In addition, for purposes of determining whether the Fund has Moody's Eligible
Assets with an aggregate Discounted Value that equals or exceeds the APS Basic
Maintenance Amount, the following amounts shall be subtracted from the
aggregate Discounted Value of the Moody's Eligible Assets held by the Fund to
the extent the relevant asset is a Moody's Eligible Asset: (i) 10% of the
exercise price of a written call option; (ii) the exercise price of any written
put option; (iii) where the Fund is the seller under a financial futures
contract, 10% of the settlement price of the financial futures contract; (iv)
where the Fund is the purchaser under a financial futures contract, any amounts
payable by the Fund under such financial futures contract; (v) the settlement
price of the underlying financial futures contract if the Fund writes put
options on a financial futures contract; and (vi) 105% of the Market Value of
the underlying financial futures contracts if the Fund writes call options on a
financial futures contract and does not own the underlying contract. The
Discounted Value of all forward commitments to which the Fund is a party and of
all securities deliverable to the Fund pursuant to such forward commitments
shall be zero.

The Discount Factors and guidelines for determining the market value of the
Fund's portfolio holdings have been based on criteria established in connection
with rating the APS. These factors include, but are not limited to, the
sensitivity of the market value of the 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. In no event shall the Discounted
Value of any asset of the Fund exceed its unpaid principal balance or face
amount as of the date of calculation. The Discount Factor relating to any asset
of the Fund and the APS Basic Maintenance Amount, the assets eligible for
inclusion in the calculation of the Discounted Value of the Fund's portfolio
and certain definitions and methods of calculation relating thereto may be
changed from time to time by the Fund, without shareholder approval, but only
in the event the Fund receives written confirmation from Moody's, or any
Substitute Rating Agency, that any such changes would not impair the ratings
then assigned to the APS by Moody's or such Substitute Rating Agency.

On or before the third Business Day after a Valuation Date on which the Fund
fails to maintain Moody's Eligible Assets with an aggregate Discounted Value
equal to or greater than the APS Basic Maintenance


- --------------------------------------------------------------------------------
46

<PAGE>

Description of APS
- --------------------------------------------------------------------------------

Amount, the Fund is required to deliver to the Auction Agent and Moody's a
report with respect to the calculation of the APS Basic Maintenance Amount and
the value of its portfolio holdings (an "APS Basic Maintenance Report") as of
the date of such failure. Additionally, on or before the third Business Day
after the first day of a Special Dividend Period, the Fund will deliver an APS
Basic Maintenance Report to Moody's and the Auction Agent. The Fund also will
deliver an APS Basic Maintenance Report as of the last Business Day of the last
month of each fiscal quarter of the Fund 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 the last month of each fiscal quarter of the Fund,
the Fund will deliver a letter prepared by the Fund's independent accountants
regarding the accuracy of the calculations made by the Fund in its most recent
APS Basic Maintenance Report (and in another APS Basic Maintenance Report,
randomly selected by the Fund's independent accountants, that was delivered
during such fiscal quarter). Also, on or before 5:00 p.m., New York City time,
on the first Business Day after any Common Shares are repurchased by the Fund,
the Fund will complete and deliver to Moody's an APS Basic Maintenance Report
as of the close of business on such date that Common Shares are repurchased. If
any such letter prepared by the Fund's independent accountants shows that an
error was made in the most recent APS Basic Maintenance Report, the calculation
or determination made by the Fund's independent accountants will be conclusive
and binding on the Fund.

REDEMPTION

Optional Redemption
To the extent permitted under the 1940 Act and under Massachusetts law, upon
giving a notice of redemption, as provided below, the Fund, at its option, may
redeem the APS, in whole or in part, out of funds legally available therefor,
at the Optional Redemption Price per share on any Dividend Payment Date;
provided that no APS may be redeemed at the option of the Fund during (a) the
Initial Dividend Period with respect to the APS or (b) a Non-Call Period to
which such share is subject. "Optional Redemption Price" means $25,000 per
share of APS plus an amount equal to accumulated but unpaid dividends (whether
or not earned or declared) to the date fixed for redemption plus any applicable
redemption premium, if any, attributable to the designation of a Premium Call
Period, but excluding Gross-up Dividends. In addition, holders of APS may be
entitled to receive Gross-up Dividends in the event of redemption of such APS
to the extent provided herein. See "--Dividends--Gross-up Dividends." The Fund
has the authority to redeem the APS for any reason and may redeem all or part
of the outstanding APS if it anticipates that the Fund's leveraged capital
structure will result in a lower rate of return to holders of Common Shares for
any significant period of time than that obtainable if the Common Shares were
unleveraged.

Mandatory Redemption
Under the Fund's Amended By-Laws, the Fund will be required to redeem, out of
funds legally available therefor, at the Mandatory Redemption Price per share,
the APS to the extent permitted under the 1940 Act and Massachusetts law, on a
date fixed by the Board of Trustees, if the Fund fails to maintain Moody's
Eligible Assets with an aggregate Discounted Value equal to or greater than the
APS Basic Maintenance Amount or to satisfy the 1940 Act APS Asset Coverage and
such failure is not cured on or before the APS Basic Maintenance Cure Date or
the 1940 Act Cure Date (herein collectively referred to as a "Cure Date"), as
the case may be. "Mandatory Redemption Price" for each series of APS means
$25,000 per share plus an amount equal to accumulated but unpaid dividends
(whether or not earned or declared) to the date fixed for redemption, but
excluding Gross-up Dividends. In addition, holders of APS may be entitled to
receive Gross-up Dividends in the event of redemption of such APS to the extent
provided herein. See "--Dividends--Gross-up Dividends." The number of APS to be
redeemed will be equal to the lesser of (a) the minimum number of APS the
redemption of which, if deemed to have


- --------------------------------------------------------------------------------
                                                                             47

<PAGE>

Description of APS
- --------------------------------------------------------------------------------

occurred immediately prior to the opening of business on the Cure Date,
together with all other Preferred Shares subject to redemption or retirement,
would result in the Fund having Moody's Eligible Assets with an aggregate
Discounted Value equal to or greater than the APS Basic Maintenance Amount or
satisfaction of the 1940 Act APS Asset Coverage, as the case may be, on such
Cure Date (provided that, if there is no such minimum number of shares the
redemption of which would have such result, all APS then outstanding will be
redeemed), and (b) the maximum number of APS, together with all other shares of
Preferred Shares subject to redemption or retirement, that can be redeemed out
of funds expected to be legally available therefor on such redemption date. In
determining the number of APS required to be redeemed in accordance with the
foregoing, the Fund shall allocate the number required to be redeemed which
would result in the Fund having Moody's Eligible Assets with an aggregate
Discounted Value equal to or greater than the APS Basic Maintenance Amount or
satisfaction of the 1940 Act APS Asset Coverage, as the case may be, pro rata
among APS and other Preferred Shares subject to redemption pursuant to
provisions similar to those set forth below; provided that APS that may not be
redeemed at the option of the Fund due to the designation of a Non-Call Period
applicable to such shares (A) will be subject to mandatory redemption only to
the extent that other shares are not available to satisfy the number of shares
required to be redeemed and (B) will be selected for redemption in an ascending
order of outstanding number of days in the Non-Call Period (with shares with
the lowest number of days to be redeemed first) and by lot in the event of
shares having an equal number of days in such Non-Call Period. The Fund is
required to effect such a mandatory redemption not later than 35 days after
such Cure Date, except that if the Fund does not have funds legally available
for the redemption of all of the required number of APS which are subject to
mandatory redemption or the Fund otherwise is unable to effect such redemption
on or prior to 35 days after such Cure Date, the Fund will redeem those APS
which it was unable to redeem on the earliest practicable date on which it is
able to effect such redemption.

General
If the APS are to be redeemed, a notice of redemption will be mailed to each
record holder of such APS (initially Cede & Co. as nominee of the Securities
Depository) and to the Auction Agent not less than 17 nor more than 30 days
prior to the date fixed for the redemption thereof. Each notice of redemption
will include a statement setting forth: (i) the redemption date, (ii) the
aggregate number of APS to be redeemed, (iii) the redemption price, (iv) the
place or places where APS are to be surrendered for payment of the redemption
price, (v) a statement that dividends on the shares to be redeemed will cease
to accumulate on such redemption date (except that holders may be entitled to
Gross-up Dividends) and (vi) the provision of the Amended By-Laws pursuant to
which such shares are being redeemed. No defect in the notice of redemption or
in the mailing or publication thereof will affect the validity of the
redemption proceedings, except as required by applicable law.

If less than all of the outstanding APS are to be redeemed, the shares to be
redeemed will, unless otherwise required for the Amended By-Laws, be selected
by lot or such other method as the Fund deems fair and equitable, and the
results thereof will be communicated to the Auction Agent. The Auction Agent
will give notice to the Securities Depository, whose nominee will be the record
holder of all APS, and the Securities Depository will determine the number of
shares to be redeemed from the account of the Agent Member of each Existing
Holder. Each Agent Member will determine the number of shares to be redeemed
from the account of each Existing Holder for which it acts as agent. An Agent
Member may select for redemption shares from the accounts of some Existing
Holders without selecting for redemption any shares from the accounts of other
Existing Holders. Notwithstanding the foregoing, if neither the Securities
Depository nor its nominee is the record holder of all of the APS series, the
particular shares to be redeemed shall be selected by the Fund by lot or by
such other method as the Fund deems fair and equitable.


- --------------------------------------------------------------------------------
48

<PAGE>

Description of APS
- --------------------------------------------------------------------------------


If the Fund gives notice of redemption, and concurrently or thereafter deposits
in trust with the Auction Agent, or segregates in an account at the Fund's
custodian bank for the benefit of the Auction Agent, Deposit Securities (with a
right of substitution) having an aggregate Discounted Value equal to the
redemption payment for the APS as to which notice of redemption has been given,
with irrevocable instructions and authority to pay the redemption price to the
record holders thereof, then upon the date of such deposit or, if no such
deposit is made, upon such date fixed for redemption (unless the Fund defaults
in making payment of the redemption price), all rights of the holders of such
shares called for redemption will cease and terminate, except the right of such
holders to receive the redemption price thereof and any Gross-up Dividends, but
without interest, and such shares no longer will be deemed to be outstanding.
The Fund will be entitled to receive, from time to time, the interest, if any,
earned on such Deposit Securities deposited with the Auction Agent, and the
holders of any shares so redeemed will have no claim to any such interest. Any
funds so deposited which are unclaimed at the end of one year from such
redemption date will be repaid, upon demand, to the Fund, after which the
holders of the APS of such series so called for redemption may look only to the
Fund for payment thereof.

So long as any APS are held of record by the nominee of the Securities
Depository (initially Cede & Co.), the redemption price for such shares will be
paid on the redemption date to the nominee of the Securities Depository. The
Securities Depository's normal procedures now provide for it to distribute the
amount of the redemption price to Agent Members who, in turn, are expected to
distribute such funds to the persons for whom they are acting as agent.

Notwithstanding the provisions for redemption described above, no APS shall be
subject to optional redemption (i) unless all dividends in arrears on the
outstanding APS, and all shares of beneficial interest of the Fund ranking on a
parity with the APS with respect to the payment of dividends or upon
liquidation, have been or are being contemporaneously paid or declared and set
aside for payment and (ii) if redemption thereof would result in the Fund's
failure to maintain Moody's Eligible Assets with an aggregate Discounted Value
equal to or greater than the APS Basic Maintenance Amount.

LIQUIDATION RIGHTS
Upon any liquidation, dissolution or winding up of the Fund, whether voluntary
or involuntary, the holders of APS of each series will be entitled to receive,
out of the assets of the Fund available for distribution to shareholders,
before any distribution or payment is made upon any Common Shares or any other
shares of beneficial interest of the Fund ranking junior in right of payment
upon liquidation of APS, $25,000 per share together with the amount of any
dividends accumulated but unpaid (whether or not earned or declared) thereon to
the date of distribution, and after such payment the holders of APS will be
entitled to no other payments except for any Gross-up Dividends. If such assets
of the Fund are insufficient to make the full liquidation payment on
outstanding APS and liquidation payments on any other outstanding class or
series of Preferred Shares of the Fund ranking on a parity with the APS as to
payment upon liquidation, then such assets will be distributed among the
holders of APS and the holders of shares of such other class or series ratably
in proportion to the respective preferential amounts to which they are
entitled. After payment of the full amount of liquidation distribution to which
they are entitled, the holders of APS will not be entitled to any further
participation in any distribution of assets by the Fund except for any Gross-up
Dividends. A consolidation, merger or share exchange of the Fund with or into
any other entity or entities or a sale, whether for cash, shares of stock,
securities or properties, of all or substantially all or any part of the assets
of the Fund shall not be deemed or construed to be a liquidation, dissolution
or winding up of the Fund.

VOTING RIGHTS
Except as otherwise indicated in this Prospectus and except as otherwise
required by applicable law, holders of APS will be entitled to one vote per
share on each matter submitted to a vote of shareholders and will vote together
with holders of Common Shares and other Preferred Shares as a single class.


- --------------------------------------------------------------------------------
                                                                             49

<PAGE>

Description of APS
- --------------------------------------------------------------------------------


In connection with the election of the Fund's Trustees, holders of the APS and
any other Preferred Shares, voting as a separate class, shall be entitled at
all times to elect two of the Fund's Trustees, and the remaining Trustees will
be elected by holders of Common Shares and APS and any other Preferred Shares,
voting together as a single class. In addition, if at any time dividends on
outstanding APS are unpaid in an amount equal to at least two full years'
dividends thereon and sufficient cash or securities shall not have been
deposited with the Auction Agent for the payment of such accumulated dividends,
or if at any time holders of any shares of Preferred Shares are entitled,
together with the holders of APS, to elect a majority of the Trustees of the
Fund under the 1940 Act, then the number of Trustees constituting the Board of
Trustees automatically shall be increased by the smallest number that, when
added to the two Trustees elected exclusively by the holders of APS and any
other Preferred Shares 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 the APS and any other Preferred Shares, 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 in any event will be entitled to
elect, constitutes a majority of the total number of Trustees of the Fund as so
increased. The terms of office of the persons who are Trustees at the time of
that election will continue. If the Fund thereafter shall pay, or declare and
set apart for payment in full, all dividends payable on all outstanding APS and
any other Preferred Shares for all past Dividend Periods, the additional voting
rights of the holders of APS and any other Preferred Shares as described above
shall cease, and the terms of office of all of the additional Trustees elected
by the holders of APS and any other Preferred Shares (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 APS and any other Preferred Shares have
the right to elect in any event) will terminate automatically.

The affirmative vote of a majority of the votes entitled to be cast by holders
of outstanding APS and any other Preferred Shares, voting together as one
class, will be required to (i) authorize, create or issue any class or series
of shares ranking prior to the APS or any other series of Preferred Shares with
respect to the payment of dividends or the distribution of assets on
liquidation; provided, however, that no vote is required to authorize the
issuance of another series of APS or another class of Preferred Shares which
are substantially identical in all respects to the APS or (ii) amend, alter or
repeal the provisions of the Declaration or the Amended By-Laws, whether by
merger, consolidation or otherwise, so as to adversely affect any of the
contract rights expressly set forth in the Declaration or the Amended By-Laws
of holders of APS or any other Preferred Shares. To the extent permitted under
the 1940 Act, in the event shares of more than one series of APS are
outstanding, the Fund shall not approve any of the actions set forth in clause
(i) or (ii) which adversely affects the contract rights expressly set forth in
the Declaration or the Amended By-Laws of a holder of shares of a series of APS
differently than those of a holder of shares of any other series of APS without
the affirmative vote of at least a majority of votes entitled to be cast by
holders of the APS of each series adversely affected and outstanding at such
time (each such adversely affected series voting separately as a class). The
Board of Trustees, however, without shareholder approval, may amend, alter or
repeal any or all of the various Rating Agency guidelines described herein in
the event the Fund receives confirmation from Moody's (or the applicable
Substitute Rating Agency) that any such amendment, alteration or repeal would
not impair the rating then assigned to the APS by such Rating Agency. Unless a
higher percentage is provided for under the Declaration, the affirmative vote
of a majority of the votes entitled to be cast by holders of outstanding APS
and any other Preferred Shares, voting as a separate class, will be required to
approve any plan of reorganization (including bankruptcy proceedings) adversely
affecting such shares or any action requiring a vote of security holders under
Section 13(a) of the 1940 Act including, among other things, changes in the
investment restrictions described as fundamental policies under "Investment
Restrictions" in the Statement of Additional Information. The class vote of
holders of APS and any other Preferred Shares described above in each case will
be in addition to a separate vote of the requisite percentage of Common


- --------------------------------------------------------------------------------
50

<PAGE>

Description of APS
- --------------------------------------------------------------------------------

Shares and APS and any other Preferred Shares, voting together as a single
class, necessary to authorize the action in question.

The foregoing voting provisions will not apply to the APS if, at or prior to
the time when the act with respect to which such vote otherwise would be
required shall be effected, 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.

Management of the Fund

TRUSTEES AND OFFICERS

The Board of Trustees is responsible for the management of the Fund, including
supervision of the duties performed by the Manager and PIMCO. The names and
business addresses of the Trustees and officers of the Fund and their principal
occupations and other affiliations during the past five years are set forth
under "Management of the Fund" in the Statement of Additional Information.

INVESTMENT MANAGER

The Manager serves as the investment manager of the Fund. Subject to the
supervision of the Board of Trustees, the Manager is responsible for managing,
either directly or through others selected by it, the investment activities of
the Fund and the Fund's business affairs and other administrative matters. The
Manager is located at 1345 Avenue of the Americas, New York, New York 10105.

Organized in 2000, the Manager provides investment management and advisory
services to several closed-end and open-end investment company clients. As of
June 30, 2002, the Manager had approximately $7 billion in assets under
management. Allianz Dresdner Asset Management of America L.P. is the direct
parent company of PIMCO Advisory Services Holdings LLC, of which the Manager is
a wholly-owned subsidiary. As of June 30, 2002, Allianz Dresdner Asset
Management of America L.P. and its subsidiary partnerships, including PIMCO,
had approximately $346 billion in assets under management.

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

PORTFOLIO MANAGER

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

PIMCO is located at 840 Newport Center Drive, Newport Beach, California 92660.
Organized in 1971, PIMCO provides investment management and advisory services
to private accounts of institutional and individual clients and to mutual
funds. As of June 30, 2002, PIMCO had approximately $275 billion in assets
under management. The Manager (and not the Fund) pays a portion of the fees it
receives to PIMCO in return for PIMCO's services.

Bill Gross, a founder of PIMCO, serves as Managing Director and Chief
Investment Officer of PIMCO. In his role as Chief Investment Officer, he serves
as the head of the Investment Committee, which


- --------------------------------------------------------------------------------
                                                                             51

<PAGE>

Management of the Fund
- --------------------------------------------------------------------------------

oversees setting investment policy decisions, including duration positioning,
yield curve management, sector rotation, credit quality and overall portfolio
composition, for all PIMCO portfolios and strategies, including the Fund. The
following individual at PIMCO has primary responsibility for the day-to-day
portfolio management of the Fund.

<TABLE>
<CAPTION>
                    Since                   Recent Professional Experience
- ---------------------------------------------------------------------------------------
<S>            <C>              <C>
Mark V. McCray 2002 (Inception) Executive Vice President, PIMCO. Mr. McCray joined
                                PIMCO as a Portfolio Manager in 2000. Prior to that, he
                                was a bond trader from 1992-1999 at Goldman Sachs &
                                Co. where he was appointed Vice President in 1996 and
                                named co-head of municipal bond trading in 1997 with
                                responsibility for the firm's proprietary account and
                                supervised municipal bond traders.
</TABLE>

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

INVESTMENT MANAGEMENT AGREEMENT

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

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

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

<TABLE>
<CAPTION>
                                              Percentage Waived              Percentage Waived
                       (contractual annual rate as a percentage   (annual rate as a percentage
                                    of average daily net assets    of average daily net assets
                                  attributable to Common Shares  attributable to Common Shares
                                   assuming no Preferred Shares    -- assuming the issuance of
Period Ending June 30,               are issued or outstanding)          Preferred Shares) (2)
- -----------------------------------------------------------------------------------------------
<S>                    <C>                                       <C>
2003(1)...............                                     0.15%                          0.24%
2004..................                                     0.15%                          0.24%
2005..................                                     0.15%                          0.24%
2006..................                                     0.15%                          0.24%
2007..................                                     0.15%                          0.24%
2008..................                                     0.10%                          0.16%
2009..................                                     0.05%                          0.08%
</TABLE>
- --------
(1) From the commencement of the Fund's operations.
(2) Assumes the issuance of Preferred Shares in an amount equal to 38% of the
    Fund's capital (after their issuance).


- --------------------------------------------------------------------------------
52

<PAGE>

Management of the Fund
- --------------------------------------------------------------------------------


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

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

Net asset value

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

The NAV of the Fund will be determined as of the close of regular trading on
the New York Stock Exchange (normally 4:00 p.m., New York City time) (the "NYSE
Close") on each day the New York Stock Exchange is open. Domestic debt
securities are normally priced using data reflecting the earlier closing of the
principal markets for those securities. Information that becomes known to the
Fund or its agent after the Fund's NAV has been calculated on a particular day
will not be used to retroactively adjust the price of a security or the Fund's
NAV determined earlier that day.

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

Taxes

FEDERAL INCOME TAX MATTERS

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


- --------------------------------------------------------------------------------
                                                                             53

<PAGE>

Taxes
- --------------------------------------------------------------------------------


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

In order for any distributions to holders of APS to be eligible to be treated
as exempt interest dividends, the APS must be treated as equity for federal
income tax purposes. Based in part on certain representations made by the Fund
to Ropes & Gray relating to the lack of any present intention to redeem or
purchase APS at any time in the future, it is the opinion of Ropes & Gray that
the APS will constitute equity for federal income tax purposes. This opinion
relies in part on a published ruling of the IRS stating that certain auction
rate preferred stock similar in many material respects to the APS represents
equity. The opinion of Ropes & Gray represents only its best legal judgment and
is not binding on the IRS or the courts. If the IRS were successfully to assert
that variable rate preferred stock such as the APS should be treated as debt
for federal income tax purposes, dividends on APS would not be increased by the
Fund and holders of APS would not be entitled to any additional distributions
to offset the effect of paying federal income tax on the Fund's distributions
so recharacterized as interest. Ropes & Gray has advised the Fund that, should
the IRS pursue in court the position that the APS should be treated as debt for
federal income tax purposes, the IRS would be unlikely to prevail.

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

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

The New York Municipal Bonds in which the Fund will invest are generally issued
by the State of New York, a city in New York or a political subdivision,
agency, authority or instrumentality of such state or city. Thus, substantially
all of the Fund's dividends to you will qualify as "exempt-interest dividends,"
which are not generally subject to federal income tax. An investment in the
Fund may result in liability for federal alternative minimum tax for both
individual and corporate shareholders. The Fund will at all times seek to avoid
portfolio investments that pay interest that is taxable to individuals under
the federal alternative minimum tax. Nonetheless, the Fund may not be
successful in this regard. Therefore, if your goal is to avoid or limit your
receipt of income that is taxable under the alternative minimum tax, you should
discuss with your tax advisor whether the Fund is an appropriate investment for
you.

The IRS has taken the position in a published ruling that the Fund is required
for each taxable year to allocate net capital gain and other income subject to
regular federal income tax, if any, proportionately among its Common Shares and
each series of APS in accordance with the percentage of total Fund
distributions received by each such class of shares with respect to such year.
As described above in the section entitled "Description of
APS--Dividends--Gross-up Dividends," if the Fund retroactively


- --------------------------------------------------------------------------------
54

<PAGE>

Taxes
- --------------------------------------------------------------------------------

allocates any net capital gains or other taxable income to the APS, in certain
circumstances, it will pay Gross-up Dividends to the holders of the APS. There
are other circumstances where, even if it is determined after the payment of a
dividend that a portion of that dividend was subject to federal income tax, the
Fund will not be required to pay any additional amount to compensate for any
tax payable on the dividend.

The federal income tax consequences of Gross-up Dividends under existing law
are uncertain. For example, it is unclear how Gross-up Dividends will be
treated under the rules in Subchapter M of the Code applicable to dividends
paid following the close of a taxable year in respect of a prior year's income.
The Fund intends to treat such Gross-up Dividends as paid during such prior
taxable year for purposes of the rules governing the Fund's treatment of such
dividends, and to treat a holder as receiving a dividend distribution in the
amount of any Gross-up Dividend only as and when such Gross-up Dividend is paid.

Existing authorities do not specifically address whether dividends (including
possible Gross-up Dividends) that are paid following the close of a taxable
year, but that are treated for tax purposes as derived from the income of such
prior taxable year, are treated as dividends paid during such prior taxable
year for purposes of determining each class's proportionate share of a
particular type of income. The Fund currently intends to treat such dividends
as having been paid in the prior taxable year for purposes of determining each
class's proportionate share of a particular type of income with respect to such
prior taxable year. Existing authorities also do not specifically address the
allocation of taxable income among the dividends paid to holders of a class of
shares during or with respect to a taxable year. It is possible that the IRS
could disagree with the Fund's position concerning the treatment of dividends
paid after the close of a taxable year or with the Fund's method of allocation,
in which case the IRS could attempt to recharacterize a portion of the
dividends paid to the holders of APS and designated by the Fund as exempt
interest dividends as consisting instead of capital gains or other taxable
income. If the IRS were to prevail with respect to any such attempted
recharacterization, holders of APS could be subject to tax on amounts so
recharacterized and the Fund could be subject to federal income and excise tax.
In such event, no additional amounts (including Gross-up Dividends) would be
paid by the Fund with respect to dividends so recharacterized to compensate for
any additional tax owed by holders of APS.

If, in connection with the selection of a Long-Term Dividend Period, (i) the
Fund provides that a Premium Call Period will follow a Non-Call Period, (ii)
based on all the facts and circumstances at the time of the designation of the
Long-Term Dividend Period the Fund is more likely than not to redeem the
Preferred Shares during the Premium Call Period, and (iii) the premium to be
paid upon redemption during the Premium Call Period exceeds a reasonable
penalty for early redemption, it is possible that the holders of APS will be
required to accrue such premium as a dividend (to the extent of the Fund's
earnings and profits) over the term of the Non-Call Period.

The Fund will generally designate Gross-up Dividends as exempt-interest
dividends to the extent it determines such designation is consistent with the
allocation principles, as described in "Description of APS--Dividends--Gross-up
Dividends." However, a portion or all of a Gross-up Dividend will be taxable
either in the taxable year in which the dividend or dividends to which the
Gross-up Dividend relates was paid or in the taxable year in which the Gross-up
Dividend is paid. The Fund will not be required to pay any additional amount if
it is determined that its treatment of Gross-up Dividends was improper.

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


- --------------------------------------------------------------------------------
                                                                             55

<PAGE>

Taxes
- --------------------------------------------------------------------------------

or all of any market discount that is other than de minimis will be included in
the Fund's ordinary income and will be taxable to shareholders as such when
such income is distributed. The Fund's investments in these and certain other
debt obligations may cause the Fund to recognize taxable income in excess of
the cash generated by such obligations. Thus, the Fund could be required at
times to liquidate other investments in order to satisfy its distribution
requirements.

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

Any gain resulting from the sale or exchange of Fund shares will generally also
be subject to tax. In addition, the exemption from federal income tax for
exempt-interest dividends does not necessarily result in exemption for such
dividends under the income or other tax laws of any state or local taxing
authority. You should consult your tax advisor for more information on your own
tax situation, including possible state and local taxes. See "--New York Tax
Matters."

The backup withholding tax rate is 30% for amounts paid during 2002 and 2003 if
the Fund is required to apply backup withholding to taxable distributions
payable to a shareholder. Please see "Tax Matters" in the Statement of
Additional Information for additional information about the backup withholding
tax rates for subsequent years.

NEW YORK TAX MATTERS

The following is a general, abbreviated summary of certain provisions of the
applicable New York tax law as presently in effect as it directly governs the
taxation of New York resident individual, corporate and unincorporated business
holders of APS of the Fund, based upon the advice of Edwards & Angell, LLP,
special counsel to the Fund. This summary does not address the taxation of
other shareholders nor does it discuss any local taxes, other than New York
City taxes, that may be applicable. These provisions are subject to change by
legislative or administrative action, and any such change may be retroactive
with respect to Fund transactions. The following is based on the assumptions
that the Fund will qualify under Subchapter M of the Code as a regulated
investment company, that it will satisfy the conditions which will cause the
Fund's distributions to qualify as exempt-interest dividends to shareholders,
that it will distribute all interest and dividends received to the Fund's
shareholders and that the APS will constitute equity for federal income tax
purposes. The Fund will be subject to the New York Business Corporation
franchise tax and the New York City general corporation tax only if it has a
sufficient nexus with New York State or New York City. If it is subject to such
taxes, it does not expect to pay a material amount of either tax. Distributions
by the Fund that are attributable to interest on any obligation of New York and
its political subdivisions or to interest on obligations of U.S. territories
and possessions that are exempt from state taxation under federal law will not
be subject to the New York State personal income tax or the New York City
personal income or unincorporated business taxes. All other distributions,


- --------------------------------------------------------------------------------
56

<PAGE>

Taxes
- --------------------------------------------------------------------------------

including distributions attributable to interest on obligations of the United
States or its instrumentalities and distributions attributable to capital
gains, will be subject to the New York State personal income tax and the New
York City personal income and unincorporated business taxes.

All distributions from the Fund, regardless of source, will increase the
taxable base of shareholders subject to the New York Business Corporation
franchise tax or the New York City general corporation tax. Gain from the sale,
exchange, or other disposition of APS of the Fund will be subject to the New
York State personal income and franchise taxes and the New York City personal
income, unincorporated business, and general corporation taxes. APS of the Fund
may be subject to New York State estate tax if owned by a New York decedent at
the time of death. APS of the Fund will not be subject to property taxes
imposed by New York State or City. Interest on indebtedness incurred to
purchase, or continued to carry, Common Shares of the Fund generally will not
be deductible for New York State or New York City personal income tax purposes.

This section relates only to the federal and New York income tax consequences
of investing in the Fund; the consequences under other tax laws may differ. You
should consult your tax advisor for more detailed information concerning New
York State and New York City tax matters and as to the possible application of
additional state and local income tax laws to Fund dividends and capital
distributions. Please see "Tax Matters" in the Statement of Additional
Information for additional information regarding the tax aspects of investing
in the Fund.

Description of capital structure


The Fund is an unincorporated business trust established under the laws of The
Commonwealth of Massachusetts by the Declaration. The Declaration provides that
the Trustees of the Fund may authorize separate classes of shares of beneficial
interest. The Trustees have authorized an unlimited number of Common Shares and
Preferred Shares. Preferred Shares (such as the APS) may be issued in one or
more series, with such par value and with such rights as determined by the
Board of Trustees, by action of the Board of Trustees without the approval of
the Common Shareholders. For a description of the APS, see "Description of
APS." The following table shows the amount of (i) shares authorized and (ii)
shares outstanding, for each class of authorized securities of the Fund as of
August 15, 2002.



<TABLE>
<CAPTION>
                                                     Amount      Amount
        Title of Class                           Authorized Outstanding
        ---------------------------------------------------------------
        <S>                                      <C>        <C>
        Common Shares...........................  Unlimited  10,301,814
        Auction Preferred Shares
           Series A.............................      1,800         -0-
           Series B.............................      1,800         -0-
</TABLE>




Holders of Common Shares are entitled to share equally in dividends declared by
the Board of Trustees payable to holders of Common Shares and in the net assets
of the Fund available for distribution to holders of Common Shares after
payment of the preferential amounts payable to holders of any outstanding
Preferred Shares. Neither holders of Common Shares nor holders of Preferred
Shares have pre-emptive or conversion rights or give shareholders the right to
cause the Fund to redeem their shares. Upon liquidation of the Fund, after
paying or adequately providing for the payment of all liabilities of the Fund
and the liquidation preference with respect to any outstanding Preferred
Shares, and upon receipt of such releases, indemnities and refunding agreements
as they deem necessary for their


- --------------------------------------------------------------------------------
                                                                             57

<PAGE>

Description of capital structure
- --------------------------------------------------------------------------------

protection, the Trustees may distribute the remaining assets of the Fund among
the holders of the Common Shares.

Pursuant to the Fund's Dividend Reinvestment Plan, all Common Shareholders
whose shares are registered in their own names will have all dividends,
including any capital gain dividends, reinvested automatically in additional
Common Shares by PFPC Inc., as agent for the Common Shareholders, unless the
shareholder elects to receive cash. The Fund and PFPC Inc. reserve the right to
amend or terminate the Dividend Reinvestment Plan.

Holders of Common Shares are entitled to one vote for each share held and will
vote with the holders of any outstanding APS or other Preferred Shares on each
matter submitted to a vote of holders of Common Shares, except as described
under "Description of APS--Voting Rights."

Shareholders are entitled to one vote for each share held. Except as provided
under "Description of APS--Voting Rights," holders of APS are (voting as a
separate class) entitled to elect two Trustees, and the remaining Trustees will
be elected by holders of Common Shares and APS, voting as a single class.

So long as any APS or any other Preferred Shares are outstanding, holders of
Common Shares will not be entitled to receive any dividends of or other
distributions from the Fund, unless at the time of such declaration, (1) all
accrued dividends on Preferred Shares or accrued interest on borrowings has
been paid and (2) the value of the Fund's total assets (determined after
deducting the amount of such dividend or other distribution), less all
liabilities and indebtedness of the Fund not represented by senior securities,
is at least 300% of the aggregate amount of such securities representing
indebtedness and at least 200% of the aggregate amount of securities
representing indebtedness plus the aggregate liquidation value of the
outstanding Preferred Shares (expected to equal the aggregate original purchase
price of the outstanding Preferred Shares plus redemption premium, if any,
together with any accrued and unpaid dividends thereon, whether or not earned
or declared and on a cumulative basis). In addition to the requirements of the
1940 Act, the Fund is required to comply with other asset coverage requirements
as a condition of the Fund obtaining a rating of the Preferred Shares from a
Rating Agency. These requirements include an asset coverage test more stringent
than under the 1940 Act. See "Description of APS--Dividends--Restrictions on
Dividends and Other Payments."

The Fund will send unaudited reports at least semi-annually and audited
financial statements annually to all of its shareholders.

The Common Shares commenced trading on the NYSE on June 26, 2002. At August 7,
2002, the net asset value per Common Share was $14.48, and the closing price
per Common Share on the NYSE was $15.05.

OTHER ISSUES RELATING TO PREFERRED SHARES

Under the 1940 Act, the Fund is permitted to have outstanding more than one
series of Preferred Shares as long as no single series has priority over
another series as to the distribution of assets of the Fund or the payment of
dividends. Neither holders of Common Shares nor holders of Preferred Shares
have pre-emptive rights to purchase any APS or any other Preferred Shares that
might be issued. It is anticipated that the net asset value per share of the
APS will equal its original purchase price per share plus accumulated dividends
per share.


- --------------------------------------------------------------------------------
58

<PAGE>

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


Anti-takeover and other provisions in the Declaration of Trust

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

As described below, the Declaration grants special approval rights with respect
to certain matters to members of the Board who qualify as "Continuing
Trustees," which term means a Trustee who either (i) has been a member of the
Board for a period of at least 36 months (or since the commencement of the
Fund's operations, if less than 36 months) or (ii) was nominated to serve as a
member of the Board of Trustees by a majority of the Continuing Trustees then
members of the Board.

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

The Trustees may from time to time grant other voting rights to shareholders
with respect to these and other matters in the Amended By-Laws, certain of
which are required by the 1940 Act. For example, the Amended By-Laws grant
holders of the APS and any other Preferred Shares special voting rights with
respect to certain matters described in the preceding paragraph. See
"Description of APS--Voting Rights."

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


- --------------------------------------------------------------------------------
                                                                             59

<PAGE>

Anti-takeover and other provisions in the Declaration of Trust
- --------------------------------------------------------------------------------

discouraging a third party from seeking to obtain control of the Fund in a
tender offer or similar transaction. The Board of Trustees of the Fund has
considered the foregoing anti-takeover provisions and concluded that they are
in the best interests of the Fund.

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

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

Repurchase of Common Shares; conversion to open-end fund

The Fund is a closed-end investment company, and, as such, its shareholders
will not have the right to cause the Fund to redeem their shares. Shares of a
closed-end investment company may frequently trade at prices lower than net
asset value. The Fund's Board of Trustees regularly monitors the relationship
between the market price and net asset value of the Common Shares. If the
Common Shares were to trade at a substantial discount to net asset value for an
extended period of time, the Board may consider the repurchase of the Common
Shares on the open market or in private transactions, the making of a tender
offer for such shares or the conversion of the Fund to an open-end investment
company.

If the Fund converted to an open-end company, it would be required to redeem
all Preferred Shares then outstanding (requiring in turn that it liquidate a
portion of its investment portfolio), and the Common Shares would no longer be
listed on the New York Stock Exchange. In contrast to a closed-end investment
company, shareholders of an open-end investment company may require the company
to redeem their shares at any time (except in certain circumstances as
authorized by or under the 1940 Act) at their net asset value, less any
redemption charge that is in effect at the time of redemption.

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


- --------------------------------------------------------------------------------
60

<PAGE>

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


Underwriting

The underwriters named below (the "Underwriters"), acting through UBS Warburg
LLC, 299 Park Avenue, New York, New York, and Merrill Lynch, Pierce, Fenner &
Smith Incorporated, 4 World Financial Center, New York, New York, as lead
managers, and A.G. Edwards & Sons, Inc. and Prudential Securities Incorporated
as their representatives (together with the lead managers, the
"Representatives"), have severally agreed, subject to the terms and conditions
of the Underwriting Agreement with the Fund and the Manager, to purchase from
the Fund the number of APS set forth opposite their respective names. The
Underwriters are committed to purchase and pay for all of such APS if any are
purchased.


<TABLE>
<CAPTION>
                                                                         Number
Underwriters                                                             of APS
- -------------------------------------------------------------------------------
<S>                                                                      <C>
UBS Warburg LLC......................................................... 1,440
Merrill Lynch, Pierce, Fenner & Smith
           Incorporated................................................. 1,440
A.G. Edwards & Sons, Inc................................................   360
Prudential Securities Incorporated......................................   360
                                                                         -----
   Total................................................................ 3,600
                                                                         =====
</TABLE>



The Underwriters have advised the Fund that they propose initially to offer the
APS to the public at the public offering price set forth on the cover page of
this Prospectus, and to certain dealers at such price less a concession not in
excess of $150 per share. The Underwriters may allow, and such dealers may
reallow, a discount not in excess of $100 per share to other dealers. After the
initial public offering, the public offering price, concession and discount may
be changed. Investors must pay for any APS purchased in the initial public
offering on or before August 20, 2002.


The Underwriters will act in Auctions as Broker-Dealers as set forth under
"Description of APS--The Auction--Broker-Dealer Agreements" and will be
entitled to fees for services as Broker-Dealers as set forth under "Description
of APS--Broker-Dealers." The Underwriters also may provide information to be
used in ascertaining the Reference Rate.

The Fund anticipates that the Representatives and certain other Underwriters
may from time to time act as brokers and dealers in connection with the
execution of the Fund's portfolio transactions after they have ceased to be
principal underwriters of the Fund under the 1940 Act and, subject to certain
conditions, may act as such brokers while they are principal underwriters.

The Fund and the Manager have agreed to indemnify the Underwriters against
certain liabilities including liabilities under the Securities Act of 1933, as
amended.

Shareholder servicing agent, custodian and transfer agents

The Manager (and not the Fund) has agreed to pay from its own assets to UBS
Warburg LLC a shareholder servicing fee at an annual rate equal to 0.10% of the
average daily net asset value of the Fund (including assets attributable to any
Preferred Shares that may be outstanding, including the APS) pursuant to a
shareholder servicing agreement between the Manager and UBS Warburg LLC (the
"Shareholder Servicing Agreement"). Pursuant to the Shareholder Servicing
Agreement, UBS Warburg LLC will: (i) undertake to make public information
pertaining to the Fund on an ongoing basis and to

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

                                                                             61

<PAGE>

Shareholder servicing agent, custodian and transfer agents
- --------------------------------------------------------------------------------

communicate to investors and prospective investors the Fund's features and
benefits (including periodic seminars or conference calls, responses to
questions from current or prospective shareholders and specific shareholder
contact where appropriate); (ii) make available to investors and prospective
investors market price, net asset value, yield and other information regarding
the Fund, if reasonably obtainable, for the purpose of maintaining the
visibility of the Fund in the investor community; (iii) at the request of the
Manager, provide certain economic research and statistical information and
reports, if reasonably obtainable, on behalf of the Fund, and consult with
representatives and Trustees of the Fund in connection therewith, which
information and reports shall include: (a) statistical and financial market
information with respect to the Fund's market performance and (b) comparative
information regarding the Fund and other closed-end management investment
companies with respect to (1) the net asset value of their respective shares,
(2) the respective market performance of the Fund and such other companies, and
(3) other relevant performance indicators; and (iv) at the request of the
Manager, provide information to and consult with the Board of Trustees with
respect to applicable modifications to dividend policies or capital structure,
repositioning or restructuring of the Fund, conversion of the Fund to an
open-end investment company, or a Fund liquidation or merger; provided,
however, that under the terms of the Shareholder Servicing Agreement, UBS
Warburg LLC is not obligated to render any opinions, valuations or
recommendations of any kind or to perform any such similar services. Under the
terms of the Shareholder Servicing Agreement, UBS Warburg LLC is relieved from
liability to the Manager for any act or omission in the course of its
performance under the Shareholder Servicing Agreement in the absence of gross
negligence or willful misconduct. The Shareholder Services Agreement will
remain in effect so long as the Investment Management Agreement remains in
effect between the Fund and the Manager or any successor in interest or
affiliate of the Manager, as and to the extent that such Investment Management
Agreement is renewed periodically in accordance with the 1940 Act.

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

Deutsche Bank Trust Company Americas, 100 Plaza One, 6th Floor, Jersey City,
New Jersey 07311, serves as Auction Agent, transfer agent, registrar, dividend
paying agent and redemption agent for the APS. PFPC Inc., 400 Bellevue Parkway,
Wilmington, Delaware 19809, serves as the transfer agent, registrar and
dividend disbursement agent for the Common Shares, as well as agent for the
Fund's Dividend Reinvestment Plan for Common Shares.

Legal matters

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


- --------------------------------------------------------------------------------
62

<PAGE>

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


Table of contents for the
statement of additional information

<TABLE>
   <S>                                                                    <C>
   Use of Proceeds.......................................................   3
   Investment Objective and Policies.....................................   3
   Investment Restrictions...............................................  27
   Management of the Fund................................................  29
   Investment Manager and Portfolio Manager..............................  38
   Portfolio Transactions................................................  43
   Distributions.........................................................  45
   Description of Shares.................................................  46
   Anti-Takeover and Other Provisions in the Declaration of Trust........  47
   Repurchase of Fund Shares; Conversion to Open-End Fund................  49
   Tax Matters...........................................................  51
   Performance Related and Comparative Information.......................  57
   Custodian, Transfer Agents and Dividend Disbursement Agents...........  57
   Independent Accountants...............................................  58
   Counsel...............................................................  58
   Registration Statement................................................  58
   Financial Statements..................................................  59
   Appendix A-- Description of Securities Ratings........................ A-1
   Appendix B--Factors Pertaining to New York............................ B-1
   Appendix C--Settlement Procedures..................................... C-1
   Appendix D--Auction Procedures........................................ D-1
</TABLE>

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

                                                                             63

<PAGE>

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


Glossary

"'AA' Composite Commercial Paper Rate" on any Valuation Date, means (i) the
Interest Equivalent of the rate on commercial paper placed on behalf of issuers
whose corporate bonds are rated "AA" by S&P or "Aa" by Moody's or the
equivalent of such rating by another nationally recognized statistical rating
organization, as such rate is 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 such a rate, then the arithmetic average of the
Interest Equivalent of the rate on commercial paper placed on behalf of such
issuers, as quoted on a discount basis or otherwise by UBS Warburg LLC or
Merrill Lynch, Pierce, Fenner & Smith Incorporated or their respective
successors that are Commercial Paper Dealers, to the Auction Agent for the
close of business on the Business Day immediately preceding such date. If one
of the Commercial Paper Dealers does not quote a rate required to determine the
"AA" Composite Commercial Paper Rate, the "AA" Composite Commercial Paper Rate
will be determined on the basis of the quotation or quotations furnished by any
Substitute Commercial Paper Dealer or Substitute Commercial Paper Dealers
selected by the Fund to provide such rate or rates not being supplied by the
Commercial Paper Dealer. If the number of Dividend Period days shall be (i) 7
or more but fewer than 49 days, such rate shall be the Interest Equivalent of
the 30-day rate on such commercial paper; (ii) 49 or more but fewer than 70
days, such rate shall be the Interest Equivalent of the 60-day rate on such
commercial paper; (iii) 70 or more days but fewer than 85 days, such rate shall
be the arithmetic average of the Interest Equivalent of the 60-day and 90-day
rates on such commercial paper; (iv) 85 or more days but fewer than 99 days,
such rate shall be the Interest Equivalent of the 90-day rate on such
commercial paper; (v) 99 or more days but fewer than 120 days, such rate shall
be the arithmetic average of the Interest Equivalent of the 90-day and 120-day
rates on such commercial paper; (vi) 120 or more days but fewer than 141 days,
such rate shall be the Interest Equivalent of the 120-day rate on such
commercial paper; (vii) 141 or more days but fewer than 162 days, such rate
shall be the arithmetic average of the Interest Equivalent of the 120-day and
180-day rates on such commercial paper; and (viii) 162 or more days but fewer
than 183 days, such rate shall be the Interest Equivalent of the 180-day rate
on such commercial paper.

"Agent Member" means a member of the Securities Depository that will act on
behalf of a Beneficial Owner of one or more APS or on behalf of a Potential
Beneficial Owner.


"Amended By-Laws" means the By-Laws of the Fund as amended August 15, 2002,
specifying, in part, the powers, preferences and rights of the APS.


"Applicable Percentage" has the meaning specified under "Description of
APS--Auction Procedures--Orders by Beneficial Owners, Potential Beneficial
Owners, Existing Holders and Potential Holders" in this Prospectus.

"Applicable Rate" means the rate per annum at which cash dividends are payable
on APS for any Dividend Period.

"APS" means the Auction Preferred Shares with par value $0.00001 per share and
a liquidation preference of $25,000 per share plus an amount equal to
accumulated but unpaid dividends thereon (whether or not earned or declared) of
the Fund.

"APS Basic Maintenance Amount" has the meaning specified under "Description of
APS--Asset Maintenance--APS Basic Maintenance Amount" in this Prospectus.

"APS Basic Maintenance Cure Date" has the meaning specified under "Description
of APS--Asset Maintenance--APS Basic Maintenance Amount" in this Prospectus.

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

64

<PAGE>

Glossary
- --------------------------------------------------------------------------------


"APS Basic Maintenance Report" has the meaning specified under "Description of
APS--Asset Maintenance--APS Basic Maintenance Amount" in this Prospectus.

"Auction" means a periodic operation of the Auction Procedures.

"Auction Agency Agreement" means the agreement entered into between the Fund
and the Auction Agent which provides, among other things, that the Auction
Agent will follow the Auction Procedures for the purpose of determining the
Applicable Rate.

"Auction Agent" means Deutsche Bank Trust Company Americas unless and until
another commercial bank, trust company or other financial institution appointed
by a resolution of the Board of Trustees of the Fund or a duly authorized
committee thereof enters into an agreement with the Fund to follow the Auction
Procedures for the purpose of determining the Applicable Rate and to act as
transfer agent, registrar, dividend disbursing agent and redemption agent for
the APS.

"Auction Date" has the meaning specified under "Description of APS--Auction
Procedures--Auction Date; Advance Notice of Allocation of Taxable Income;
Inclusion of Taxable Income in Dividends" in this Prospectus.

"Auction Procedures" means the procedures for conducting Auctions set forth in
Appendix C to the Statement of Additional Information.

"Available APS" has the meaning specified under "Description of APS--Auction
Procedures--Determination of Sufficient Clearing Bids, Winning Bid Rate and
Applicable Rate" in this Prospectus.

"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 APS or a Broker-Dealer that holds APS for its own account.

"Bid" has the meaning specified under "Description of APS--Auction
Procedures--Orders by Beneficial Owners, Potential Beneficial Owners, Existing
Holders and Potential Holders" in this Prospectus.

"Bidder" has the meaning specified under "Description of APS--Auction
Procedures--Orders by Beneficial Owners, Potential Beneficial Owners, Existing
Holders and Potential Holders" in this Prospectus.

"Board of Trustees" or "Board" means the Board of Trustees of the Fund.

"Broker-Dealer" has the meaning specified under "Description of APS--The
Auction--Broker-Dealer Agreements" in this Prospectus.

"Broker-Dealer Agreement" has the meaning specified under "Description of
APS--The Auction--Broker-Dealer Agreements" in this Prospectus.

"Business Day" means a day on which the New York Stock Exchange is open for
trading and which is not a Saturday, Sunday or other day on which banks in New
York City are authorized or obligated by law to close.

"City" has the meaning specified under "Risks--State-Specific Risk" in this
Prospectus.

"City Executive Budget" has the meaning specified under "Risks--State-Specific
Risk" in this Prospectus.

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

                                                                             65

<PAGE>

Glossary
- --------------------------------------------------------------------------------


"Closing Transactions" has the meaning set forth in the definition of "Moody's
Hedging Transactions" below.

"Code" has the meaning specified under "Taxes--Federal Income Tax Matters" in
this Prospectus.

"Commercial Paper Dealers" means UBS Warburg LLC, Merrill Lynch, Pierce, Fenner
& Smith Incorporated and such other commercial paper dealer or dealers as the
Fund from time to time may appoint or, in lieu thereof, their respective
affiliates and successors.

"Common Shares" means the common shares of beneficial interest, par value
$0.00001 per share, of the Fund.

"Cure Date" has the meaning specified under "Description of
APS--Redemption--Mandatory Redemption" in this Prospectus.

"Date of Original Issue" means, with respect to any share of APS, the date on
which such share first is issued by the Fund.

"Declaration" has the meaning specified under "Prospectus summary--Special Risk
Considerations--Anti-Takeover Provisions" in this Prospectus.

"Deposit Securities" means cash and Municipal Obligations rated at least A2
(having a remaining maturity of 12 months or less), P-1, VMIG-1 or MIG-1 by
Moody's or A (having a remaining maturity of 12 months or less), A-1+ or SP-1+
by S&P.

"Discount Factor" means a Moody's Discount Factor.

"Discounted Value" of any asset of the Fund means with respect to a Moody's
Eligible Asset, the quotient of the market value thereof divided by the
applicable Moody's Discount Factor.

"Dividend Payment Date" has the meaning specified under "Description of
APS--Dividends--General" in this Prospectus.

"Dividend Period" has the meaning specified under "Description of
APS--Dividends--General" in this Prospectus.

"Existing Holder" means a Broker-Dealer or any such other person as may be
permitted by the Fund that is listed as the holder of record of APS in the
records of the Auction Agent.

"Extension Period" has the meaning specified under "Description of
APS--Dividends--Notification of Dividend Period" in this Prospectus.

"Federal Tax Rate Increase" has the meaning set forth in the definition of
"Moody's Volatility Factor" below.

"Fitch" means Fitch, Inc., doing business as Fitch Ratings, or its successors.

"Fund" means PIMCO New York Municipal Income Fund II, a Massachusetts business
trust that is the issuer of the APS.

"Gross-up Dividend" has the meaning specified under "Description of
APS--Dividends--Gross-up Dividends" in this Prospectus.

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

66

<PAGE>

Glossary
- --------------------------------------------------------------------------------


"Hold Order" has the meaning specified under "Description of APS--Auction
Procedures--Orders By Beneficial Owners, Potential Beneficial Owners, Existing
Holders and Potential Holders" in this Prospectus.

"Initial Dividend Payment Date" means, with respect to a series of APS, the
Initial Dividend Payment Date as determined by the Board of Trustees or
pursuant to their delegated authority with respect to such series.

"Initial Dividend Period" means, for each series of APS, the period from and
including the Date of Original Issue but excluding the Initial Dividend Payment
Date.

"Interest Equivalent" means a yield on a 360-day basis of a discount basis
security which is equal to the yield on an equivalent interest-bearing security.

"Investment Management Agreement" has the meaning set forth under "Management
of the Fund--Investment Management Agreement" in this Prospectus.

"IRS" means the United States Internal Revenue Service.

"Issue Type Category" means, with respect to a Municipal Obligation acquired by
the Fund, for purposes of calculating Moody's Eligible Assets as of any
Valuation Date, one of the following categories into which such Municipal
Obligation falls based upon a good faith determination by the Fund: health care
issues (including issues related to teaching and non-teaching hospitals, public
or private, and elder-care facilities, including nursing homes); housing issues
(including issues related to single- and multi-family housing projects);
educational facilities issues (including issues related to public and private
schools); student loan issues; resource recovery issues; transportation issues
(including issues related to mass transit, airports and highways); industrial
development bond issues (including issues related to pollution control
facilities); utility issues (including issues related to the provision of gas,
water, sewers and electricity); general obligation issues; lease obligations
(including certificates of participation); escrowed bonds; and other issues
("Other Issues") not falling within one of the aforementioned categories. The
general obligation issue category includes any issue that is directly or
indirectly guaranteed by any state or any political subdivision of a state.
Utility issues are included in the general obligation issue category if the
issue is directly or indirectly guaranteed by a state or any political
subdivision of a state. Municipal Obligations in the utility issue category
will be classified within one of the three following sub-categories: (i)
electric, gas and combination issues (if the combination issue includes an
electric issue); (ii) water and sewer utilities and combination issues (if the
combination issues does not include an electric issue); and (iii) irrigation,
resource recovery, solid waste and other utilities. Municipal Obligations in
the transportation issue category will be classified within one of the two
following sub-categories: (i) streets and highways, toll roads, bridges and
tunnels, airports and multi-purpose port authorities (multiple revenue streams
generated by toll roads, airports, real estate, bridges); and (ii) mass
transit, parking seaports and others.

"Kenny Index" shall have the meaning set forth in the definition of "Taxable
Equivalent of the Short-Term Municipal Obligations Rate" below.

"Liens" shall have the meaning set forth in the definition of "Moody's Eligible
Asset" below.

"Long Term Dividend Period" has the meaning specified under "Prospectus
summary--Dividends on APS" in this Prospectus.

"Manager" means PIMCO Funds Advisors LLC.

"Mandatory Redemption Price" has the meaning specified under "Description of
APS--Redemption--Mandatory Redemption" in this Prospectus.

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

                                                                             67

<PAGE>

Glossary
- --------------------------------------------------------------------------------


"Marginal Tax Rate" means the maximum marginal federal individual income tax
rate applicable to an individual's or a corporation's ordinary income,
whichever is greater.

"Market Value" of any asset of the Fund shall be the market value thereof
determined by the Pricing Service. Market Value of any asset shall include any
interest accrued thereon. The Pricing Service shall value portfolio securities
at the quoted bid prices or the mean between the quoted bid and asked price or
the yield equivalent when quotations are not readily available. 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 obligations 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 and/or a matrix system to determine valuations. 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 Fund from dealers who are members
of the National Association of Securities Dealers, Inc. and who 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 Board of Trustees.

"Maximum Applicable Rate" has the meaning specified under "Description of
APS--Auction Procedures--Orders by Beneficial Owners, Potential Beneficial
Owners, Existing Holders and Potential Holders" in this Prospectus.

"Maximum Potential Gross-up Dividend Liability" has the meaning specified under
"Description of APS--Asset Maintenance--APS Basic Maintenance Amount" in this
Prospectus.

"Moody's" means Moody's Investors Service, Inc. or 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:

<TABLE>
<CAPTION>
                                                        Rating Category
                                 -------------------------------------------------------------
Exposure Period                  Aaa*  Aa*   A* Baa* Other** (V)MIG-1*** SP-1+**** Unrated*****
- -----------------------------------------------------------------------------------------------
<S>                              <C>  <C>  <C>  <C>  <C>     <C>         <C>       <C>
7 weeks......................... 151% 159% 166% 173%   187%      136%       148%       225%
8 weeks or less but greater than
 seven weeks.................... 154  161  168  176    190       137        149        231
9 weeks or less but greater than
 eight weeks.................... 158  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 or not rated by Moody's and
      less than BBB or not rated by S&P, not to exceed 10% of Moody's Eligible
      Assets.

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

68

<PAGE>

Glossary
- --------------------------------------------------------------------------------


Notwithstanding the foregoing, (i) except as provided in clause (ii) below, 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-l or P-1 by
Moody's and mature or have a demand feature at par exercisable in 30 days or
less, or 125%, as 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, (ii) the Moody's Discount Factor for RIBS and structured notes
shall be the product of (x) the percentage determined by reference to the
rating on the security underlying such RIBS multiplied by (y) 1.25 (provided
that the trust in which such RIBS are held may be terminated within five
business days), and (iii) except as provided in clause (ii) above, no Moody's
Discount Factor will be applied to cash, 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 and options (to the extent entered into in Moody's Hedging
Transactions) and similar instruments (including RIBS (provided that the trusts
in which such RIBS are held may be terminated within five business days) and
structured notes), or a Municipal Obligation that (i) pays interest in cash,
(ii) does not have its Moody's rating, as applicable, suspended by Moody's, and
(iii) is part of an issue of Municipal Obligations of at least $5,000,000,
except for Municipal Obligations rated below A by Moody's or Municipal
Obligations within the healthcare Issue Type Category, in which case the
minimum issue size is $10,000,000. Except for general obligation bonds,
Municipal Obligations issued by any one issuer and rated BBB or lower or not
rated by S&P and rated Ba or B or not rated by Moody's ("Other Securities") may
comprise no more than 4% of total Moody's Eligible Assets; such Other
Securities, 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 Other Securities, Baa and A-rated 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 Other Securities, Baa, A and AA-rated
Municipal Obligations, if any, together with any Municipal 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 Obligation. Other Securities falling within a
particular Issue Type Category may comprise no more than 12% of total Moody's
Eligible Assets; such Other Securities, if any, together with any Municipal
Obligations falling within a particular Issue Type Category and rated Baa by
Moody's or A by S&P, may comprise no more than 20% of total Moody's Eligible
Assets; such Other Securities, Baa and A-rated Municipal Obligations, if any,
together with any Municipal Obligations falling within a particular Issue Type
Category 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 Other Securities, Baa, A and AA-rated
Municipal Obligations, if any, together with any Municipal Obligations falling
within a particular Issue Type Category and rated Aa by Moody's or AAA by S&P,
may comprise no more than 60% of total Moody's Eligible Assets. For purposes of
this definition, a Municipal Obligation shall be deemed to be rated BBB by S&P
if rated BBB-, BBB or BBB+ by S&P. Notwithstanding any other provision of this
definition, (A) in the case of general obligation Municipal Obligations only,
Other Securities issued by issuers located within any one county may comprise
no more than 4% of Moody's Eligible Assets; such Other Securities, if any,
together with any Municipal Obligations issued by issuers located within the
same county and rated Baa by Moody's or A by S&P, may comprise no more than 6%
of Moody's

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

                                                                             69

<PAGE>

Glossary
- --------------------------------------------------------------------------------

Eligible Assets; such Other Securities, Baa and A-rated Municipal Obligations,
if any, together with any Municipal Obligations issued by issuers located
within the same county and rated A by Moody's or AA by S&P, may comprise no
more than 10% of Moody's Eligible Assets; and such Other Securities, Baa, A and
AA-rated Municipal Obligations, if any, together with any Municipal Obligations
issued by issuers located within the same county and rated Aa by Moody's or AAA
by S&P, may comprise no more than 20% of Moody's Eligible Assets; and (B) in no
event may (i) student loan Municipal Obligations comprise more than 10% of
Moody's Eligible Assets; (ii) resource recovery Municipal Obligations comprise
more than 10% of Moody's Eligible Assets; and (iii) Other Issues comprise more
than 10% of Moody's Eligible Assets. 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 S&P, shall be considered to have a
long-term rating of A. When the Fund sells a Municipal Obligation and agrees to
repurchase such Municipal Obligation at a future date, 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 APS Basic Maintenance Amount. When the Fund 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 Fund upon such
future date, provided that the counterparty to the transaction has a long-term
debt rating of at least A2 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.

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 Fund 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 Fund by the Manager, PIMCO, State Street Bank and Trust Company, its
transfer agent or registrar or the Auction Agent and (d) Liens arising by
virtue of any repurchase agreement; (ii) deposited irrevocably for the payment
of any liabilities for purposes of determining the APS Basic Maintenance
Amount; or (iii) held in a margin account.

"Moody's Exposure Period" means the period commencing on a given Valuation Date
and ending 49 days thereafter.

"Moody's Hedging Transactions" means purchases or sales of exchange-traded
financial futures contracts based on the Municipal Index or Treasury Bonds, and
purchases, writings or sales of exchange-traded put options on such financial
futures contracts, the Municipal Index or Treasury Bonds, and purchases,
writings or sales of exchange-traded call options on such financial futures
contracts, the Municipal Index or Treasury Bonds, subject to the following
limitations:

(i) the Fund will not engage in any Moody's Hedging Transaction based on the
    Municipal Index (other than transactions that terminate a futures contract
    or option held by the Fund by the Fund's taking the opposite position
    thereto ("Closing Transactions")) that would cause the Fund at the time of
    such transaction to own or have sold:


     (A) outstanding financial futures contracts based on the Municipal Index
         exceeding in number 10% (or such higher percentage as Moody's may
         approve) of the average number of daily traded financial 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; or


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

70

<PAGE>

Glossary
- --------------------------------------------------------------------------------



     (B) outstanding financial futures contracts based on the Municipal Index
         having a Market Value exceeding 50% (or such higher percentage as
         Moody's may approve) of the Market Value of all Municipal Obligations
         constituting Moody's Eligible Assets owned by the Fund (other than
         Moody's Eligible Assets already subject to a Moody's Hedging
         Transaction);


(ii) the Fund will not engage in any Moody's Hedging Transaction based on
     Treasury Bonds (other than Closing Transactions) that would cause the Fund
     at the time of such transaction to own or have sold:


     (A) outstanding financial futures contracts based on Treasury Bonds with
         such contracts having an aggregate Market Value exceeding 20% (or such
         higher percentage as Moody's may approve) of the aggregate Market
         Value of Moody's Eligible Assets owned by the Fund and rated Aa or
         higher by Moody's (or, if not rated by Moody's but rated by S&P, rated
         AAA by S&P); or


     (B) outstanding financial futures contracts based on Treasury Bonds with
         such contracts having an aggregate Market Value exceeding 80% of the
         aggregate Market Value of all Municipal Obligations constituting
         Moody's Eligible Assets owned by the Fund (other than Moody's Eligible
         Assets already subject to a Moody's Hedging Transaction) and rated Baa
         or A by Moody's (or, if not rated by Moody's but rated by S&P, rated A
         or AA by S&P)

    (for purposes of the foregoing clauses (i) and (ii), the Fund shall be
    deemed to own the number of financial futures contracts that underlie any
    outstanding options written by the Fund);


(iii) the Fund will engage in Closing Transactions to close out any outstanding
      financial futures contract based on the Municipal Index if the amount of
      open interest in the Municipal Index as reported by The Wall Street
      Journal is less than 5,000 (or such lower number as Moody's may approve);



    (as contemplated under "How the Fund manages risk - Hedging and Related
    Strategies," the Fund is currently seeking to increase the percentage in
    clause (i)(A) above to 33 1/3% and the percentage in clause (ii)(A) above
    to 50% and to decrease the number in clause (iii) above to zero; however,
    there can be no assurance that Moody's will agree to any of these changes);


(iv) the Fund will engage in a Closing Transaction to close out any outstanding
     financial futures contract by no later than the fifth Business Day of the
     month in which such contract expires and will engage in a Closing
     Transaction to close out any outstanding option on a financial futures
     contract by no later than the first Business Day of the month in which
     such option expires;

(v) the Fund will engage in Moody's Hedging Transactions only with respect to
    financial futures contracts or options thereon having the next settlement
    date or the settlement date immediately thereafter;

(vi) while the Fund may use options and futures transactions for hedging and
     risk management purposes, it will not engage in options and futures
     transactions for leveraging or speculative purposes and will not write any
     call options or sell any financial futures contracts for the purpose of
     hedging the anticipated purchase of an asset prior to completion of such
     purchase; and

(vii) the Fund will not enter into an option or futures transaction unless,
      after giving effect thereto, the Fund would continue to have Moody's
      Eligible Assets with an aggregate Discounted Value equal to or greater
      than the APS Basic Maintenance Amount.

"Moody's Volatility Factor" means, as of any Valuation Date, (i) in the case of
any 7-Day Dividend Period, any Special Dividend Period of 28 days or fewer, or
any Special Dividend Period of 57 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 Dividend Period of more than 28 but fewer than
36 days, a multiplicative factor equal to 203%; (iii) in the case of any
Special Dividend Period of more than 35 but fewer than 43 days, a
multiplicative factor equal to 217%; (iv) in the case of any Special Dividend
Period


- --------------------------------------------------------------------------------
                                                                             71

<PAGE>

Glossary
- --------------------------------------------------------------------------------

of more than 42 but fewer than 50 days, a multiplicative factor equal to 226%;
and (v) in the case of any Special Dividend Period of more than 49 but fewer
than 57 days, a multiplicative factor equal to 235%. If, as a result of the
enactment of changes to the Code, the Marginal Tax Rate 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 Dividend Period described in (i) above in
this definition instead shall be determined by reference to the following table:

<TABLE>
<CAPTION>
                                                Volatility
                      Federal Tax Rate Increase     Factor
                      ------------------------------------
                      <S>                       <C>
                                 5%............    295%
                                 10%...........    317%
                                 15%...........    341%
                                 20%...........    369%
                                 25%...........    400%
                                 30%...........    436%
                                 35%...........    477%
                                 40%...........    525%
</TABLE>


"Municipal Index" means the Bond Buyer Municipal Bond Index or any successor
index approved by Moody's.


"Municipal Obligations" means municipal obligations, including municipal bonds
and short-term municipal obligations, the interest from which is exempt from
federal income taxes.

"NAV" has the meaning specified under "Net asset value" in this Prospectus.

"New York Municipal Bonds" has the meaning specified under "Prospectus
summary--Investment Objective and Policies" in this Prospectus.

"1940 Act" means the Investment Company Act of 1940, and the regulations
thereunder, each as amended from time to time.

"1940 Act APS Asset Coverage" has the meaning specified under "Rating agency
guidelines" in this Prospectus.

"1940 Act Cure Date" has the meaning specified under "Description of APS--Asset
Maintenance--1940 Act APS Asset Coverage" in this Prospectus.

"Non-Call Period" has the meaning set forth in the definition of "Specific
Redemption Provisions" below.

"Non-Payment Period" has the meaning specified under "Description of
APS--Dividends--Non-Payment Period; Late Charge" in this Prospectus.

"Non-Payment Period Rate" has the meaning specified under "Description of
APS--Dividends--Non-Payment Period; Late Charge" in this Prospectus.

"Normal Dividend Payment Date" has the meaning specified under "Description of
APS--Dividends--General" in this Prospectus.

"Notice of Revocation" has the meaning specified under "Description of
APS--Dividends--Notification of Dividend Period" in this Prospectus.

"Notice of Special Dividend Period" has the meaning specified under
"Description of APS--Dividends--Notification of Dividend Period" in this
Prospectus.

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

72

<PAGE>

Glossary
- --------------------------------------------------------------------------------


"NYSE Close" has the meaning set forth under "Net Asset Value" in this
Prospectus.

"Optional Redemption Price" has the meaning specified under "Description of
APS--Redemption--Optional Redemption" in this Prospectus.

"Order" has the meaning specified under "Description of APS--Auction
Procedures--Orders by Beneficial Owners, Potential Beneficial Owners, Existing
Holders and Potential Holders" in this Prospectus.

"Other Issues" has the meaning set forth in the definition of "Issue Type
Category" above.

"Other Securities" has the meaning set forth in the definition of "Moody's
Eligible Asset" above.

"PIMCO" means Pacific Investment Management Company LLC.

"Potential Beneficial Owner" means a customer of a Broker-Dealer or a
Broker-Dealer that is not a Beneficial Owner of APS but that wishes to purchase
such shares, or that is a Beneficial Owner that wishes to purchase additional
APS.

"Potential Holder" means any Broker-Dealer or any such other person as may be
permitted by the Fund, including any Existing Holder, who may be interested in
acquiring APS (or, in the case of an Existing Holder, additional APS).

"Preference Item" has the meaning specified under "Description of
APS--Dividends--General" in this Prospectus.

"Preferred Shares" means preferred shares of beneficial interest of the Fund,
and includes APS.

"Premium Call Period" has the meaning set forth in the definition of "Specific
Redemption Provisions" below.

"Pricing Service" means Standard & Poor's/J.J. Kenny or any other pricing
service designated by the Board of Trustees for purposes of determining whether
the Fund has Moody's Eligible Assets with an aggregate Discounted Value that
equals or exceeds the APS Basic Maintenance Amount.

"Rating Agency" means a nationally recognized statistical rating organization.

"Receivables For Municipal Obligations Sold" means for purposes of calculation
of 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 Fund 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.

"Reference Rate" means: (i) with respect to any 7-Day Dividend Period or any
Short Term Dividend Period having 28 or fewer days, the higher of the
applicable "AA" Composite Commercial Paper Rate and the Taxable Equivalent of
the Short Term Municipal Obligation Rate, (ii) with respect to any Short


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                                                                             73

<PAGE>

Glossary
- --------------------------------------------------------------------------------

Term Dividend Period having more than 28 but fewer than 183 days, the
applicable "AA" Composite Commercial Paper Rate, (iii) with respect to any
Short Term Dividend Period having 183 or more but fewer than 364 days, the
applicable U.S. Treasury Bill Rate and (iv) with respect to any Long Term
Dividend Period, the applicable U.S. Treasury Note Rate.

"Representatives" has the meaning specified under "Underwriting" in this
Prospectus.

"Request for Special Dividend Period" has the meaning specified under
"Description of APS--Dividends--Notification of Dividend Period" in this
Prospectus.

"Response" has the meaning specified under "Description of
APS--Dividends--Notification of Dividend Period" in this Prospectus.

"Retroactive Taxable Allocation" has the meaning specified under "Description
of APS--Dividends--Gross-up Dividends" in this Prospectus.

"RIBS" means residual interest municipal bonds.

"S&P" means Standard & Poor's, a division of The McGraw-Hill Companies, Inc.,
or its successors.

"Securities Depository" means The Depository Trust Company and its successors
and assigns or any successor securities depository selected by the Fund that
agrees to follow the procedures required to be followed by such securities
depository in connection with the APS.

"Sell Order" has the meaning specified under "Description of APS--Auction
Procedures--Orders by Beneficial Owners, Potential Beneficial Owners, Existing
Holders and Potential Holders" in this Prospectus.

"7-Day Dividend Period" has the meaning specified under "Prospectus
summary--Dividends on APS" in this Prospectus.

"Shareholder Servicing Agreement" has the meaning specified under "Shareholder
servicing agent, custodian and transfer agent" in this Prospectus.

"Short Term Dividend Period" has the meaning specified under "Prospectus
summary--Dividends on APS" in this Prospectus.

"Special Dividend Period" has the meaning specified under "Prospectus
summary--Dividends on APS" in this Prospectus.

"Specific Redemption Provisions" means, with respect to a Special Dividend
Period, either, or both of, (i) a period (a "Non-Call Period") determined by
the Board of Trustees of the Fund, after consultation with the Auction Agent
and the Broker-Dealers, during which the APS subject to such Dividend Period
shall not be subject to redemption at the option of the Fund and (ii) a period
(a "Premium Call Period"), consisting of a number of whole years and determined
by the Board of Trustees of the Fund, after consultation with the Auction Agent
and the Broker-Dealers, during each year of which the APS subject to such
Dividend Period shall be redeemable at the Fund's option at a price per share
equal to $25,000 plus accumulated but unpaid dividends plus a premium expressed
as a percentage of $25,000, as determined by the Board of Trustees of the Fund
after consultation with the Auction Agent and the Broker-Dealers.

"State" has the meaning specified under "Risks--State-Specific Risk" in this
Prospectus.


- --------------------------------------------------------------------------------
74

<PAGE>

Glossary
- --------------------------------------------------------------------------------


"State Budget" has the meaning specified under "Risks--State-Specific Risk" in
this Prospectus.

"State Executive Budget" has the meaning specified under "Risks--State-Specific
Risk" in this Prospectus.

"Submission Deadline" has the meaning specified under "Description of
APS--Auction Procedures--Submission of Orders by Broker-Dealers to Auction
Agent" in this Prospectus.

"Submitted Bid" has the meaning specified under "Description of APS--Auction
Procedures--Determination of Sufficient Clearing Bids, Winning Bid Rate and
Applicable Rate" in this Prospectus.

"Submitted Hold Order" has the meaning specified under "Description of
APS--Auction Procedures--Determination of Sufficient Clearing Bids, Winning Bid
Rate and Applicable Rate" in this Prospectus.

"Submitted Order" has the meaning specified under "Description of APS--Auction
Procedures--Determination of Sufficient Clearing Bids, Winning Bid Rate and
Applicable Rate" in this Prospectus.

"Submitted Sell Order" has the meaning specified under "Description of
APS--Auction Procedures--Determination of Sufficient Clearing Bids, Winning Bid
Rate and Applicable Rate" in this Prospectus.

"Substitute Commercial Paper Dealer" means such substitute Commercial Paper
Dealer or Dealers as the Fund may from time to time appoint or their respective
affiliates and successors.

"Subsequent Dividend Period" means each Dividend Period after the Initial
Dividend Period.

"Substitute Rating Agency" shall mean a nationally recognized statistical
rating organization selected by UBS Warburg LLC and Merrill Lynch, Pierce,
Fenner & Smith Incorporated, or their respective affiliates and successors,
after consultation with the Fund, to act as a substitute rating agency to
determine the credit ratings of the APS.

"Sufficient Clearing Bids" has the meaning specified in Subsection 11.4(i) of
the Auction Procedures.

"Taxable Equivalent of the Short-Term Municipal Obligations Rate" on any date
means 90% of the quotient of (A) the per annum rate expressed on an interest
equivalent basis equal to the Kenny S&P 30 day High Grade Index or any
successor index (the "Kenny Index") 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 Kenny Information Systems Inc. or any successor
thereto, based upon 30-day yield evaluations at par of short term bonds the
interest on which is excludable for federal income tax purposes under the Code
of "high grade" component issuers selected by Kenny Information Systems Inc. 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 a Preference Item,
divided by (B) 1.00 minus the Marginal Tax Rate (expressed as a decimal);
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 Kenny Information Systems Inc. or any
successor, the Taxable Equivalent of the Short-Term Municipal Obligations 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 Marginal Tax Rate noted
above (expressed as a decimal). The Fund may not utilize a successor index to
the Kenny Index unless Moody's provides the Fund with written confirmation that
the use of such successor index will not adversely affect the then-current
Moody's rating of the APS.

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

                                                                             75

<PAGE>

Glossary
- --------------------------------------------------------------------------------


"Taxable Income" has the meaning specified under "Prospectus summary--Advance
Notice of Allocation of Taxable Income; Inclusion of Taxable Income in
Dividends" in this Prospectus.

"Treasury Bonds" means United States Treasury Bonds or Notes.

"Underwriters" has the meaning specified under "Prospectus summary--The
Offering" in this Prospectus.

"U.S. Treasury Bill Rate" on any date means (i) the Interest Equivalent of the
rate on the actively traded Treasury Bill with a maturity most nearly
comparable to the length of the related Dividend Period, as such rate is made
available on a discount basis or otherwise by the Federal Reserve Bank of New
York in its Composite 3:30 p.m. Quotations for U.S. Government Securities
report for such Business Day, or (ii) if such yield as so calculated is not
available, the Alternate Treasury Bill Rate on such date. "Alternate Treasury
Bill Rate" on any date means the Interest Equivalent of the yield as calculated
by reference to the arithmetic average of the bid price quotations of the
actively traded Treasury Bill with a maturity most nearly comparable to the
length of the related Dividend Period, as determined by bid price quotations as
of any time on the Business Day immediately preceding such date, obtained from
at least three recognized primary U.S. Government securities dealers selected
by the Auction Agent.

"U.S. Treasury Note Rate" on any date means (i) the yield as calculated by
reference to the bid price quotation of the actively traded, current coupon
Treasury Note with a maturity most nearly comparable to the length of the
related Dividend Period, as such bid price quotation is published on the
Business Day immediately preceding such date by the Federal Reserve Bank of New
York in its Composite 3:30 p.m. Quotations for U.S. Government Securities
report for such Business Day, or (ii) if such yield as so calculated is not
available, the Alternate Treasury Note Rate on such date. "Alternate Treasury
Note Rate" on any date means the yield as calculated by reference to the
arithmetic average of the bid price quotations of the actively traded, current
coupon Treasury Note with a maturity most nearly comparable to the length of
the related Dividend Period, as determined by the bid price quotations as of
any time on the Business Day immediately preceding such date, obtained from at
least three recognized primary U.S. Government securities dealers selected by
the Auction Agent.

"Valuation Date" has the meaning specified under "Description of APS--Asset
Maintenance--APS Basic Maintenance Amount" in this Prospectus.

"Winning Bid Rate" has the meaning specified under "Description of APS--Auction
Procedures--Determination of Sufficient Clearing Bids, Winning Bid Rate and
Applicable Rate" in this Prospectus.

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

76

<PAGE>

[LOGO] PIMCO
FUNDS




<PAGE>



                     PIMCO NEW YORK MUNICIPAL INCOME FUND II

                       STATEMENT OF ADDITIONAL INFORMATION

                               August 16, 2002

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

         This Statement of Additional Information relating to auction preferred
shares of the Fund ("Preferred Shares" or "APS") is not a prospectus, and should
be read in conjunction with the Fund's prospectus relating thereto dated
August 16, 2002 (the "Prospectus"). This Statement of Additional Information
does not include all information that a prospective investor should consider
before purchasing Preferred Shares, and investors should obtain and read the
Prospectus prior to purchasing such shares. A copy of the Prospectus may be
obtained without charge by calling (877) 819-2224. You may also obtain a copy of
the Prospectus on the web site (http://www.sec.gov) of the Securities and
Exchange Commission ("SEC"). Capitalized terms used but not defined in this
Statement of Additional Information have the meanings ascribed to them in the
Prospectus.


<PAGE>

                                TABLE OF CONTENTS

USE OF PROCEEDS.............................................................   3
INVESTMENT OBJECTIVE AND POLICIES...........................................   3
INVESTMENT RESTRICTIONS.....................................................  27
MANAGEMENT OF THE FUND......................................................  29
INVESTMENT MANAGER AND PORTFOLIO MANAGER....................................  38
PORTFOLIO TRANSACTIONS......................................................  43
DISTRIBUTIONS...............................................................  45
DESCRIPTION OF SHARES.......................................................  46
ANTI-TAKEOVER AND OTHER PROVISIONS IN THE DECLARATION OF TRUST..............  47
REPURCHASE OF FUND SHARES; CONVERSION TO OPEN-END FUND......................  49
TAX MATTERS.................................................................  51
PERFORMANCE RELATED AND COMPARATIVE INFORMATION.............................  57
CUSTODIAN, TRANSFER AGENTS AND DIVIDEND DISBURSEMENT AGENTS.................  57
INDEPENDENT ACCOUNTANTS.....................................................  58
COUNSEL.....................................................................  58
REGISTRATION STATEMENT......................................................  58
FINANCIAL STATEMENTS........................................................  59
APPENDIX A - Description of Securities Ratings.............................. A-1
APPENDIX B - Factors Pertaining to New York................................. B-1
APPENDIX C - Settlement Procedures.......................................... C-1
APPENDIX D - Auction Procedures............................................. D-1

     This Statement of Additional Information is dated August 16, 2002.


                                       -2-

<PAGE>

                                 USE OF PROCEEDS

         The net proceeds of the offering of Preferred Shares will be
approximately $88,925,000 after payment of offering costs and the sales load.

         Pending investment in Municipal Bonds (as hereinafter defined) that
meet the Fund's investment objective and policies, it is anticipated that the
net proceeds of the offering will be invested in high quality, short-term,
tax-exempt securities. If necessary to invest fully the net proceeds of the
offering immediately, the Fund may also purchase high quality, short-term
securities, including mortgage-backed and corporate debt securities, the income
on which is subject to regular federal, New York State and New York City income
tax.

                        INVESTMENT OBJECTIVE AND POLICIES

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

Municipal Bonds

         Under normal market conditions, the Fund will invest substantially all
(at least 90%) of its total assets in municipal bonds which pay interest that,
in the opinion of bond counsel to the issuer (or on the basis of other authority
believed by the Fund's portfolio manager to be reliable), is exempt from
federal, New York State and New York City income taxes. The Fund will at all
times seek to avoid bonds generating interest potentially subjecting individuals
to the alternative minimum tax. "Municipal Bonds" as used in this Statement of
Additional Information refers generally to municipal bonds which pay interest
that is exempt from federal income tax.

         Municipal Bonds share the attributes of debt/fixed income securities in
general, but are generally issued by states, municipalities and other political
subdivisions, agencies, authorities and instrumentalities of states and
multi-state agencies or authorities. The Municipal Bonds that the Fund may
purchase include general obligation bonds and limited obligation bonds (or
revenue bonds), including industrial development bonds issued pursuant to former
federal tax law. General obligation bonds are obligations involving the credit
of an issuer possessing taxing power and are payable from such issuer's general
revenues and not from any particular source. Limited obligation bonds are
payable only from the revenues derived from a particular facility or class of
facilities or, in some cases, from the proceeds of a special excise or other
specific revenue source. Tax-exempt private activity bonds and industrial
development bonds generally are also revenue bonds and thus are not payable from
the issuer's general revenues. The credit and quality of private activity bonds
and industrial development bonds are usually related to the credit of the
corporate user of the facilities. Payment of interest on and repayment of
principal of such bonds is the responsibility of the corporate user (and/or any
guarantor).

         The Fund will invest at least 80% of its net assets in Municipal Bonds
that at the time of investment are investment grade quality. Investment grade
quality bonds are bonds rated within the four highest grades (Baa or BBB or
better by Moody's Investors Service, Inc. ("Moody's"), Standard & Poor's ("S&P")
or Fitch, Inc. ("Fitch")) or bonds that are unrated but judged to be of


                                       -3-

<PAGE>


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


         The Fund will primarily invest in Municipal Bonds with long-term
maturities in order to maintain a weighted average maturity of 15-30 years, but
the average weighted maturity of obligations held by the Fund may be shortened,
depending on market conditions. As a result, the Fund's portfolio at any given
time may include both long-term and intermediate-term Municipal Bonds. Moreover,
for temporary defensive purposes (e.g., during times when PIMCO believes that
temporary imbalances of supply and demand or other temporary dislocations in the
tax-exempt bond market adversely affect the price at which long-term or
intermediate-term Municipal Bonds are available), the Fund may invest any
percentage of its net assets in high quality, short-term investments, including
mortgage-backed and corporate debt securities, that may be either tax-exempt or
taxable, and up to 10% of its net assets in securities of open- or closed-end
investment companies that invest primarily in Municipal Bonds of the type in
which the Fund may invest directly. The Fund may also invest without limit in
these securities temporarily in order to keep the Fund's cash fully invested,
including periods during which the net proceeds of the offering are being
invested. The Fund intends to invest in taxable short-term investments only in
the event that suitable tax-exempt short-term investments are not available at
reasonable prices and yields. See "Tax Matters" for information relating to the
allocation of taxable income between and among the Fund's common shares (called
"Common Shares" herein) and the Preferred Shares. Tax-exempt short-term
investments include various obligations issued by state and local governmental
issuers, such as tax-exempt notes (bond anticipation notes, tax anticipation
notes and revenue anticipation notes or other such Municipal Bonds maturing in
three years or less from the date of issuance) and municipal commercial paper.
The Fund will invest only in taxable short-term investments that are U.S.
government securities or securities rated within the four highest grade by
Moody's, S&P or Fitch, and which mature within one year from the date of
purchase or carry a variable or floating rate of interest. See Appendix A for a
general description of Moody's, S&P's and Fitch's ratings of securities in such
categories. Taxable short-term investments of the Fund may include certificates
of deposit issued by U.S. banks with assets of at least $1 billion, or
commercial paper or corporate notes, bonds or debentures with a remaining
maturity of one year or less, or repurchase agreements. See "--Short-Term
Investments/Temporary Defensive Strategies." To the extent the Fund invests in
taxable investments, the Fund will not at such times be in a position to achieve
its investment objective.

         Also included within the general category of Municipal Bonds in which
the Fund may invest are participations in lease obligations or installment
purchase contract obligations of municipal authorities or entities ("Municipal
Lease Obligations"). Although a Municipal Lease Obligation does not constitute a
general obligation of the municipality for which the municipality's taxing power
is pledged, a Municipal Lease Obligation is ordinarily backed by the
municipality's covenant to budget for, appropriate and make the payments due
under the Municipal Lease Obligation. However, certain Municipal Lease
Obligations contain "non-appropriation" clauses that provide that the
municipality has no obligation to make lease or


                                       -4-

<PAGE>

installment purchase payments in future years unless money is appropriated for
such purpose on a yearly basis. In the case of a "non-appropriation" lease, the
Fund's ability to recover under the lease in the event of non-appropriation or
default will be limited solely to the repossession of the leased property,
without recourse to the general credit of the lessee, and disposition or
releasing of the property might prove difficult. There have been challenges to
the legality of lease financing in numerous states, and, from time to time,
certain municipalities have considered not appropriating money for lease
payments. In deciding whether to purchase a Municipal Lease Obligation, PIMCO
will assess the financial condition of the borrower, the merits of the project,
the level of public support for the project, and the legislative history of
lease financing in the state. These securities may be less readily marketable
than other Municipal Bonds. The Fund may also purchase unrated lease obligations
if determined by PIMCO to be of comparable quality to rated securities in which
the Fund is permitted to invest.

         The Fund may seek to enhance its yield through the purchase of private
placements. These securities are sold through private negotiations, usually to
institutions or mutual funds, and may have resale restrictions. Their yields are
usually higher than comparable public securities to compensate the investor for
their limited marketability. The Fund may invest up to 20% of its net assets in
securities which are illiquid at the time of investment, including unmarketable
private placements.

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

         The Fund may invest in Municipal Bonds with credit enhancements such as
letters of credit, municipal bond insurance and Standby Bond Purchase Agreements
("SBPAs"). Letters of credit are issued by a third party, usually a bank, to
enhance liquidity and ensure repayment of principal and any accrued interest if
the underlying Municipal Bond should default. Municipal bond insurance, which is
usually purchased by the bond issuer from a private, non-governmental insurance
company, provides an unconditional and irrevocable guarantee that the insured
bond's principal and interest will be paid when due. Insurance does not
guarantee the price of the bond or the share price of the Fund. The credit
rating of an insured bond reflects the credit rating of the insurer, based on
its claims-paying ability. The obligation of a municipal bond insurance company
to pay a claim extends over the life of each insured bond. Although defaults on
insured Municipal Bonds have been low to date and municipal bond insurers have
ordinarily met their claims, there is no assurance this will continue. A
higher-than-expected default rate could strain the insurer's loss reserves and
adversely affect its ability to pay claims to bondholders. The number of
municipal bond insurers is relatively small, and not all of them have the
highest rating. An SBPA is a liquidity facility provided to pay the purchase
price of bonds that cannot be re-marketed. The obligation of the liquidity
provider (usually a bank) is only to advance funds to purchase tendered bonds
that cannot be remarketed and does not cover principal or interest under any
other circumstances. The liquidity provider's obligations under the SBPA are
usually subject to numerous conditions, including the continued creditworthiness
of the underlying borrower.


                                       -5-

<PAGE>

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

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

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

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

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

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

         Obligations of issuers of Municipal Bonds are subject to the provisions
of bankruptcy, insolvency and other laws, such as the Federal Bankruptcy Reform
Act of 1978, affecting the rights and remedies of creditors. Congress or state
legislatures may seek to extend the time for payment of principal or interest,
or both, or to impose other constraints upon enforcement of


                                       -6-

<PAGE>

such obligations. There is also the possibility that as a result of litigation
or other conditions, the power or ability of issuers to meet their obligations
for the payment of interest and principal on their Municipal Bonds may be
materially affected or their obligations may be found to be invalid or
unenforceable. Such litigation or conditions may from time to time have the
effect of introducing uncertainties in the market for Municipal Bonds or certain
segments thereof, or of materially affecting the credit risk with respect to
particular bonds. Adverse economic, business, legal or political developments
might affect all or a substantial portion of the Fund's Municipal Bonds in the
same manner. The Fund will be particularly subject to these risks because it
focuses its investments in a particular state.

Factors Pertaining to New York

         Factors pertaining to New York are set forth in Appendix B.

Residual Interest Municipal Bonds (RIBS)

         The Fund may also invest up to 10% of its total assets in residual
interest Municipal Bonds ("RIBS") whose interest rates bear an inverse
relationship to the interest rate on another security or the value of an index.
RIBS are created by dividing the income stream provided by the underlying bonds
to create two securities, one short-term and one long-term. The interest rate on
the short-term component is reset by an index or auction process normally every
seven to 35 days. After income is paid on the short-term securities at current
rates, the residual income from the underlying bond(s) goes to the long-term
securities. Therefore, rising short-term interest rates result in lower income
for the longer-term portion, and vice versa. The longer-term bonds can be very
volatile and may be less liquid than other Municipal Bonds of comparable
maturity. An investment in RIBS typically will involve greater risk than an
investment in a fixed rate bond. Because increases in the interest rate on the
other security or index reduce the residual interest paid on a RIB, the value of
a RIB is generally more volatile than that of a fixed rate bond. RIBS have
interest rate adjustment formulas that generally reduce or, in the extreme,
eliminate the interest paid to the Fund when short-term interest rates rise, and
increase the interest paid to the Fund when short-term interest rates fall. RIBS
have varying degrees of liquidity that approximate the liquidity of the
underlying bond(s), and the market price for these securities is volatile. These
securities generally will underperform the market of fixed rate bonds in a
rising interest rate environment, but tend to outperform the market of fixed
rate bonds when interest rates decline or remain relatively stable. Although
volatile, RIBS typically offer the potential for yields exceeding the yields
available on fixed rate bonds with comparable credit quality, coupon, call
provisions and maturity. The Fund may also invest in RIBS for the purpose of
increasing the Fund's leverage as a more flexible alternative to the issuance of
Preferred Shares. Should short-term and long-term interest rates rise, the
combination of the Fund's investment in RIBS and its use of other forms of
leverage (including through the issuance of Preferred Shares or the use of other
derivative instruments) likely will adversely affect the Fund's net asset value
per share and income, distributions and total returns to shareholders. Trusts in
which RIBS may be held could be terminated, in which case the residual bond
holder would take possession of the underlying bond(s) on an unleveraged basis.


                                       -7-

<PAGE>

Short-Term Investments / Temporary Defensive Strategies

         Upon PIMCO's recommendation, for temporary defensive purposes, the Fund
may invest up to 100% of its net assets in high quality, short-term investments,
including mortgage-backed and corporate debt securities, that may be either
tax-exempt or taxable. The Fund may also invest without limit in these
securities temporarily in order to keep the Fund's cash fully invested,
including during the period in which the net proceeds of the offering are being
invested. The Fund intends to invest in taxable short-term investments only in
the event that suitable tax-exempt short-term investments are not available at
reasonable prices and yields. To the extent the Fund invests in taxable
short-term investments, the Fund will not at such times be in a position to
achieve its investment objective of providing current income exempt from federal
income tax.

         Short-Term Taxable Fixed Income Securities

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

                  (1) U.S. government securities, including bills, notes and
         bonds differing as to maturity and rates of interest that are either
         issued or guaranteed by the U.S. Treasury or by U.S. government
         agencies or instrumentalities. U.S. government agency securities
         include, without limitation, securities issued by (a) the Federal
         Housing Administration, Farmers Home Administration, Export-Import Bank
         of the United States, Small Business Administration, and the Government
         National Mortgage Association, whose securities are supported by the
         full faith and credit of the United States; (b) the Federal Home Loan
         Banks, Federal Intermediate Credit Banks, and the Tennessee Valley
         Authority, whose securities are supported by the right of the agency to
         borrow from the U.S. Treasury; (c) the Federal National Mortgage
         Association, whose securities are supported by the discretionary
         authority of the U.S. government to purchase certain obligations of the
         agency or instrumentality; and (d) the Student Loan Marketing
         Association, whose securities are supported only by its credit. While
         the U.S. government provides financial support to such U.S.
         government-sponsored agencies or instrumentalities, no assurance can be
         given that it always will do so since it is not so obligated by law.
         The U.S. government, its agencies, and instrumentalities do not
         guarantee the market value of their securities. Consequently, the value
         of such securities may fluctuate.

                  (2) Certificates of deposit issued against funds deposited in
         a bank or a savings and loan association. Such certificates are for a
         definite period of time, earn a specified rate of return, and are
         normally negotiable. The issuer of a certificate of deposit agrees to
         pay the amount deposited plus interest to the bearer of the certificate
         on the date specified thereon. Certificates of deposit purchased by the
         Fund may not be fully insured.

                  (3) Repurchase agreements, which involve purchases of debt
         securities. A repurchase agreement is a contractual agreement whereby
         the seller of securities (e.g., U.S. government securities) agrees to
         repurchase the same security at a specified price on a future date
         agreed upon by the parties. The agreed-upon repurchase price
         determines the yield during the Fund's holding period. Repurchase
         agreements are considered to be


                                       -8-

<PAGE>

         loans collateralized by the underlying security that is the subject of
         the repurchase contract. Income generated from transactions in
         repurchase agreements will be taxable. The Fund will only enter into
         repurchase agreements with registered securities dealers or domestic
         banks that PIMCO believes present minimal credit risk. The risk to the
         Fund is limited to the ability of the issuer to pay the agreed-upon
         repurchase price on the delivery date; however, although the value of
         the underlying collateral at the time the transaction is entered into
         always equals or exceeds the agreed-upon repurchase price, if the
         value of the collateral declines there is a risk of loss of both
         principal and interest. In the event of default, the collateral may be
         sold but the Fund might incur a loss if the value of the collateral
         declines, and might incur disposition costs or experience delays in
         connection with liquidating the collateral. In addition, if bankruptcy
         proceedings are commenced with respect to the seller of the security,
         realization upon the collateral by the Fund may be delayed or limited.
         PIMCO will monitor the value of the collateral at the time the
         transaction is entered into and at all times subsequent during the
         term of the repurchase agreement in an effort to determine that such
         value always equals or exceeds the agreed-upon repurchase price.

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

         Short-Term Tax-Exempt Fixed Income Securities

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

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

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


                                       -9-

<PAGE>

delinquencies, could adversely affect the issuer's ability to meet its
obligations on outstanding TANs.

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

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

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

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

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

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

         High Yield Securities ("Junk Bonds")

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


                                       -10-

<PAGE>

Bonds rated AAA in which the Fund may invest may have been so rated on the basis
of the existence of insurance guaranteeing the timely payment, when due, of all
principal and interest.

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

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

         The secondary market on which high yield securities are traded may be
less liquid than the market for higher grade securities. Less liquidity in the
secondary trading market could adversely affect the price at which the Fund
could sell a high yield security, and could adversely affect the daily net asset
value of the shares. Adverse publicity and investor perceptions, whether or not
based on fundamental analysis, may decrease the values and liquidity of high
yield securities, especially in a thinly traded market. When secondary markets
for high yield securities are less liquid than the market for higher grade
securities, it may be more difficult to value the securities because such
valuation may require more research, and elements of judgment may play a greater
role in the valuation because there is less reliable, objective data available.
During periods of thin trading in these markets, the spread between bid and
asked prices is likely to increase significantly and the Fund may have greater
difficulty selling its portfolio securities. The Fund will be more dependent on
PIMCO's research and analysis when investing in high yield securities. PIMCO
seeks to minimize the risks of investing in all securities through
diversification, in-depth credit analysis and attention to current developments
in interest rates and market conditions.

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


                                       -11-

<PAGE>

PIMCO does not rely solely on credit ratings when selecting securities for the
Fund, and develops its own independent analysis of issuer credit quality.

         The Fund's credit quality policies apply only at the time a security is
purchased, and the Fund is not required to dispose of a security in the event
that a rating agency or PIMCO downgrades its assessment of the credit
characteristics of a particular issue. In determining whether to retain or sell
such a security, PIMCO may consider such factors as PIMCO's assessment of the
credit quality of the issuer of such security, the price at which such security
could be sold and the rating, if any, assigned to such security by other rating
agencies. However, analysis of the creditworthiness of issuers of high yield
securities may be more complex than for issuers of higher quality debt
securities.

Municipal Warrants

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

Mortgage-Backed Securities

         The Fund may invest in mortgage-backed securities. Mortgage-backed
securities in which the Fund may invest include fixed and adjustable rate
mortgage pass-through securities and other securities that directly or
indirectly represent a participation in, or are secured by and payable from,
mortgage loans on real property.

         The value of mortgage-backed securities may be particularly sensitive
to changes in prevailing interest rates. Early repayment of principal on some
mortgage-backed securities may expose the Fund to a lower rate of return upon
reinvestment of principal. When interest rates rise, the value of a
mortgage-backed security generally will decline; however, when interest rates
are declining, the value of mortgage-backed securities with prepayment features
may not increase as much as other fixed income securities without such
prepayment features. The rate of prepayments on underlying mortgages will affect
the price and volatility of a mortgage-backed security, and may shorten or
extend the effective maturity of the security beyond what was anticipated at the
time of purchase. If unanticipated rates of prepayment on underlying mortgages
increase the effective maturity of a mortgage-related security, the volatility
of the security can be expected to increase. The value of these securities may
fluctuate in response to the market's perception of the creditworthiness of the
issuers. Additionally, although mortgages and mortgage-backed securities are
generally supported by some form of government or private guarantee and/or
insurance, there is no assurance that private guarantors or insurers will meet
their obligations.

Variable and Floating Rate Securities

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


                                       -12-

<PAGE>

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

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

         The Fund may also invest in inverse floating rate debt instruments
("inverse floaters"). The interest rate on an inverse floater resets in the
opposite direction from the market rate of interest to which the inverse floater
is indexed. An inverse floating rate security may exhibit greater price
volatility than a fixed rate obligation of similar credit quality.

Structured Notes and Other Hybrid Instruments

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

         The Fund may invest in other types of "hybrid" instruments that combine
the characteristics of securities, futures, and options. For example, the
principal amount or interest rate of a hybrid could be tied (positively or
negatively) to the price of some securities index or another interest rate (each
a "benchmark"). The interest rate or (unlike most debt obligations) the
principal amount payable at maturity of a hybrid security may be increased or
decreased, depending on changes in the value of the benchmark. Hybrids can be
used as an efficient means of pursuing a variety of investment goals, including
duration management and increased total return. Hybrids may not bear interest or
pay dividends. The value of a hybrid or its interest rate may be a multiple of a
benchmark and, as a result, may be leveraged and move (up or down) more steeply
and rapidly than the benchmark. These benchmarks may be sensitive to economic


                                       -13-

<PAGE>

and political events that cannot be readily foreseen by the purchaser of a
hybrid. Under certain conditions, the redemption value of a hybrid could be
zero. Thus, an investment in a hybrid may entail significant market risks that
are not associated with a similar investment in a traditional, U.S.
dollar-denominated bond that has a fixed principal amount and pays a fixed rate
or floating rate of interest. The purchase of hybrids also exposes the Fund to
the credit risk of the issuer of the hybrids. These risks may cause significant
fluctuations in the net asset value of the Fund.

         Certain issuers of structured products, such as hybrid instruments, may
be deemed to be investment companies as defined in the 1940 Act. As a result,
the Fund's investments in these products may be subject to limits applicable to
investments in investment companies and may be subject to restrictions contained
in the 1940 Act.

Municipal Market Data Rate Locks

         The Fund may purchase and sell Municipal Market Data Rate Locks ("MMD
Rate Locks"). An MMD Rate Lock permits the Fund to lock in a specified municipal
interest rate for a portion of its portfolio to preserve a return on a
particular investment or a portion of its portfolio as a duration management
technique or to protect against any increase in the price of securities to be
purchased at a later date. The Fund will ordinarily use these transactions as a
hedge or for duration or risk management although it is permitted to enter into
them to enhance income or gain. An MMD Rate Lock is a contract between the Fund
and an MMD Rate Lock provider pursuant to which the parties agree to make
payments to each other on a notional amount, contingent upon whether the
Municipal Market Data AAA General Obligation Scale is above or below a specified
level on the expiration date of the contract. For example, if the Fund buys an
MMD Rate Lock and the Municipal Market Data AAA General Obligation Scale is
below the specified level on the expiration date, the counterparty to the
contract will make a payment to the Fund equal to the specified level minus the
actual level, multiplied by the notional amount of the contract. If the
Municipal Market Data AAA General Obligation Scale is above the specified level
on the expiration date, the Fund will make a payment to the counterparty equal
to the actual level minus the specified level, multiplied by the notional amount
of the contract. In entering into MMD Rate Locks, there is a risk that municipal
yields will move in the direction opposite of the direction anticipated by the
Fund.

Borrowing

         The Fund may borrow money to the extent permitted under the 1940 Act,
as interpreted, modified or otherwise permitted by regulatory authority having
jurisdiction from time to time. The Fund may from time to time borrow money to
add leverage to the portfolio. The Fund may also borrow money for temporary
administrative purposes.

         Under the 1940 Act, the Fund generally is not permitted to engage in
borrowings unless immediately after a borrowing the value of the Fund's total
assets less liabilities (other than the borrowing) is at least 300% of the
principal amount of such borrowing (i.e., such principal amount may not exceed
33 1/3% of the Fund's total assets). In addition, the Fund is not permitted to
declare any cash dividend or other distribution on Common Shares unless, at the
time of such declaration, the value of the Fund's total assets, less liabilities
other than borrowing, is at least 300% of such principal amount. If the Fund
borrows, it intends, to the extent possible,


                                       -14-

<PAGE>

to prepay all or a portion of the principal amount of the borrowing to the
extent necessary in order to maintain the required asset coverage. Failure to
maintain certain asset coverage requirements could result in an event of default
and entitle holders of Preferred Shares ("Preferred Shareholders") to elect a
majority of the Trustees of the Fund.

         As described elsewhere in this section, the Fund also may enter into
certain transactions, including RIBS and other derivative instruments that can
constitute a form of borrowing or financing transaction by the Fund. The Fund
may enter into these transactions in order to add leverage to the portfolio. The
Fund may (but is not required to) cover its commitment under these instruments
by the segregation of assets determined to be liquid by PIMCO in accordance with
procedures adopted by the Trustees, equal in value to the amount of the Fund's
commitment, or by entering into offsetting transactions or owning positions
covering its obligations. In that case, the instruments will not be considered
"senior securities" under the 1940 Act for purposes of the asset coverage
requirements otherwise applicable to borrowings by the Fund or the Fund's
issuance of Preferred Shares. Borrowing will tend to exaggerate the effect on
net asset value of any increase or decrease in the market value of the Fund's
portfolio. Money borrowed will be subject to interest costs that may or may not
be recovered by appreciation of the securities purchased. The Fund also may be
required to maintain minimum average balances in connection with such borrowing
or to pay a commitment or other fee to maintain a line of credit; either of
these requirements would increase the cost of borrowing over the stated interest
rate.

Derivative Instruments

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

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

         The Fund might not employ any of the strategies described below, and no
assurance can be given that any strategy used will succeed. If PIMCO incorrectly
forecasts interest rates, market values or other economic factors in utilizing a
derivatives strategy for the Fund, the Fund might have been in a better position
if it had not entered into the transaction at all. Also, suitable derivative
transactions may not be available in all circumstances. The use of these
strategies involves certain special risks, including a possible imperfect
correlation, or even no correlation,


                                       -15-

<PAGE>

between price movements of derivative instruments and price movements of related
investments. While some strategies involving derivative instruments can reduce
the risk of loss, they can also reduce the opportunity for gain or even result
in losses by offsetting favorable price movements in related investments or
otherwise, due to the possible inability of the Fund to purchase or sell a
portfolio security at a time that otherwise would be favorable or the possible
need to sell a portfolio security at a disadvantageous time because the Fund is
required to maintain asset coverage or offsetting positions in connection with
transactions in derivative instruments, and the possible inability of the Fund
to close out or to liquidate its derivatives positions. Income earned by the
Fund from many derivative strategies will be treated as capital gain and, if not
offset by net realized capital loss, will be distributed to shareholders in
taxable distributions.

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

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

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


                                       -16-

<PAGE>

assets determined to be liquid by PIMCO in accordance with procedures
established by the Board of Trustees.

         If an option written by the Fund expires unexercised, the Fund realizes
a capital gain equal to the premium received at the time the option was written.
If an option purchased by the Fund expires unexercised, the Fund realizes a
capital loss equal to the premium paid. Prior to the earlier of exercise or
expiration, an exchange-traded option may be closed out by an offsetting
purchase or sale of an option of the same series (type, exchange, underlying
security or index, exercise price, and expiration). There can be no assurance,
however, that a closing purchase or sale transaction can be effected when the
Fund desires.

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

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

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

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

         During the option period, the covered call writer has, in return for
the premium on the option, given up the opportunity to profit from a price
increase in the underlying security above


                                       -17-

<PAGE>

the exercise price, but, as long as its obligation as a writer continues, has
retained the risk of loss should the price of the underlying security decline.
The writer of an option has no control over the time when it may be required to
fulfill its obligation as a writer of the option. Once an option writer has
received an exercise notice, it cannot effect a closing purchase transaction in
order to terminate its obligation under the option and must deliver the
underlying security at the exercise price. If a put or call option purchased by
the Fund is not sold when it has remaining value, and if the market price of the
underlying security remains equal to or greater than the exercise price (in the
case of a put), or remains less than or equal to the exercise price (in the case
of a call), the Fund will lose its entire investment in the option. Also, where
a put or call option on a particular security is purchased to hedge against
price movements in a related security, the price of the put or call option may
move more or less than the price of the related security.

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

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

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

         A securities or interest rate futures contract provides for the future
sale by one party and purchase by another party of a specified quantity of the
security or financial instrument representative of interest rate fluctuations at
a specified price and time. A futures contract on an index is an agreement
pursuant to which two parties agree to take or make delivery of an amount of
cash equal to the difference between the value of the index at the close of the
last trading day of the contract and the price at which the index contract was
originally written. Although the value of an index might be a function of the
value of certain specified securities, physical delivery of these securities is
not always made. A public market exists in futures contracts covering a number
of indexes as well as financial instruments, including, without limitation: U.S.
Treasury bonds; U.S. Treasury notes; three-month U.S. Treasury bills; 90-day
commercial paper; bank certificates of deposit; and the Bond Buyer 40 Bond
Index. It is expected that other futures contracts will be developed and traded
in the future.


                                       -18-

<PAGE>

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

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

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

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

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


                                       -19-

<PAGE>

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

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

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

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

         When selling a futures contract, the Fund will maintain with its
custodian (and mark-to-market on a daily basis) assets determined to be liquid
by PIMCO in accordance


                                       -20-

<PAGE>

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

         When selling a call option on a futures contract, the Fund will
maintain with its custodian (and mark-to-market on a daily basis) assets
determined to be liquid by PIMCO in accordance
         with procedures established by the Board of Trustees, that, when added
to the amounts deposited with a futures commission merchant as margin, equal the
total market value of the futures contract underlying the call option.
Alternatively, the Fund may cover its position by entering into a long position
in the same futures contract at a price no higher than the strike price of the
call option, by owning the instruments underlying the futures contract, or by
holding a separate call option permitting the Fund to purchase the same futures
contract at a price not higher than the strike price of the call option sold by
the Fund.

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

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

         The requirements for qualification as a regulated investment company
also may limit the extent to which the Fund may enter into futures, futures
options or forward contracts. See "Tax Matters."

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

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


                                       -21-

<PAGE>

may be distorted by differences in initial and variation margin requirements,
the liquidity of such markets and the participation of speculators in such
markets.

         Futures exchanges may limit the amount of fluctuation permitted in
certain futures contract prices during a single trading day. The daily limit
establishes the maximum amount that the price of a futures contract may vary
either up or down from the previous day's settlement price at the end of the
current trading session. Once the daily limit has been reached in a futures
contract subject to the limit, no more trades may be made on that day at a price
beyond that limit. The daily limit governs only price movements during a
particular trading day and therefore does not limit potential losses because the
limit may work to prevent the liquidation of unfavorable positions. For example,
futures prices have occasionally moved to the daily limit for several
consecutive trading days with little or no trading, thereby preventing prompt
liquidation of positions and subjecting some holders of futures contracts to
substantial losses.

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

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

         Most swap agreements entered into by the Fund would calculate the
obligations of the parties to the agreement on a "net basis." Consequently, the
Fund's current obligations (or rights) under a swap agreement will generally be
equal only to the net amount to be paid or received under the agreement based on
the relative values of the positions held by each party to


                                       -22-

<PAGE>

the agreement (the "net amount"). The Fund's current obligations under a swap
agreement will be accrued daily (offset against any amounts owed to the Fund).
The Fund may use swap agreements to add leverage to the portfolio. The Fund may
(but is not required to) cover any accrued but unpaid net amounts owed to a swap
counterparty through the segregation of assets determined to be liquid by PIMCO
in accordance with procedures established by the Board of Trustees. Obligations
under swap agreements so covered will not be construed to be "senior securities"
for purposes of the Fund's investment restriction concerning senior securities
and borrowings.

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

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

         Certain swap agreements are exempt from most provisions of the
Commodity Exchange Act ("CEA") and, therefore, are not regulated as futures or
commodity option transactions under the CEA.

Short Sales

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

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


                                       -23-

<PAGE>

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

         To the extent that the Fund engages in short sales, it will provide
collateral to the broker-dealer. A short sale is "against the box" to the extent
that the Fund contemporaneously owns, or has the right to obtain at no added
cost, securities identical to those sold short. The Fund may also engage in
so-called "naked" short sales (i.e., short sales that are not "against the
box"), in which case the Fund's losses could theoretically be unlimited, in
cases where the Fund is unable for whatever reason to close out its short
position. The Fund has the flexibility to engage in short selling to the extent
permitted by the 1940 Act and rules and interpretations thereunder.

Illiquid Securities

         The Fund may invest up to 20% of its net assets in securities which are
illiquid at the time of investment. The term "illiquid securities" for this
purpose means securities that cannot be disposed of within seven days in the
ordinary course of business at approximately the amount at which the Fund has
valued the securities. Illiquid securities are considered to include, among
other things, written over-the-counter options, securities or other liquid
assets being used as cover for such options, repurchase agreements with
maturities in excess of seven days, certain loan participation interests, fixed
time deposits which are not subject to prepayment or provide for withdrawal
penalties upon prepayment (other than overnight deposits), and other securities
whose disposition is restricted under the federal securities laws (other than
securities issued pursuant to Rule 144A under the 1933 Act and certain
commercial paper that PIMCO has determined to be liquid under procedures
approved by the Board of Trustees).

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

Portfolio Trading and Turnover Rate

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


                                       -24-

<PAGE>

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

         The portfolio turnover rate of the Fund is calculated by dividing (a)
the lesser of purchases or sales of portfolio securities for the particular
fiscal year by (b) the monthly average of the value of the portfolio securities
owned by the Fund during the particular fiscal year. In calculating the rate of
portfolio turnover, there is excluded from both (a) and (b) all securities,
including options, whose maturities or expiration dates at the time of
acquisition were one year or less.

Other Investment Companies

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

When-Issued, Delayed Delivery and Forward Commitment Transactions

         The Fund may purchase or sell securities on a when-issued, delayed
delivery, or forward commitment basis. Typically, no income accrues on
securities the Fund has committed to


                                       -25-

<PAGE>

purchase prior to the time delivery of the securities is made, although the Fund
may earn income on securities it has segregated.

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

         When the Fund has sold a security on a when-issued, delayed delivery,
or forward commitment basis, the Fund does not participate in future gains or
losses with respect to the security. If the other party to a transaction fails
to deliver or pay for the securities, the Fund could miss a favorable price or
yield opportunity or could suffer a loss. The Fund may dispose of or renegotiate
a transaction after it is entered into, and may sell when-issued, delayed
delivery or forward commitment securities before they are delivered, which may
result in a capital gain or loss. There is no percentage limitation on the
extent to which the Fund may purchase or sell securities on a when-issued,
delayed delivery, or forward commitment basis.

Zero-Coupon Bonds and Step-Ups

         Zero-coupon securities are debt obligations that do not entitle the
holder to any periodic payments of interest either for the entire life of the
obligation or for an initial period after the issuance of the obligations. Like
zero-coupon bonds, "step-up" bonds pay no interest initially but eventually
begin to pay a coupon rate prior to maturity, which rate may increase at stated
intervals during the life of the security. Each of these instruments is
typically issued and traded at a deep discount from its face amount. The amount
of the discount varies depending on such factors as the time remaining until
maturity of the securities, prevailing interest rates, the liquidity of the
security and the perceived credit quality of the issuer. The market prices of
zero-coupon bonds and step-ups generally are more volatile than the market
prices of debt instruments that pay interest currently and in cash and are
likely to respond to changes in interest rates to a greater degree than do other
types of securities having similar maturities and credit quality. In order to
satisfy a requirement for qualification as a "regulated investment company"
under the Internal Revenue Code of 1986, as amended (the "Code"), an investment
company, such as the Fund, must distribute each year at least 90% of its net
investment income, including the original issue discount accrued on zero-coupon
bonds and step-ups. Because the Fund will not on a current basis receive cash
payments from the issuer of these securities in respect of any accrued original
issue discount, in some years the Fund may have to distribute cash obtained from
selling other portfolio holdings of the Fund. In some circumstances, such sales
might be necessary in order to satisfy cash distribution requirements even
though investment considerations might otherwise make it undesirable for the
Fund to sell securities at such time. Under many market conditions, investments
in zero-coupon bonds and step-ups may be illiquid, making it difficult for the
Fund to dispose of them or determine their current value.


                                       -26-

<PAGE>

                             INVESTMENT RESTRICTIONS

Fundamental Investment Restrictions

         Except as described below, the Fund, as a fundamental policy, may not,
without the approval of the holders of a majority of the outstanding Common
Shares and any outstanding preferred shares of beneficial interest of the Fund
(including the Preferred Shares) voting together as a single class, and of the
holders of a majority of any outstanding preferred shares of beneficial interest
of the Fund (including the Preferred Shares) voting as a separate class:

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

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

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

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

                  (5) Make loans, except to the extent permitted under the
         Investment Company Act of 1940, as amended, and as interpreted,
         modified, or otherwise permitted by regulatory authority having
         jurisdiction, from time to time.

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

         In addition, as a fundamental policy, the Fund must, under normal
circumstances, invest at least 80% of its Assets (as that term is defined in
Rule 35d-1 under the Investment Company Act of 1940, as amended), measured at
the time of investment, in investments the income from which is, in the opinion
of bond counsel to the issuer (or on the basis of other authority believed by
the Fund's portfolio manager to be reliable), exempt from federal and New York
state income taxes. For purposes of this policy, the Fund may count investments
that generate income subject to the alternative minimum tax toward the 80%
investment requirement.


                                       -27-

<PAGE>

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

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

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

         The Fund would be deemed to "concentrate" in a particular industry if
it invested 25% or more of its net assets in that industry. The Fund's industry
concentration policy does not preclude it from focusing investments in issuers
in a group of related industrial sectors (such as different types of utilities).

         To the extent the Fund covers its commitment under a derivative
instrument by the segregation of assets determined by PIMCO to be liquid in
accordance with procedures adopted by the Trustees, equal in value to the amount
of the Fund's commitment, such instrument will not be considered a "senior
security" for purposes of the asset coverage requirements otherwise applicable
to borrowings by the Fund or the Fund's issuance of Preferred Shares.

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

         It is a condition of the issuance of the Preferred Shares that they be
issued with a credit quality rating of "Aaa" from Moody's. In order to obtain
and maintain the required ratings, the Fund will be required to comply with
investment quality, diversification and other guidelines established by Moody's.
Such guidelines will likely be more restrictive than the restrictions set forth
above. The Fund does not anticipate that such guidelines would have a material
adverse effect on its holders of Common Shares ("Common Shareholders") or its
ability to achieve its investment objective. Moody's receives fees in connection
with its ratings issuances.


                                       -28-

<PAGE>

                             MANAGEMENT OF THE FUND

Trustees and Officers

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

         The Trustees and officers of the Fund, their ages, the position they
hold with the Fund, their term of office and length of time served, a
description of their principal occupations during the past five years, the
number of portfolios in the fund complex that the Trustee oversees and any other
directorships held by the Trustee are listed in the two tables immediately
following. Except as shown, each Trustee's and officer's principal occupation
and business experience for the last five years has been with the employer(s)
indicated, although in some cases the Trustee may have held different positions
with such employer(s). Unless otherwise indicated, the business address of the
persons listed below is c/o PIMCO Funds Advisors LLC, 1345 Avenue of the
Americas, New York, New York 10105.

                              Independent Trustees*
                              ---------------------
<TABLE>
<CAPTION>
           (1)                 (2)            (3)                    (4)                   (5)             (6)

                                                                                        Number of
                                           Term of                                     Portfolios
                                         Office and                                     in Fund          Other
                          Position(s)     Length of                                     Complex      Directorships
     Name, Address            Held          Time          Principal Occupation(s)     Overseen by       Held by
        and Age            with Fund       Served         During the Past 5 Years       Trustee         Trustee

<S>                       <C>            <C>            <C>                            <C>           <C>
Paul Belica                Trustee       Since          Trustee, Fixed Income          8             None.
Age 80                                   inception      Shares, PIMCO Corporate
                                         (June, 2002).  Income Fund, PIMCO Municipal
                                                        Income Fund, PIMCO
                                                        California Municipal Income
                                                        Fund and PIMCO New York
                                                        Municipal Income Fund;
                                                        Manager, Stratigos Fund,
                                                        LLC, Whistler Fund, LLC,
                                                        Xanthus Fund, LLC and
                                                        Wynstone Fund, LLC;
                                                        Director, Student Loan
                                                        Finance Corp., Education
                                                        Loans, Inc., Goal Funding,
                                                        Inc., Surety Loan Funding,
                                                        Inc.  Formerly, Advisor,
                                                        Salomon Smith Barney Inc.;
                                                        Director, Central European
                                                        Value Fund, Inc., Deck House
                                                        Inc., The Czech Republic
                                                        Fund, Inc.
</TABLE>


                                       -29-

<PAGE>


<TABLE>
<CAPTION>
           (1)                 (2)            (3)                    (4)                   (5)             (6)

                                                                                        Number of
                                           Term of                                     Portfolios
                                         Office and                                     in Fund          Other
                          Position(s)     Length of                                     Complex      Directorships
     Name, Address            Held          Time          Principal Occupation(s)     Overseen by       Held by
        and Age            with Fund       Served         During the Past 5 Years       Trustee         Trustee

<S>                       <C>            <C>            <C>                            <C>           <C>
Robert E. Connor           Trustee       Since          Trustee, Fixed Income          9             None.
Age 68                                   inception      SHares, PIMCO Corporate
                                         (June, 2002).  Income Fund, PIMCO Municipal
                                                        Income Fund, PIMCO
                                                        California Municipal Income
                                                        Fund and PIMCO New York
                                                        Municipal Income Fund;
                                                        Director, Municipal
                                                        Advantage Fund, Inc.;
                                                        Corporate Affairs
                                                        Consultant.  Formerly,
                                                        Senior Vice President,
                                                        Corporate Office, Salomon
                                                        Smith Barney Inc.

John J. Dalessandro II     Trustee       Since          President and Director, J.J.   7             None.
Age 65                                   inception      Dalessandro II Ltd.,
                                         (June,         2002). registered
                                                        broker-dealer and member
                                                        of the New York Stock
                                                        Exchange; Trustee, PIMCO
                                                        Corporate Income Fund,
                                                        PIMCO Municipal Income
                                                        Fund, PIMCO California
                                                        Municipal Income Fund
                                                        and PIMCO New York
                                                        Municipal Income Fund.

Hans W. Kertess            Trustee       Since          Consultant, Dain Rauscher      7             None.
Age 62                                   inception      Inc.; Trustee, PIMCO
                                         (June,         2002). Corporate Income
                                                        Fund, PIMCO Municipal
                                                        Income Fund, PIMCO
                                                        California Municipal
                                                        Income Fund and PIMCO
                                                        New York Municipal
                                                        Income Fund. Formerly,
                                                        Managing Director,
                                                        Salomon Brothers;
                                                        Managing Director, Dain
                                                        Rauscher Inc.

</TABLE>





                                       -30-

<PAGE>



                              Interested Trustees**
                              ---------------------
<TABLE>
<CAPTION>
           (1)                 (2)            (3)                    (4)                   (5)             (6)

                                                                                        Number of
                                           Term of                                     Portfolios
                                         Office and                                     in Fund          Other
                          Position(s)     Length of                                     Complex      Directorships
     Name, Address            Held          Time          Principal Occupation(s)     Overseen by       Held by
        and Age            with Fund       Served         During the Past 5 Years       Trustee         Trustee

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

R. Peter Sullivan III      Trustee       Since          Trustee, PIMCO Corporate       7             None.
Age 60                                   inception      Income Fund, PIMCO Municipal
                                         (June, 2002).  Income Fund, PIMCO
                                                        California Municipal Income
                                                        Fund and PIMCO New York
                                                        Municipal Income Fund.
                                                        Formerly, Managing Partner,
                                                        Bear Wagner Specialists LLC.
</TABLE>

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

         * Mr. Dalessandro is treated by the Fund as not being an "interested
person" (as defined in Section 2(a)(19) of the 1940 Act) of the Fund, the
Manager, PIMCO or of the Underwriters, despite his affiliation with J.J.
Dalessandro II Ltd., a member of the New York Stock Exchange (the "Exchange")
that operates as a floor broker and does not effect portfolio transactions for
entities other than other members of the Exchange. Mr. Kertess retired from Dain
Rauscher Inc. (a broker-dealer that within the last 6 months may have executed
portfolio transactions for the PIMCO Funds) effective January 1, 2002. He
currently serves as a consultant and independent contractor to Dain Rauscher
Inc. and is no longer treated as an "interested person" of the Fund as a result
of his position with Dain Rauscher Inc.


         ** Mr. Sullivan owns shares of Merrill Lynch, one of the underwriters
of the Fund's Preferred Share offering. Mr. Sullivan will be treated by the Fund
as an "interested person" of the Fund through his ownership of shares of Merrill
Lynch, until such time as Merrill Lynch completes its participation in the
distribution of the Preferred Shares.



         In accordance with the Fund's staggered board (see "Anti-Takeover and
Other Provisions in the Declaration of Trust"), the Common Shareholders will
elect Trustees to fill the vacancies of Trustees whose terms expire at each
annual meeting of Common Shareholders, unless any preferred shares of beneficial
interest are outstanding, in which event the holders of preferred shares, voting
as a separate class, will elect two Trustees and the remaining Trustees shall be
elected by Common Shareholders and the holders of preferred shares, voting
together as a single class. The holders of preferred shares will be entitled to
elect a majority of the Fund's Trustees under certain circumstances.


                                       -31-

<PAGE>

                                    Officers
                                    --------

<TABLE>
<CAPTION>
           (1)                 (2)            (3)                    (4)                   (5)             (6)

                                                                                        Number of
                                           Term of                                     Portfolios
                                         Office and                                     in Fund          Other
                          Position(s)     Length of                                     Complex      Directorships
     Name, Address            Held          Time          Principal Occupation(s)     Overseen by       Held by
        and Age            with Fund       Served         During the Past 5 Years       Trustee         Trustee

<S>                       <C>            <C>            <C>                            <C>           <C>
Stephen J. Treadway        President     Since          Managing Director, Allianz     N/A           N/A
2187 Atlantic Street                     inception      Dresdner Asset Management of
Stamford, CT 06902                       (June, 2002).  America L.P.; Managing
Age 54                                                  Director and Chief Executive
                                                        Officer, PIMCO Funds
                                                        Advisors LLC; Managing
                                                        Director and Chief Executive
                                                        Officer, PIMCO Funds
                                                        Distributors LLC ("PFD");
                                                        Trustee, President and Chief
                                                        Executive Officer, PIMCO
                                                        Funds: Multi-Manager Series;
                                                        Chairman, Fixed Income
                                                        SHares; Trustee, Chairman
                                                        and President, OCC Cash
                                                        Reserves, Inc., OCC
                                                        Accumulation Trust, PIMCO
                                                        Corporate Income Fund, PIMCO
                                                        Municipal Income Fund, PIMCO
                                                        California Municipal Income
                                                        Fund and PIMCO New York
                                                        Municipal Income Fund;
                                                        Chairman and Trustee,
                                                        Municipal Advantage Fund,
                                                        Inc.; President, The
                                                        Emerging Markets Income
                                                        Fund, Inc., The Emerging
                                                        Markets Income Fund II,
                                                        Inc., The Emerging Markets
                                                        Floating Rate Fund, Inc.,
                                                        Global Partners Income Fund,
                                                        Inc., Municipal Partners
                                                        Fund, Inc. and Municipal
                                                        Partners Fund II, Inc.
                                                        Formerly, Executive Vice
                                                        President, Smith Barney Inc.

Newton B. Schott, Jr.      Vice          Since          Managing Director, Chief       N/A           N/A
2187 Atlantic Street       President,    inception      Administrative Officer,
Stamford, CT  06902        Secretary     (June, 2002).  Secretary and General
Age 59                                                  Counsel, PFD; Managing
                                                        Director, Chief Legal
                                                        Officer and Secretary, PIMCO
                                                        Funds Advisors LLC;
                                                        President, Municipal
                                                        Advantage Fund, Inc.; Vice
                                                        President and Secretary,
                                                        PIMCO Funds: Multi-Manager
                                                        Series, PIMCO Corporate
                                                        Income Fund, PIMCO Municipal
                                                        Income Fund, PIMCO
                                                        California Municipal Income
                                                        Fund, PIMCO New York
                                                        Municipal Income Fund;
                                                        Executive Vice President,
                                                        The Emerging Markets Income

</TABLE>


                                       -32-

<PAGE>

<TABLE>
<CAPTION>
           (1)                 (2)            (3)                    (4)                   (5)             (6)

                                                                                        Number of
                                           Term of                                     Portfolios
                                         Office and                                     in Fund          Other
                          Position(s)     Length of                                     Complex      Directorships
     Name, Address            Held          Time          Principal Occupation(s)     Overseen by       Held by
        and Age            with Fund       Served         During the Past 5 Years       Trustee         Trustee

<S>                       <C>            <C>            <C>                            <C>           <C>
                                                        Fund, Inc., The Emerging
                                                        Markets Income Fund II,
                                                        Inc., The Emerging Markets
                                                        Floating Rate Fund, Inc.,
                                                        Global Partners Income Fund,
                                                        Inc., Municipal Partners
                                                        Fund, Inc. and Municipal
                                                        Partners Fund II, Inc.
                                                        Secretary, Fixed Income
                                                        SHares. Formerly, Vice
                                                        President and Clerk, PIMCO
                                                        Advisors Funds.

Brian S. Shlissel          Treasurer;    Since          Senior Vice President, PIMCO   N/A           N/A
Age 37                     Principal     inception      Funds Advisors LLC;
                           Financial     (June, 2002).  Executive Vice President and
                           and                          Treasurer, OCC Cash
                           Accounting                   Reserves, Inc. and OCC
                           Officer                      Accumulation Trust;
                                                        President, Chief Executive
                                                        Officer and Treasurer, Fixed
                                                        Income SHares; Treasurer,
                                                        Municipal Advantage Fund
                                                        Inc.; Treasurer and
                                                        Principal Financial and
                                                        Accounting Officer, PIMCO
                                                        Corporate Income Fund, PIMCO
                                                        Municipal Income Fund, PIMCO
                                                        California Municipal Income
                                                        Fund and PIMCO New York
                                                        Municipal Income Fund;  Vice
                                                        President, Emerging Markets
                                                        Income Fund, Inc., Emerging
                                                        Markets Income Fund II,
                                                        Inc., Emerging Markets
                                                        Floating Rate Fund, Inc.,
                                                        Global Partners Income Fund,
                                                        Inc., Municipal Partners
                                                        Fund, Inc., and Municipal
                                                        Partners Fund II, Inc.
                                                        Formerly, Vice President,
                                                        Mitchell Hutchins Asset
                                                        Management Inc.

Mark V. McCray             Vice          Since          Executive Vice President,      N/A           N/A
840 Newport Center Drive   President     inception      PIMCO; Vice President, PIMCO
Newport Beach, CA  92660                 (June, 2002).  Municipal Income Fund, PIMCO
Age 34                                                  California Municipal Income
                                                        Fund and PIMCO New York
                                                        Municipal Income Fund.
                                                        Formerly, Vice President
                                                        and co-head of municipal
                                                        bond trading, Goldman
                                                        Sachs & Co.
</TABLE>

                                       -33-

<PAGE>

<TABLE>
<CAPTION>
           (1)                 (2)            (3)                    (4)                   (5)             (6)

                                                                                        Number of
                                           Term of                                     Portfolios
                                         Office and                                     in Fund          Other
                          Position(s)     Length of                                     Complex      Directorships
     Name, Address            Held          Time          Principal Occupation(s)     Overseen by       Held by
        and Age            with Fund       Served         During the Past 5 Years       Trustee         Trustee

<S>                       <C>            <C>            <C>                            <C>           <C>
Michael B. Zuckerman       Assistant     Since          Vice President, PIMCO Funds    N/A           N/A
Age 36                     Secretary     inception      Advisors LLC; Secretary,
                                         (June, 2002).  Municipal Advantage Fund,
                                                        Inc., OCC Accumulation Trust
                                                        and OCC Cash Reserves, Inc.;
                                                        Assistant Secretary, Fixed
                                                        Income SHares, PIMCO
                                                        Corporate Income Fund, PIMCO
                                                        Municipal Income Fund, PIMCO
                                                        California Municipal Income
                                                        Fund and PIMCO New York
                                                        Municipal Income Fund.
                                                        Formerly, Associate, Dechert
                                                        Price and Rhoads; Associate
                                                        Counsel, Metropolitan Life
                                                        Insurance Company.
</TABLE>


         For interested Trustees and officers, positions held with affiliated
persons or principal underwriters of the Fund are listed in the following table:
<TABLE>
<CAPTION>
            (1)                                                         (2)

           Name                   Positions Held with Affiliated Persons or Principal Underwriters of the Fund

<S>                               <C>
Stephen J. Treadway                                                 See above.

Hans W. Kertess                                                     See above.

R. Peter Sullivan III                                               See above.

Newton B. Schott, Jr.                                               See above.

Brian S. Shlissel                                                   See above.

Mark V. McCray                                                      See above.

Michael B. Zuckerman                                                See above.
</TABLE>


Committees of the Board of Trustees

         Audit Oversight Committee

         Provides oversight with respect to the internal and external accounting
and auditing procedures of the Fund and, among other things, considers the
selection of independent public accountants for the Fund and the scope of the
audit, approves all significant services proposed to be performed by those
accountants on behalf of the Fund, and considers other services provided by
those accountants to the Fund, the Manager and PIMCO and the possible effect of
those


                                       -34-

<PAGE>

services on the independence of those accountants. Messrs. Belica, Connor,
Kertess and Sullivan serve on this committee.

         Nominating Committee

         Responsible for reviewing and recommending qualified candidates to the
Board in the event that a position is vacated or created. Messrs. Belica,
Connor, Kertess and Sullivan serve on this committee. The Nominating Committee
will review and consider nominees recommended by shareholders to serve as
Trustee, provided any such recommendation is submitted in writing to the Fund,
c/o Newton B. Schott, Jr., Secretary, at the address of the principal executive
offices of the Fund. The Nominating Committee has full discretion to reject
nominees recommended by shareholders, and there is no assurance that any such
person so recommended and considered by a committee will be nominated for
election to the Board.

         Valuation Committee

         Reviews procedures for the valuation of securities and periodically
reviews information from the Manager and PIMCO regarding fair value and
liquidity determination made pursuant to the Board-approved procedures, and
makes related recommendations to the full Board and assists the full Board in
resolving particular valuation matters. Messrs. Belica, Connor and Sullivan
serve on this committee.

Securities Ownership

         For each Trustee, the following table discloses the dollar range of
equity securities beneficially owned by the Trustee in the Fund and, on an
aggregate basis, in any registered investment companies overseen by the Trustee
within the Fund's family of investment companies as of December 31, 2001:
<TABLE>
<CAPTION>
                      (1)                                (2)                                (3)

                                                                        Aggregate Dollar Range of Equity Securities
                                                   Dollar Range of        in All Registered Investment Companies
                                                  Equity Securities          Overseen by Trustee in Family of
                Name of Trustee                      in the Fund                  Investment Companies
<S>                                               <C>                   <C>
Hans W. Kertess                                         None.                              None.

John J. Dalessandro II                                  None.                              None.

Paul Belica                                             None.                            >$100,000

Robert E. Connor                                        None.                              None.

R. Peter Sullivan III                                   None.                              None.
</TABLE>

         For independent Trustees and their immediate family members, the
following table provides information regarding each class of securities owned
beneficially in an investment adviser or principal underwriter of the Fund, or a
person (other than a registered investment


                                       -35-

<PAGE>

         company) directly or indirectly controlling, controlled by, or under
common control with an investment adviser or principal underwriter of the Fund
as of December 31, 2001:
<TABLE>
<CAPTION>
           (1)                    (2)                   (3)                    (4)                (5)              (6)

                                Name of
                              Owners and
                             Relationships                                                     Value of
     Name of Trustee           to Trustee             Company             Title of Class      Securities     Percent of Class
<S>                          <C>                      <C>                 <C>                 <C>            <C>
Paul Belica                       None                   -                      -                 -                 -
Robert E. Connor                  None                   -                      -                 -                 -
John J. Dalessandro II            None                   -                      -                 -                 -
</TABLE>

         As of August 7, 2002, the Fund's officers and Trustees as a group owned
less than 1% of the outstanding Common Shares.

         As of August 7, 2002, the following persons owned of record the number
of Common Shares noted below, representing the indicated percentage of the
Fund's outstanding shares as of such date.
<TABLE>
<CAPTION>
                                                                                         Percentage of the Fund's
                                                                       Number of            outstanding shares
Shareholder                                                          Common Shares          as of August 7, 2002
- -----------                                                          -------------          -------------------
<S>                                                                 <C>                  <C>
Donaldson, Lufkin and Jenrette Securities Corporation                   732,400                     7.14%
1 Pershing Plaza
Jersey City, NJ 07399

A.G. Edwards & Sons, Inc.                                               578,988                     5.64
2801 Clark Street
St. Louis, MO 63103

Fiserv Securities, Inc.                                                 528,634                     5.15
c/o ADP Proxy Services
Edgewood, NY 11717

Merrill Lynch, Pierce, Fenner & Smith Safekeeping                       764,762                     7.45
4 Corporate Place
Piscataway, NJ 08854

Prudential Securities Incorporated                                    1,972,647                    19.24
c/o ADP Proxy Services
51 Mercedes Way
Edgewood, NY 11717

RBC Dain Rauscher Inc.                                                  578,683                     5.64
510 Marquette Ave. South
Minneapolis, MN 55402

Salomon Smith Barney Inc.                                               843,168                     8.22
333 W. 34th Street
New York, NY 10001

UBS PaineWebber Inc.                                                  2,761,654                    26.93
1000 Harbor Blvd.
Weehawken, NJ 07087

</TABLE>

Compensation

         Messrs. Belica, Connor, Dalessandro, Kertess and Sullivan also serve as
Trustees of PIMCO California Municipal Income Fund, PIMCO New York Municipal
Income Fund, PIMCO Municipal Income Fund, PIMCO California Municipal Income Fund
II and PIMCO Municipal Income Fund II (together with the Fund, the "Municipal
Funds") and PIMCO Corporate Income Fund, six closed-end funds for which the
Manager serves as investment manager and PIMCO serves as portfolio manager. In
addition to the Municipal Funds and PIMCO Corporate Income Fund, Mr. Belica is a
director or trustee, as the case may be, of one open-end investment company
(comprising two separate investment portfolios) advised by the Manager; and Mr.
Connor is a director or trustee, as the case may be, of one open-end investment
company (comprising two separate investment portfolios) and one closed-end
investment company advised by the Manager. To the best of the Fund's knowledge,
none of the "independent" Trustees has ever been a director, officer, or
employee of, or a consultant to, the Manager, PIMCO, any one or more of the
Underwriters or any one or more affiliates of any of the foregoing, except that
Mr. Connor provides occasional editorial consulting services as an


                                       -36-

<PAGE>

independent contractor to an administrative unit of Salomon Smith Barney Inc. As
indicated above, certain of the officers and Trustees of the Fund are affiliated
with the Manager and/or PIMCO.

         The Municipal Funds and PIMCO Corporate Income Fund (together, the
"PIMCO Closed-End Funds") are expected to hold joint meetings of their Boards of
Trustees whenever possible. Each Trustee, other than any Trustee who is a
director, officer, partner or employee of the Manager, PIMCO or any entity
controlling, controlled by or under common control with the Manager or PIMCO,
receives $14,000 for each joint meeting for the first four joint meetings in
each year and $7,000 for each additional joint meeting in such year if the
meetings are attended in person. Trustees receive $3,500 per joint meeting if
the meetings are attended telephonically. Members of the Audit Oversight
Committee will receive $3,500 per joint meeting of the PIMCO Closed-End Funds'
Audit Oversight Committees if the meeting takes place on a day other than the
day of a regularly scheduled Board meeting. Trustees will also be reimbursed for
meeting-related expenses.

         The PIMCO Closed-End Funds will allocate the Trustees' compensation and
other costs of their joint meetings pro rata based on each PIMCO Closed-End
Fund's net assets, including assets attributable to any preferred shares.

         It is estimated that the Trustees will receive the amounts set forth in
the following table from the Fund for its initial fiscal year ending March 31,
2003. For the calendar year ended December 31, 2001, the Trustees received the
compensation set forth in the following table for serving as trustees of other
funds in the "Fund Complex." Each officer and Trustee who is a director,
officer, partner or employee of the Manager, PIMCO or any entity controlling,
controlled by or under common control with the Manager or PIMCO serves without
any compensation from the Fund.
<TABLE>
<CAPTION>
               (1)                                (2)                                       (3)

                                    Aggregate Compensation from         Total Compensation from Fund and Fund
                                      Fund for the Fiscal Year        Complex Paid to Trustees for the Calendar
    Name of Person, Position           Ending March 31, 2003*               Year Ending December 31, 2001**

<S>                                 <C>                               <C>
Paul Belica                                     $10,000                                   $26,000

Robert E. Connor                                $10,000                                   $36,500

Hans W. Kertess                                 $10,000                                    $6,000

John J. Dalessandro II                          $10,000                                   $13,500

R. Peter Sullivan III                           $10,000                                      $0
</TABLE>
- -----------------

         * Since the Fund has not completed its first full fiscal year,
compensation is estimated based upon future payments to be made by the Fund
during the current fiscal year and upon estimated relative net assets of the
PIMCO Closed-End Funds. The estimate is for the fiscal year ending March 31,
2003.


                                       -37-

<PAGE>

         ** In addition to the PIMCO Closed-End Funds, during the year ended
December 31, 2001, Mr. Belica served as a Trustee of one open-end investment
company (comprising two separate investment portfolios) advised by the Manager,
and Mr. Connor served as a director or Trustee of one open-end investment
company (comprising two separate investment portfolios) and one closed-end
investment company advised by the Manager. These investment companies are
considered to be in the same "Fund Complex" as the Fund.

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

Codes of Ethics

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

                    INVESTMENT MANAGER AND PORTFOLIO MANAGER

Investment Manager

         The Manager serves as investment manager to the Fund pursuant to an
investment management agreement (the "Investment Management Agreement") between
it and the Fund. The Manager, a Delaware limited liability company organized in
2000, is wholly-owned by PIMCO Advisory Services Holdings LLC, a wholly-owned
subsidiary of Allianz Dresdner Asset Management of America L.P. ("ADAM of
America", formerly PIMCO Advisors, L.P.). ADAM of America was organized as a
limited partnership under Delaware law in 1987. ADAM of America's sole general
partner is Allianz Paclife Partners LLC. Allianz Paclife Partners LLC is a
Delaware limited liability company with two members, ADAM U.S. Holding LLC, a
Delaware limited liability company, and Pacific Asset Management LLC, a Delaware
limited liability company. ADAM U.S. Holdings LLC is a wholly-owned subsidiary
of Allianz Dresdner Asset Management of America LLC, a wholly-owned subsidiary
of Allianz of America, Inc., which is a wholly-owned subsidiary of Allianz AG.
Pacific Asset Management LLC is a wholly-owned subsidiary of Pacific Life
Insurance Company ("Pacific Life"), which is a wholly-owned


                                       -38-

<PAGE>

subsidiary of Pacific Mutual Holding Company. Pacific Mutual Holding Company is
a Newport Beach, California-based insurance holding company. Pacific Life
Insurance Company's address is 700 Newport Center Drive, Newport Beach,
California.

         The general partner of ADAM of America has substantially delegated its
management and control of ADAM of America to an Executive Committee. The
Executive Committee of ADAM of America is comprised of Udo Frank, William S.
Thompson, Jr. and Marcus Riess.

         The Manager is located at 1345 Avenue of the Americas, New York, New
York 10105. As of December 31, 2001, the Manager had approximately $80 billion
in assets under management. As of June 30, 2002, ADAM of America and its
subsidiary partnerships had approximately $346 billion in assets under
management.

         Allianz of America has entered into a put/call arrangement for the
possible disposition of Pacific Life's indirect interest in the Manager. The put
option held by Pacific Life will allow it to require Allianz of America, on the
last business day of each calendar quarter following May 5, 2000, to purchase at
a formula-based price all units of the Manager owned directly or indirectly by
Pacific Life. The call option held by Allianz of America will allow it,
beginning January 31, 2003 or upon a change in control of Pacific Life, to
require Pacific Life to sell or cause to be sold to Allianz of America, at the
same formula-based price, all units of the Manager owned directly or indirectly
by Pacific Life.


         As of the date of this Statement of Additional Information, significant
institutional shareholders of Allianz AG currently include Munchener
Ruckversicherungs-Gesellschaft AG ("Munich Re") and HypoVereinsbank. Allianz AG
in turn owns more than 95% of Dresdner Bank AG. Credit Lyonnais, Munich Re and
HypoVereinsbank, as well as certain broker-dealers that might be controlled by
or affiliated with these entities or Dresdner Bank AG, such as Dresdner
Klienwort Benson North America LLC may be considered to be affiliated persons of
the Manager and PIMCO.(Broker-dealer affiliates of such significant
institutional shareholders are sometimes referred to herein as "Affiliated
Brokers.") Absent an SEC exemption or other relief, the Fund generally is
precluded from effecting principal transactions with the Affiliated Brokers, and
its ability to purchase securities being underwritten by an Affiliated Broker or
a syndicate including an Affiliated Broker is subject to restrictions.
Similarly, the Fund's ability to utilize the Affiliated Brokers for agency
transactions is subject to the restrictions of Rule 17e-1 under the 1940 Act.
PIMCO does not believe that the restrictions on transactions with the Affiliated
Brokers described above will materially adversely affect its ability to provide
services to the Fund, the Fund's ability to take advantage of market
opportunities, or the Fund's overall performance.


         Allianz AG's address is Koniginstrasse 28, D-80802, Munich, Germany.
Pacific Life's address is 700 Newport Center Drive, Newport Beach, CA 92660.

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


                                       -39-

<PAGE>

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

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

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

         From the commencement of the Fund's operations through June 30, 2009,
the Manager has contractually agreed to waive a portion of the management fees
it is entitled to receive from the Fund in the amounts, and for the time
periods, set forth below:
<TABLE>
<CAPTION>
                                    Percentage Waived                  Percentage Waived
                              (contractual annual rate as a    (annual rate as a percentage of
                              percentage of average daily net       average daily net assets
                               assets attributable to Common    attributable to Common Shares -
                              Shares - assuming no Preferred        assuming the issuance of
 Period Ending June 30,       Shares are issued or outstanding)        Preferred Shares)(2)
 ----------------------      --------------------------------------------------------------
<S>                                      <C>                               <C>
 2003(1).......................            0.15%                             0.24%
 2004   .......................            0.15%                             0.24%
 2005   .......................            0.15%                             0.24%
 2006   .......................            0.15%                             0.24%
 2007   .......................            0.15%                             0.24%
 2008   .......................            0.10%                             0.16%
 2009   .......................            0.05%                             0.08%
</TABLE>
- --------------
(1)      From the commencement of the Fund's operations.
(2)      Assumes the issuance of Preferred Shares in an amount equal to 38% of
         the Fund's capital (after their issuance).

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


                                       -40-

<PAGE>

         Except as otherwise described in the Prospectus, the Fund pays, in
addition to the investment management fee described above, all expenses not
assumed by the Manager, including, without limitation, fees and expenses of
Trustees who are not "interested persons" of the Manager or the Fund, interest
charges, taxes, brokerage commissions, expenses of issue of shares, fees and
expenses of registering and qualifying the Fund and its classes of shares for
distribution under federal and state laws and regulations, charges of
custodians, auditing and legal expenses, expenses of determining net asset value
of the Fund, reports to shareholders, expenses of meetings of shareholders,
expenses of printing and mailing prospectuses, proxy statements and proxies to
existing shareholders, and its proportionate share of insurance premiums and
professional association dues or assessments. The Fund is also responsible for
such nonrecurring expenses as may arise, including litigation in which the Fund
may be a party, and other expenses as determined by the Trustees. The Fund may
have an obligation to indemnify its officers and Trustees with respect to such
litigation.

Portfolio Manager

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

         Under the Portfolio Management Agreement, the Manager pays a portion of
the fees it receives from the Fund to PIMCO in return for PIMCO's services, at
the maximum annual rate of 0.50% of the Fund's average daily net assets
(including assets attributable to the Preferred Shares). PIMCO has contractually
agreed to waive a portion of the fee it is entitled to receive from the Manager
such that PIMCO will receive 0.26% of the Fund's average daily net assets from
the commencement of Fund operations through June 30, 2007 (i.e., roughly the
first 5 years of Fund operations), 0.40% of average daily net assets in year 6,
0.45% in year 7 and 0.50% in each year thereafter.


         Originally organized in 1971, reorganized as a Delaware general
partnership in 1994 and reorganized as a Delaware limited liability company in
2000, PIMCO provides investment management and advisory services to private
accounts of institutional and individual clients and to mutual funds. The
membership interests of PIMCO as of January 10, 2002, were held 94% by ADAM of
America and 6% by the managing directors of PIMCO. As of June 30, 2002, PIMCO
had approximately $7 billion in assets under management. PIMCO is located at
840 Newport Center Drive, Newport Beach, California 92660.


         Certain Terms of the Investment Management Agreement and Portfolio
Management Agreement. The Investment Management Agreement and the Portfolio
Management Agreement were each approved by the Trustees of the Fund (including
all of the Trustees who are not "interested persons" of the Manager or PIMCO).
The Investment Management Agreement and Portfolio Management Agreement will each
continue in force with respect to the Fund for two years from their respective
dates, and from year to year thereafter, but only so long as their continuance
is approved at least annually by (i) vote, cast in person at a meeting called
for that


                                       -41-

<PAGE>

purpose, of a majority of those Trustees who are not "interested persons" of the
Manager, PIMCO or the Fund, and by (ii) the majority vote of either the full
Board of Trustees or the vote of a majority of the outstanding shares of all
classes of the Fund. Each of the Investment Management Agreement and Portfolio
Management Agreement automatically terminates on assignment. The Investment
Management Agreement may be terminated on not less than 60 days' notice by the
Manager to the Fund or by the Fund to the Manager. The Portfolio Management
Agreement may be terminated on not less than 60 days' notice by the Manager to
PIMCO or by PIMCO to the Manager, or by the Fund at any time by notice to the
Manager and PIMCO.

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

         Basis for Approval of the Investment Management Agreement and Portfolio
Management Agreement. In determining to approve the Investment Management
Agreement and the Portfolio Management Agreement, the Trustees met with the
relevant investment advisory personnel from the Manager and PIMCO and considered
information relating to the education, experience and number of investment
professionals and other personnel who would provide services under the
applicable agreement. See "Management of the Fund" in the Prospectus and this
Statement of Additional Information. The Trustees also took into account the
time and attention to be devoted by senior management to the Fund and the other
funds in the complex. The Trustees evaluated the level of skill required to
manage the Fund and concluded that the human resources to be available at the
Manager and PIMCO were appropriate to fulfill effectively the duties of the
Manager and PIMCO on behalf of the Fund under the applicable agreement. The
Trustees also considered the business reputation of the Manager and PIMCO, their
financial resources and professional liability insurance coverage and concluded
that they would be able to meet any reasonably foreseeable obligations under the
applicable agreement.

         The Trustees received information concerning the investment philosophy
and investment process to be applied by PIMCO in managing the Fund. In this
connection, the Trustees considered PIMCO's in-house research capabilities as
well as other resources available to PIMCO's personnel, including research
services available to PIMCO as a result of securities transactions effected for
the Fund and other investment advisory clients. The Trustees concluded that
PIMCO's investment process, research capabilities and philosophy were well
suited to the Fund, given the Fund's investment objective and policies.

         The Trustees considered the scope of the services provided by the
Manager and PIMCO to the Fund under the Investment Management Agreement and
Portfolio Management Agreement, respectively, relative to services provided by
third parties to other mutual funds. The Trustees noted that the Manager's and
PIMCO's standard of care was comparable to that found in most investment company
advisory agreements. See "--Certain Terms of the Investment Management Agreement
and the Portfolio Management Agreement" above. The Trustees concluded that the
scope of the Manager's and PIMCO's services to be provided to the Fund was
consistent with the Fund's operational requirements, including, in addition to
its


                                       -42-

<PAGE>

investment objective, compliance with the Fund's investment restrictions, tax
and reporting requirements and related shareholder services.

         The Trustees considered the quality of the services to be provided by
the Manager and PIMCO to the Fund. The Trustees also evaluated the procedures of
the Manager and PIMCO designed to fulfill the their fiduciary duty to the Fund
with respect to possible conflicts of interest, including their codes of ethics
(regulating the personal trading of their officers and employees) (see
"Management of the Fund--Code of Ethics" above), the procedures by which PIMCO
allocates trades among its various investment advisory clients, the integrity of
the systems in place to ensure compliance with the foregoing and the record of
PIMCO in these matters. The Trustees also received information concerning
standards of the Manager and PIMCO with respect to the execution of portfolio
transactions. See "Portfolio Transactions" below.

         In approving the agreements, the Trustees also gave substantial
consideration to the fees payable under the agreements. The Trustees reviewed
information concerning fees paid to investment advisers of similar municipal
bond funds. The Trustees also considered the fees of the Fund as a percentage of
assets at different asset levels and possible economies of scale to the Manager.
The Trustees evaluated the Manager's profitability with respect to the Fund,
concluding that such profitability was not inconsistent with levels of
profitability that had been determined by courts not to be "excessive." In
evaluating the Fund's advisory fees, the Trustees also took into account the
complexity of investment management for the Fund relative to other types of
funds. The Trustees concluded that, generally, municipal bond funds require
greater intensity of research and trading acumen than more diversified funds.

                             PORTFOLIO TRANSACTIONS

Investment Decisions and Portfolio Transactions

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


                                       -43-

<PAGE>

and allocated between such clients in a manner which the Manager or PIMCO
believes is equitable to each and in accordance with the amount being purchased
or sold by each. There may be circumstances when purchases or sales of portfolio
securities for one or more clients will have an adverse effect on other clients.

Brokerage and Research Services

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

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

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

         It has for many years been a common practice in the investment advisory
business for advisers of investment companies and other institutional investors
to receive research services from broker-dealers which execute portfolio
transactions for the clients of such advisers. Consistent with this practice,
PIMCO may receive research services from many broker-dealers with which PIMCO
places the Fund's portfolio transactions. PIMCO may also receive research or
research credits from brokers which are generated from underwriting commissions
when purchasing new issues of debt securities or other assets for the Fund.
These services, which in some cases may also be purchased for cash, include such
matters as general economic and security market reviews, industry and company
reviews, evaluations of securities and recommendations as to the purchase and
sale of securities. Some of these services are of value to PIMCO in advising
various of its clients (including the Fund), although not all of these services


                                       -44-

<PAGE>

are necessarily useful and of value in managing the Fund. Neither the management
fee paid by the Fund to the Manager nor the portfolio management fee paid by the
Manager to PIMCO is reduced because PIMCO and its affiliates receive such
services.

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

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

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

                                  DISTRIBUTIONS


         See "Description of APS--Dividends" and "Description of capital
structure" in the Prospectus for information relating to distributions made to
Fund shareholders.

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

         While any Preferred Shares are outstanding, the Fund may not declare
any cash dividend or other distribution on its Common Shares unless at the time
of such declaration (1) all accumulated dividends on the Preferred Shares have
been paid and (2) the net asset value of the Fund's portfolio (determined after
deducting the amount of such dividend or other distribution) is at least 200% of
the liquidation value of any outstanding Preferred Shares. This latter
limitation on the Fund's ability to make distributions on its Common Shares
could cause the Fund to incur income and excise tax and, under certain
circumstances, impair the ability of the Fund to maintain its qualification for
taxation as a regulated investment company. See "Tax Matters."


         The Board of Trustees has declared a dividend of $0.08125 per common
share payable on September 9, 2002.


                                       -45-

<PAGE>
                              DESCRIPTION OF SHARES

Common Shares

         The Declaration authorizes the issuance of an unlimited number of
Common Shares. The Common Shares currently outstanding have been issued with a
par value of $0.00001 per share. All Common Shares have equal rights as to the
payment of dividends and the distribution of assets upon liquidation of the
Fund. The Common Shares currently outstanding have been fully paid and, subject
to matters discussed in "Anti-Takeover and Other Provisions in the Declaration
of Trust--Shareholder Liability" below, non-assessable, and will have no
pre-emptive or conversion rights or rights to cumulative voting. At any time
when the Preferred Shares are outstanding, Common Shareholders will not be
entitled to receive any distributions from the Fund unless all accrued dividends
on Preferred Shares have been paid, and unless asset coverage (as defined in the
1940 Act) with respect to Preferred Shares would be at least 200% after giving
effect to such distributions. See "Description of APS - Dividends - Restrictions
on Dividends and Other Payments" and "Description of capital structure" in the
Prospectus.

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

         Shares of closed-end investment companies may frequently trade at
prices lower than net asset value. Shares of closed-end investment companies
like the Fund that invest predominantly in investment grade Municipal Bonds have
during some periods traded at prices higher than net asset value and during
other periods traded at prices lower than net asset value. There can be no
assurance that Common Shares or shares of other municipal funds will trade at a
price higher than net asset value in the future. Net asset value generally
increases when interest rates decline, and decreases when interest rates rise,
and these changes are likely to be greater in the case of a fund, such as the
Fund, having a leveraged capital structure. Whether investors realize gains or
losses upon the sale of Common Shares does not depend upon the Fund's net asset
value but depends entirely upon whether the market price of the Common Shares at
the time of sale is above or below the original purchase price for the shares.
Since the market price of the Common Shares is determined by factors beyond the
control of the Fund, the Fund cannot predict whether the Common Shares will
trade at, below, or above net asset value or at, below or above the initial
public offering price. Accordingly, the Common Shares are designed primarily for
long-term investors, and investors in the Common Shares should not view the Fund
as a vehicle for trading purposes.

Preferred Shares

         See "Description of APS" and "Description of capital structure" in the
Prospectus for information relating to the Preferred Shares.


                                       -46-

<PAGE>
         ANTI-TAKEOVER AND OTHER PROVISIONS IN THE DECLARATION OF TRUST

Shareholder Liability

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

Anti-Takeover Provisions

         As described below, the Declaration includes provisions that could have
the effect of limiting the ability of other entities or persons to acquire
control of the Fund or to change the composition of its Board of Trustees, and
could have the effect of depriving shareholders of opportunities to sell their
shares at a premium over prevailing market prices by discouraging a third party
from seeking to obtain control of the Fund.

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

         Except as provided in the next paragraph, the affirmative vote or
consent of at least seventy-five percent (75%) of the Board of Trustees and at
least seventy-five percent (75%) of the shares of the Fund outstanding and
entitled to vote thereon are required to authorize any of the following
transactions (each a "Material Transaction"): (1) a merger, consolidation or
share exchange of the Fund or any series or class of shares of the Fund with or
into any other person or company, or of any such person or company with or into
the Fund or any such series or class of shares; (2) the issuance or transfer by
the Fund or any series or class of shares (in one or a series of transactions in
any twelve-month period) of any securities of the Fund or such series or class
to any other person or entity for cash, securities or other property (or
combination thereof) having an aggregate fair market value of $1,000,000 or
more, excluding sales of securities of the Fund or such series or class in
connection with a public offering, issuances of securities of the Fund or such
series or class pursuant to a dividend reinvestment plan adopted by the Fund and
issuances of securities of the Fund or such series or class upon the exercise of
any stock subscription rights distributed by the Fund; or (3) a sale, lease,
exchange, mortgage, pledge, transfer or other disposition by the Fund or any
series or class of shares (in one or a series of transactions in any
twelve-month period) to or with any person of any assets of the Fund or such
series or class having an aggregate fair market value of $1,000,000 or more,
except for


                                       -47-

<PAGE>

transactions in securities effected by the Fund or such series or class in the
ordinary course of its business. The same affirmative votes are required with
respect to any shareholder proposal as to specific investment decisions made or
to be made with respect to the Fund's assets or the assets of any series or
class of shares of the Fund.

         Notwithstanding the approval requirements specified in the preceding
paragraph, the Declaration requires no vote or consent of the Fund's
shareholders to authorize a Material Transaction if the transaction is approved
by a vote of both a majority of the Board of Trustees and seventy-five percent
(75%) of the Continuing Trustees (as defined below), so long as all other
conditions and requirements, if any, provided for in the Fund's Amended By-laws
and applicable law (including any shareholder voting rights under the 1940 Act)
have been satisfied.

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

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

         As noted, the voting provisions described above could have the effect
of depriving Common Shareholders of an opportunity to sell their Common Shares
at a premium over prevailing market prices by discouraging a third party from
seeking to obtain control of the Fund in a tender offer or similar transaction.
In the view of the Fund's Board of Trustees, however, these provisions offer
several possible advantages, including: (1) requiring persons seeking control of
the Fund to negotiate with its management regarding the price to be paid for the
amount of Common Shares required to obtain control; (2) promoting continuity and
stability; and (3) enhancing the Fund's ability to pursue long-term strategies
that are consistent with its investment objective and management policies. The
Board of Trustees has determined that the voting requirements described above,
which are generally greater than the minimum requirements under the 1940 Act,
are in the best interests of the Common Shareholders generally.

         A "Continuing Trustee," as used in the discussion above, is any member
of the Fund's Board of Trustees who either (i) has been a member of the Board
for a period of at least thirty-six months (or since the commencement of the
Fund's operations, if less than thirty-six months) or (ii) was nominated to
serve as a member of the Board of Trustees by a majority of the Continuing
Trustees then members of the Board.

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


                                       -48-

<PAGE>

Liability of Trustees

         The Declaration provides that the obligations of the Fund are not
binding upon the Trustees of the Fund individually, but only upon the assets and
property of the Fund, and that the Trustees shall not be liable for errors of
judgment or mistakes of fact or law. Nothing in the Declaration, however,
protects a Trustee against any liability to which he would otherwise be subject
by reason of willful misfeasance, bad faith, gross negligence or reckless
disregard of the duties involved in the conduct of his office.

             REPURCHASE OF FUND SHARES; CONVERSION TO OPEN-END FUND

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

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

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

         The Fund's Board of Trustees may also from time to time consider
submitting to the holders of the shares of beneficial interest of the Fund a
proposal to convert the Fund to an open-end investment company. In determining
whether to exercise its sole discretion to submit this issue to shareholders,
the Board of Trustees would consider all factors then relevant, including


                                       -49-

<PAGE>

the relationship of the market price of the Common Shares to net asset value,
the extent to which the Fund's capital structure is leveraged and the
possibility of re-leveraging, the spread, if any, between the yields on
securities in the Fund's portfolio and interest and dividend charges on
Preferred Shares issued by the Fund and general market and economic conditions.

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

         If the Fund converted to an open-end company, it would be required to
redeem all Preferred Shares then outstanding (requiring in turn that it
liquidate a portion of its investment portfolio), and the Common Shares likely
would no longer be listed on the New York Stock Exchange. Shareholders of an
open-end investment company may require the company to redeem their shares on
any business day (except in certain circumstances as authorized by or under the
1940 Act) at their net asset value, less such redemption charge, if any, as
might be in effect at the time of redemption. In order to avoid maintaining
large cash positions or liquidating favorable investments to meet redemptions,
open-end companies typically engage in a continuous offering of their shares.
Open-end companies are thus subject to periodic asset in-flows and out-flows
that can complicate portfolio management.

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

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

         Before deciding whether to take any action if the Common Shares trade
below net asset value, the Board of Trustees would consider all relevant
factors, including the extent and duration of the discount, the liquidity of the
Fund's portfolio, the impact of any action that might


                                       -50-

<PAGE>

be taken on the Fund or its shareholders and market considerations. Based on
these considerations, even if the Fund's shares should trade at a discount, the
Board of Trustees may determine that, in the interest of the Fund and its
shareholders, no action should be taken.

                                   TAX MATTERS

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

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

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

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

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

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

         The Fund intends to distribute at least annually to its shareholders
all or substantially all of its net tax-exempt interest and any investment
company taxable income, and may distribute its net capital gain. The Fund may
also retain for investment its net capital gain. If the Fund does


                                       -51-

<PAGE>

retain any net capital gain or any investment company taxable income, it will be
subject to tax at regular corporate rates on the amount retained. If the Fund
retains any net capital gain, it may designate the retained amount as
undistributed capital gains in a notice to its shareholders who, if subject to
federal income tax on long-term capital gains, (i) will be required to include
in income for federal income tax purposes, as long-term capital gain, their
shares of such undistributed amount, and (ii) will be entitled to credit their
proportionate shares of the tax paid by the Fund on such undistributed amount
against their federal income tax liabilities, if any, and to claim refunds to
the extent the credit exceeds such liabilities. For federal income tax purposes,
the tax basis of shares owned by a shareholder of the Fund will be increased by
an amount equal under current law to the difference between the amount of
undistributed capital gains included in the shareholder's gross income and the
tax deemed paid by the shareholder under clause (ii) of the preceding sentence.

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

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

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

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


                                       -52-

<PAGE>

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

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

         Under the Code, the interest on certain "private activity bonds" issued
after August 7, 1986 is treated as a preference item and is (after reduction by
applicable expenses) included in federal alternative minimum taxable income. The
Fund will furnish to shareholders annually a report indicating the percentage of
Fund income treated as a preference item for federal AMT purposes. In addition,
for corporations, alternative minimum taxable income is increased by a
percentage of the excess of an alternative measure of income that includes
interest on all tax-exempt securities over the amount otherwise determined to be
alternative minimum taxable income. Accordingly, the portion of the Fund's
dividends that would otherwise be tax-exempt to the shareholders may cause an
investor to be subject to the AMT or may increase the tax liability of an
investor who is subject to such tax. As described above, the portfolio manager
will normally avoid investments in bonds potentially subjecting individuals to
the AMT, which generally includes private activity bonds.

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

         The Fund designates distributions made to the share classes as
consisting of a portion of each type of income distributed by the Fund. The
portion of each type of income deemed received by each class of shareholders is
equal to the portion of total Fund distributions received by such class. Thus,
the Fund will designate dividends paid as exempt-interest dividends in a manner
that allocates such dividends between and among the Common Shares, the Series A
Preferred Shares and the Series B Preferred Shares in proportion to the total
dividends paid to


                                       -53-

<PAGE>

each class during or with respect to the taxable year or otherwise as required
by applicable law. Long-term capital gain distributions and other income subject
to regular federal income tax will similarly be allocated between and among the
two (or more) classes.

         Dividends (including Capital Gain Dividends) will be taxable as
described above whether received in cash or in shares. A shareholder whose
distributions are reinvested in shares will be treated as having received a
dividend equal to either (i) the fair market value of the new shares issued to
the shareholder, or (ii) if the shares are trading below net asset value, the
amount of cash allocated to the shareholder for the purchase of shares on its
behalf in the open market.

         Part or all of the interest on indebtedness, if any, incurred or
continued by a shareholder to purchase or carry shares of the Fund paying
exempt-interest dividends is not deductible. The portion of interest that is not
deductible is equal to the total interest paid or accrued on the indebtedness,
multiplied by the percentage of the Fund's total distributions (not including
distributions from net long-term capital gains) paid to the shareholder that are
exempt-interest dividends. Under rules used by the Internal Revenue Service (the
"Service") to determine when borrowed funds are considered used for the purpose
of purchasing or carrying particular assets, the purchase of shares may be
considered to have been made with borrowed funds even though such funds are not
directly traceable to the purchase of shares.

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

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

         The Fund will inform investors within 60 days of the Fund's fiscal
year-end of the percentage of its income distributions designated as tax-exempt.
The percentage is applied uniformly to all distributions made in respect of
Common Shares during the year; percentages may differ among distributions to
holders of Preferred Shares. The percentage of income designated as tax-exempt
for any particular distribution, whether to holders of Common Shares or holders
of Preferred Shares, may be substantially different from the percentage of the
Fund's income that was tax-exempt during the period covered by the distribution.

         Hedging Transactions. If the Fund engages in hedging transactions,
including hedging transactions in options, futures contracts, and straddles, or
other similar transactions, it will be subject to special tax rules (including
constructive sale, mark-to-market, straddle, wash sale, and short sale rules),
the effect of which may be to accelerate income to the Fund, defer losses to the
Fund, cause adjustments in the holding periods of the Fund's securities, convert
long-term


                                       -54-

<PAGE>

capital gains into short-term capital gains or convert short-term capital losses
into long-term capital losses. These rules could therefore affect the amount,
timing and character of distributions to shareholders. Income earned as a result
of the Fund's hedging activities will not be eligible to be treated as
exempt-interest dividends when distributed to shareholders. The Fund will
endeavor to make any available elections pertaining to such transactions in a
manner believed to be in the best interests of the Fund.

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

         Return of Capital Distributions. If the Fund makes a distribution to a
shareholder in excess of the Fund's current and accumulated earnings and profits
in any taxable year, the excess distribution will be treated as a return of
capital to the extent of such shareholder's tax basis in its shares, and
thereafter as capital gain. A return of capital is not taxable, but it reduces a
shareholder's tax basis in its shares, thus reducing any loss or increasing any
gain on a subsequent taxable disposition by the shareholder of its shares. Where
one or more such distributions occur in any taxable year of the Fund, the
available earnings and profits will be allocated, first, to the distributions
made to the holders of Preferred Shares, and only thereafter to distributions
made to holders of Common Shares. As a result, the holders of Preferred Shares
will receive a disproportionate share of the distributions treated as dividends,
and the holders of the Common Shares will receive a disproportionate share of
the distributions treated as a return of capital.

         Dividends and distributions on the Fund's shares are generally subject
to federal income tax as described herein to the extent they do not exceed the
Fund's realized income and gains, even though such dividends and distributions
may economically represent a return of a particular shareholder's investment.
Such distributions are likely to occur in respect of shares purchased at a time
when the Fund's net asset value reflects gains that are either unrealized, or
realized but not distributed. Such realized gains may be required to be
distributed even when the Fund's net asset value also reflects unrealized
losses. Distributions are taxable to a shareholder even if they are paid from
income or gains earned by the Fund prior to the shareholder's investment (and
thus included in the price paid by the shareholders).

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


                                       -55-

<PAGE>

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

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

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


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


                                       -56-

<PAGE>

         In order for a foreign investor to qualify for exemption from the
back-up withholding tax rates under income tax treaties, the foreign investor
must comply with special certification and filing requirements. Foreign
investors in the Fund should consult their tax advisers in this regard.

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

         State and City Tax Matters.  Tax matters pertaining to New York are set
forth in Appendix B.

                 PERFORMANCE RELATED AND COMPARATIVE INFORMATION

         The Fund may be a suitable investment for a shareholder who is a
resident of New York and thinking of adding bond investments to his portfolio to
balance the appreciated stocks that the shareholder is holding. Although the
Fund currently intends at all times to avoid investments generating income
potentially subjecting individuals to the federal alternative minimum tax, it
may not be successful in doing so. Therefore, Preferred Shares may not be a
suitable investment for investors who are subject to the federal alternative
minimum tax or who would become subject to such tax by purchasing Preferred
Shares. The suitability of an investment in Preferred Shares will depend upon a
comparison of the after-tax yield likely to be provided from the Fund with that
from comparable tax-exempt investments (including those not subject to the
alternative minimum tax), and from comparable fully taxable investments, in
light of each such investor's tax position.

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

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

         For the period from June 28, 2002 (the commencement of the Fund's
operations) through July 31, 2002, the Fund's net increase in net assets
resulting from investment operations was $1,265,685.

         Past performance is not indicative of future results.

           CUSTODIAN, TRANSFER AGENTS AND DIVIDEND DISBURSEMENT AGENTS

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


                                       -57-

<PAGE>

         PFPC Inc., 400 Bellevue Parkway, Wilmington, Delaware 19809, serves as
the transfer agent, registrar and dividend disbursement agent for the Common
Shares, as well as agent for the Dividend Reinvestment Plan relating to the
Common Shares.


         Deutsche Bank Trust Company Americas, 100 Plaza One, 6th Floor, Jersey
City, New Jersey 07311, serves as auction agent, transfer agent, registrar,
dividend paying agent and redemption agent for the Preferred Shares.


                             INDEPENDENT ACCOUNTANTS


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


                                     COUNSEL

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

                             REGISTRATION STATEMENT

         A Registration Statement on Form N-2, including any amendments thereto,
relating to the shares of the Fund offered hereby, has been filed by the Fund
with the Securities and Exchange Commission (the "SEC"), Washington, D.C. The
Prospectus and this Statement of Additional Information do not contain all of
the information set forth in the Registration Statement, including any exhibits
and schedules thereto. For further information with respect to the Fund and the
shares offered or to be offered hereby, reference is made to the Fund's
Registration Statement. Statements contained in the Prospectus and this
Statement of Additional Information as to the contents of any contract or other
document referred to are not necessarily complete and in each instance reference
is made to the copy of such contract or other document filed as an exhibit to
the Registration Statement, each such statement being qualified in all respects
by such reference. Copies of the Registration Statement may be inspected without
charge at the SEC's principal office in Washington, D.C., and copies of all or
any part thereof may be obtained from the SEC upon the payment of certain fees
prescribed by the SEC.


                                       -58-

<PAGE>

                              FINANCIAL STATEMENTS

     The Statement of Assets and Liabilities of the Fund dated as of June 19,
2002, and the Statement of Operations for the one-day period ending June 19,
2002, including the Notes thereto, and the report of PricewaterhouseCoopers LLP
thereon dated June 20, 2002, as included in the Fund's Statement of Additional
Information dated June 25, 2002, relating to the Common Shares, is hereby
incorporated by reference into this Statement of Additional Information, which
means that such Statement of Assets and Liabilities, Statement of Operations and
the Notes thereto are considered to be a part of this Statement of Additional
Information. The Statement of Additional Information for the Common Shares was
filed electronically with the SEC on June 27, 2002 (Accession No.
0000927016-02-003448).


                                      -59-

<PAGE>


                     PIMCO NEW YORK MUNICIPAL INCOME FUND II
                       STATEMENT OF ASSETS AND LIABILITIES
                                  July 31, 2002
                                   (unaudited)

<TABLE>

<CAPTION>

Assets:
<S>                                                                                              <C>
  Investments, at value (cost-$134,837,407) .................................................       $135,846,183
  Cash ......................................................................................         21,171,771
  Receivable for investment sold ............................................................         12,000,000
  Interest receivable .......................................................................            639,858
  Prepaid expenses ..........................................................................             11,578
                                                                                                 ----------------
    Total Assets ............................................................................        169,669,390
                                                                                                 ----------------



Liabilities:
  Payable for investments purchased .........................................................         25,246,800
  Investment management fee payable .........................................................             61,607
  Common stock offering expenses payable ....................................................             34,245
  Accrued expenses ..........................................................................             11,050
                                                                                                 ----------------
    Total Liabilities .......................................................................         25,353,702
                                                                                                 ----------------
     Net Assets .............................................................................       $144,315,688
                                                                                                 ================

Composition of Net Assets:
  Par value ($0.00001 per share, applicable to 10,006,981 shares issued and outstanding) ....                100
  Paid-in-capital in excess of par ..........................................................        143,049,903
  Undistributed net investment income .......................................................            207,181
  Net realized gain on investments ..........................................................             49,728
  Net unrealized appreciation of investments ................................................          1,008,776
                                                                                                 ----------------
    Net Assets ..............................................................................       $144,315,588
                                                                                                 ================

    Net assets value per share ..............................................................             $14.42
                                                                                                          =======
</TABLE>



See accompanying notes to financial information.


                                      -60-

<PAGE>

                     PIMCO NEW YORK MUNICIPAL INCOME FUND II
                             STATEMENT OF OPERATIONS
               For the period June 28, 2002* through July 31, 2002
                                   (unaudited)


Investment Income:
   Interest.......................................................   $  280,995
                                                                     ----------

Expenses:
   Investment management fees.....................................       61,607
   Custodian fees.................................................        4,590
   Transfer agent fees............................................        2,380
   Audit and tax service fees.....................................        1,190
   Trustees' fees and expenses....................................        1,020
   Legal fees.....................................................          850
   Reports to shareholders........................................          510
   Miscellaneous..................................................        1,667
                                                                     ----------
      Total expenses .............................................       73,814
                                                                     ----------
         Net investment income ...................................      207,181
                                                                     ----------

Realized and Unrealized Gain on Investments:

Net realized gain on investments..................................       49,728
Net unrealized appreciation of investments........................    1,008,776
                                                                     ----------

         Net realized and unrealized gain on investments..........    1,058,504
                                                                     ----------
Net increase in net assets resulting from investment operations...   $1,265,685
                                                                     ==========


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

                       STATEMENT OF CHANGES IN NET ASSETS
               For the period June 28, 2002* through July 31, 2002
                                   (unaudited)


Income from Investment Operations:
   Net investment income.......................................... $    207,181
   Net realized gain on investments...............................       49,728
   Net unrealized appreciation of investments.....................    1,008,776
                                                                   ------------
      Net increase in net assets resulting from investment
        operations................................................    1,265,685
                                                                   ------------

Share Transactions:
   Net proceeds from the sale of shares...........................  143,250,000
   Common stock offering expenses charged to paid-in-capital
      in excess of par............................................     (300,000)
                                                                   ------------
      Total share transactions....................................  142,950,000
                                                                   ------------

      Total increase in net assets................................  144,215,685
                                                                   ------------
Net Assets:
   Beginning of period............................................     100,003
                                                                   ------------
   End of period (including undistributed net investment
      income of $207,181)......................................... $144,315,688
                                                                   ============

Shares Issued:
   Issued.........................................................   10,000,000
                                                                   ============

- ---------------------------
* Commencement of operations


See accompanying notes to financial information.


                                      -61-

<PAGE>


                    PIMCO NEW YORK MUNICIPAL INCOME FUND II
                         NOTES TO FINANCIAL INFORMATION
                                 July 31, 2002
                                  (unaudited)


1.   Organization
PIMCO New York Municipal Income Fund II , (the "Fund") was organized as a
Massachusetts business trust on March 29, 2002. Prior to commencing operations
on June 28, 2002, the Fund had no operations other than matters relating to its
organization and registration as a non-diversified, closed-end management
investment company under the Investment Company Act of 1940, as amended, and the
sale and issuance to PIMCO Funds Advisors LLC (the "Investment Manager"), an
indirect majority-owned subsidiary of Allianz AG, of 6,981 shares of beneficial
interest at an aggregate purchase price of $100,003. The Investment Manager has
agreed to reimburse the amount by which the aggregate of all the Fund's
organizational expenses and offering costs (other than the sales load) exceeds
$0.03 per share. There are an unlimited number of $0.00001 par value common
stock authorized.

2.   Accounting Policies

(a)  Valuation of Investments
Debt securities are valued daily by an independent pricing service approved by
the Board of Trustees. Any security or other asset for which market quotations
are not readily available is valued at fair value as determined in good faith
under procedures established by the Board of Trustees. The Fund invests
substantially all of its assets in municipal bonds which pay interest that is
exempt from federal, New York State and New York City income taxes. The Fund
will seek to avoid bonds generating interest potentially subjecting individuals
to alternative minimum tax. The Fund is susceptible to political, economic,
regulatory and other factors affecting issues of New York Municipal Bonds. The
issuers' ability to meet its obligations may be affected by the economic
condition of the facility or specific revenue source from whose revenue payments
of obligations may be made.

(b)  Investment Transactions and Investment Income
Investment transactions are accounted for on the trade date. Realized gains and
losses on investments are determined on the identified cost basis. Interest
income is recorded on an accrual basis. Original issue discounts or premiums on
debt securities purchased are accreted or amortized daily to non-taxable
interest income. Market discounts, if any, are accreted daily to taxable income.

(c)  Expense Offset
The Fund benefits from an expense offset arrangement with its custodian bank
whereby uninvested cash balances earn credits which reduce monthly custodian
expenses. Had these cash balances been invested in income producing securities,
they would have generated income for the Fund.

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

3.   Investment Manager And Related Parties
Pursuant to the Investment Management Agreement, the Fund pays the Investment
Manager an annual management fee, payable monthly, at the annual rate of 0.65%
of the Fund's average daily net assets, inclusive of net assets attributable to
any preferred shares that may be issued. The Investment Manager has retained its
affiliate, Pacific Investment Management Company LLC ("PIMCO"), to manage the
Fund's investments.

                                      -62-

<PAGE>


                    PIMCO NEW YORK MUNICIPAL INCOME FUND II
                         NOTES TO FINANCIAL INFORMATION
                                 July 31, 2002
                                  (unaudited)





3.   Investment Manager And Related Parties (concluded)

The Investment Manager (not the Fund) will pay a portion of the fees it receives
as Investment Manager to PIMCO in return for its services, at the maximum annual
rate of 0.50% of the Fund's average daily net assets, inclusive of net assets
attributable to any preferred shares that may be issued.

In order to reduce Fund expenses, the Investment Manager has contractually
agreed to waive a portion of its investment management fees at the annual rate
of 0.15% of the Fund's average daily net assets, inclusive of net assets
attributable to any preferred shares that may be issued, from the commencement
of operations through June 30, 2007, and an increasing amount thereafter through
June 30, 2009. PIMCO has contractually agreed to waive a portion of the fees it
is entitled to receive from the Investment Manager such that it will receive
0.26% of Fund's average daily net assets, inclusive of any net assets
attributable to any preferred shares issued, from the commencement of operations
through June 30, 2007, and an increasing amount thereafter through June 30,
2009.

                                      -63-

<PAGE>

                     PIMCO NEW YORK MUNICIPAL INCOME FUND II
                             SCHEDULE OF INVESTMENTS
                                  July 31, 2002
                                   (unaudited)
<TABLE>
<CAPTION>

  Principal
   Amount
    (000)     Cusip #                                                                                 Value*
- ---------------------------------------------------------------------------------------------------------------
<S>           <C>          <C>                                                                     <C>
                           NEW YORK MUNICIPAL BONDS & NOTES - 58.0%
  $10,000     295095AQ6    Erie Cnty Tobacco Asset
                              6.50%, 7/15/32 ...................................................   $ 10,575,600
                           Metropolitan Transportation Auth. Rev.,
    1,850     59259RBE3       5.00%, 11/15/30, Ser. A ..........................................      1,825,044
   10,000     59259RFX7       5.25%, 11/15/31, Ser. E ..........................................     10,030,700
                           Metropolitan Transportation Auth. Service Contract,
    7,000     5925973U0       5.35%, 7/1/31, Ser. B ............................................      7,069,300
                           New York City Health & Hospital Corp., Rev.
    1,100     649674EB0       5.375%, 2/15/26, Ser. A ..........................................      1,102,013
    2,000     649674EA2       5.45%, 2/15/26, Ser. A ...........................................      2,008,820
                           New York City Muni. Water Fin. Auth., Water & Sewer Sys. Rev.,
   15,000     64970KVC8       5.125%, 6/15/34, Ser. A ..........................................     14,871,000
                           New York City Transitional Fin. Auth. Rev.,
   10,000     6497167K7       5.00%, 11/1/27, Ser. B ...........................................      9,858,100
    5,000     64983XL69    State Dormitory Auth. Revs., Lenox Hill Hospital
                              5.50%, 7/1/30 ....................................................      5,026,250
    4,270     649901KR5    State Dormitory Auth. Rev., Teachers College
                              5.00%, 7/1/32 ....................................................      4,198,221
    2,000     64985MN69    State Environmental Facs. Corp., State Clean Water & Drinking
                              5.125%, 6/15/31 ..................................................      2,009,860
    4,700     8960295L5    Triborough  Bridge &  Tunnel Auth. Revs.,
                              5.00%, 1/1/32, Ser. A ............................................      4,621,557
   10,000     898526BM9    TSASC INC NY,
                              6.375%, 7/15/39 ..................................................     10,465,000
                                                                                                   ------------
                           Total New York Municipal Bonds & Notes (cost-$83,013,476)............     83,661,465
                                                                                                   ------------

                            NEW YORK SHORT-TERM VARIABLE RATE DEMAND NOTES** - 36.1%

                           Long Island Power Auth. Elec. Sys. Rev.,
   13,988     542690PS5       8.85%, 8/1/02, Ser. 339 ..........................................     14,235,358
    3,000     542690RU8       1.35%, 8/1/02, Ser. 1B ...........................................      3,000,000
    5,000     649659GE3    New York, General Obligation,
                              1.25%, 8/7/02, Ser A .............................................      5,000,000
    4,000     649702PD3    New York City Hsg. Dev. Corp. Mtge. Rev.
                              1.50%, 8/1/02 ....................................................      4,000,000
    2,000     64971CYZ1    New York City Industrial Dev. Agency Civic Fac. Rev.
                              1.30%, 8/7/02 ....................................................      2,000,000
    6,565     64970KNE3    New York City Muni. Water Fin. Auth., Water  &
                           Sewer Sys. Rev.,
                              7.70%, 8/1/02 Ser. 364, ..........................................      5,999,360
    5,000     649716WE3    New York City Transitional Fin. Auth. Rev.,
                              1.25%, 8/7/02, Ser. A ............................................      5,000,000
    4,950     649901FR1    State Dormitory Auth. Rev., Columbia University
                              1.25%, 8/1/02, Ser. C ............................................      4,950,000
    3,000     649876PV5    State Loc Govt. Assistance Corp.
                              1.15%, 8/7/02, Ser. E ............................................      3,000,000
    5,000     73358EAM6    Port Auth. New York & New Jersey Special Oblig., Rev.
                              1.45%, 8/1/02 ....................................................      5,000,000
                                                                                                   ------------
                           Total New York Short-Term Variable Rate Demand ......................     52,184,718
                           Notes (cost-$51,823,931)                                                ------------
                              Total Investments (cost-$134,837,407) ..............   94.1%         $135,846,183
                              Other assets less liabilities ......................    5.9%            8,469,505
                                                                                     -----         ------------
                              Net Assets .........................................  100.0%         $144,315,688
                                                                                     =====         ============
</TABLE>
- --------------------------------
*  Long-term debt securities are valued by an independent price service
   authorized by the Board of Trustees.

** Variable Rate Demand Notes are instruments whose interest rates change on a
   specified date (such as a coupon date or interest payment date) and/or
   whose interest rates vary with changes in a designated base rate (such as
   the prime interest rate).

Maturity date shown is date of next rate change.


See accompanying notes to financial information.


                                      -64-

<PAGE>

                                   APPENDIX A

                        DESCRIPTION OF SECURITIES RATINGS

         The Fund's investments may range in quality from securities rated in
the lowest category to securities rated in the highest category (as rated by
Moody's, S&P or Fitch or, if unrated, determined by PIMCO to be of comparable
quality). The percentage of the Fund's assets invested in securities in a
particular rating category will vary. The following terms are generally used to
describe the credit quality of debt securities:

         High Quality Debt Securities are those rated in one of the two highest
rating categories (the highest category for commercial paper) or, if unrated,
deemed comparable by PIMCO.

         Investment Grade Debt Securities are those rated in one of the four
highest rating categories or, if unrated, deemed comparable by PIMCO.

         Below Investment Grade, High Yield Securities (the "Junk Bonds") are
those rated lower than Baa by Moody's, BBB by S&P and BBB by Fitch and
comparable securities. They are deemed predominately speculative with respect to
the issuer's ability to repay principal and interest.

         Following is a description of Moody's, S&P's and Fitch's rating
categories applicable to debt securities.

Moody's Investors Service, Inc.

         Corporate and Municipal Bond Ratings

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

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


                                       A-1

<PAGE>

         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 a
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.

         Moody's bond ratings, where specified, are applicable to financial
contracts, senior bank obligations and insurance company senior policyholder and
claims obligations with an original maturity in excess of one year. Obligations
relying upon support mechanisms such as letter-of-credit and bonds of indemnity
are excluded unless explicitly rated. Obligations of a branch of a bank are
considered to be domiciled in the country in which the branch is located.

         Unless noted as an exception, Moody's rating on a bank's ability to
repay senior obligations extends only to branches located in countries which
carry a Moody's Sovereign Rating for Bank Deposits. Such branch obligations are
rated at the lower of the bank's rating or Moody's Sovereign Rating for the Bank
Deposits for the country in which the branch is located. When the currency in
which an obligation is denominated is not the same as the currency of the
country in which the obligation is domiciled, Moody's ratings do not incorporate
an opinion as to whether payment of the obligation will be affected by the
actions of the government controlling the currency of denomination. In addition,
risk associated with bilateral conflicts between an investor's home country and
either the issuer's home country or the country where an issuer branch is
located are not incorporated into Moody's ratings.

         Moody's makes no representation that rated bank obligations or
insurance company obligations are exempt from registration under the U.S.
Securities Act of 1933 or issued in conformity with any other applicable law or
regulation. Nor does Moody's represent any specific bank or insurance company
obligation is legally enforceable or a valid senior obligation of a rated
issuer.


                                       A-2

<PAGE>

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

         Corporate Short-Term Debt Ratings

         Moody's short-term debt ratings are opinions of the ability of issuers
to repay punctually senior debt obligations. These obligations have an original
maturity not exceeding one year, unless explicitly noted.

         Moody's employs the following three designations, all judged to be
investment grade, to indicate the relative repayment ability of rated issuers:

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

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

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

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

Standard & Poor's Ratings Services

         Issue Credit Rating Definitions

         A Standard & Poor's issue credit rating is a current opinion of the
creditworthiness of an obligor with respect to a specific financial obligation,
a specific class of financial obligations, or a specific financial program
(including ratings on medium term note programs and commercial paper programs).
It takes into consideration the creditworthiness of guarantors, insurers, or
other forms of credit enhancement on the obligation and takes into account the
currency in which the obligation is denominated. The issue credit rating is not
a recommendation to purchase, sell, or


                                       A-3

<PAGE>

hold a financial obligation, inasmuch as it does not comment as to market price
or suitability for a particular investor.

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

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

         Issue credit ratings are based, in varying degrees, on the following
considerations: likelihood of payment -- capacity and willingness of the obligor
to meet its financial commitment on an obligation in accordance with the terms
of the obligation; nature of and provisions of the obligation; protection
afforded by, and relative position of, the obligation in the event of
bankruptcy, reorganization, or other arrangement under the laws of bankruptcy
and other laws affecting creditors' rights.

         The issue rating definitions are expressed in terms of default risk. As
such, they pertain to senior obligations of an entity. Junior obligations are
typically rated lower than senior obligations, to reflect the lower priority in
bankruptcy, as noted above. (Such differentiation applies when an entity has
both senior and subordinated obligations, secured and unsecured obligations, or
operating company and holding company obligations.) Accordingly, in the case of
junior debt, the rating may not conform exactly with the category definition.

         Corporate and Municipal Bond Ratings

         Investment Grade

         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.

         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.


                                       A-4

<PAGE>

         Speculative Grade

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

         BB: 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: A 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 taken,
but payments on this obligation are being continued. A C also will be assigned
to a preferred stock issue in arrears on dividends or sinking fund payments, but
that is currently paying.

         CI: The rating CI is reserved for income bonds on which no interest is
being paid.

         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.

         Provisional ratings: The letter "p" indicates that the rating is
provisional. A provisional rating assumes the successful completion of the
project being financed by the debt being rated and indicates that payment of
debt service requirements is largely or entirely dependent upon the successful
and timely completion of the project. This rating, however, while addressing
credit quality subsequent to completion of the project, makes no comment on the
likelihood of, or the


                                       A-5

<PAGE>

risk of default upon failure of, such completion. The investor should exercise
his own judgment with respect to such likelihood and risk.

         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.

         The absence of an "r" symbol should not be taken as an indication that
an obligation will exhibit no volatility or variability in total return.

         N.R.: This indicates that no rating has been requested, that there is
insufficient information on which to base a rating, or that Standard & Poor's
does not rate a particular obligation as a matter of policy.

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

         Commercial Paper Rating Definitions

         A Standard & Poor's commercial paper rating is a current assessment of
the likelihood of timely payment of debt having an original maturity of no more
than 365 days. Ratings are graded into several categories, ranging from A for
the highest quality obligations to D for the lowest. These categories are as
follows:

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

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

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

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


                                       A-6

<PAGE>

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

         D: A short-term obligation rated D is in payment default. The D rating
category is used when payments on an obligation are not made on the date due
even if the applicable grace period has not expired, unless 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.

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

Fitch, Inc.

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

         Long-Term Credit Ratings

         Investment Grade

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

         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


                                       A-7

<PAGE>

         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, favorable business and economic environment.

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

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

         Short-Term Credit Ratings

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

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

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

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

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


                                       A-8

<PAGE>

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

         D:  Default.  Denotes actual or imminent payment default.

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

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

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

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

         A Rating Outlook indicates the direction a rating is likely to move
over a one to two year period. Outlooks may be positive, stable, or negative. A
positive or negative Rating Outlook does not imply a rating change is
inevitable. Similarly, companies whose outlooks are `stable' could be downgraded
before an outlook moves to positive or negative if circumstances warrant such an
action. Occasionally, Fitch may be unable to identify the fundamental trend. In
these cases, the Rating Outlook may be described as evolving.


                                       A-9

<PAGE>

                                   APPENDIX B

                         FACTORS PERTAINING TO NEW YORK

FACTORS PERTAINING TO NEW YORK

         The following information is a brief summary of factors affecting the
economy of New York City (the "City") or New York State (the "State" or "New
York"). Other factors will affect other issuers. The summary is based primarily
upon information in the State's Annual Information Statement, as updated, and
the most recently publicly available offering statement relating to debt
offerings of the City and the City's 2002-2006 Financial Plan, however, such
information has not been updated. The Fund has not independently verified this
information.

         The State, some of its agencies, instrumentalities and public
authorities and certain of its municipalities and the City have sometimes faced
serious financial difficulties that could have an adverse effect on the sources
of payment for or the market value of the New York Municipal Bonds in which the
Fund invests.

NEW YORK CITY

         General. The events of September 11, 2001 had a significant impact upon
the City economy. The City expects, based on actions and statements of the U.S.
Congress and the President and measures taken by the State, that it will be
fully reimbursed for the cost to recover from, clean up and repair the
consequences of the World Trade Center attack. However, prior to September 11,
the City's economy had been weakening primarily as the result of the downturn in
the securities and financial services industries. The loss of over seventy
thousand jobs in the City due to September 11, which are not expected to be
recovered until 2005, will produce additional adverse budgetary pressures
including increases to later year budget gaps and reductions to State surpluses
that decrease the ability of the State to provide financial support to the City.
The City of New York Executive Budget Fiscal Year 2003 released by the Mayor of
the City on April 17, 2002 (the "City Executive Budget"), projects total revenue
to be lost to the City as a result of September 11 during those fiscal years
will be $3.9 billion and that expenses over the same period have increased by
$6.1 billion from projections made prior to September 11. On June 19, 2002, the
Mayor and the City Council announced a budget agreement which, while it restored
some of the funds cut in the City Executive Budget, adopted the City Executive
Budget with no material changes.

         More than any other New York municipality, the fiscal health of the
City depends upon the fiscal health of the State, which has projected slower
growth and warned of the risk of a downturn. As a result of September 11, the
City Executive Budget assumes reduced economic activity in the second half of
calendar year 2001, job and income losses through the first half of 2002 and a
moderate recovery thereafter. The City Executive Budget also projects declines
in revenues from forecasts made prior to September 11 for fiscal years 2002
through 2006 as a result of reduced economic activity.

         For each of the 1981 through 2001 fiscal years, the City had an
operating surplus, before discretionary transfers, and achieved balanced
operating results as reported in accordance with generally accepted accounting
principles ("GAAP") after discretionary transfers. Historically,


                                       B-1

<PAGE>

the City has been required to close substantial gaps between forecast revenues
and forecast expenditures in order to maintain balanced operating results.
Particularly given the uncertain impact of September 11 and the expected
reduction in economic activity in the City, there can be no assurance that the
City will continue to maintain balanced operating results as required by State
law without reductions in City services or entitlement programs to tax or other
revenue increases that could adversely affect the City's economic base.


         For fiscal year 2001 the City had an operating surplus of $3.0 billion.
On April 17, 2002, the Mayor of the City released the City Executive Budget for
fiscal year 2003 (July 1, 2002 to June 30, 2003). The City Executive Budget was
$41.9 billion and incorporated a number of steps to close a projected $5.0
billion budget gap, including City agency cuts ranging up to 36%, staffing
changes requiring union consent, stretching out some elements of the City's four
year construction plan to five years, debt restructuring and asset sales and
proposed State and federal initiatives to generate $2.2 billion of gap closing
actions in fiscal year 2003 and an aggregate of $5.5 billion in fiscal years
2004 through 2006. The Mayor also proposed that the City issue $1.5 billion
of its general obligation bonds in fiscal year 2003 to help close the budget
gap. While the City Executive Budget did not project any need for deficit
financing in later fiscal years, the inability of the City to close significant
outyear budget gaps could require such financing, which might affect the rating
of the City's general obligation bonds.

         In July 2002, the Mayor announced that the City would have to cut an
additional $1 billion from the 2003 fiscal year budget in order to deal with an
increase in the 2003 budget gap. The Mayor has instructed City agencies to
provide him by September 4, 2002 with proposals for cuts of 7.5% in their
budgets for fiscal 2003 for a total of an additional $1 billion in cuts. While
no specifics regarding such additional savings are available, contingent cuts
proposed earlier this year by the Mayor included reductions in uniformed
agencies, education and other services.


         City's Financing Program. Implementation of the City Executive Budget
is in part dependent upon the City's ability to market its securities
successfully in the public credit markets. The City's financing program for
fiscal years 2002 through 2006 contemplates the issuance of $13.7 billion of
general obligation bonds, $5.9 billion of bonds and Recovery Bonds described
below to be issued by the New York City Transitional Finance Authority (the
"Transitional Finance Authority"), $2.0 billion of bonds to be issued by TSASC,
Inc., a not-for-profit corporation empowered to issue tax-exempt debt backed by
tobacco settlement revenues, and $10.0 billion of bonds and notes to be issued
by New York City Municipal Water Finance Authority (the "Water Authority"). In
1997, the State created the Transitional Finance Authority, to assist the City
in keeping the City's indebtedness within the forecast level of the
constitutional restrictions on the amount of debt the City is authorized to
incur. The City had faced limitations on its borrowing capacity after 1998 under
the State's constitution that would have prevented it from borrowing additional
funds, as a result of the decrease in real estate values within the City. The
Transitional Finance Authority is authorized to issue up to $11.5 billion of
bonds. In addition, the City issues revenue notes and tax anticipation notes to
finance seasonal working capital requirements. The success of projected public
sales of these bonds and notes will be subject to prevailing market conditions.
The City's planned capital and operating expenditures are dependent upon the
sale of its general obligation bonds and notes, and the Water Authority and
Transitional Finance Authority bonds. In September 2001, the state legislature
granted the City an additional $2.5 billion in debt-incurring capacity to pay
costs related to September 11 through bonds issued by the Transitional Finance
Authority ("Recovery Bonds"), $1.0 billion of which were issued on October 4,
2001 and the balance of which will be issued in fiscal year 2002-2003.

         2001 Fiscal Year. For the 2001 fiscal year (July 1, 2000 - June 30,
2001) the City had an operating surplus of $3.0 billion, before discretionary
and other transfers, and achieved balanced operating results, after
discretionary and other transfers, in accordance with GAAP. The 2001 fiscal year
was the twenty-first year that the City has achieved an operating surplus,
before


                                       B-2

<PAGE>

discretionary and other transfers, and balanced operating results, after
discretionary and other transfers.

         2003-2006 Financial Plan. Pursuant to the laws of the State, the Mayor
is responsible for preparing the City's financial plan, including the City's
current financial plan for the 2003 through 2006 fiscal years, which is included
in the City Executive Budget (the "City Financial Plan"). The projections set
forth in the City Financial Plan are based on various assumptions and
contingencies that are uncertain and may not materialize. Changes in major
assumptions could significantly affect the City's ability to balance its budget
as required by State law and to meet annual cash flow and financing
requirements.


         The City Financial Plan reflected certain extraordinary actions
necessitated by September 11 and projected a budget surplus of $322 million for
the 2002 fiscal year and budget gaps of $5.2 billion, $5.7 billion and $6.0
billion, respectively, for the 2004, 2005 and 2006 fiscal years prior to any gap
closing actions. As discussed above, these gaps appear to be widening. Some of
the gap closing measures proposed in the City Financial Plan for fiscal year
2003 were to have recurring effects and were projected at that time to reduce
the fiscal year 2004, 2005 and 2006 budget gaps to $2.7 billion, $3.1 billion
and $3.6 billion, respectively. The Mayor proposes to close these outyear gaps
through unspecified additional City agency cuts, federal and State initiatives
and other actions. As a result of the widening in outyear budget gaps, the Major
has given the City agencies until September 4, 2002 to propose 7.5% reductions
in their budgets.


         The City Financial Plan includes a proposed discretionary transfer in
the 2002 fiscal year of $322 million to pay debt service due in the fiscal year
2003. In addition, the City Financial Plan reflects a proposed cigarette tax
increase resulting in increased revenues totaling $249 million in fiscal year
2003 and declining yearly to a total increase of $241 million in fiscal year
2006 which is subject to State legislative approval. The Mayor has proposed
restoring the City's stock transfer tax, which in the past generated $114
million annually which also must be approved by the State legislature.


         Assumptions. The City Financial Plan is based on numerous assumptions,
including the impact of September 11 on the City's economy, the general
condition of the City's and the region's economies and the receipt of
economically sensitive tax revenues in the amounts projected and reimbursement
by the federal government and State of expenditures necessitated by September
11. The City Financial Plan is subject to various other uncertainties and
contingencies relating to, among other factors: (i) the extent, if any, to which
wage increases for City employees exceed the annual wage costs assumed for the
2002 through 2006 fiscal years; (ii) interest earnings and wage projections
underlying projections of the City's required pension fund contributions; (iii)
the willingness and ability of the State and Federal governments to provide the
aid and enact the revenue enhancing or expenditure relief initiatives
contemplated by the City Financial Plan and to take various other actions to
assist the City in its gap closing actions; (iv) the ability of Health and
Hospitals Corporation, the Board of Education and other agencies to maintain
balanced budgets; (v) the impact on City revenues and expenditures of Federal
and State welfare reform and any future legislation affecting Medicare or other


                                       B-3

<PAGE>

entitlement programs; (vi) the ability of the City to control expenditures and
implement cost reduction and gap closing initiatives identified in the City
Financial Plan for the 2003 fiscal year and proposed but unspecified for later
years; (vii) the City's ability to market its securities successfully in the
public credit markets; (viii) the impact of conditions in the real estate market
on real estate tax revenues; (ix) the sale of OTB in fiscal year 2004, which
requires State legislative approval; and (x) unanticipated expenditures that may
be incurred as a result of the need to maintain the City's infrastructure or
future terrorist acts.

         The City Financial Plan reflects the sudden economic downturn as the
result of September 11 in the last half of 2001 and assumes job and income
losses in the first half of 2002 but moderate growth in the balance of 2002
resulting in a flat City economy for calendar year 2002. The City Financial Plan
forecasts a steady recovery thereafter. The City does not expect to recover all
of the jobs lost as a result of September 11 until 2005. Given the uncertain
impact of September 11 on the City's economy, including the loss of jobs and
business, impact on tourism in the City and the slowdown in the securities
industry, there can be no assurance that the economic projections included in
the City Financial Plan are accurate or that the tax revenues projected in the
Financial Plan to be received will be received in the amounts anticipated.


         Municipal Unions. The Mayor's gap closing proposals in fiscal year 2003
include a slight reduction of the City's workforce through attrition, severance
and early retirement, including a reduction of 1,600 in uniformed police
officers that will be offset by hiring of civilians by the Police Department.
These police department and other staff reduction proposals may require union
consents. While the City has established a Reserve for Collective Bargaining,
the terms of wage settlements could be determined through the impasse procedure
in the New York City Collective Bargaining Law, which can impose a binding
settlement that substantially increases reserves established by the City.


         Intergovernmental Aid. The City depends on the State for aid both to
enable the City to balance its budget and to meet its cash requirements. There
can be no assurance that State aid to the City will be maintained at amounts
currently projected or interim appropriations enacted; or that the State will
not reduce or delay aid any of which could have adverse effects on the City's
cash flow or expenditures. In addition, the Federal budget negotiation process
could result in reductions or delays in the receipt of Federal grants which
would have additional adverse effects on the City's cash flow or revenues. The
City is particularly dependent upon the federal government and the State to
reimburse it for expenditures relating to September 11. While both the federal
government and the State have publicly supported the City and promised to
makefunds available to fund recovery, clean-up and repairs relating to September
11,there can be no assurance that budget constraints or the other priorities,
including future terrorist attacks will not interfere or prevent delivery of
such aid.

         Outstanding Indebtedness. As of December 31, 2001, the City and the
Municipal Assistance Corporation for the City of New York had respectively
approximately $27.3 and $2.2 billion of net outstanding long-term debt.

         Litigation. The City is currently a defendant in a significant number
of lawsuits. While the ultimate outcome and fiscal impact, if any, on the
proceedings and claims are not currently predictable, adverse determination in
certain of them might have a material adverse effect upon the City's ability to
carry out the City Financial Plan. As of June 30, 2001 claims were pending


                                       B-4

<PAGE>

against the City, for which the City has estimated it may potentially incur
liability of $4.2 billion. The City currently is a defendant in a proceeding
relating to the New York City Teachers' Retirement System in which damages in
excess of $250 million are sought. In fiscal year 2000-2001 the City paid $594.8
million with respect to judgments and claims and projects such payments will
total $409.6 million and $418.7 million in fiscal years 2001-2002 and 2002-2003,
respectively.

         Ratings. As of May 23, 2002, Moody's rated the City's outstanding
general obligation bonds A2, Standard and Poor's rated such bonds A and Fitch
rated such bonds A+. There can be no assurance that, after the review of the
State Budget and the agreement between the Mayor and the City Council regarding
the City Executive Budget, their ratings of the City's general obligations bonds
will be maintained. Such ratings reflect only the view of Moody's, Standard and
Poor's and Fitch, from which an explanation of the significance of such ratings
may be obtained. There is no assurance that such ratings will continue for any
given period of time or that they will not be revised downward or withdrawn
entirely. Any such downward revision or withdrawal could have an adverse effect
on the market prices of City bonds and could increase the City's borrowing
costs.

NEW YORK STATE

         2000-2001 Fiscal Year. The State finished its 2000-2001 fiscal year
with a surplus of $2.7 billion.

         2001-2002 Fiscal Year. The revised cash-basis 2001-2002 State Financial
Plan issued by the Division of the Budget on January 22, 2002 projects that the
State will end its 2001-2002 fiscal year with a surplus of $2.1 billion.

         2002-2003 Fiscal Year. The Governor released his 2002-2003 Executive
Budget (the "State Executive Budget") on January 22, 2002, which contained
financial projections for the State's 2001-2002 through 2004-2005 fiscal years,
and a proposed Capital Program and Financing Plan for the 2002-2003 through
2006-2007 fiscal years. The State Executive Budget projected a total budget gap
of $6.8 billion in the 2001-2002 and 2002-2003 fiscal years.

         On May 15, 2002, the Governor and legislative leaders announced that
they had come to an agreement on a final balanced 2002-2003 State Budget (the
"State Budget"). The agreement includes actions to close the budget gap
previously identified in the State Executive Budget plus an additional $1.4
billion gap identified in March and April 2002. Under the State Budget,
taxpayer-supported General Fund spending falls by nearly $1.0 billion, or 2.6
percent. General Fund spending will total $40.2 billion. All Funds spending will
increase by less than 1 percent (0.8%) from that proposed in the State Executive
Budget and will total $89.6 billion. This represents a 6 percent annual increase
reflecting $2.5 billion in increased Federal aid. State Funds will total $59.5
billion, a 4.4 percent annual increase.

         The State Budget includes a series of one-time actions to close this
budget gap. These actions included using $1.2 billion of available cash reserves
and other fund balances; implementing a tax amnesty program; offering early
retirement to state workers; and converting hard dollar capital financing to
bonding while reducing overall capital authorizations. The State's Tax
Stabilization Reserve Fund, a fund to address unforeseen budget needs, will be
maintained at $710 million. A $1.0 billion tax cut is included in the State
Budget targeted to job


                                       B-5

<PAGE>

creation, victims of September 11, economic incentives to lower Manhattan and
senior citizens. The State proposes to eliminate 5,000 positions through the
early retirement initiative.

         The State Executive Budget, however, projected potential budget gaps of
$2.8 billion and $3.3 billion, in fiscal years 2003-2004 and 2004-2005,
respectively.

         The most significant risks to the State's financial plan set forth in
the State Executive Budget are the rate of layoffs related to September 11, and
the impact of the event upon the City and the personal income statewide. In
addition, the occurrence of other terrorist attacks whether within or outside of
New York could have a significant adverse effect on the State's economy. The
volatility of the financial markets even before September 11 and its impact upon
financial sector compensation and capital gains recognition by investors also
represent a significant risk to the State's financial plan, as set forth in the
State Executive Budget.

         Owing to these and other factors, the State may face substantial
potential budget gaps in future years resulting from a significant disparity
between tax revenues from lower receipts and the spending required to maintain
State programs at mandated levels. Any such recurring imbalance would be
exacerbated by the use by the State of nonrecurring resources to achieve
budgetary balance in a particular fiscal year. To correct any recurring
budgetary imbalance, the State would need to take significant actions to align
recurring receipts and disbursements in future fiscal years.

         Capital Spending and Financing. Under the State law, the Governor is
required to submit a Five-Year Capital Program and Financing Plan ("Capital
Plan") annually. The proposed 2002-2003 through 2006-2007 fiscal year Capital
Plan provides for capital spending of $5.0 billion in the 2002-2003 fiscal year
to be financed through general obligation, authority and state bonds and
available resources. General obligation bonds are backed by the full faith and
credit of the State. As of March 31, 2001, $4.4 billion of State general
obligation bonds were outstanding. Also as of such date, $4.7 billion of bonds
issued by the Local Governmental Assistance Corporation, an entity established
to fund assistance to localities in earlier years when the State was running
budget deficits, were outstanding. Various state authorities had $27.9 billion
of indebtedness outstanding in the form of bonds, lease financings and other
financing arrangements. This state authority indebtedness is not backed by the
full faith and credit of the State.

         Litigation. The State is currently a defendant in a significant number
of lawsuits. Such litigation includes, but is not limited to, claims asserted
against the State arising from alleged torts, alleged breaches of contracts,
condemnation proceedings and other alleged violations of State and Federal laws.
State programs, primarily Medicaid and mental health programs are frequently
challenged on State and Federal constitutional grounds. Several Native American
groups have commenced litigation against New York claiming the rights to
thousands of acres of land seized in the eighteenth and nineteenth centuries.
Adverse developments in legal proceedings or the initiation of new proceedings
could affect the ability of the State to maintain a balanced State Financial
Plan in any given fiscal year. There can be no assurance that an adverse
decision in one or more legal proceedings would not exceed the amount the State
reserves for the payment of judgments or materially impair the State's financial
operations. With respect to pending and threatened litigation, the State
reported in its Annual Information Statement dated


                                       B-6

<PAGE>

October 2, 2001 its estimate of $730 million for awarded and anticipated
unfavorable judgments, of which $242 million was expected to be paid within the
2001-2002 fiscal year.

         Other Localities. Certain localities in addition to the City could have
financial problems leading to requests for additional State assistance during
the State's 2002-2003 fiscal year and thereafter. The potential impact on the
State of such actions by localities is not included in the State Budget.

         Fiscal difficulties experienced in Nassau County resulted in the
creation of the Nassau County Interim Finance Authority (the "Authority") in
2000. The Authority is charged with oversight of the fiscal affairs of Nassau
County. The State paid $25 million in assistance to Nassau County for the
2001-2002 fiscal year and the Governor has proposed assistance of $50 million in
the Executive Budget. The Authority as of January 22, 2002 had issued $436
million in bonds and $690 million in bond anticipation notes.

         Ratings. Moody's has given the State's general obligation bonds a
rating of A2, Standard and Poor's had given the bonds a rating of AA, and Fitch
had given the bonds a rating of AA. Such ratings reflect only the view of
Moody's and Standard and Poor's from which an explanation of the significance of
such ratings may be obtained. There is no assurance that such ratings will
continue for any given period of time or that they will not be revised downward
or withdrawn entirely. Any such downward revision or withdrawal could have an
adverse effect on the market prices of State bonds and could increase the
State's borrowing costs.

NEW YORK TAX MATTERS

         The following discussion of New York income tax matters is based upon
the advice of Edwards & Angell, LLP, special counsel to the Fund.


         The following is a general, abbreviated summary of certain provisions
of the applicable New York tax law as presently in effect as it directly governs
the taxation of New York resident individual, corporate and unincorporated
business holders of Preferred Shares. This summary does not address the taxation
of other shareholders nor does it discuss any local taxes, other than New York
City taxes, that may be applicable. These provisions are subject to change by
legislative or administrative action, and any such change may be retroactive
with respect to Fund transactions. The following is based on the assumptions
that the Fund will qualify under Subchapter M of the Code as a regulated
investment company, that it will satisfy the conditions which will cause the
Fund's distributions to qualify as exempt-interest dividends to shareholders,
that it will distribute all interest and dividends received to the Fund's
shareholders and that the Preferred Shares will constitute equity for federal
income tax purposes. The Fund will be subject to the New York Business
Corporation franchise tax and the New York City general corporation tax only if
it has a sufficient nexus with New York State or New York City. If it is subject
to such taxes, it does not expect to pay a material amount of either tax.
Distributions by the Fund that are attributable to interest on any obligation of
New York and its political subdivisions or to interest on obligations of U.S.
territories and possessions that are exempt from state taxation under federal
law will not be subject to the New York State personal income tax or the New
York City personal income or unincorporated business taxes. All other
distributions, including distributions attributable to interest on obligations
of the United States or its instrumentalities and distributions attributable to
capital gains, will be subject to the New



                                       B-7

<PAGE>

York State personal income tax and the New York City personal income and
unincorporated business taxes.


         All distributions from the Fund, regardless of source, will increase
the taxable base of shareholders subject to the New York Business Corporation
franchise tax or the New York City general corporation tax. Gain from the sale,
exchange or other disposition of the Preferred Shares will be subject to the New
York State personal income and franchise taxes and the New York City personal
income, unincorporated business, and general corporation taxes. The Preferred
Shares may be subject to New York State estate tax if owned by a New York
decedent at the time of death. The Preferred Shares will not be subject to
property taxes imposed by New York State or City. Interest on indebtedness
incurred to purchase, or continued to carry, the Preferred Shares generally will
not be deductible for New York State or New York City personal income tax
purposes.


         This section relates only to the federal and New York income tax
consequences of investing in the Fund; the consequences under other tax laws may
differ. You should consult your tax advisor for more detailed information
concerning New York State and New York City tax matters and as to the possible
application of additional state and local income tax laws to Fund dividends and
capital distributions. Please see "Tax Matters" in the Statement of Additional
Information for additional information regarding the tax aspects of investing in
the Fund.



                                       B-8

<PAGE>

                                   APPENDIX C

                              SETTLEMENT PROCEDURES

         The following summary of Settlement Procedures sets forth the
procedures expected to be followed in connection with the settlement of each
Auction and will be incorporated by reference in the Auction Agency Agreement
and each Broker-Dealer Agreement. Nothing contained in this Appendix B
constitutes a representation by the Fund that in each Auction each party
referred to herein actually will perform the procedures described herein to be
performed by such party. Capitalized terms used herein shall have the respective
meanings specified in the glossary of the Prospectus or Appendix A hereto, as
the case may be.

         (a) On each Auction Date, the Auction Agent shall notify by telephone
or through the Auction Agent's auction processing system the Broker-Dealers that
participated in the Auction held on such Auction Date and submitted an Order on
behalf of any Beneficial Owner or Potential Beneficial Owner of:

                  (i) the Applicable Rate fixed for the next succeeding Dividend
         Period;

                  (ii) whether Sufficient Clearing Bids existed for the
         determination of the Applicable Rate;

                  (iii) if such Broker-Dealer (a "Seller's Broker-Dealer")
         submitted a Bid or a Sell Order on behalf of a Beneficial Owner, the
         number of Preferred Shares, if any, to be sold by such Beneficial
         Owner;

                  (iv) if such Broker-Dealer (a "Buyer's Broker-Dealer")
         submitted a Bid on behalf of a Potential Beneficial Owner, the number
         of Preferred Shares, if any, to be purchased by such Potential
         Beneficial Owner;

                  (v) if the aggregate number of Preferred Shares to be sold by
         all Beneficial Owners on whose behalf such Broker-Dealer submitted a
         Bid or a Sell Order exceeds the aggregate number of Preferred Shares to
         be purchased by all Potential Beneficial Owners on whose behalf such
         Broker-Dealer submitted a Bid, the name or names of one or more Buyer's
         Broker-Dealers (and the name of the Agent Member, if any, of each such
         Buyer's Broker-Dealer) acting for one or more purchasers of such excess
         number of Preferred Shares and the number of such shares to be
         purchased from one or more Beneficial Owners on whose behalf such
         Broker-Dealer acted by one or more Potential Beneficial Owners on whose
         behalf each of such Buyer's Broker-Dealers acted;

                  (vi) if the aggregate number of Preferred Shares to be
         purchased by all Potential Beneficial Owners on whose behalf such
         Broker-Dealer submitted a Bid exceeds the aggregate number of Preferred
         Shares to be sold by all Beneficial Owners on whose behalf such
         Broker-Dealer submitted a Bid or a Sell Order, the name or names of one
         or more Seller's Broker-Dealers (and the name of the Agent Member, if
         any, of each such Seller's Broker-Dealer) acting for one or more
         sellers of such excess number of Preferred Shares and the number of
         such shares to be sold to one or more Potential Beneficial Owners on
         whose behalf such Broker-Dealer acted by one or more Beneficial Owners
         on whose behalf each of such Seller's Broker-Dealers acted; and


                                       C-1

<PAGE>

                  (vii) the Auction Date of the next succeeding Auction with
         respect to the Preferred Shares.

         (b) On each Auction Date, each Broker-Dealer that submitted an Order on
behalf of any Beneficial Owner or Potential Beneficial Owner shall:

                  (i) in the case of a Broker-Dealer that is a Buyer's
         Broker-Dealer, instruct each Potential Beneficial Owner on whose behalf
         such Broker-Dealer submitted a Bid that was accepted, in whole or in
         part, to instruct such Potential Beneficial Owner'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 Preferred
         Shares to be purchased pursuant to such Bid against receipt of such
         shares and advise such Potential Beneficial Owner of the Applicable
         Rate for the next succeeding Dividend Period;

                  (ii) in the case of a Broker-Dealer that is a Seller's
         Broker-Dealer, instruct each Beneficial Owner on whose behalf such
         Broker-Dealer submitted a Sell Order that was accepted, in whole or in
         part, or a Bid that was accepted, in whole or in part, to instruct such
         Beneficial Owner's Agent Member to deliver to such Broker-Dealer (or
         its Agent Member) through the Securities Depository the number of
         Preferred Shares to be sold pursuant to such Order against payment
         therefor and advise any such Beneficial Owner that will continue to
         hold Preferred Shares of the Applicable Rate for the next succeeding
         Dividend Period;

                  (iii) advise each Beneficial Owner on whose behalf such
         Broker-Dealer submitted a Hold Order of the Applicable Rate for the
         next succeeding Dividend Period;

                  (iv) advise each Beneficial Owner on whose behalf such
         Broker-Dealer submitted an Order of the Auction Date for the next
         succeeding Auction; and

                  (v) advise each Potential Beneficial Owner on whose behalf
         such Broker-Dealer submitted a Bid that was accepted, in whole or in
         part, of the Auction Date for the next succeeding Auction.

         (c) On the basis of the information provided to it pursuant to (a)
above, each Broker-Dealer that submitted a Bid or a Sell Order on behalf of a
Potential Beneficial Owner or a Beneficial Owner shall, in such manner and at
such time or times as in its sole discretion it may determine, allocate any
funds received by it pursuant to (b)(i) above and any Preferred Shares received
by it pursuant to (b)(ii) above among the Potential Beneficial Owners, if any,
on whose behalf such Broker-Dealer submitted Bids, the Beneficial Owners, if
any, on whose behalf such Broker-Dealer submitted Bids that were accepted or
Sell Orders, and any Broker-Dealer or Broker-Dealers identified to it by the
Auction Agent pursuant to (a)(v) or (a)(vi) above.

         (d) On each Auction Date:

                  (i) each Potential Beneficial Owner and Beneficial Owner shall
         instruct its Agent Member as provided in (b)(i) or (ii) above, as the
         case may be;

                  (ii) each Seller's Broker-Dealer which is not an Agent Member
         of the Securities Depository shall instruct its Agent Member to (A) pay
         through the Securities Depository


                                       C-2

<PAGE>

         to the Agent Member of the Beneficial Owner delivering shares to such
         Broker-Dealer pursuant to (b)(ii) above the amount necessary to
         purchase such shares against receipt of such shares, and (B) deliver
         such shares through the Securities Depository to a Buyer's
         Broker-Dealer (or its Agent Member) identified to such Seller's
         Broker-Dealer pursuant to (a)(v) above against payment therefor; and

                  (iii) each Buyer's Broker-Dealer which is not an Agent Member
         of the Securities Depository shall instruct its Agent Member to (A) pay
         through the Securities Depository to a Seller's Broker-Dealer (or its
         Agent Member) identified pursuant to (a)(vi) above the amount necessary
         to purchase the shares to be purchased pursuant to (b)(i) above against
         receipt of such shares, and (B) deliver such shares through the
         Securities Depository to the Agent Member of the purchaser thereof
         against payment therefor.

         (e) On the day after the Auction Date:

                  (i) each Bidder's Agent Member referred to in (d)(i) above
         shall instruct the Securities Depository to execute the transactions
         described in (b)(i) or (ii) above, and the Securities Depository shall
         execute such transactions;

                  (ii) each Seller's Broker-Dealer or its Agent Member shall
         instruct the Securities Depository to execute the transactions
         described in (d)(ii) above, and the Securities Depository shall execute
         such transactions; and

                  (iii) each Buyer's Broker-Dealer or its Agent Member shall
         instruct the Securities Depository to execute the transactions
         described in (d)(iii) above, and the Securities Depository shall
         execute such transactions.

         (f) If a Beneficial Owner selling Preferred Shares in an Auction fails
to deliver such shares (by authorized book-entry), a Broker-Dealer may deliver
to the Potential Beneficial Owner on behalf of which it submitted a Bid that was
accepted a number of whole Preferred Shares that is less than the number of
shares that otherwise was to be purchased by such Potential Beneficial Owner. In
such event, the number of Preferred Shares to be so delivered shall be
determined solely by such Broker-Dealer. Delivery of such lesser number of
shares shall constitute good delivery. Notwithstanding the foregoing terms of
this paragraph (f), any delivery or non-delivery of shares which shall represent
any departure from the results of an Auction, as determined by the Auction
Agent, shall be of no effect unless and until the Auction Agent shall have been
notified of such delivery or non-delivery in accordance with the provisions of
the Auction Agency Agreement and the Broker-Dealer Agreements.


                                       C-3

<PAGE>

                                   APPENDIX D

                               AUCTION PROCEDURES

         The following procedures following procedures will be set forth in
provisions of the Amended By-Laws relating to the Preferred Shares, and will be
incorporated by reference in the Auction Agency Agreement and each Broker-Dealer
Agreement. The terms not defined below are defined in the Prospectus. Nothing
contained in this Appendix C constitutes a representation by the Fund that in
each Auction each party referred to herein actually will perform the procedures
described herein to be performed by such party.

                                   ARTICLE 11

                                      * * *

         11.10 Auction Procedures. (a) Certain definitions. As used in this
Section 11.10, the following terms shall have the following meanings, unless the
context otherwise requires:

         (i) "APS" means the shares of APS being auctioned pursuant to this
Section 11.10.

         (ii) "Auction Date" means the first Business Day preceding the first
day of a Dividend Period.

         (iii) "Available APS" has the meaning specified in Section 11.10(d)(i)
below.

         (iv) "Bid" has the meaning specified in Section 11.10(b)(i) below.

         (v) "Bidder" has the meaning specified in Section 11.10(b)(i) below.

         (vi) "Hold Order" has the meaning specified in Section 11.10(b)(i)
below.

         (vii) "Maximum Applicable Rate" for any Dividend Period will be the
Applicable Percentage of the Reference Rate. The Auction Agent will round each
applicable Maximum Applicable Rate to the nearest one-thousandth (0.001) of one
percent per annum, with any such number ending in five ten-thousandths of one
percent being rounded upwards to the nearest one-thousandth (0.001) of one
percent. The Auction Agent will not round the applicable Reference Rate as part
of its calculation of the Maximum Applicable Rate. The Applicable Percentage
will be determined based on (i) the credit rating assigned on such date to such
shares by Moody's (or, if Moody's shall not make such rating available, the
equivalent of such rating by a Substitute Rating Agency) and (ii) whether the
Trust has provided notification to the Auction Agent prior to the Auction
establishing the Applicable Rate for any dividend that net capital gains or
other taxable income will be included in such dividend on shares of APS as
follows:


                                       D-1

<PAGE>
<TABLE>
<CAPTION>
                                                    Percentage of                          Percentage of
                                                  Reference Rate -                       Reference Rate -
Moody's Credit Ratings on APS                      No Notification                         Notification
- -----------------------------                      ---------------                         ------------
<S>                                                     <C>                                    <C>
aa3 or higher                                           110%                                   150%

a                                                       125%                                   160%

baa                                                     150%                                   250%

Below baa                                               200%                                   275%
</TABLE>

         The Trust shall take all reasonable action necessary to enable Moody's
to provide a rating for each series of APS. If Moody's shall not make such a
rating available, UBS Warburg LLC and Merrill Lynch, Pierce, Fenner & Smith
Incorporated, or their respective affiliates and successors, after consultation
with the Trust, shall select another Rating Agency to act as a Substitute Rating
Agency.


         (viii) "Order" has the meaning specified in Section 11.10(b)(i) below.

         (ix) "Sell Order" has the meaning specified in Section 11.10(b)(i)
below.

         (x) "Submission Deadline" means 1:00 P.M., New York City time, on any
Auction Date or such other time on any Auction Date as may be specified by the
Auction Agent from time to time as the time by which each Broker-Dealer must
submit to the Auction Agent in writing all Orders obtained by it for the Auction
to be conducted on such Auction Date.

         (xi) "Submitted Bid" has the meaning specified in Section 11.10(d)(i)
below.

         (xii) "Submitted Hold Order" has the meaning specified in Section
11.10(d)(i) below.

         (xiii) "Submitted Order" has the meaning specified in Section
11.10(d)(i) below.

         (xiv) "Submitted Sell Order" has the meaning specified in Section
11.10(d)(i) below.

         (xv) "Sufficient Clearing Bids" has the meaning specified in Section
11.10(d)(i) below.

         (xvi) "Winning Bid Rate" has the meaning specified in Section
11.10(d)(i) below.

         (b) Orders by Beneficial Owners, Potential Beneficial Owners, Existing
Holders and Potential Holders.

         (i) Unless otherwise permitted by the Trust, Beneficial Owners and
Potential Beneficial Owners may only participate in Auctions through their
Broker-Dealers. Broker-Dealers will submit the Orders of their respective
customers who are Beneficial Owners and Potential Beneficial Owners to the
Auction Agent, designating themselves 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. A Broker-Dealer may also hold shares of APS in its
own account as a Beneficial Owner. A Broker-Dealer may thus submit Orders to the
Auction Agent as a Beneficial Owner or a Potential Beneficial Owner and
therefore participate in an Auction as an Existing Holder or


                                       D-2

<PAGE>

Potential Holder on behalf of both itself and its customers. On or prior to the
Submission Deadline on each Auction Date:

         (A) each Beneficial Owner may submit to its Broker-Dealer information
as to:

         (1) the number of Outstanding shares, if any, of APS held by such
Beneficial Owner which such Beneficial Owner desires to continue to hold without
regard to the Applicable Rate for the next succeeding Dividend Period for such
shares;

         (2) the number of Outstanding shares, if any, of APS held by such
Beneficial Owner which such Beneficial Owner desires to continue to hold,
provided that the Applicable Rate for the next succeeding Dividend Period for
such shares shall not be less than the rate per annum specified by such
Beneficial Owner; and/or

         (3) the number of Outstanding shares, if any, of APS held by such
Beneficial Owner which such Beneficial Owner offers to sell without regard to
the Applicable Rate for the next succeeding Dividend Period; and

         (B) each Broker-Dealer, using a list of Potential Beneficial Owners
that shall be maintained in good faith for the purpose of conducting a
competitive Auction, shall contact Potential Beneficial Owners, including
Persons that are not Beneficial Owners, on such list to determine the number of
Outstanding shares, if any, of APS which each such Potential Beneficial Owner
offers to purchase, provided that the Applicable Rate for the next succeeding
Dividend Period shall not be less than the rate per annum specified by such
Potential Beneficial Owner.


         For the purposes hereof, the communication by a Beneficial Owner or
Potential Beneficial Owner to a Broker-Dealer, or the communication by a
Broker-Dealer acting for its own account to the Auction Agent, of information
referred to in clause (A) or (B) of this Section 11.10(b)(i) is hereinafter
referred to as an "Order" and each Beneficial Owner and each Potential
Beneficial Owner placing an Order, including a Broker-Dealer acting in such
capacity for its own account, is hereinafter referred to as a "Bidder"; an Order
containing the information referred to in clause (A)(1) of this Section
11.10(b)(i) is hereinafter referred to as a "Hold Order"; an Order containing
the information referred to in clause (A)(2) or (B) of this Section 11.10(b)(i)
is hereinafter referred to as a "Bid"; and an Order containing the information
referred to in clause (A)(3) of this Section 11.10(b)(i) is hereinafter referred
to as a "Sell Order." Inasmuch as a Broker-Dealer participates in an Auction as
an Existing Holder or a Potential Holder only to represent the interests of a
Beneficial Owner or Potential Beneficial Owner, whether it be its customers or
itself, all discussion herein relating to the consequences of an Auction for
Existing Holders and Potential Holders also applies to the underlying beneficial
ownership interests represented.

         (ii) (A) A Bid by an Existing Holder shall constitute an irrevocable
offer to sell:

         (1) the number of Outstanding shares of APS specified in such Bid if
the Applicable Rate determined on such Auction Date shall be less than the rate
per annum specified in such Bid; or

         (2) such number or a lesser number of Outstanding shares of APS to be
determined as set forth in Section 11.10(e)(i)(D) if the Applicable Rate
determined on such Auction Date shall be equal to the rate per annum specified
therein; or


                                       D-3

<PAGE>

         (3) a lesser number of Outstanding shares of APS to be determined as
set forth in Section 11.10(e)(ii)(C) if such specified rate per annum shall be
higher than the Maximum Applicable Rate and Sufficient Clearing Bids do not
exist.

         (B) A Sell Order by an Existing Holder shall constitute an irrevocable
offer to sell:

         (1) the number of Outstanding shares of APS specified in such Sell
Order; or

         (2) such number or a lesser number of Outstanding shares of APS to be
determined as set forth in Section 11.10(e)(ii)(C) if Sufficient Clearing Bids
do not exist.

         (C) A Bid by a Potential Holder shall constitute an irrevocable offer
to purchase:

         (1) the number of Outstanding shares of APS specified in such Bid if
the Applicable Rate determined on such Auction Date shall be higher than the
rate per annum specified in such Bid; or

         (2) such number or a lesser number of Outstanding shares of APS to be
determined as set forth in Section 11.10(e)(i)(E) if the Applicable Rate
determined on such Auction Date shall be equal to the rate per annum specified
therein.

         (c) Submission of Orders by Broker-Dealers to Auction Agent.

         (i) Each Broker-Dealer shall submit in writing or through the Auction
Agent's Auction Processing System to the Auction Agent prior to the Submission
Deadline on each Auction Date all Orders 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 specifying with
respect to each Order:

         (A) the name of the Bidder placing such Order (which shall be the
Broker-Dealer unless otherwise permitted by the Trust);

         (B) the aggregate number of Outstanding shares of APS that are the
subject of such Order;

         (C) to the extent that such Bidder is an Existing Holder:

         (1) the number of Outstanding shares, if any, of APS subject to any
Hold Order placed by such Existing Holder;

         (2) the number of Outstanding shares, if any, of APS subject to any Bid
placed by such Existing Holder and the rate per annum specified in such Bid; and

         (3) the number of Outstanding shares, if any, of APS subject to any
Sell Order placed by such Existing Holder; and

         (D) to the extent such Bidder is a Potential Holder, the rate per annum
specified in such Potential Holder's Bid.


                                       D-4

<PAGE>

         (ii) If any rate per annum 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%.

         (iii) If an Order or Orders covering all of the Outstanding shares of
APS held by an Existing Holder are not submitted to the Auction Agent prior to
the Submission Deadline, the Auction Agent shall deem a Hold Order (in the case
of an Auction relating to a Special Dividend Period of 91 days or less) or a
Sell Order (in the case of an Auction relating to a Special Dividend Period of
longer than 91 days) to have been submitted on behalf of such Existing Holder
covering the number of Outstanding shares of APS held by such Existing Holder
and not subject to Orders submitted to the Auction Agent.

         (iv) If one or more Orders on behalf of an Existing Holder covering in
the aggregate more than the number of Outstanding shares of APS held by such
Existing Holder are submitted to the Auction Agent, such Order shall be
considered valid as follows and in the following order of priority:

         (A) any Hold Order submitted on behalf of such Existing Holder shall be
considered valid up to and including the number of Outstanding shares of APS
held by such Existing Holder; provided that if more than one Hold Order is
submitted on behalf of such Existing Holder and the number of shares of APS
subject to such Hold Orders exceeds the number of Outstanding shares of APS held
by such Existing Holder, the number of shares of APS subject to each of such
Hold Orders shall be reduced pro rata so that such Hold Orders, in the
aggregate, will cover exactly the number of Outstanding shares of APS held by
such Existing Holder;

         (B) any Bids submitted on behalf of such Existing Holder shall be
considered valid, in the ascending order of their respective rates per annum if
more than one Bid is submitted on behalf of such Existing Holder, up to and
including the excess of the number of Outstanding shares of APS held by such
Existing Holder over the number of shares of APS subject to any Hold Order
referred to in Section 11.10(c)(iv)(A) above (and if more than one Bid submitted
on behalf of such Existing Holder specifies the same rate per annum and together
they cover more than the remaining number of shares that can be the subject of
valid Bids after application of Section 11.10(c)(iv)(A) above and of the
foregoing portion of this Section 11.10(c)(iv)(B) to any Bid or Bids specifying
a lower rate or rates per annum, the number of shares subject to each of such
Bids shall be reduced pro rata so that such Bids, in the aggregate, cover
exactly such remaining number of shares); and the number of shares, if any,
subject to Bids not valid under this Section 11.10(c)(iv)(B) shall be treated as
the subject of a Bid by a Potential Holder; and

         (C) any Sell Order shall be considered valid up to and including the
excess of the number of Outstanding shares of APS held by such Existing Holder
over the number of shares of APS subject to Hold Orders referred to in Section
11.10(c)(iv)(A) and Bids referred to in Section 11.10(c)(iv)(B); provided that
if more than one Sell Order is submitted on behalf of any Existing Holder and
the number of shares of APS subject to such Sell Orders is greater than such
excess, the number of shares of APS subject to each of such Sell Orders shall be
reduced pro rata so that such Sell Orders, in the aggregate, cover exactly the
number of shares of APS equal to such excess.


                                       D-5

<PAGE>

         (v) If more than one Bid is submitted on behalf of any Potential
Holder, each Bid submitted shall be a separate Bid with the rate per annum and
number of shares of APS therein specified.

         (vi) Any Order submitted by a Beneficial Owner as 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.

         (vii) The Trust shall not be responsible for a Broker-Dealer's failure
to act in accordance with the instructions of Beneficial Owners or Potential
Beneficial Owners or failure to comply with the provisions of this Section
11.10.

         (d) Determination of Sufficient Clearing Bids, Winning Bid Rate and
Applicable Rate.

         (i) Not earlier than the Submission Deadline on each Auction Date, the
Auction Agent shall assemble all Orders submitted or deemed submitted to it by
the Broker-Dealers (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 shall determine:

         (A) the excess of the total number of Outstanding shares of APS over
the number of Outstanding shares of APS that are the subject of Submitted Hold
Orders (such excess being hereinafter referred to as the "Available APS");

         (B) from the Submitted Orders whether the number of Outstanding shares
of APS that are the subject of Submitted Bids by Potential Holders specifying
one or more rates per annum equal to or lower than the Maximum Applicable Rate
exceeds or is equal to the sum of:

         (1) the number of Outstanding shares of APS that are the subject of
Submitted Bids by Existing Holders specifying one or more rates per annum higher
than the Maximum Applicable Rate, and

         (2) the number of Outstanding shares of APS that are subject to
Submitted Sell Orders (if such excess or such equality exists (other than
because the number of Outstanding shares of APS in clause (1) above and this
clause (2) are each zero because all of the Outstanding shares of APS are the
subject of Submitted Hold Orders), such Submitted Bids by Potential Holders
being hereinafter referred to collectively as "Sufficient Clearing Bids"); and

         (C) if Sufficient Clearing Bids exist, the lowest rate per annum
specified in the Submitted Bids (the "Winning Bid Rate") that if:

         (1) each Submitted Bid from Existing Holders specifying the Winning Bid
Rate and all other Submitted Bids from Existing Holders specifying lower rates
per annum were rejected, thus entitling such Existing Holders to continue to
hold the shares of APS that are the subject of such Submitted Bids, and

         (2) each Submitted Bid from Potential Holders specifying the Winning
Bid Rate and all other Submitted Bids from Potential Holders specifying lower
rates per annum were accepted, thus entitling the Potential Holders to purchase
the shares of APS that are the subject of such


                                       D-6

<PAGE>

Submitted Bids, would result in the number of shares subject to all Submitted
Bids specifying the Winning Bid Rate or a lower rate per annum being at least
equal to the Available APS.

         (ii) Promptly after the Auction Agent has made the determinations
pursuant to Section 11.10(d)(i), the Auction Agent shall advise the Trust of the
Maximum Applicable Rate and, based on such determinations, the Applicable Rate
for the next succeeding Dividend Period as follows:

         (A) if Sufficient Clearing Bids exist, that the Applicable Rate for the
next succeeding Dividend Period shall be equal to the Winning Bid Rate;

         (B) if Sufficient Clearing Bids do not exist (other than because all of
the Outstanding shares of APS are the subject of Submitted Hold Orders), that
the Applicable Rate for the next succeeding Dividend Period shall be equal to
the Maximum Applicable Rate; or

         (C) if all of the Outstanding shares of APS are the subject of
Submitted Hold Orders, that the Dividend Period next succeeding the Auction
shall automatically be the same length as the immediately preceding Dividend
Period and the Applicable Rate for the next succeeding Dividend Period shall be
equal to 40% of the Reference Rate (or 60% of such rate if the Trust has
provided notification to the Auction Agent prior to the Auction establishing the
Applicable Rate for any dividend pursuant to Section 11.2(f) hereof that net
capital gains or other taxable income will be included in such dividend on
shares of APS) on the date of the Auction.

         (e) Acceptance and Rejection of Submitted Bids and Submitted Sell
Orders and Allocation of Shares. Based on the determinations made pursuant to
Section 11.10(d)(i), the Submitted Bids and Submitted Sell Orders shall be
accepted or rejected and the Auction Agent shall take such other action as set
forth below:

         (i) If Sufficient Clearing Bids have been made, subject to the
provisions of Section 11.10(e)(iii) and Section 11.10(e)(iv), Submitted Bids and
Submitted Sell Orders shall be accepted or rejected in the following order of
priority and all other Submitted Bids shall be rejected:

         (A) the Submitted Sell Orders of Existing Holders shall be accepted and
the Submitted Bid of each of the Existing Holders specifying any rate per annum
that is higher than the Winning Bid Rate shall be accepted, thus requiring each
such Existing Holder to sell the Outstanding shares of APS that are the subject
of such Submitted Sell Order or Submitted Bid;

         (B) the Submitted Bid of each of the Existing Holders specifying any
rate per annum that is lower than the Winning Bid Rate shall be rejected, thus
entitling each such Existing Holder to continue to hold the Outstanding shares
of APS that are the subject of such Submitted Bid;

         (C) the Submitted Bid of each of the Potential Holders specifying any
rate per annum that is lower than the Winning Bid Rate shall be accepted;

         (D) the Submitted Bid of each of the Existing Holders specifying a rate
per annum that is equal to the Winning Bid Rate shall be rejected, thus
entitling each such Existing Holder to continue to hold the Outstanding shares
of APS that are the subject of such Submitted Bid, unless the number of
Outstanding shares of APS subject to all such Submitted Bids shall be


                                       D-7

<PAGE>

greater than the number of Outstanding shares of APS ("Remaining Shares") equal
to the excess of the Available APS over the number of Outstanding shares of APS
subject to Submitted Bids described in Section 11.10(e)(i)(B) and Section
11.10(e)(i)(C), in which event the Submitted Bids of each such Existing Holder
shall be accepted, and each such Existing Holder shall be required to sell
Outstanding shares of APS, but only in an amount equal to the difference between
(1) the number of Outstanding shares of APS then held by such Existing Holder
subject to such Submitted Bid and (2) the number of shares of APS obtained by
multiplying (x) the number of Remaining Shares by (y) a fraction the numerator
of which shall be the number of Outstanding shares of APS held by such Existing
Holder subject to such Submitted Bid and the denominator of which shall be the
sum of the number of Outstanding shares of APS subject to such Submitted Bids
made by all such Existing Holders that specified a rate per annum equal to the
Winning Bid Rate; and

         (E) the Submitted Bid of each of the Potential Holders specifying a
rate per annum that is equal to the Winning Bid Rate shall be accepted but only
in an amount equal to the number of Outstanding shares of APS obtained by
multiplying (x) the difference between the Available APS and the number of
Outstanding shares of APS subject to Submitted Bids described in Section
11.10(e)(i)(B), Section 11.10(e)(i)(C) and Section 11.10(e)(i)(D) by (y) a
fraction the numerator of which shall be the number of Outstanding shares of APS
subject to such Submitted Bid and the denominator of which shall be the sum of
the number of Outstanding shares of APS subject to such Submitted Bids made by
all such Potential Holders that specified rates per annum equal to the Winning
Bid Rate.

         (ii) If Sufficient Clearing Bids have not been made (other than because
all of the Outstanding shares of APS are subject to Submitted Hold Orders),
subject to the provisions of Section 11.10(e)(iii), Submitted Orders shall be
accepted or rejected as follows in the following order of priority and all other
Submitted Bids shall be rejected:

         (A) the Submitted Bid of each Existing Holder specifying any rate per
annum that is equal to or lower than the Maximum Applicable Rate shall be
rejected, thus entitling such Existing Holder to continue to hold the
Outstanding shares of APS that are the subject of such Submitted Bid;

         (B) the Submitted Bid of each Potential Holder specifying any rate per
annum that is equal to or lower than the Maximum Applicable Rate shall be
accepted, thus requiring such Potential Holder to purchase the Outstanding
shares of APS that are the subject of such Submitted Bid; and

         (C) the Submitted Bids of each Existing Holder specifying any rate per
annum that is higher than the Maximum Applicable Rate shall be accepted and the
Submitted Sell Orders of each Existing Holder shall be accepted, in both cases
only in an amount equal to the difference between (1) the number of Outstanding
shares of APS then held by such Existing Holder subject to such Submitted Bid or
Submitted Sell Order and (2) the number of shares of APS obtained by multiplying
(x) the difference between the Available APS and the aggregate number of
Outstanding shares of APS subject to Submitted Bids described in Section
11.10(e)(ii)(A) and Section 11.10(e)(ii)(B) by (y) a fraction the numerator of
which shall be the number of Outstanding shares of APS held by such Existing
Holder subject to such Submitted Bid or


                                       D-8

<PAGE>

Submitted Sell Order and the denominator of which shall be the number of
Outstanding shares of APS subject to all such Submitted Bids and Submitted Sell
Orders.

         (iii) If, as a result of the procedures described in Section 11.10(e),
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 APS
on any Auction Date, the Auction Agent shall, in such manner as in its sole
discretion it shall determine, round up or down the number of shares of APS to
be purchased or sold by any Existing Holder or Potential Holder on such Auction
Date so that each Outstanding share of APS purchased or sold by each Existing
Holder or Potential Holder on such Auction Date shall be a whole share of APS.

         (iv) If, as a result of the procedures described in Section 11.10(e),
any Potential Holder would be entitled or required to purchase less than a whole
share of APS on any Auction Date, the Auction Agent shall, in such manner as in
its sole discretion it shall determine, allocate shares of APS for purchase
among Potential Holders so that only whole shares of APS are purchased on such
Auction Date by any Potential Holder, even if such allocation results in one or
more of such Potential Holders not purchasing any shares of APS on such Auction
Date.

         (v) Based on the results of each Auction, the Auction Agent shall
determine, with respect to each Broker-Dealer that submitted Bids or Sell Orders
on behalf of Existing Holders or Potential Holders, the aggregate number of
Outstanding shares of APS to be purchased and the aggregate number of the
Outstanding shares of APS to be sold by such Potential Holders and Existing
Holders and, to the extent that such aggregate number of Outstanding shares to
be purchased and such aggregate number of Outstanding shares to be sold differ,
the Auction Agent shall determine to which other Broker-Dealer or Broker-Dealers
acting for one or more purchasers such Broker-Dealer shall deliver, or from
which other Broker-Dealer or Broker-Dealers acting for one or more sellers such
Broker-Dealer shall receive, as the case may be, Outstanding shares of APS.

         (f) Miscellaneous.

         (i) The Trust may interpret the provisions of this Section 11.10 to
resolve any inconsistency or ambiguity, remedy any formal defect or make any
other change or modification that does not substantially adversely affect the
rights of Beneficial Owners of APS.

         (ii) A Beneficial Owner or an Existing Holder (A) may sell, transfer or
otherwise dispose of shares of APS only pursuant to a Bid or Sell Order in
accordance with the procedures described in this Section 11.10 or to or through
a Broker-Dealer or to such other persons as may be permitted by the Fund,
provided that in the case of all transfers other than pursuant to Auctions such
Beneficial Owner or Existing Holder, its Broker-Dealer, if applicable, or its
Agent Member advises the Auction Agent of such transfer and (B) except as
otherwise required by law, shall have the ownership of the shares of APS held by
it maintained in book entry form by the Securities Depository in the account of
its Agent Member, which in turn will maintain records of such Beneficial Owner's
beneficial ownership. The Trust may not submit an Order in any Auction.

         (iii) All of the Outstanding shares of APS of a series shall be
registered in the name of the nominee of the Securities Depository unless
otherwise required by law or unless there is no Securities Depository. If there
is no Securities Depository, at the Trust's option and upon its


                                       D-9

<PAGE>

receipt of such documents as it deems appropriate, any shares of APS may be
registered in the Stock Register in the name of the Beneficial Owner thereof and
such Beneficial Owner thereupon will be entitled to receive certificates
therefor and required to deliver certificates therefor upon transfer or exchange
thereof.

                                       D-10

<PAGE>

                           PART C - OTHER INFORMATION

Item 24: Financial Statements and Exhibits

      1. Financial Statements:


            Included in Part A: Not applicable.
            Included in Part B:

     The Registrant's audited Statement of Assets and Liabilities dated as of
June 19 2002 and Statement of Operations for the one-day period ending June 19,
2002, including notes thereto and the report of PricewaterhouseCoopers LLP
thereon, are incorporated by reference into Part B from the Statement of
Additional Information dated June 25, 2002 for the offering of the Registrant's
common shares, which was filed with the SEC on June 27, 2002 (File No.
333-86284).

               2. Exhibits:

a.1   Agreement and Declaration of Trust dated March 29, 2002. (1)

a.2   Amended and Restated Agreement and Declaration of Trust dated June 18,
      2002. (2)

b.1   Bylaws of Registrant dated March 29, 2002. (1)

b.2   Amended and Restated Bylaws of Registrant, filed herewith.

c.    None.

d.1   Article III (Shares) and Article V (Shareholders' Voting Powers and
      Meetings) of the Amended and Restated Agreement and Declaration of Trust.
      (2)

d.2   Article 10 (Shareholders' Voting Powers and Meetings) of the Amended and
      Restated Bylaws of Registrant. (2)

d.3   Form of Share Certificate of the Common Shares. (2)

d.4   Specimen Certificates representing the Registrant's Auction Preferred
      Shares ("APS"). (4)

e.    Terms and Conditions of Dividend Reinvestment Plan. (2)

f.    None.

g.1   Investment Management Agreement between Registrant and PIMCO Funds
      Advisors LLC dated June 18, 2002. (2)

g.2   Portfolio Management Agreement between PIMCO Funds Advisors LLC
      and Pacific Investment Management Company LLC dated June 18, 2002. (2)

h.1   Form of Additional Compensation Agreement. (2)

h.2   Form of Master Agreement Among Underwriters, filed herewith.

h.3   Form of Underwriting Agreement for the APS, filed herewith.

i.    None.

j.    Form of Custodian Agreement between Registrant and State Street Bank &
      Trust Co. (2)

k.1   Form of Transfer Agency Services Agreement between Registrant and
      PFPC Inc. (2)

                                       C-1

<PAGE>


k.2    Organizational and Offering Expenses Reimbursement Agreement
       between Registrant and PIMCO Funds Advisors LLC dated June 18, 2002. (2)

k.3    Fee Waiver Agreement between Registrant and PIMCO Funds Advisors LLC
       dated June 18, 2002.(2)

k.4    Fee Waiver Agreement between PIMCO Funds Advisors LLC and Pacific
       Investment Management Company LLC dated June 18, 2002. (2)

k.5    Form of Auction Agency Agreement between the Registrant and the Auction
       Agent as to the Registrant's APS. (4)
k.6    Form of Broker-Dealer Agreement as to the Registrant's APS. (4)

k.7    Form of Depository Trust Company Representations Letter as to
       Registrant's APS. (4)

l.     Opinion and consent of Ropes & Gray as to the Registrant's APS,
       filed herewith.


m.     None.


n.     Consent of Registrant's independent accountants. (4)


o.     None.

p.     Subscription Agreement of PIMCO Funds Advisors LLC dated June 18,
       2002. (2)


q.     None.


r.1    Code of Ethics of Registrant dated June 18, 2002. (2)

r.2    Code of Ethics of PIMCO Funds Advisors LLC dated January 1, 2002. (2)

r.3    Code of Ethics of Pacific Investment Management Company LLC dated
       December 31, 2001. (2)

s.     Power of Attorney for each of Messrs. Treadway, Belica, Connor,
       Dalessandro, Kertess, Sullivan, Schott, and Shlissel. (3)


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




       (1)  Incorporated by reference to the Registrant's Initial Registration
            Statement on Form N-2, File No. 333-86284, filed on April 15, 2002.

       (2)  Incorporated by reference to Pre-Effective Amendment No. 2 to the
            Registrant's Registration Statement on Form N-2, File No. 333-86284,
            filed on June 25, 2002.

       (3)  Incorporated by reference to the corresponding exhibit of the
            Initial Registration Statement on Form N-2 of Registrant's
            Preferred Shares, File No. 333-91740.


       (4)  Incorporated by reference to Pre-Effective Amendment No. 1 to the
            Registrant's Registration Statement on Form N-2, File No.
            333-91740, filed on August 12, 2002.

                                       C-2

<PAGE>

Item 25: Marketing Arrangements


         See Sections 3(p), 4(h), 5(i), 8 and 9 of Exhibit h.1 of Item 24 of
         this Registration Statement and Sections 8, 9, and 16 of Exhibit h.3
         of Item 24 of this Registration Statement.

Item 26: Other Expenses of Issuance and Distribution

         Legal Fees                                                  50,000
         Printing and Engraving expenses                             80,000
         SEC Registration Fees                                        8,280
         Moody's Registration Fee                                    27,000
         Directors fees (pref org mtg)                                3,300
         Accounting expenses                                          5,000
         Miscellaneous                                                1,420
                                                                  ---------
             Total Offering Expenses                                175,000


Item 27: Persons Controlled by or under Common Control with Registrant

      Not applicable.

Item 28: Number of Holders of Securities

      At August 7, 2002

                                                   Number of
               Title of Class                    Record Holders
               --------------                    --------------

        Auction Preferred Shares of
            beneficial interest,
            no par value                               0

        Common Shares, par value $0.00001             42

Item 29: Indemnification

     Reference is made to Article VIII, Sections 1 through 4, of the
Registrant's Amended and Restated Agreement and Declaration of Trust, which is
incorporated by reference herein.

     Insofar as indemnification for liabilities arising under the Securities Act
of 1933, as amended (the "Act"), may be permitted to trustees, officers and
controlling persons of the Registrant by the Registrant pursuant to the Trust's
Amended and Restated Agreement and Declaration of Trust, its Amended and
Restated Bylaws or otherwise, the Registrant is aware that in the opinion of the
Securities and Exchange Commission, such indemnification is against public
policy as expressed in the Act and, therefore, is unenforceable. In the event
that a claim for indemnification against such liabilities (other than the
payment by the Registrant of expenses incurred or paid by trustees, officers or
controlling persons of the Registrant in the successful defense of any action,
suit or proceeding) is asserted by such trustees, officers or controlling
persons in connection with the securities being registered, the Registrant will,
unless in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the Act and
will be governed by the final adjudication of such issue.


                                       C-3

<PAGE>
Item 30: Business and Other Connections of Investment Adviser

       Descriptions of the business of PIMCO Funds Advisors LLC, the
Registrant's investment manager, and Pacific Investment Management Company LLC,
the Registrant's portfolio manager, are set forth under the captions "Investment
Manager" and "Portfolio Manager" under "Management of the Fund" in both the
prospectus and Statement of Additional Information forming part of this
Registration Statement. The following sets forth business and other connections
of each director and executive officer (and persons performing similar
functions) of PIMCO Funds Advisors LLC and Pacific Investment Management Company
LLC.

                            PIMCO Funds Advisors LLC
                           1345 Avenue of the Americas
                               New York, NY 10105

Name                Position with Advisor         Other Connections
- ----------------    --------------------------    ------------------------------

Larry A. Altadonna  Vice President

Andrew Bocko        Senior Vice President and     Senior Vice President,
                    Director of IT                PIMCO Funds Advisors LLC,
                                                  Allianz Dresdner Asset
                                                  Management U.S. Equities LLC,
                                                  PIMCO Funds Advisors LLC,
                                                  Allianz Dresdner Asset
                                                  Management of America L.P.

Tim Clark           Managing Director

Cindy Columbo       Vice President

Patrick Coyne       Vice President

David C. Flattum    Managing Director,            Managing Director, General
                    General Counsel               Counsel and Head of Corporate
                                                  Functions, Allianz Dresdner
                                                  Asset Management of America
                                                  L.P., Managing Director,
                                                  Allianz Dresdner Asset
                                                  Management U.S. Equities LLC,
                                                  Allianz Hedge Fund Partners
                                                  Holding L.P., Nicholas
                                                  Applegate Capital Management
                                                  Holdings, PIMCO Advisory
                                                  Service Holdings, LLC

Derek Hayes         Senior Vice President

Steve Jobe          Senior Vice President

Alan Kwan           Vice President

John C. Maney       Executive Vice President      Executive Vice President and
                    and Chief Financial           Chief Financial Officer,
                                                  Allianz Dresdner Asset
                                                  Management of America L.P.,
                                                  Chief Financial Officer, PIMCO
                                                  Funds Advisors LLC, Allianz
                                                  Dresdner Asset Management U.S.
                                                  Equities LLC, Cadence Capital
                                                  Management LLC, NFJ Investment
                                                  Group L.P., OCE Distributors
                                                  LLC, OpCap Advisors LLC,
                                                  Oppenheimer Capital LLC,
                                                  Pacific Investment Management
                                                  Company LLC, PIMCO Allianz
                                                  Advisors LLC, PIMCO CD
                                                  Distributors LLC, PIMCO Equity
                                                  Advisors LLC, PIMCO Equity
                                                  Partners LLC, PIMCO Funds
                                                  Advertising Agency Inc., PIMCO
                                                  Funds Distributors LLC,
                                                  Allianz Private Client
                                                  Services LLC, StocksPLUS
                                                  Management Inc. and Value
                                                  Advisors LLC

Vinh T. Nguyen      Vice President and            Vice President and Controller,
                    Controller                    PIMCO Funds Advisors LLC,
                                                  Allianz Dresdner Asset
                                                  Management of America L.P.,
                                                  Allianz Dresdner Asset
                                                  Management U.S. Equities LLC,
                                                  Cadence Capital Management
                                                  LLC, NFJ Investment Group
                                                  L.P., OCE Distributors LLC,
                                                  OpCap Advisors LLC,
                                                  Oppenheimer Capital LLC,
                                                  Pacific Investment Management
                                                  Company LLC, PIMCO Allianz
                                                  Advisors LLC, PIMCO CD
                                                  Distributors LLC, PIMCO Equity
                                                  Advisors LLC,


                                       C-4

<PAGE>

                                                  PIMCO Equity Partners LLC,
                                                  PIMCO Funds Advertising Agency
                                                  Inc., PIMCO Funds Distributors
                                                  LLC, Allianz Private Client
                                                  Services LLC, StocksPLUS
                                                  Management Inc. and Value
                                                  Advisors LLC

Francis C. Poli        Executive Vice President,  Chief Legal and Compliance
                       Director of Compliance     Officer, PIMCO Funds Advisors
                       and Assistant Secretary    LLC, Allianz Dresdner Asset
                                                  Management Of America L.P.,
                                                  Allianz Dresdner Asset
                                                  Management U.S. Equities LLC,
                                                  Allianz Hedge Fund Partners
                                                  L.P., Allianz Private Client
                                                  Services LLC, Cadence Capital
                                                  Management LLC, NFJ Investment
                                                  Group L.P., OCC Distributors
                                                  LLC, OpCap Advisors LLC,
                                                  Oppenheimer Capital LLC, PIMCO
                                                  Advisory Services Holdings
                                                  LLC, PIMCO Allianz Advisors
                                                  LLC, PIMCO CD Distributors
                                                  LLC, PIMCO Equity Advisors LLC

Bob Rokose             Vice President and
                       Assistant Controller

Newton B. Schott, Jr.  Managing Director,         Vice President, PIMCO Allianz
                       Chief Legal Officer        Advisors LLC, Executive Vice
                       and Secretary              President, Chief Legal Officer
                                                  and Secretary, PIMCO Funds
                                                  Advertising Agency Inc., PIMCO
                                                  Funds Distributors LLC

Brian S. Shlissel     Senior Vice President

Stewart A. Smith       Vice President and         Secretary, PIMCO Funds
                       Assistant Secretary        Advisors LLC, Allianz Dresdner
                                                  Asset Management of America
                                                  L.P., Allianz Dresdner Asset
                                                  Management U.S. Equities LLC,
                                                  Alianz Hedge Fund Partners
                                                  L.P., Allianz Private Client
                                                  Services LLC, Cadence Capital
                                                  Management LLC, NFJ Investment
                                                  Group L.P., PIMCO Advisory
                                                  Services Holding LLC, PIMCO
                                                  Allianz Advisors, PIMCO CD
                                                  Distributors and PIMCO Equity
                                                  Advisors LLC, Assistant
                                                  Secretary, Oppenheimer Capital
                                                  LLC, OpCap Advisors and OCC
                                                  Distributors LLC

Stephen J. Treadway    Managing Director and      Chairman, President and Chief
                       Chief Executive Officer    Executive Officer, PIMCO
                                                  Funds Advertising Agency
                                                  Inc.; Managing Director and
                                                  Chief Executive Officer,
                                                  PIMCO Funds Distributors LLC,
                                                  Managing Director, PIMCO
                                                  Allianz Advisors LLC,
                                                  Allianz Private Client
                                                  Services LLC, Allianz Dresdner
                                                  Asset Management of America
                                                  L.P.

James G. Ward          Executive Vice President   Executive Vice President,
                       and Director of Human      Allianz Asset Management of
                       Resources                  America L.P., Director of
                                                  Human Resources, Allianz Asset
                                                  Management U.S. Equities LLC,
                                                  PIMCO Funds Distributors LLC


Michael B. Zuckerman   Vice President

                                       C-5

<PAGE>

                    Pacific Investment Management Company LLC
                                    ("PIMCO")
                       840 Newport Center Drive, Suite 300
                             Newport Beach, CA 92660

Name                          Business and Other Connections
- ----------------------------- --------------------------------------------------

Arnold, Tammie J.             Executive Vice President, PIMCO

Benz, William R. II           Managing Director, Executive Committee Member,
                              PIMCO

Bhansali, Vineer              Executive Vice President, PIMCO

Brynjolfsson, John B.         Executive Vice President, PIMCO

Burns, R. Wesley              Managing Director, PIMCO; President and Trustee of
                              PIMCO Funds and PIMCO Variable Insurance Trust;
                              President and Director of PIMCO Commercial
                              Mortgage Securities Trust, Inc.; Director, PIMCO
                              Funds: Global Investors Series plc and PIMCO
                              Global Advisors (Ireland) Limited

Cupps, Wendy W.               Executive Vice President, PIMCO

Dialynas, Chris P.            Managing Director, PIMCO

El-Erian, Mohamed A.          Managing Director, PIMCO

Gross, William H.             Managing Director and Executive Committee Member,
                              PIMCO; Director and Vice President, StocksPLUS
                              Management, Inc.; Senior Vice President of PIMCO
                              Funds and PIMCO Variable Insurance Trust

Hague, John L.                Managing Director, PIMCO

Hally, Gordon C.              Executive Vice President, PIMCO

Hamalainen, Pasi M.           Managing Director, PIMCO

Harris, Brent R.              Managing Director and Executive Committee Member,
                              PIMCO; Director and Vice President, StocksPLUS
                              Management, Inc.; Trustee and Chairman of PIMCO
                              Funds and PIMCO Variable Insurance Trust; Director
                              and Chairman, PIMCO Commercial Mortgage Securities
                              Trust, Inc.; Managing Director, PIMCO Specialty
                              Markets LLC

Hinman, David C.              Executive Vice President, PIMCO

Hodge, Douglas M.             Executive Vice President, PIMCO; Director,
                              PIMCO JAPAN LTD

Holden, Brent L.              Managing Director, PIMCO

Isberg, Margaret E.           Managing Director, PIMCO; Senior Vice President of
                              PIMCO Funds


Keller, James M.              Managing Director, PIMCO



Kennedy, Raymond G.           Managing Director, PIMCO


Loftus, John S.               Managing Director, PIMCO; Senior Vice President of
                              PIMCO Funds; Vice President and Assistant
                              Secretary, StocksPLUS Management, Inc.

Mariappa, Sudesh N.           Executive Vice President, PIMCO


                                       C-6

<PAGE>

Mather, Scott A.              Executive Vice President, PIMCO; Senior Vice
                              President, PIMCO Commercial Mortgage Securities
                              Trust, Inc.

McCray, Mark V.               Executive Vice President, PIMCO

McCulley, Paul A.             Managing Director, PIMCO

McDevitt, Joseph E.           Executive Vice President, PIMCO; Director and
                              Chief Executive Officer, PIMCO Europe Ltd

Meiling, Dean S.              Managing Director, PIMCO

Monsan, Kristen S.            Executive Vice President, PIMCO

Muzzy, James F.               Managing Director, PIMCO; Director and Vice
                              President, StocksPLUS Management, Inc.; Senior
                              Vice President, PIMCO Variable Insurance Trust;
                              Vice President of PIMCO Funds; Director, PIMCO
                              Europe Ltd., PIMCO JAPAN LTD., PIMCO Asia Pte
                              Ltd., PIMCO Australia Pty Ltd.

Otterbein, Thomas J.          Executive Vice President, PIMCO

Phansalkar, Mohan V.          Executive Vice President, Secretary and Chief
                              Legal Officer, PIMCO; Vice President and
                              Secretary, StocksPLUS Management, Inc.

Podlich, William F.           Managing Director, PIMCO

Powers, William C.            Managing Director and Executive Committee Member,
                              PIMCO; Senior Vice President, PIMCO Commercial
                              Mortgage Securities Trust, Inc.

Schmider, Ernest L.           Managing Director, PIMCO

Simon, W. Scott               Executive Vice President, PIMCO

Thomas, Lee R.                Managing Director, PIMCO

Thompson, William S.          Managing Director and Executive Committee Member,
                              PIMCO; Director and President, StocksPLUS
                              Management, Inc.; Senior Vice President of PIMCO
                              Variable Insurance Trust; Vice President of PIMCO
                              Funds and PIMCO Commercial Mortgage Securities
                              Trust, Inc.

Trosky, Benjamin L.           Managing Director, PIMCO; Senior Vice President,
                              PIMCO Commercial Mortgage Securities Trust, Inc.


Weil, Richard M.              Managing Director, Chief Operating Officer and
                              Executive Committee Member, PIMCO


Wood, George H.               Executive Vice President, PIMCO

Wyman, Charles C.             Executive Vice President, PIMCO

                                       C-7

<PAGE>

Item 31: Location of Accounts and Records

      The account books and other documents required to be maintained by the
Registrant pursuant to Section 31(a) of the Investment Company Act of 1940 and
the Rules thereunder will be maintained at the offices of State Street Bank &
Trust Co., 225 Franklin Street, Boston, MA 02110 and/or PFPC Inc., 400 Bellevue
Parkway, Wilmington, Delaware 19809.

Item 32: Management Services

      Not applicable.

Item 33: Undertakings

      1. Registrant undertakes to suspend the offering of its shares until it
amends the prospectus filed herewith if (1) subsequent to the effective date of
its registration statement, the net asset value declines more than 10 percent
from its net asset value as of the effective date of the registration statement,
or (2) the net asset value increases to an amount greater than its net proceeds
as stated in the prospectus.

      2. Not applicable.

      3. Not applicable.

      4. Not applicable.

      5. The Registrant undertakes that:

            a. For purposes of determining any liability under the Securities
      Act of 1933, the information omitted from the form of prospectus filed as
      part of this registration statement in reliance upon Rule 430A and
      contained in the form of prospectus filed by the Registrant under Rule
      497(h) under the Securities Act of 1933 shall be deemed to be part of this
      registration statement as of the time it was declared effective; and

            b. 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. The Registrant undertakes to send by first class mail or other means
designed to ensure equally prompt delivery, within two business days of receipt
of a written or oral request, any Statement of Additional Information.

                                     Notice

      A copy of the Agreement and Declaration of Trust of PIMCO Municipal Income
Fund II (the "Fund"), together with all amendments thereto, is on file with the
Secretary of State of The Commonwealth of Massachusetts, and notice is hereby
given that this instrument is executed on behalf of the Fund by any officer of
the Fund as an officer and not individually and that the obligations of or
arising out of this instrument are not binding upon any of the Trustees of the
Fund or shareholders of the Fund individually, but are binding only upon the
assets and property of the Fund.


                                      C-8

<PAGE>

                                   signatures

     Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant has duly caused this Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of New York, and the State of New York on the 16th day
of August, 2002.

                                    PIMCO NEW YORK MUNICIPAL INCOME FUND II

                                    By:    /s/ Stephen J. Treadway
                                           ----------------------------
                                           Stephen J. Treadway,
                                           President

     Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities and on the dates indicated.

<TABLE>
<CAPTION>
Name                                  Capacity                                 Date
<S>                                  <C>                                       <C>
/s/ Stephen J. Treadway               President                                August 16, 2002
- ---------------------------------
Stephen J. Treadway

Paul Belica*                          Trustee                                  August 16, 2002
- ---------------------------------
Paul Belica

Robert E. Connor*                     Trustee                                  August 16, 2002
- ---------------------------------
Robert E. Connor

John J. Dalessandro II*               Trustee                                  August 16, 2002
- ---------------------------------
John J. Dalessandro II

Hans Kertess*                         Trustee                                  August 16, 2002
- ---------------------------------
Hans Kertess

R. Peter Sullivan III*                Trustee                                  August 16, 2002
- ---------------------------------
R. Peter Sullivan III

/s/ Brian S. Shlissel                 Treasurer and Principal                  August 16, 2002
- ---------------------------------     Financial and Accounting Officer
Brian S. Shlissel
</TABLE>

                               *By:   /s/ Stephen J. Treadway
                                      ----------------------------
                                      Stephen J. Treadway,
                                      Attorney-In-Fact
                                      Date:       August 16, 2002




<PAGE>

                               INDEX TO EXHIBITS

Exhibit      Exhibit Name
- -------      ------------

  b.2        Amended and Restated Bylaws

  h.2        Form of Master Agreement Among Underwriters

  h.3        Form of Underwriting Agreement for the APS

  l.         Opinion and Consent of Ropes & Gray




</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-99. (B) (2)
<SEQUENCE>3
<FILENAME>dex99b2.txt
<DESCRIPTION>AMENDED AND RESTATED BYLAWS OF REGISTRANT
<TEXT>
<PAGE>

                                                                     Exhibit b.2

                              AMENDED AND RESTATED
                                     BYLAWS
                                       of
                     PIMCO NEW YORK MUNICIPAL INCOME FUND II

                  (Amended and Restated as of August 15, 2002)


                                    ARTICLE 1
             Agreement and Declaration of Trust and Principal Office

       1.1    Principal Office of the Trust. A principal office of the Trust
shall be located in New York, New York. The Trust may have other principal
offices within or without Massachusetts as the Trustees may determine or as they
may authorize.

       1.2    Agreement and Declaration of Trust. These Amended and Restated
Bylaws (the "Bylaws") shall be subject to the Agreement and Declaration of
Trust, as amended or restated from time to time (the "Declaration of Trust"), of
PIMCO New York Municipal Income Fund II, the Massachusetts business trust
established by the Declaration of Trust (the "Trust"). Capitalized terms used in
these Bylaws and not otherwise defined herein shall have the meanings given to
such terms in the Declaration of Trust.

                                    ARTICLE 2
                              Meetings of Trustees

       2.1    Regular Meetings. Regular meetings of the Trustees may be held
without call or notice at such places and at such times as the Trustees may from
time to time determine, provided that notice of the first regular meeting
following any such determination shall be given to absent Trustees. A regular
meeting of the Trustees may be held without call or notice immediately after and
at the same place as the annual meeting of the Shareholders.

       2.2    Special Meetings. Special meetings of the Trustees may be held at
any time and at any place designated in the call of the meeting when called by
the Chairman of the Trustees, the President or the Treasurer or by two or more
Trustees, sufficient notice thereof being given to each Trustee by the Secretary
or an Assistant Secretary or by the officer or the Trustees calling the meeting.

       2.3    Notice. It shall be sufficient notice to a Trustee of a special
meeting to send notice by mail at least forty-eight hours, or by telegram, telex
or telecopy or other electronic facsimile transmission method at least
twenty-four hours, before the meeting addressed to the Trustee at his or her
usual or last known business or residence address or to give notice to him or
her in person or by telephone at least twenty-four hours before the meeting.
Notice of a meeting need not be given to any Trustee if a written waiver of
notice, executed by him or her, before or after the meeting, is filed with the
records of the meeting, or to any Trustee who attends the

<PAGE>

meeting without protesting prior thereto or at its commencement the lack of
notice to him or her. Neither notice of a meeting nor a waiver of a notice need
specify the purposes of the meeting.

       2.4    Quorum. At any meeting of the Trustees a majority of the Trustees
then in office shall constitute a quorum. Any meeting may be adjourned from time
to time by a majority of the votes cast upon the question, whether or not a
quorum is present, and the meeting may be held as adjourned without further
notice.

                                   ARTICLE 3
                                    Officers

       3.1    Enumeration; Qualification. The officers of the Trust shall be a
President, a Treasurer, a Secretary, and such other officers including a
Chairman of the Trustees, if any, as the Trustees from time to time may in their
discretion elect. The Trust may also have such agents as the Trustees from time
to time may in their discretion appoint. The Chairman of the Trustees, if one is
elected, shall be a Trustee and may but need not be a Shareholder; and any other
officer may but need not be a Trustee or a Shareholder. Any two or more offices
may be held by the same person.

       3.2    Election. The President, the Treasurer, and the Secretary shall be
elected annually by the Trustees. Other officers, if any, may be elected or
appointed by the Trustees at the same meeting at which the President, Treasurer
and Secretary are elected or at any other time. Vacancies in any office may be
filled at any time.

       3.3    Tenure. The Chairman of the Trustees, if one is elected, the
President, the Treasurer and the Secretary shall hold office until their
respective successors are chosen and qualified, or in each case until he or she
sooner dies, resigns, is removed with or without cause or becomes disqualified.
Each other officer shall hold office and each agent of the Trust shall retain
authority at the pleasure of the Trustees.

       3.4    Powers. Subject to the other provisions of these Bylaws, each
officer shall have, in addition to the duties and powers herein and in the
Declaration of Trust set forth, such duties and powers as are commonly incident
to the office occupied by him or her as if the Trust were organized as a
Massachusetts business corporation and such other duties and powers as the
Trustees may from time to time designate.

       3.5    Chairman; President; Vice President. Unless the Trustees otherwise
provide, the Chairman of the Trustees or, if there is none or in the absence of
the Chairman, the President shall preside at all meetings of the Shareholders
and of the Trustees. The President shall be the chief executive officer. Any
Vice President shall have such duties and powers as may be designated from time
to time by the Trustees or the President.

       3.6    Treasurer; Assistant Treasurer. The Treasurer shall be the chief
financial and accounting officer of the Trust, and shall, subject to the
provisions of the Declaration of Trust and to any arrangement made by the
Trustees with a custodian, investment adviser, sub-adviser or manager, or
transfer, shareholder servicing or similar agent, be in charge of the valuable

                                      -2-

<PAGE>

papers, books of account and accounting records of the Trust, and shall have
such other duties and powers as may be designated from time to time by the
Trustees or by the President. Any Assistant Treasurer shall have such duties and
powers as may be designated from time to time by the Trustees or the President.

       3.7    Secretary; Assistant Secretary. The Secretary shall record all
proceedings of the Shareholders and the Trustees in books to be kept therefor,
which books or a copy thereof shall be kept at the principal office of the
Trust. In the absence of the Secretary from any meeting of the Shareholders or
Trustees, an Assistant Secretary, or if there be none or if he or she is absent,
a temporary secretary chosen at such meeting shall record the proceedings
thereof in the aforesaid books. Any Assistant Secretary shall have such duties
and powers as may be designated from time to time by the Trustees or the
President.

       3.8    Resignations. Any officer may resign at any time by written
instrument signed by him or her and delivered to the Chairman, if any, the
President or the Secretary, or to a meeting of the Trustees. Such resignation
shall be effective upon receipt unless specified to be effective at some other
time. Except to the extent expressly provided in a written agreement with the
Trust, no officer resigning and no officer removed shall have any right to any
compensation for any period following his or her resignation or removal, or any
right to damages on account of such removal.

                                   ARTICLE 4
                                   Committees

       4.1    Quorum; Voting. Except as provided below or as otherwise
specifically provided in the resolutions constituting a Committee of the
Trustees and providing for the conduct of its meetings, a majority of the
members of any Committee of the Trustees shall constitute a quorum for the
transaction of business, and any action of such a Committee may be taken at a
meeting by a vote of a majority of the members present (a quorum being present)
or evidenced by one or more writings signed by such a majority. Members of a
Committee may participate in a meeting of such Committee by means of a
conference telephone or other communications equipment by means of which all
persons participating in the meeting can hear each other at the same time and
participation by such means shall constitute presence in person at a meeting.

       With respect to a Valuation Committee of the Trustees, one or more of the
Committee members shall constitute a quorum for the transaction of business.

       Except as specifically provided in the resolutions constituting a
Committee of the Trustees and providing for the conduct of its meetings, Article
2, Section 2.3 of these Bylaws relating to special meetings shall govern the
notice requirements for Committee meetings, except that it shall be sufficient
notice to a Valuation Committee of the Trustees to send notice by telegram,
telex or telecopy or other electronic means (including by telephone
voice-message or e-mail) at least fifteen minutes before the meeting.

                                      -3-

<PAGE>

                                    ARTICLE 5
                                     Reports

       5.1    General. The Trustees and officers shall render reports at the
time and in the manner required by the Declaration of Trust or any applicable
law. Officers and Committees shall render such additional reports as they may
deem desirable or as may from time to time be required by the Trustees.

                                    ARTICLE 6
                                   Fiscal Year

       6.1    General. Except as from time to time otherwise provided by the
Trustees, the initial fiscal year of the Trust shall end on such date as is
determined in advance or in arrears by the Treasurer, and the subsequent fiscal
years shall end on such date in subsequent years.

                                    ARTICLE 7
                                      Seal

       7.1    General. The seal of the Trust shall, subject to alteration by the
Trustees, consist of a flat-faced die with the word "Massachusetts", together
with the name of the Trust and the year of its organization cut or engraved
thereon; provided, however, that unless otherwise required by the Trustees, the
seal shall not be necessary to be placed on, and its absence shall not impair
the validity of, any document, instrument or other paper executed and delivered
by or on behalf of the Trust.

                                    ARTICLE 8
                               Execution of Papers

       8.1    General. Except as the Trustees may generally or in particular
cases authorize the execution thereof in some other manner, all deeds, leases,
transfers, contracts, bonds, notes, checks, drafts and other obligations made,
accepted or endorsed by the Trust shall be executed by the President, any Vice
President, the Treasurer or by whomever else shall be designated for that
purpose by vote of the Trustees, and need not bear the seal of the Trust.

                                    ARTICLE 9
                         Issuance of Share Certificates

       9.1    Share Certificates. Except as provided in Article 11 hereof, each
Shareholder shall be entitled to a certificate stating the number of Shares
owned by him or her, in such form as shall be prescribed from time to time by
the Trustees. Such certificates shall be signed by the President or any Vice
President and by the Treasurer or any Assistant Treasurer. Such signatures may
be by facsimile if the certificate is signed by a transfer agent, or by a
registrar, other than a Trustee, officer or employee of the Trust. In case any
officer who has signed or whose facsimile signature has been placed on such
certificate shall cease to be such officer before such certificate is issued, it
may be issued by the Trust with the same effect as if he or she were such
officer at the time of its issuance.

                                      -4-

<PAGE>

       Notwithstanding the foregoing, in lieu of issuing certificates for
Shares, the Trustees or the transfer agent may either issue receipts therefor or
may keep accounts upon the books of the Trust for the record holders of such
Shares, who shall in either case be deemed, for all purposes hereunder, to be
the holders of certificates for such Shares as if they had accepted such
certificates and shall be held to have expressly assented and agreed to the
terms hereof.

       9.2    Loss of Certificates. In case of the alleged loss or destruction
or the mutilation of a share certificate, a duplicate certificate may be issued
in place thereof, upon such terms as the Trustees shall prescribe.

       9.3    Issuance of New Certificates to Pledgee. A pledgee of Shares
transferred as collateral security shall be entitled to a new certificate if the
instrument of transfer substantially describes the debt or duty that is intended
to be secured thereby. Such new certificate shall express on its face that it is
held as collateral security, and the name of pledgor shall be stated thereon,
who alone shall be liable as a Shareholder and entitled to vote thereon.

       9.4    Discontinuance of Issuance of Certificates. Notwithstanding
anything to the contrary in this Article 9, the Trustees may at any time
discontinue the issuance of share certificates and may, by written notice to
each Shareholder, require the surrender of share certificates to the Trust for
cancellation. Such surrender and cancellation shall not effect the ownership of
Shares in the Trust.

                                   ARTICLE 10
                    Shareholders' Voting Powers and Meetings

       10.1   Voting Powers. The Shareholders shall have power to vote only (i)
for the election or removal of Trustees as provided in Article IV, Sections 1
and 3 of the Declaration of Trust and Article 11 hereto, (ii) with respect to
any Manager or sub-adviser as provided in Article IV, Section 8 of the
Declaration of Trust to the extent required by the 1940 Act, (iii) with respect
to certain transactions and other matters to the extent and as provided in
Article V, Sections 2 and 3 of the Declaration of Trust and Article 11 hereto,
(iv) with respect to any termination of this Trust to the extent and as provided
in Article IX, Section 4 of the Declaration of Trust and Article 11 hereto (for
the avoidance of any doubt, Shareholders shall have no separate right to vote
with respect to the termination of the Trust or a series or class of Shares if
the Trustees (including the Continuing Trustees) exercise their right to
terminate the Trust or such series or class pursuant to clauses (ii) or (y) of
Article IX, Section 4 of the Declaration of Trust), (v) with respect to any
amendment of the Declaration of Trust to the extent and as provided in Article
IX, Section 7 of the Declaration of Trust and Article 11 hereto, (vi) 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 (vii) with respect to such additional matters relating
to the Trust as may be required by law, the Declaration of Trust, these Bylaws
or any registration of the Trust with the Securities and Exchange 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

                                      -5-

<PAGE>

fractional Share shall be entitled to a proportionate fractional vote, except as
otherwise provided in the Declaration of Trust, these Bylaws, or required by
applicable law. Except as otherwise provided in the Declaration of Trust or in
respect of the terms of a class of preferred shares of beneficial interest of
the Trust as reflected in these Bylaws or required by applicable law, all Shares
of the Trust then entitled to vote shall 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. Shares may be voted in person or
by proxy. A proxy with respect to Shares held in the name of two or more persons
shall be valid if executed by any one of them unless at or prior to exercise of
the proxy the Trust receives a specific written notice to the contrary from any
one of them. The placing of a Shareholder's name on a proxy pursuant to
telephonic or electronically transmitted instructions obtained pursuant to
procedures reasonably designed to verify that such instructions have been
authorized by such Shareholder shall constitute execution of such proxy by or on
behalf of such Shareholder. A proxy purporting to be executed by or on behalf of
a Shareholder shall be deemed valid unless challenged at or prior to its
exercise and the burden of proving invalidity shall rest on the challenger.
Until Shares of a particular class or series are issued, the Trustees may
exercise all rights of Shareholders and may take any action required by law, the
Declaration of Trust or these Bylaws to be taken by Shareholders as to such
class or series.

     10.2 Voting Power and Meetings. Except as provided in the next sentence,
regular meetings of the Shareholders for the election of Trustees and the
transaction of such other business as may properly come before the meeting shall
be held, so long as Shares are listed for trading on the New York Stock
Exchange, on at least an annual basis, on such day and at such place as shall be
designated by the Trustees. In the event that such a meeting is not held in any
annual period if so required, whether the omission be by oversight or otherwise,
a subsequent special meeting may be called by the Trustees and held in lieu of
such meeting with the same effect as if held within such annual period. Special
meetings of the Shareholders or any or all classes or series of Shares may also
be called by the Trustees from time to time for such other purposes as may be
prescribed by law, by the Declaration of Trust or by these Bylaws, or for the
purpose of taking action upon any other matter deemed by a majority of the
Trustees and a majority of the Continuing Trustees to be necessary or desirable.
A special meeting of Shareholders may be held at any such time, day and place as
is designated by the Trustees. Written notice of any meeting of Shareholders,
stating the date, time, place and purpose of the meeting, shall be given or
caused to be given by a majority of the Trustees and a majority of the
Continuing Trustees at least seven days before such meeting to each Shareholder
entitled to vote thereat by leaving such notice with the Shareholder at his or
her residence or usual place of business or by mailing such notice, postage
prepaid, to the Shareholder's address as it appears on the records of the Trust.
Such notice may be given by the Secretary or an Assistant Secretary or by any
other officer or agent designated for such purpose by the Trustees. Whenever
notice of a meeting is required to be given to a Shareholder under the
Declaration of Trust or these Bylaws, a written waiver thereof, executed before
or after the meeting by such Shareholder or his or her attorney thereunto
authorized and filed with the records of the meeting, shall be deemed equivalent
to such notice. Notice of a meeting need not be given to any Shareholder who
attends the meeting without protesting prior thereto or at its commencement the
lack of notice to such Shareholder. No ballot shall be required for any election
unless required by a Shareholder

                                      -6-

<PAGE>

present or represented at the meeting and entitled to vote in such election.
Notwithstanding anything to the contrary in this Section 10.2, no matter shall
be properly before any annual or special meeting of Shareholders and no business
shall be transacted thereat unless in accordance with Section 10.6 of these
Bylaws.

     10.3 Quorum and Required Vote. Except when a larger quorum is required by
any provision of law or the Declaration of Trust or these Bylaws, thirty percent
(30%) of the Shares entitled to vote on a particular matter shall constitute a
quorum for the transaction of business at a Shareholders' meeting, except that
where any provision of law or the Declaration of Trust or these Bylaws permits
or requires that holders of any class or series of Shares shall vote as an
individual class or series, then thirty percent (30%) (unless a larger quorum is
required as specified above) of Shares of that class or series entitled to vote
shall be necessary to constitute a quorum for the transaction of business by
that class or series. Any lesser number shall be sufficient for adjournments.
Any adjourned session or sessions may be held, within a reasonable time after
the date set for the original meeting, without the necessity of further notice.
Except when a different vote is required by any provision of law or the
Declaration of Trust or these Bylaws, a plurality of the quorum of Shares
necessary for the transaction of business at a Shareholders' meeting shall
decide any questions and a plurality of Shares voted shall elect a Trustee,
provided that where any provision of law or of the Declaration of Trust or these
Bylaws permits or requires that the holders of any class or series of Shares
shall vote as an individual class or series, then a plurality of the quorum of
Shares of that class or series necessary for the transaction of business by that
class or series at a Shareholders' meeting shall decide that matter insofar as
that class or series is concerned.

     10.4 Action by Written Consent. Any action taken by Shareholders may be
taken without a meeting if a majority of Shareholders entitled to vote on the
matter (or such larger proportion thereof as shall be required by any express
provision of law or the Declaration of Trust or these Bylaws) consent to the
action in writing and such written consents are filed with the records of the
meetings of Shareholders. Such consent shall be treated for all purposes as a
vote taken at a meeting of Shareholders.

     10.5 Record Dates. For the purpose of determining the Shareholders who are
entitled to vote or act at any meeting or any adjournment thereof, or who are
entitled to receive payment of any dividend or of any other distribution, the
Trustees may from time to time fix a time, which shall be not more than 90 days
before the date of any meeting of Shareholders or the date for the payment of
any dividend or of any other distribution, as the record date for determining
the Shareholders having the right to notice of and to vote at such meeting and
any adjournment thereof or the right to receive such dividend or distribution,
and in such case only Shareholders of record on such record date shall have the
right notwithstanding any transfer of Shares on the books of the Trust after the
record date; or without fixing such record date the Trustees may for any of such
purposes close the register or transfer books for all or any part of such
period.

                                      -7-

<PAGE>

     10.6 Advance Notice of Shareholder Nominees for Trustees and Other
Shareholder Proposals.

     (a) As used in this Section 10.6, the term "annual meeting" refers to any
annual meeting of Shareholders as well as any special meeting held in lieu of an
annual meeting as described in the first two sentences of Section 10.2 of these
Bylaws, and the term "special meeting" refers to all meetings of Shareholders
other than an annual meeting or a special meeting in lieu of an annual meeting.

     (b) The matters to be considered and brought before any annual or special
meeting of Shareholders shall be limited to only such matters, including the
nomination and election of Trustees, as shall be brought properly before such
meeting in compliance with the procedures set forth in this Section 10.6. Only
persons who are nominated in accordance with the procedures set forth in this
Section 10.6 shall be eligible for election as Trustees, and no proposal to fix
the number of Trustees shall be brought before an annual or special meeting of
Shareholders or otherwise transacted unless in accordance with the procedures
set forth in this Section 10.6, except as may be otherwise provided in these
Bylaws with respect to the right of holders of preferred shares of beneficial
interest, if any, of the Trust to nominate and elect a specified number of
Trustees in certain circumstances.

     (c) For any matter to be properly before any annual meeting, the matter
must be (i) specified in the notice of meeting given by or at the direction of a
majority of the Trustees and a majority of the Continuing Trustees pursuant to
Section 10.2 of these Bylaws, (ii) otherwise brought before the meeting by or at
the direction of a majority of the Continuing Trustees (or any duly authorized
committee thereof), or (iii) brought before the meeting in the manner specified
in this Section 10.6(c) by a Shareholder of record entitled to vote at the
meeting or by a Shareholder (a "Beneficial Owner") that holds Shares entitled to
vote at the meeting through a nominee or "street name" holder of record and that
can demonstrate to the Trust such indirect ownership and such Beneficial Owner's
entitlement to vote such Shares, provided that the Shareholder was the
Shareholder of record or the Beneficial Owner held such Shares at the time the
notice provided for in this Section 10.6(c) is delivered to the Secretary.

     In addition to any other requirements under applicable law and the
Declaration of Trust and these Bylaws, persons nominated by Shareholders for
election as Trustees and any other proposals by Shareholders may be properly
brought before an annual meeting only pursuant to timely notice (the
"Shareholder Notice") in writing to the Secretary. To be timely, the Shareholder
Notice must be delivered to or mailed and received at the principal executive
offices of the Trust not less than forty-five (45) nor more than sixty (60) days
prior to the first anniversary date of the date on which the Trust first mailed
its proxy materials for the prior year's annual meeting; provided, however, with
respect to the annual meeting to be held in the calendar year 2003, the
Shareholder Notice must be so delivered or mailed and so received on or before
May 1, 2003; provided further, however, if and only if the annual meeting is not
scheduled to be held within a period that commences thirty (30) days before the
first anniversary date of the annual meeting for the preceding year and ends
thirty (30) days after such anniversary date (an annual meeting date outside
such period being referred to herein as an "Other Annual

                                      -8-

<PAGE>

Meeting Date"), such Shareholder Notice must be given in the manner provided
herein by the later of the close of business on (i) the date forty-five (45)
days prior to such Other Annual Meeting Date or (ii) the tenth (10th) business
day following the date such Other Annual Meeting Date is first publicly
announced or disclosed.

     Any Shareholder desiring to nominate any person or persons (as the case may
be) for election as a Trustee or Trustees of the Trust shall deliver, as part of
such Shareholder Notice: (i) a statement in writing setting forth (A) the name,
age, date of birth, business address, residence address and nationality of the
person or persons to be nominated; (B) the class or series and number of all
Shares of the Trust owned of record or beneficially by each such person or
persons, as reported to such Shareholder by such nominee(s); (C) any other
information regarding each such person required by paragraphs (a), (d), (e) and
(f) of Item 401 of Regulation S-K or paragraph (b) of Item 22 of Rule 14a-101
(Schedule 14A) under the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), adopted by the Securities and Exchange Commission (or the
corresponding provisions of any regulation or rule subsequently adopted by the
Securities and Exchange Commission or any successor agency applicable to the
Trust); (D) any other information regarding the person or persons to be
nominated that would be required to be disclosed in a proxy statement or other
filings required to be made in connection with solicitation of proxies for
election of Trustees or directors pursuant to Section 14 of the Exchange Act and
the rules and regulations promulgated thereunder; and (E) whether such
Shareholder believes any nominee is or will be an "interested person" of the
Trust (as defined in the Investment Company Act of 1940, as amended) and, if not
an "interested person," information regarding each nominee that will be
sufficient for the Trust to make such determination; and (ii) the written and
signed consent of the person or persons to be nominated to be named as nominees
and to serve as Trustees if elected. In addition, the Trustees may require any
proposed nominee to furnish such other information as they may reasonably
require or deem necessary to determine the eligibility of such proposed nominee
to serve as a Trustee. Any Shareholder Notice required by this Section 10.6(c)
in respect of a proposal to fix the number of Trustees shall also set forth a
description of and the text of the proposal, which description and text shall
state a fixed number of Trustees that otherwise complies with applicable law,
these Bylaws and the Declaration of Trust.

     Without limiting the foregoing, any Shareholder who gives a Shareholder
Notice of any matter proposed to be brought before a Shareholder meeting
(whether or not involving nominees for Trustees) shall deliver, as part of such
Shareholder Notice: (i) the description of and text of the proposal to be
presented; (ii) a brief written statement of the reasons why such Shareholder
favors the proposal; (iii) such Shareholder's name and address as they appear on
the Trust's books; (iv) any other information relating to the Shareholder that
would be required to be disclosed in a proxy statement or other filings required
to be made in connection with the solicitation of proxies with respect to the
matter(s) proposed pursuant to Section 14 of the Exchange Act and the rules and
regulations promulgated thereunder; (v) the class or series and number of all
Shares of the Trust owned beneficially and of record by such Shareholder; (vi)
any material interest of such Shareholder in the matter proposed (other than as
a Shareholder); (vii) a representation that the Shareholder intends to appear in
person or by proxy at the Shareholder meeting to act on the matter(s) proposed;
(viii) if the proposal involves nominee(s) for Trustees,

                                      -9-

<PAGE>

a description of all arrangements or understandings between the Shareholder and
each proposed nominee and any other person or persons (including their names)
pursuant to which the nomination(s) are to be made by the Shareholder; and (ix)
in the case of a Beneficial Owner, evidence establishing such Beneficial Owner's
indirect ownership of, and entitlement to vote, Shares at the meeting of
Shareholders. As used in this Section 10.6, Shares "beneficially owned" shall
mean all Shares which such person is deemed to beneficially own pursuant to
Rules 13d-3 and 13d-5 under the Exchange Act.

     (d) For any matter to be properly before any special meeting, the matter
must be specified in the notice of meeting given by or at the direction of a
majority of the Trustees and a majority of the Continuing Trustees pursuant to
Section 10.2 of these Bylaws. In the event the Trust calls a special meeting for
the purpose of electing one or more Trustees, any Shareholder may nominate a
person or persons (as the case may be) for election to such position(s) as
specified in the Trust's notice of meeting if and only if the Shareholder
provides a notice containing the information required in the Shareholder Notice
to the Secretary required with respect to annual meetings by Section 10.6(c)
hereof, and such notice is delivered to or mailed and received at the principal
executive office of the Trust not later than the close of business on the tenth
(10/th/) day following the day on which the date of the special meeting and of
the nominees proposed by the Trustees to be elected at such meeting are publicly
announced or disclosed.

     (e) For purposes of this Section 10.6, a matter shall be deemed to have
been "publicly announced or disclosed" if such matter is disclosed in a press
release reported by the Dow Jones News Service, Associated Press or comparable
national news service, in a document publicly filed by the Trust with the
Securities and Exchange Commission, or in a Web site accessible to the public
maintained by the Trust or by its investment adviser or an affiliate of such
investment adviser with respect to the Trust.

     (f) In no event shall an adjournment or postponement (or a public
announcement thereof) of a meeting of Shareholders commence a new time period
(or extend any time period) for the giving of notice as provided in this Section
10.6.

     (g) The person presiding at any meeting of Shareholders, in addition to
making any other determinations that may be appropriate to the conduct of the
meeting, shall have the power and duty to determine (i) whether a nomination or
proposal of other matters to be brought before a meeting and notice thereof have
been duly made and given in the manner provided in this Section 10.6 and
elsewhere in these Bylaws and the Declaration of Trust and (ii) if not so made
or given, to direct and declare at the meeting that such nomination and/or such
other matters shall be disregarded and shall not be considered. Any
determination by the person presiding shall be binding on all parties absent
manifest error.

     (h) Notwithstanding anything to the contrary in this Section 10.6 or
otherwise in these Bylaws, unless required by federal law, no matter shall be
considered at or brought before any annual or special meeting unless such matter
has been approved for these purposes by a majority of the Continuing Trustees
and, in particular, no Beneficial Owner shall have any rights as a

                                      -10-

<PAGE>

Shareholder except as may be required by federal law. Furthermore, nothing in
this Section 10.6 shall be construed as creating any implication or presumption
as to the requirements of federal law.

                                   ARTICLE 11
            Statement Creating One Series of Auction Preferred Shares

       Auction Preferred Shares, Series A: 1,800 shares of beneficial interest
of Preferred Shares, par value $0.00001 per share, liquidation preference
$25,000 per share plus an amount equal to accumulated but unpaid dividends
(whether or not earned or declared) thereon, is hereby designated "Auction
Preferred Shares, Series A." Each share of Auction Preferred Shares, Series A
(sometimes referred to herein as "Series A APS") may be issued on a date to be
determined by the Board of Trustees of the Trust or pursuant to their delegated
authority; have an Initial Dividend Rate and an Initial Dividend Payment Date as
shall be determined in advance of the issuance thereof by the Board of Trustees
of the Trust or pursuant to their delegated authority; and have such other
preferences, voting powers, limitations as to dividends, qualifications and
terms and conditions of redemption as are set forth in these Bylaws. The Series
A APS shall constitute a separate series of Preferred Shares of the Trust, and
each share of Series A APS shall be identical.

       Auction Preferred Shares, Series B: 1,800 shares of beneficial interest
of Preferred Shares, par value $0.00001 per share, liquidation preference
$25,000 per share plus an amount equal to accumulated but unpaid dividends
(whether or not earned or declared) thereon, is hereby designated "Auction
Preferred Shares, Series B." Each share of Auction Preferred Shares, Series B
(sometimes referred to herein as "Series B APS") may be issued on a date to be
determined by the Board of Trustees of the Trust or pursuant to their delegated
authority; have an Initial Dividend Rate and an Initial Dividend Payment Date as
shall be determined in advance of the issuance thereof by the Board of Trustees
of the Trust or pursuant to their delegated authority; and have such other
preferences, voting powers, limitations as to dividends, qualifications and
terms and conditions of redemption as are set forth in these Bylaws. The Series
B APS shall constitute a separate series of Preferred Shares of the Trust, and
each share of Series B APS shall be identical.

       11.1  Definitions. (a) Unless the context or use indicates another or
different meaning or intent, in Article 11 of these Bylaws the following terms
have the following meanings, whether used in the singular or plural:

       "'AA' Composite Commercial Paper Rate," on any Valuation Date, means (i)
the Interest Equivalent of the rate on commercial paper placed on behalf of
issuers whose corporate bonds are rated "AA" by S&P or "Aa" by Moody's or the
equivalent of such rating by another Rating Agency, as such rate is 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 such a rate,
then the arithmetic average of the Interest Equivalent of the rate on commercial
paper placed on behalf of such issuers, as quoted on a discount basis or
otherwise by UBS Warburg LLC or Merrill Lynch,

                                      -11-

<PAGE>

Pierce, Fenner & Smith Incorporated or their respective successors that are
Commercial Paper Dealers, to the Auction Agent for the close of business on the
Business Day immediately preceding such date. If one of the Commercial Paper
Dealers does not quote a rate required to determine the "AA" Composite
Commercial Paper Rate, the "AA" Composite Commercial Paper Rate will be
determined on the basis of the quotation or quotations furnished by any
Substitute Commercial Paper Dealer or Substitute Commercial Paper Dealers
selected by the Trust to provide such rate or rates not being supplied by the
Commercial Paper Dealer. If the number of Dividend Period days shall be (i) 7 or
more but fewer than 49 days, such rate shall be the Interest Equivalent of the
30-day rate on such commercial paper; (ii) 49 or more but fewer than 70 days,
such rate shall be the Interest Equivalent of the 60-day rate on such commercial
paper; (iii) 70 or more days but fewer than 85 days, such rate shall be the
arithmetic average of the Interest Equivalent on the 60-day and 90-day rates on
such commercial paper; (iv) 85 or more days but fewer than 99 days, such rate
shall be the Interest Equivalent of the 90-day rate on such commercial paper;
(v) 99 or more days but fewer than 120 days, such rate shall be the arithmetic
average of the Interest Equivalent of the 90-day and 120-day rates on such
commercial paper; (vi) 120 or more days but fewer than 141 days, such rate shall
be the Interest Equivalent of the 120-day rate on such commercial paper; (vii)
141 or more days but fewer than 162 days, such rate shall be the arithmetic
average of the Interest Equivalent of the 120-day and 180-day rates on such
commercial paper; and (viii) 162 or more days but fewer than 183 days, such rate
shall be the Interest Equivalent of the 180-day rate on such commercial paper.

       "Accountant's Confirmation" has the meaning set forth in Section 11.7(c)
of these Bylaws.

       "Adviser" means the Trust's investment adviser which initially shall be
PIMCO Funds Advisors LLC.

       "Affiliate" means any Person, other than UBS Warburg LLC or its
successors, known to the Auction Agent to be controlled by, in control of, or
under common control with, the Trust.

       "Agent Member" means a member of the Securities Depository that will act
on behalf of a Beneficial Owner of one or more APS or on behalf of a Potential
Beneficial Owner.

       "Applicable Percentage" has the meaning set forth in Section
11.10(a)(vii) of these Bylaws.

       "Applicable Rate" means the rate per annum at which cash dividends are
payable on the APS for any Dividend Period.

       "APS" means the Series A APS and the Series B APS.

       "APS Basic Maintenance Amount," as of any Valuation Date, means the
dollar amount equal to the sum of (i)(A) the product of the number of shares of
APS 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 APS (or other Preferred Shares) then subject to

                                      -12-

<PAGE>

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 each series of APS
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 APS Outstanding from such first respective Dividend
Payment Date therefor through the 49th day after such Valuation Date, at the
Maximum Applicable Rate (calculated as if such Valuation Date were the Auction
Date for the Dividend Period commencing on such Dividend Payment Date) for a
7-Day Dividend 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 Dividend
Period to the Auction Agent with respect to shares of such series, such Maximum
Applicable Rate shall be the higher of (a) the Maximum Applicable Rate for the
Special Dividend Period of shares of such series to commence on such Dividend
Payment Date and (b) the Maximum Applicable Rate for a 7-Day Rate Period of
shares of such series to commence on such Dividend Payment Date, multiplied by
the Moody's Volatility Factor applicable to a 7-Day Dividend Period, or, in the
event the Trust shall have delivered a Notice of Special Dividend Period to the
Auction Agent with respect to shares of such series designating a Special
Dividend Period consisting of 49 days or more, the Moody's Volatility Factor
applicable to a Special Dividend 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 during a Non-Payment Period (or, in the case of Preferred Shares
other than APS, a period similar to a Non-Payment Period), the dividend for
purposes of calculation would accumulate at the then current Non-Payment Period
Rate (or similar rate for Preferred Shares other than APS) 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 Preferred Shares other than APS, 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 Dividend
Liability in respect of shares of APS (and similar amounts payable in respect of
other Preferred Shares) 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., 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

                                      -13-

<PAGE>

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).

       "APS Basic Maintenance Cure Date," with respect to the failure by the
Trust to satisfy the APS Basic Maintenance Amount (as required by Section
11.7(a) of these Bylaws) as of a given Valuation Date, means the sixth Business
Day following such Valuation Date.

       "APS Basic Maintenance Report" means a report signed by any of the
President, Treasurer, any Senior Vice President or any 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 APS Basic Maintenance Amount.

       "Auction" means a periodic operation of the Auction Procedures.

       "Auction Agent" means Deutsche Bank Trust Company Americas unless and
until another commercial bank, trust company or other financial institution
appointed by a resolution of the Board of Trustees of the Trust or a duly
authorized committee thereof enters into an agreement with the Trust to follow
the Auction Procedures for the purpose of determining the Applicable Rate and to
act as transfer agent, registrar, dividend disbursing agent and redemption agent
for the APS.

       "Auction Date" has the meaning set forth in Section 11.10(a)(ii) of these
Bylaws.

       "Auction Procedures" means the procedures for conducting Auctions set
forth in Section 11.10 of these Bylaws.

       "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 APS or a Broker-Dealer that holds APS for its own account.

       "Broker-Dealer" means any broker-dealer, or other entity permitted by law
to perform the functions required of a Broker-Dealer pursuant to Section 11.10
of these Bylaws, that has been selected by the Trust and has entered into a
Broker-Dealer Agreement with the Auction Agent that remains effective.

       "Broker-Dealer Agreement" means an agreement between the Auction Agent
and a Broker-Dealer pursuant to which such Broker-Dealer agrees to follow the
procedures specified in Section 11.10 of these Bylaws.

       "Business Day" means a day on which the New York Stock Exchange is open
for trading and which is not a Saturday, Sunday or other day on which banks in
New York City are authorized or obligated by law to close.

       "Closing Transactions" has the meaning set forth in Section 11.8(a) of
these Bylaws.

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

                                      -14-

<PAGE>

       "Commercial Paper Dealers" means UBS Warburg LLC, 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 thereof, their respective
affiliates or successors.

       "Common Shares" means the shares of beneficial interest designated as
common shares, no par value, of the Trust.

       "Cure Date" has the meaning set forth in Section 11.4(a)(ii) of these
Bylaws.

       "Date of Original Issue" means, with respect to any share of APS, the
date on which the Trust first issues such share.

       "Declaration of Trust" means the Amended and Restated Agreement and
Declaration of Trust of the Trust dated June 18, 2002, as from time to time
amended and supplemented.

       "Deposit Securities" means cash and Municipal Obligations rated at least
A2 (having a remaining maturity of 12 months or less), P-1, VMIG-1 or MIG-1 by
Moody's or A (having a remaining maturity of 12 months or less), A-1+ or SP-1+
by S&P.

       "Discount Factor" means a Moody's Discount Factor.

       "Discounted Value" of any asset of the Trust means, with respect to a
Moody's Eligible Asset, the quotient of the Market Value thereof divided by the
applicable Moody's Discount Factor.

       "Dividend Payment Date," with respect to APS, has the meaning set forth
in Section 11.2(b)(i) of these Bylaws.

       "Dividend Period" means the Initial Dividend Period, any 7-Day Dividend
Period and any Special Dividend Period.

       "Eligible Assets" means Moody's Eligible Assets.

       "Existing Holder" means a Broker-Dealer, or any such other Person that
may be permitted by the Trust, that is listed as the holder of record of APS in
the Share Books.

       "Extension Period" has the meaning set forth in Section 11.2(c)(iii) of
these Bylaws.

       "Federal Tax Rate Increase" has the meaning set forth under the
definition of "Moody's Volatility Factor" below.

       "Forward Commitment" has the meaning set forth in Section 11.8(d) of
these Bylaws.

       "Gross-Up Dividend" has the meaning set forth in Section 11.2(e) of these
Bylaws.

       "Holder" means a Person identified as a holder of record of APS in the
Share Register.

                                      -15-

<PAGE>

     "Independent Accountant" means 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, and serving as such for the Trust.

     "Initial Dividend Payment Date" means, with respect to a series of APS, the
Initial Dividend Payment Date as determined by the Board of Trustees of the
Trust or pursuant to their delegated authority with respect to such series.

     "Initial Dividend Period" has the meaning set forth in Section 11.2(c)(i)
of these Bylaws.

     "Initial Dividend Rate" means, with respect to a series of APS, the rate
per annum applicable to the Initial Dividend Period for such series of APS.

     "Interest Equivalent" means a yield on a 360-day basis of a discount basis
security which is equal to the yield on an equivalent interest-bearing security.

     "Issue Type Category" means, with respect to a Municipal Obligation
acquired by the Trust, for purposes of calculating Moody's Eligible Assets as of
any Valuation Date, one of the following categories into which such Municipal
Obligation falls based upon a good faith determination by the Trust: health care
issues (including issues related to teaching and non-teaching hospitals, public
or private, and elder-care facilities, including nursing homes); housing issues
(including issues related to single- and multi-family housing projects);
educational facilities issues (including issues related to public and private
schools); student loan issues; resource recovery issues; transportation issues
(including issues related to mass transit, airports and highways); industrial
development bond issues (including issues related to pollution control
facilities); utility issues (including issues related to the provision of gas,
water, sewers and electricity); general obligation issues; lease obligations
(including certificates of participation); escrowed bonds; and other issues
("Other Issues") not falling within one of the aforementioned categories. The
general obligation issue category includes any issue that is directly or
indirectly guaranteed by any state or any political subdivision of a state.
Utility issues are included in the general obligation issue category if the
issue is directly or indirectly guaranteed by a state or any political
subdivision of a state. Municipal Obligations in the utility issue category will
be classified within one of the three following sub-categories: (i) electric,
gas and combination issues (if the combination issue includes an electric
issue); (ii) water and sewer utilities and combination issues (if the
combination issues does not include an electric issue); and (iii) irrigation,
resource recovery, solid waste and other utilities. Municipal Obligations in the
transportation issue category will be classified within one of the two following
sub-categories: (i) streets and highways, toll roads, bridges and tunnels,
airports and multi-purpose port authorities (multiple revenue streams generated
by toll roads, airports, real estate, bridges); (ii) mass transit, parking
seaports and others.

     "Long Term Dividend Period" means a Special Dividend Period consisting of a
specified period of one whole year or more but not greater than five years.

                                      -16-

<PAGE>

     "Liens" shall have the meaning set forth in the definition of "Moody's
Eligible Asset" below.

     "Mandatory Redemption Price" means $25,000 per share of APS plus an amount
equal to accumulated but unpaid dividends (whether or not earned or declared) to
the date fixed for redemption, but excluding Gross-up Dividends.

     "Marginal Tax Rate" means the maximum marginal regular federal individual
income tax rate applicable to an individual's or a corporation's ordinary
income, whichever is greater.

     "Market Value" of any asset of the Trust shall be the market value thereof
determined by the Pricing Service. Market Value of any asset shall include any
interest accrued thereon. The Pricing Service shall value portfolio securities
at the quoted bid prices or the mean between the quoted bid and asked price or
the yield equivalent when quotations are not readily available. 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 securities 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
and/or a matrix system to determine valuations. 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 members of the National
Association of Securities Dealers, Inc. and who 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 Board of Trustees of the Trust.

     "Maximum Applicable Rate," with respect to APS, has the meaning set forth
in Section 11.10(a)(vii) of these Bylaws.

     "Maximum Potential Gross-Up Dividend Liability" means, as of any Valuation
Date, the aggregate amount of Gross-Up Dividends that would be due if the Trust
were to make Retroactive Taxable Allocations, with respect to any fiscal 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 Dividends are fully taxable.

     "Moody's" means Moody's Investors Service, Inc. or 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:

                                      -17-

<PAGE>

<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------
       Exposure Period          Aaa*      Aa*      A*      Baa*    Other**   (V)MIG-1***     SP-1+****    Unrated*****
       ---------------          ----      ---      --      ----    -------   -----------     ---------    ------------
- ------------------------------------------------------------------------------------------------------------------------
<S>                            <C>      <C>      <C>      <C>      <C>       <C>             <C>          <C>
7 weeks                         151%     159%     166%     173%     187%      136%            148%         225%
- ------------------------------------------------------------------------------------------------------------------------
8 weeks or less but greater     154      161      168      176      190       137             149          231
than seven weeks.
- ------------------------------------------------------------------------------------------------------------------------
9 weeks or less but greater     158      163      170      177      192       138             150          240
than eight weeks
- ------------------------------------------------------------------------------------------------------------------------
</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 or not rated by Moody's and
       less than BBB or not rated by S&P, not to exceed 10% of Moody's Eligible
       Assets.

Notwithstanding the foregoing, (i) except as provided in clause (ii) below, 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-l or P-1 by
Moody's and mature or have a demand feature at par exercisable in 30 days or
less, or 125%, as 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, (ii) the Moody's Discount Factor for residual interest municipal
bonds and structured notes shall be the product of (x) the percentage determined
by reference to the rating on the security underlying such residual interest
municipal bond multiplied by (y) 1.25 (provided that the trust in which such
residual interest municipal bond is held may be terminated within five business
days), and (iii) except as provided in clause (ii) above, no Moody's Discount
Factor will be applied to cash, 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 and options (to the extent entered into in Moody's
Hedging Transactions) and similar instruments (including residual interest
municipal bonds (provided that the trust in which such residual interest
municipal bond is held may be terminated within five business days) and
structured notes), or a Municipal Obligation that (i) pays interest in cash,
(ii) does not have its Moody's rating, as applicable, suspended by Moody's, and
(iii) is part of an issue of Municipal Obligations of at least $5,000,000,
except for Municipal Obligations rated below A by Moody's or Municipal
Obligations within the healthcare Issue Type Category, in which case the minimum

                                      -18-

<PAGE>

issue size is $10,000,000. Except for general obligation bonds, Municipal
Obligations issued by any one issuer and rated BBB or lower or not rated by S&P
and rated Ba or B or not rated by Moody's ("Other Securities") may comprise no
more than 4% of total Moody's Eligible Assets; such Other Securities, 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 Other Securities, Baa and A-rated 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 Other Securities, Baa, A and AA-rated Municipal Obligations, if
any, together with any Municipal 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
Obligation. Other Securities falling within a particular Issue Type Category may
comprise no more than 12% of total Moody's Eligible Assets; such Other
Securities, if any, together with any Municipal Obligations falling within a
particular Issue Type Category and rated Baa by Moody's or A by S&P, may
comprise no more than 20% of total Moody's Eligible Assets; such Other
Securities, Baa and A-rated Municipal Obligations, if any, together with any
Municipal Obligations falling within a particular Issue Type Category 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 Other Securities, Baa, A and AA-rated Municipal
Obligations, if any, together with any Municipal Obligations falling within a
particular Issue Type Category and rated Aa by Moody's or AAA by S&P, may
comprise no more than 60% of total Moody's Eligible Assets. For purposes of this
definition, a Municipal Obligation shall be deemed to be rated BBB by S&P if
rated BBB-, BBB or BBB+ by S&P. Notwithstanding any other provision of this
definition, (A) in the case of general obligation Municipal Obligations only,
Other Securities issued by issuers located within any one county may comprise no
more than 12% of Moody's Eligible Assets; such Other Securities, if any,
together with any Municipal Obligations issued by issuers located within the
same county and rated Baa by Moody's or A by S&P, may comprise no more than 20%
of Moody's Eligible Assets; such Other Securities, Baa and A-rated Municipal
Obligations, if any, together with any Municipal Obligations issued by issuers
located within the same county and rated A by Moody's or AA by S&P, may comprise
no more than 40% of Moody's Eligible Assets; and such Other Securities, Baa, A
and AA-rated Municipal Obligations, if any, together with any Municipal
Obligations issued by issuers located within the same county and rated Aa by
Moody's or AAA by S&P, may comprise no more than 60% of Moody's Eligible Assets;
and (B) in no event may (i) student loan Municipal Obligations comprise more
than 10% of Moody's Eligible Assets; (ii) resource recovery Municipal
Obligations comprise more than 10% of Moody's Eligible Assets; and (iii) Other
Issues comprise more than 10% of Moody's Eligible Assets. 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 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 date,
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 APS Basic Maintenance

                                      -19-

<PAGE>

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 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.

     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 its investment manager or portfolio manager, the Trust's custodian,
transfer agent or registrar or the Auction Agent and (D) Liens arising by virtue
of any repurchase agreement; (ii) deposited irrevocably for the payment of any
liabilities for purposes of determining the APS Basic Maintenance Amount; or
(iii) held in a margin account.

     "Moody's Exposure Period" means the period commencing on a given Valuation
Date and ending 49 days thereafter.

     "Moody's Hedging Transactions" has the meaning set forth in Section 11.8(a)
of these Bylaws.

     "Moody's Volatility Factor" means as of any Valuation Date, (i) in the case
of any 7-Day Dividend Period, any Special Dividend Period of 28 days or fewer,
or any Special Dividend Period of 57 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 Dividend Period of more than 28 but fewer than
36 days, a multiplicative factor equal to 203%; (iii) in the case of any Special
Dividend Period of more than 35 but fewer than 43 days, a multiplicative factor
equal to 217%; (iv) in the case of any Special Dividend Period of more than 42
but fewer than 50 days, a multiplicative factor equal to 226%; and (v) in the
case of any Special Dividend Period of more than 49 but fewer than 57 days, a
multiplicative factor equal to 235%. If, as a result of the enactment of changes
to the Code, the Marginal Tax Rate 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 Dividend Period described in (i) above in this definition instead shall be
determined by reference to the following table:

                                                             Volatility
     Federal Tax Rate Increase                                   Factor
     ------------------------------------------------------------------

      5% .......................................................   295%
     10% .......................................................   317%
     15% .......................................................   341%

                                      -20-

<PAGE>

     20% .................................................    369%
     25% .................................................    400%
     30% .................................................    436%
     35% .................................................    477%
     40% .................................................    525%

     "Municipal Obligations" means municipal obligations, including municipal
bonds and short-term municipal obligations, the interest from which is exempt
from federal income taxes.

     "Municipal Index" means the Bond Buyer Municipal Bond Index or any
successor index approved by Moody's.

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

     "1940 Act APS Asset Coverage" means 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 APS
(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
beneficial interest of a closed-end investment company as a condition of paying
dividends on its common shares).

     "1940 Act Cure Date," with respect to the failure by the Trust to maintain
the 1940 Act APS Asset Coverage (as required by these Bylaws) as of the last
Business Day of each month, means the last Business Day of the following month.

     "Non-Call Period" has the meaning set forth under the definition of
"Specific Redemption Provisions."

     "Non-Payment Period" means a period commencing on and including a Dividend
Payment Date or redemption date for which the Trust shall fail to (i) declare,
prior to the close of business on the second Business Day preceding such
Dividend Payment Date, for payment on or (to the extent permitted by Section
11.2(c)(i) of these Bylaws) within three Business Days after such Dividend
Payment Date to the Holders as of 12:00 noon, New York City time, on the
Business Day preceding such Dividend Payment Date, the full amount of any
dividend on APS payable on such Dividend Payment Date, provided, however, that
if the Trust is not able to make such declaration in compliance with the
foregoing because an unforeseen event or unforeseen events causes or cause a day
that otherwise would have been a Business Day not to be a Business Day, then the
Trust may make such declaration on the Business Day immediately preceding the
Dividend Payment Date, if possible, or, if not possible, on the Dividend Payment
Date, and in such case the Trust shall not be deemed to have failed to declare a
dividend otherwise required to be declared, or (ii) deposit, irrevocably in
trust, in same-day funds, with the Auction Agent by 12:00 noon, New York City
time, (A) on such Dividend Payment Date the full amount of any cash dividend on
such shares payable (if declared) on such Dividend Payment Date or (B) on any
such redemption date for any shares of APS called for redemption, the Mandatory
Redemption Price per share of such APS or, in the case of an optional
redemption, the Optional Redemption Price per share, and ending on and including
the Business Day on which, by 12:00 noon, New

                                      -21-

<PAGE>

York City time, all unpaid cash dividends and unpaid redemption prices shall
have been so deposited or shall have otherwise been made available to Holders in
same-day funds; provided that, a Non-Payment Period shall not end unless the
Trust shall have given at least five days' but no more than 30 days' written
notice of such deposit or availability to the Auction Agent, all Existing
Holders (at their addresses appearing in the Share Books) and the Securities
Depository. Notwithstanding the foregoing, the failure by the Trust to deposit
funds as provided for by clauses (ii)(A) or (ii)(B) above within three Business
Days after any Dividend Payment Date or redemption date, as the case may be, in
each case to the extent contemplated by Section 11.2(c)(i) of these Bylaws,
shall not constitute a "Non-Payment Period."

     "Non-Payment Period Rate" means, initially, 200% of the applicable
Reference Rate (or 275% of such rate if the Trust has provided notification to
the Auction Agent prior to the Auction establishing the Applicable Rate for any
dividend that net capital gains or other taxable income will be included in such
dividend the APS), provided that the Board of Trustees of the Trust shall have
the authority to adjust, modify, alter or change from time to time the initial
Non-Payment Period Rate if the Board of Trustees of the Trust determines and
Moody's (and any Substitute Rating Agency in lieu of Moody's in the event
Moody's shall not rate the APS) advise the Trust in writing that such
adjustment, modification, alteration or change will not adversely affect its
then current ratings on the APS.

     "Normal Dividend Payment Date" has the meaning set forth in Section
11.2(b)(i) of these Bylaws.

     "Notice of Redemption" means any notice with respect to the redemption of
shares of APS pursuant to Section 11.4 of these Bylaws.

     "Notice of Revocation" has the meaning set forth in Section 11.2(c)(iii) of
these Bylaws.

     "Notice of Special Dividend Period" has the meaning set forth in Section
11.2(c)(iii) of these Bylaws.

     "Optional Redemption Price" means $25,000 per share plus an amount equal to
accumulated but unpaid dividends (whether or not earned or declared) to the date
fixed for redemption plus any applicable redemption premium attributable to the
designation of a Premium Call Period, but excluding Gross-up Dividends.

     "Other Issues" has the meaning set forth in the definition of "Issue Type
Category."

     "Other Securities" has the meaning set forth in the definition of "Moody's
Eligible Asset."

     "Outstanding" means, as of any date (i) with respect to APS, shares of APS
theretofore issued by the Trust except, without duplication, (A) any shares of
APS theretofore canceled or delivered to the Auction Agent for cancellation, or
redeemed by the Trust, or as to which a Notice of Redemption shall have been
given and Deposit Securities shall have been deposited in trust or segregated by
the Trust pursuant to Section 11.4(c) hereto and (B) any shares of APS as

                                      -22-

<PAGE>

to which the Trust or any Affiliate (other than an Affiliate that is a
Broker-Dealer) thereof shall be a Beneficial Owner, provided that shares of APS
held by an Affiliate shall be deemed outstanding for purposes of calculating the
APS Basic Maintenance Amount and (ii) with respect to other Preferred Shares,
has the equivalent meaning.

     "Parity Shares" means the APS and each other outstanding series of
Preferred Shares the holders of which, together with the holders of the APS,
shall be entitled to the receipt of dividends or of amounts distributable upon
liquidation, dissolution or winding up, as the case may be, in proportion to the
full respective preferential amounts to which they are entitled, without
preference or priority one over the other.

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

     "Potential Beneficial Owner" means a customer of a Broker-Dealer or a
Broker-Dealer that is not a Beneficial Owner of APS but that wishes to purchase
such shares, or that is a Beneficial Owner that wishes to purchase additional
APS.

     "Potential Holder" means any Broker-Dealer or any such other Person as may
be permitted by the Trust, including any Existing Holder, who may be interested
in acquiring APS (or, in the case of an Existing Holder, additional APS).

     "Preferred Shares" means preferred shares of beneficial interest of the
Trust, and includes APS.

     "Premium Call Period" has the meaning set forth under the definition of
"Specific Redemption Provisions."

     "Pricing Service" means Standard & Poor's/J.J. Kenny or any pricing service
designated by the Board of Trustees of the Trust for purposes of determining
whether the Trust has Moody's Eligible Assets with an aggregate Discounted Value
that equals or exceeds the APS Basic Maintenance Amount.

     "Quarterly Valuation Date" means the last Business Day of the last month of
each fiscal quarter of the Trust in each fiscal year of the Trust, commencing
November 29, 2002.

     "Rating Agency" means a nationally recognized statistical rating
organization.

     "Receivables for Municipal Obligations Sold" shall mean for purposes of
calculation of 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 Fund 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

                                      -23-

<PAGE>

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.

     "Reference Rate" means: (i) with respect to a Dividend Period or a Short
Term Dividend Period having 28 or fewer days, the higher of the applicable "AA"
Composite Commercial Paper Rate and the Taxable Equivalent of the Short-Term
Municipal Obligation Rate, (ii) with respect to any Short Term Dividend Period
having more than 28 but fewer than 183 days, the applicable "AA" Composite
Commercial Paper Rate, (iii) with respect to any Short Term Dividend Period
having 183 or more but fewer than 364 days, the applicable U.S. Treasury Bill
Rate and (iv) with respect to any Long Term Dividend Period, the applicable U.S.
Treasury Note Rate.

     "Request for Special Dividend Period" has the meaning set forth in Section
11.2(c)(iii) of these Bylaws.

     "Response" has the meaning set forth in Section 11.2(c)(ii) of these
Bylaws.

     "Retroactive Taxable Allocation" has the meaning set forth in Section
11.2(e) of these Bylaws.

     "Right" has the meaning set forth in Section 11.2(e) of these Bylaws.

     "S&P" means Standard & Poor's, a division of The McGraw-Hill Companies,
Inc., or its successors.

     "Securities Depository" means The Depository Trust Company and its
successors and assigns or any successor securities depository selected by the
Trust as securities depository for the APS that agrees to follow the procedures
required to be followed by such securities depository in connection with the
APS.

     "Service" means the United States Internal Revenue Service.

     "Series A APS" means the Auction Preferred Shares, Series A.

     "Series B APS" means the Auction Preferred Shares, Series B.

     "7-Day Dividend Period" means a Dividend Period consisting of seven days.

     "Share Books" means the books maintained by the Auction Agent setting forth
at all times a current list, as determined by the Auction Agent, of Existing
Holders of the APS.

     "Share Register" means the register of Holders maintained on behalf of the
Trust by the Auction Agent in its capacity as transfer agent and registrar for
the APS.

                                      -24-

<PAGE>

     "Short Term Dividend Period" means a Special Dividend Period consisting of
a specified number of days, evenly divisible by seven and not fewer than
fourteen nor more than 364.

     "Special Dividend Period" means a Short Term Dividend Period or a Long Term
Dividend Period.

     "Specific Redemption Provisions" means, with respect to a Special Dividend
Period either, or both of, (i) a period (a "Non-Call Period") determined by the
Board of Trustees of the Trust, after consultation with the Auction Agent and
the Broker-Dealers, during which the APS subject to such Dividend Period shall
not be subject to redemption at the option of the Trust and (ii) a period (a
"Premium Call Period"), consisting of a number of whole years and determined by
the Board of Trustees of the Trust, after consultation with the Auction Agent
and the Broker-Dealers, during each year of which the APS subject to such
Dividend Period shall be redeemable at the Trust's option at a price per share
equal to $25,000 plus accumulated but unpaid dividends plus a premium expressed
as a percentage of $25,000, as determined by the Board of Trustees of the Trust
after consultation with the Auction Agent and the Broker-Dealers.

     "Subsequent Dividend Period" has the meaning set forth in Section
11.2(c)(i) of these Bylaws.

     "Substitute Commercial Paper Dealers" means such substitute 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.

     "Substitute Rating Agency" means a Rating Agency selected by UBS Warburg
LLC and Merrill Lynch, Pierce, Fenner & Smith Incorporated, or their respective
affiliates and successors, after consultation with the Trust, to act as the
substitute Rating Agency to determine the credit ratings of the APS.

     "Sufficient Clearing Bids" has the meaning set forth in Section
11.10(a)(xv) of these Bylaws.

     "Taxable Equivalent of the Short-Term Municipal Obligations Rate" on any
date means 90% of the quotient of (A) the per annum rate expressed on an
interest equivalent basis equal to the Kenny S&P 30 day High Grade Index or any
successor index (the "Kenny Index"), 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 Kenny Information Systems Inc. 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 Kenny Information Systems
Inc. 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 for purposes of the federal alternative minimum tax for individuals,
divided by (B) 1.00 minus the Marginal Tax Rate (expressed as a decimal);
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 Kenny Information Systems Inc. or any
successor, the Taxable Equivalent of the Short-Term

                                      -25-

<PAGE>

Municipal Obligation 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
Marginal Tax Rate (expressed as a decimal). The Trust may not utilize a
successor index to the Kenny Index unless Moody's provides the Trust with
written confirmation that the use of such successor index will not adversely
affect the then-current Moody's rating of the APS.

       "Treasury Bonds" means United States Treasury Bonds or Notes.

       "U.S. Treasury Bill Rate" on any date means (i) the Interest Equivalent
of the rate on the actively traded Treasury Bill with a maturity most nearly
comparable to the length of the related Dividend Period, as such rate is made
available on a discount basis or otherwise by the Federal Reserve Bank of New
York in its Composite 3:30 P.M. Quotations for U.S. Government Securities report
for such Business Day, or (ii) if such yield as so calculated is not available,
the Alternate Treasury Bill Rate on such date. For purposes of determining the
"U.S. Treasury Bill Rate" the "Alternate Treasury Bill Rate" on any date means
the Interest Equivalent of the yield as calculated by reference to the
arithmetic average of the bid price quotations of the actively traded Treasury
Bill with a maturity most nearly comparable to the length of the related
Dividend Period, as determined by bid price quotations as of any time on the
Business Day immediately preceding such date, obtained from at least three
recognized primary U.S. Government securities dealers selected by the Auction
Agent.

       "U.S. Treasury Note Rate" on any date means (i) the yield as calculated
by reference to the bid price quotation of the actively traded, current coupon
Treasury Note with a maturity most nearly comparable to the length of the
related Dividend Period, as such bid price quotation is published on the
Business Day immediately preceding such date by the Federal Reserve Bank of New
York in its Composite 3:30 P.M. Quotations for U.S. Government Securities report
for such Business Day, or (ii) if such yield as so calculated is not available,
the Alternate Treasury Note Rate on such date. For purposes of determining the
U.S. Treasury Note Rate, the "Alternate Treasury Note Rate" on any date means
the yield as calculated by reference to the arithmetic average of the bid price
quotations of the actively traded, current coupon Treasury Note with a maturity
most nearly comparable to the length of the related Dividend Period, as
determined by the bid price quotations as of any time on the Business Day
immediately preceding such date, obtained from at least three recognized primary
U.S. Government securities dealers selected by the Auction Agent.

       "Valuation Date" means, for purposes of determining whether the Trust is
maintaining the APS Basic Maintenance Amount, the last Business Day of each week
commencing with the Date of Original Issue.

       "Voting Period" has the meaning set forth in Section 11.5(b) of these
Bylaws.

       (b) The foregoing definitions of Accountant's Confirmation, APS Basic
Maintenance Amount, APS Basic Maintenance Cure Date, APS Basic Maintenance
Report, Closing Transactions, Deposit Securities, Discounted Value, Forward
Commitment, Independent

                                      -26-

<PAGE>

Accountant, Market Value, Maximum Applicable Rate, Maximum Potential Gross-Up
Dividend Liability, Moody's Discount Factor, Moody's Eligible Asset, Moody's
Exposure Period, Moody's Hedging Transactions, Moody's Volatility Factor,
Municipal Index, 1940 Act APS Asset Coverage, 1940 Act Cure Date, Treasury Bonds
and Valuation Date (and any terms defined within such definitions) have been
determined by the Board of Trustees of the Trust in order to obtain a "Aaa"
rating from Moody's on the APS on their Date of Original Issue; and the Board of
Trustees of the Trust shall have the authority, without shareholder approval, to
amend, alter or repeal from time to time the foregoing definitions and the
restrictions and guidelines set forth thereunder if Moody's or any Substitute
Rating Agency advises the Trust in writing that such amendment, alteration or
repeal will not adversely affect its then current rating on the APS.

       11.2 Dividends. (a) The Holders of a particular series of APS shall be
entitled to receive, when, as and if declared by the Board of Trustees of the
Trust, out of funds legally available therefor, cumulative dividends each
consisting of (i) cash at the Applicable Rate, (ii) a Right to receive cash as
set forth in Section 11.2(e) below, and (iii) any additional amounts as set
forth in Section 11.2(f) below, and no more, payable on the respective dates set
forth below. Dividends on the shares of each series of APS so declared and
payable shall be paid (i) in preference to and in priority over any dividends
declared and payable on the Common Shares, and (ii) to the extent permitted
under the Code and to the extent available, out of net tax-exempt income earned
on the Trust's investments. To the extent permitted under the Code, dividends on
APS will be designated as exempt-interest dividends. For the purposes of this
section, the term "net tax-exempt income" shall exclude capital gains of the
Trust.

       (b) (i) Cash dividends on shares of each series of APS shall accumulate
from the Date of Original Issue and shall be payable, when, as and if declared
by the Board of Trustees of the Trust, out of funds legally available therefor,
commencing on the Initial Dividend Payment Date. Following the Initial Dividend
Payment Date for a series of APS, dividends on that series of APS will be
payable, at the option of the Trust, either (i) with respect to any 7-Day
Dividend Period and any Short Term Dividend Period of 35 or fewer days, on the
day next succeeding the last day thereof, or (ii) with respect to any Short Term
Dividend Period of more than 35 days and with respect to any Long Term Dividend
Period, monthly on the first Business Day of each calendar month during such
Short Term Dividend Period or Long Term Dividend Period and on the day next
succeeding the last day thereof (each such date referred to in clause (i) or
(ii) being herein referred to as a "Normal Dividend Payment Date"), except that
if such Normal Dividend Payment Date is not a Business Day, then the Dividend
Payment Date shall be the first Business Day next succeeding such Normal
Dividend Payment Date. Although any particular Dividend Payment Date may not
occur on the originally scheduled date because of the exceptions discussed
above, the next succeeding Dividend Payment Date, subject to such exceptions,
will occur on the next following originally scheduled date. If for any reason a
Dividend Period for a series of APS is scheduled to begin on the same day and
end on the same day as a Dividend Period for another series of APS, then the
last day of such Dividend Period for such other series of APS shall be the
second Business Day next succeeding such scheduled day unless the Trust obtains
the opinion of tax counsel referred to in this paragraph. Subject to the
limitation in the next sentence, if for any reason a Dividend Payment Date
cannot be fixed as described above, then the Board of Trustees of the Trust
shall fix the Dividend Payment Date. However, no

                                      -27-

<PAGE>

Dividend Period of any series of APS shall be co-extensive with any Dividend
Period of any other series of APS 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 APS. The Board of Trustees of the Trust before authorizing a
dividend may change a Dividend Payment Date if such change does not adversely
affect the contract rights of the Holders of APS set forth in the Declaration of
Trust or the Bylaws. The Initial Dividend Period, 7-Day Dividend Periods and
Special Dividend Periods with respect to a series of APS are hereinafter
sometimes referred to as "Dividend Periods." Each dividend payment date
determined as provided above is hereinafter referred to as a "Dividend Payment
Date."

       (ii) Each dividend shall be paid to the Holders as they appear in the
Stock Register as of 12:00 noon, New York City time, on the 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 as they appear on the Stock Register on a date, not exceeding 15 days
prior to the payment date therefor, as may be fixed by the Board of Trustees of
the Trust.

       (c) (i) During the period from and including the Date of Original Issue
to but excluding the Initial Dividend Payment Date for a series of APS (the
"Initial Dividend Period"), the Applicable Rate for such series of APS shall be
the Initial Dividend Rate. Commencing on the Initial Dividend Payment Date for a
series of APS, the Applicable Rate on that series for each subsequent dividend
period (hereinafter referred to as a "Subsequent Dividend Period"), which
Subsequent Dividend Period shall commence on and include a Dividend Payment Date
and shall end on and include the calendar day prior to the next Dividend Payment
Date (or last Dividend Payment Date in a Dividend Period if there is more than
one Dividend Payment Date), shall be equal to the rate per annum that results
from implementation of the Auction Procedures.

       For a series of APS, the Applicable Rate for such series for each
Dividend Period commencing during a Non-Payment Period shall be equal to the
Non-Payment Period Rate; and each Dividend Period, commencing after the first
day of, and during, but not after the end of, a Non-Payment Period shall be a
7-Day Dividend Period. Except in the case of the willful failure of the Trust to
pay a dividend on a Dividend Payment Date or to redeem any shares of APS on the
date set for such redemption, any amount of any dividend due on any Dividend
Payment Date (if, prior to the close of business on the second Business Day
preceding such Dividend Payment Date, the Trust has declared such dividend
payable on such Dividend Payment Date to the Holders of such shares of APS as of
12:00 noon, New York City time, on the Business Day preceding such Dividend
Payment Date) or redemption price with respect to any shares of APS not paid to
such Holders when due may be paid to such Holders in the same form of funds by
12:00 noon, New York City time, on any of the first three Business Days after
such Dividend Payment Date or due date, as the case may be, provided that, such
amount is accompanied by a late charge calculated for such period of non-payment
at the Non-Payment Period Rate applied to the amount of such non-payment based
on the actual number of days comprising such period (excluding any days that
would have been Business Days but for the occurrence of any unforeseen event or
unforeseen events that caused such days not to be Business Days) divided by

                                      -28-

<PAGE>

365, and in such case such period shall not constitute a Non-Payment Period;
provided, however, that the Trust shall not be required to pay any late charge
if it declares a dividend on the Dividend Payment Date or the Business Day
immediately preceding such Dividend Payment Date in accordance with clause (i)
of the definition of "Non-Payment Period" and deposits payment for such dividend
as contemplated by clause (ii)(A) of the definition of "Non-Payment Period" on
or before the second Business Day succeeding the day on which the dividend was
declared. In the case of a willful failure of the Trust to pay a dividend on a
Dividend Payment Date or to redeem any shares of APS on the date set for such
redemption, the preceding sentence shall not apply and the Applicable Rate for
the Dividend Period commencing during the Non-Payment Period resulting from such
failure shall be the Non-Payment Period Rate. For the purposes of the foregoing,
payment to a person in same-day funds on any Business Day at any time shall be
considered equivalent to payment to such person in New York Clearing House
(next-day) funds at the same time on the preceding Business Day, and any payment
made after 12:00 noon, New York City time, on any Business Day shall be
considered to have been made instead in the same form of funds and to the same
person before 12:00 noon, New York City time, on the next Business Day.

       (ii)  The amount of cash dividends per share of any series of APS payable
(if declared) on the Initial Dividend Payment Date, each 7-Day Dividend Period
and each Dividend Payment Date of each Short Term Dividend Period shall be
computed by multiplying the Applicable Rate for such Dividend Period by a
fraction, the numerator of which will be the number of days in such Dividend
Period or part thereof that such share was outstanding and the denominator of
which will be 365, multiplying the amount so obtained by $25,000, and rounding
the amount so obtained to the nearest cent. During any Long Term Dividend
Period, the amount of cash dividends per share of a series of APS payable (if
declared) on any Dividend Payment Date shall be computed by multiplying the
Applicable Rate for such Dividend Period by a fraction, the numerator of which
will be such number of days in such part of such Dividend Period that such share
was outstanding and for which dividends are payable on such Dividend Payment
Date and the denominator of which will be 360, multiplying the amount so
obtained by $25,000, and rounding the amount so obtained to the nearest cent.

       (iii) The Trust may, at its sole option and to the extent permitted by
law, by telephonic and written notice (a "Request for Special Dividend Period")
to the Auction Agent and to each Broker-Dealer, request that the next succeeding
Dividend Period for a series of APS be a number of days (other than seven),
evenly divisible by seven and not fewer than fourteen nor more than 364 in the
case of a Short Term Dividend Period or one whole year or more but not greater
than five years in the case of a Long Term Dividend Period, specified in such
notice, provided that the Trust may not give a Request for Special Dividend
Period for a Dividend Period of greater than 28 days (and any such request shall
be null and void) unless, for any Auction occurring after the initial Auction,
Sufficient Clearing Bids were made in the last occurring Auction and unless full
cumulative dividends, any amounts due with respect to redemptions, and any
Gross-Up Dividends payable prior to such date have been paid in full. Such
Request for Special Dividend Period, in the case of a Short Term Dividend
Period, shall be given on or prior to the second Business Day but not more than
seven Business Days prior to an Auction Date for a series of APS and, in the
case of a Long Term Dividend Period, shall be given on or prior to the second

                                      -29-

<PAGE>

Business Day but not more than 28 days prior to an Auction Date for a series of
APS. Upon receiving such Request for Special Dividend Period, the
Broker-Dealer(s) shall jointly determine the Optional Redemption Price of the
APS during such Special Dividend Period and the Specific Redemption Provisions
and shall give the Trust and the Auction Agent written notice (a "Response") of
such determination by no later than the second Business Day prior to such
Auction Date. In making such determination the Broker-Dealer(s) will consider
(1) existing short-term and long-term market rates and indices of such
short-term and long-term rates, (2) existing market supply and demand for
short-term and long-term securities, (3) existing yield curves for short-term
and long-term securities comparable to the APS, (4) industry and financial
conditions which may affect the APS, (5) the investment objective of the Trust,
and (6) the Dividend Periods and dividend rates at which current and potential
beneficial holders of the APS would remain or become beneficial holders. After
providing the Request for Special Dividend Period to the Auction Agent and each
Broker-Dealer as set forth above, the Trust may by no later than the second
Business Day prior to such Auction Date give a notice (a "Notice of Special
Dividend Period") to the Auction Agent, the Securities Depository and each
Broker-Dealer which notice will specify (i) the duration of the Special Dividend
Period, (ii) the Optional Redemption Price as specified in the related Response
and (iii) the Specific Redemption Provisions, if any, as specified in the
related Response. The Trust also shall provide a copy of such Notice of Special
Dividend Period to Moody's. The Trust shall not give a Notice of Special
Dividend Period and, if the Trust has given a Notice of Special Dividend Period,
the Trust is required to give telephonic and written notice of its revocation (a
"Notice of Revocation") to the Auction Agent, each Broker-Dealer, and the
Securities Depository on or prior to the Business Day prior to the relevant
Auction Date if (x) either the 1940 Act APS Asset Coverage is not satisfied or
the Trust shall fail to maintain Moody's Eligible Assets with an aggregate
Discounted Value at least equal to the APS Basic Maintenance Amount, on each of
the two Valuation Dates immediately preceding the Business Day prior to the
relevant Auction Date on an actual basis and on a pro forma basis giving effect
to the proposed Special Dividend Period (using as a pro forma dividend rate with
respect to such Special Dividend Period the dividend rate which the
Broker-Dealers shall advise the Trust is an approximately equal rate for
securities similar to the APS with an equal dividend period) or (y) sufficient
funds for the payment of dividends payable on the immediately succeeding
Dividend Payment Date have not been irrevocably deposited with the Auction Agent
by the close of business on the third Business Day preceding the Auction Date
immediately preceding such Dividend Payment Date. The Trust also shall provide a
copy of such Notice of Revocation to Moody's. If the Trust is prohibited from
giving a Notice of Special Dividend Period as a result of any of the factors
enumerated in clause (x) or (y) above or if the Trust gives a Notice of
Revocation with respect to a Notice of Special Dividend Period for any series of
APS, the next succeeding Dividend Period will be a 7-Day Dividend Period. In
addition, in the event Sufficient Clearing Bids are not made in an Auction, or
if an Auction is not held for any reason, such next succeeding Dividend Period
will be a 7-Day Dividend Period and the Trust may not again give a Notice of
Special Dividend Period for the APS (and any such attempted notice shall be null
and void) until Sufficient Clearing Bids have been made in an Auction with
respect to a 7-Day Dividend Period. If an Auction is not held because an
unforeseen event or unforeseen events cause a day that otherwise would have been
a Dividend Payment Date or an Auction Date not to be a Business Day, then the
length of the Dividend Period relating to such Dividend Payment Date shall be
extended by seven days (or

                                      -30-

<PAGE>

a multiple thereof if necessary because of such unforeseen event or events) (an
"Extension Period"), the Applicable Rate for such Extension Period shall be the
Applicable Rate for the Dividend Period so extended and the Dividend Payment
Date for such Dividend Period shall be the first Business Day next succeeding
the end of such Extension Period.

     (d) (i) Holders shall not be entitled to any dividends, whether payable in
cash, property or shares on APS, in excess of full cumulative dividends as
herein provided (except for Gross-up Dividends as provided in Section 11.2(e)
hereof). Except for the late charge payable pursuant to Section 11.2(c)(i)
hereof, no interest, or sum of money in lieu of interest, shall be payable in
respect of any dividend payment on the shares of APS that may be in arrears.

     (ii) For so long as any share of APS is Outstanding, 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 options, warrants or
rights to subscribe for or purchase, Common Shares or other shares of beneficial
interest, if any, ranking junior to the shares of APS as to dividends or upon
liquidation) in respect of the Common Shares or any other shares of beneficial
interest of the Trust ranking junior to or on a parity with the shares of APS as
to dividends or upon liquidation, or call for redemption, redeem, purchase or
otherwise acquire for consideration any shares of the 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 APS as to dividends and upon liquidation)
or any other such Parity Shares (except by conversion into or exchange for stock
of the Trust ranking junior to or on a parity with the shares of APS as to
dividends and upon liquidation), unless (A) immediately after such transaction,
the Trust shall have Moody's Eligible Assets with an aggregate Discounted Value
equal to or greater than the APS Basic Maintenance Amount and the Trust shall
maintain the 1940 Act APS Asset Coverage, (B) full cumulative dividends on
shares of APS due on or prior to the date of the transaction have been declared
and paid or shall have been declared and sufficient funds for the payment
thereof deposited with the Auction Agent, (C) any Gross-up Dividend required to
be paid pursuant to Section 11.2(e) below on or before the date of such
declaration or payment has been paid and (D) the Trust has redeemed the full
number of APS required to be redeemed by any provision for mandatory redemption
contained herein.

     (e) Each dividend shall consist of (i) cash at the Applicable Rate, (ii) an
uncertificated right (a "Right") to receive a Gross-up Dividend (as defined
below), and (iii) any additional amounts as set forth in Section 11.2(f) below.
Each Right shall thereafter be independent of the share or shares of APS on
which the dividend was paid. The Trust shall cause to be maintained a record of
each Right received by the respective Holders. A Right may not be transferred
other than by operation of law. If the Trust retroactively allocates any net
capital gains or other income subject to regular federal income taxes to shares
of APS solely by reason of the fact that such allocation is made as a result of
the redemption of all or a portion of the outstanding shares of APS or the
liquidation of the Trust (the amount of such allocation referred to herein as a
"Retroactive Taxable Allocation"), the Trust will, if it has not given advance
notice thereof to the Auction Agent as described in Section 11.2(f) hereof,
within 90 days (and generally within 60 days) after the end of the Trust's
fiscal year for which a Retroactive Taxable Allocation is made, provide notice
thereof to the Auction Agent and to each holder of a Right applicable to such

                                      -31-

<PAGE>

shares of APS (initially as nominee of The Depository Trust Company) during such
fiscal year at such holder's address as the same appears or last appeared on the
Stock Books of the Trust. The Trust will, within 30 days after such notice is
given to the Auction Agent, pay to the Auction Agent (who will then distribute
to such holders of Rights), out of funds legally available therefor, an amount
equal to the aggregate Gross-up Dividends with respect to all Retroactive
Taxable Allocations made to such holders during the fiscal year in question.

     A "Gross-Up Dividend" means payment to a present or former Holder of shares
of APS of an amount which, giving effect to the Retroactive Taxable Allocation,
if any, made to such Holder with respect to the fiscal year in question, would
cause such Holder's after-tax return (taking into account both the Retroactive
Taxable Allocation and the Gross-up Dividend) to be equal to the after-tax
return such holder would have received if there had been no Retroactive Taxable
Allocation. Such Gross-up Dividend shall be calculated (i) without consideration
being given to the time value of money; (ii) assuming that no holder of shares
of APS is subject to the federal alternative minimum tax with respect to
dividends received from the Trust; and (iii) assuming that each Retroactive
Taxable Allocation would be taxable in the hands of each holder of APS at the
greater of: (x) the maximum combined effective marginal regular federal, New
York State and New York City individual income tax rate applicable to ordinary
income or capital gains depending on the taxable character of the distribution
(including any surtax); or (y) the maximum combined effective marginal regular
federal, New York State and New York City corporate income tax rate applicable
to ordinary income or capital gains depending on the taxable character of the
distribution (disregarding in both (x) and (y) the effect of any other local
taxes and the phase out of, or provision limiting, personal exemptions, itemized
deductions, or the benefit of lower tax brackets).

     (f) Except as provided below, whenever the Trust is aware that it will
include any net capital gains or other income subject to regular federal income
taxes in any dividend on shares of APS, the Trust will notify the Auction Agent
of the amount to be so included at least five Business Days prior to the Auction
Date on which the Applicable Rate for such dividend is to be established. The
Trust may also include such income in a dividend on shares of a series of APS
without giving advance notice thereof if it increases the dividend by an
additional amount calculated as if such income were the subject of a Retroactive
Taxable Allocation and the additional amount were a Gross-up Dividend, provided
that the Trust will notify the Auction Agent of the additional amounts to be
included in such dividend at least five Business Days prior to the applicable
Dividend Payment Date. The Trust shall not be required to pay Gross-up Dividends
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.

     (g) No fractional shares of APS shall be issued.

     (h) Solely for purposes of the proviso in clause (i) under the definition
of "Non-Payment Period," the second parenthetical in the second sentence of the
second paragraph of Section 11.2(c)(i) of these Bylaws and the last sentence of
Section 11.2(c)(iii) of these Bylaws, any day on which banks in New York City
generally are closed, for any reason, while the New York Stock Exchange remains
open for trading and any day which otherwise would be a Business Day

                                      -32-

<PAGE>

as defined in these Bylaws on which the Auction Agent is closed for business,
for any reason, shall be considered a day which is not a Business Day.

     11.3 Liquidation Rights. Upon any liquidation, dissolution or winding up of
the Trust, whether voluntary or involuntary, the Holders shall be entitled to
receive, out of the assets of the Trust available for distribution to
shareholders, before any distribution or payment is made upon any Common Shares
or any other shares of beneficial interest ranking junior in right of payment
upon liquidation to the APS, the sum of $25,000 per share plus accumulated but
unpaid dividends (whether or not earned or declared) thereon to the date of
distribution, and after such payment the Holders will be entitled to no other
payments other than Gross-up Dividends as provided in Section 11.2(e) hereof. If
upon any liquidation, dissolution or winding up of the Trust, the amounts
payable with respect to the APS and any other Outstanding class or series of
Preferred Shares of the Trust ranking on a parity with the APS as to payment
upon liquidation are not paid in full, the Holders and the holders of such other
class or series will share ratably in any such distribution of assets in
proportion to the respective preferential amounts to which they are entitled.
After payment of the full amount of the liquidating distribution to which they
are entitled, the Holders will not be entitled to any further participation in
any distribution of assets by the Trust except for any Gross-up Dividends. A
consolidation, merger or statutory share exchange of the Trust with or into any
other Trust or entity or a sale, whether for cash, shares of stock, securities
or properties, of all or substantially all or any part of the assets of the
Trust shall not be deemed or construed to be a liquidation, dissolution or
winding up of the Trust.

     11.4 Redemption. (a) Shares of APS shall be redeemable by the Trust as
provided below:

     (i)  To the extent permitted under the 1940 Act and Massachusetts law, upon
giving a Notice of Redemption, the Trust at its option may redeem shares of any
series of APS, in whole or in part, out of funds legally available therefor, at
the Optional Redemption Price per share, on any Dividend Payment Date; provided
that no share of APS may be redeemed at the option of the Trust during (A) the
Initial Dividend Period with respect to a series of shares or (B) a Non-Call
Period to which such share is subject. In addition, holders of APS which are
redeemed shall be entitled to receive Gross-Up Dividends to the extent provided
herein.

     (ii) The Trust shall redeem, out of funds legally available therefor, at
the Mandatory Redemption Price per share, shares of APS to the extent permitted
under the 1940 Act and Massachusetts law, on a date fixed by the Board of
Trustees of the Trust, if the Trust fails to maintain Moody's Eligible Assets
with an aggregate Discounted Value equal to or greater than the APS Basic
Maintenance Amount as provided in Section 11.7(a) or to satisfy the 1940 Act APS
Asset Coverage as provided in Section 6 and such failure is not cured on or
before the APS Basic Maintenance Cure Date or the 1940 Act Cure Date (herein
collectively referred to as a "Cure Date"), as the case may be. In addition,
holders of APS so redeemed shall be entitled to receive Gross-Up Dividends to
the extent provided herein. The number of APS to be redeemed shall be equal to
the lesser of (i) the minimum number of APS the redemption of which, if deemed
to have occurred immediately prior to the opening of business on the Cure Date,
together with all shares of other Preferred Shares subject to redemption or
retirement, would result in the

                                      -33-

<PAGE>

Trust having Moody's Eligible Assets with an aggregate Discounted Value equal to
or greater than the APS Basic Maintenance Amount or satisfaction of the 1940 Act
APS Asset Coverage, as the case may be, on such Cure Date (provided that, if
there is no such minimum number of shares of APS and shares of other Preferred
Shares the redemption of which would have such result, all shares of APS and
shares of other Preferred Shares then Outstanding shall be redeemed), and (ii)
the maximum number of shares of APS, together with all shares of other Preferred
Shares subject to redemption or retirement, that can be redeemed out of funds
expected to be legally available therefor on such redemption date. In
determining the number of APS required to be redeemed in accordance with the
foregoing, the Trust shall allocate the number required to be redeemed which
would result in the Trust having Moody's Eligible Assets with an aggregate
Discounted Value equal to or greater than the APS Basic Maintenance Amount or
satisfaction of the 1940 Act APS Asset Coverage, as the case may be, pro rata
among shares of APS of all series and other Preferred Shares subject to
redemption pursuant to provisions similar to those contained in this Section
11.4(a)(ii); provided that, shares of APS which may not be redeemed at the
option of the Trust due to the designation of a Non-Call Period applicable to
such shares (A) will be subject to mandatory redemption only to the extent that
other shares are not available to satisfy the number of shares required to be
redeemed and (B) will be selected for redemption in an ascending order of
outstanding number of days in the Non-Call Period (with shares with the lowest
number of days to be redeemed first) and by lot in the event of shares having an
equal number of days in such Non-Call Period. The Trust shall effect such
redemption on a Business Day which is not later than 35 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 APS and other Preferred Shares which
are subject to mandatory redemption or the Trust otherwise is unable to effect
such redemption on or prior to 35 days after such Cure Date, the Trust shall
redeem those APS which it is unable to redeem on the earliest practicable date
on which it is able to effect such redemption out of funds legally available
therefor.

     (b) Notwithstanding any other provision of this Section 11.4, no shares of
APS may be redeemed pursuant to Section 11.4(a)(i) of these Bylaws (i) unless
all dividends in arrears on all remaining outstanding shares of Parity Shares
shall have been or are being contemporaneously paid or declared and set apart
for payment and (ii) if redemption thereof would result in the Trust's failure
to maintain Moody's Eligible Assets with an aggregate Discounted Value equal to
or greater than the APS Basic Maintenance Amount. In the event that less than
all the outstanding shares of a series of APS are to be redeemed and there is
more than one Holder, the shares of that series of APS to be redeemed shall be
selected by lot or such other method as the Trust shall deem fair and equitable.

     (c) Whenever shares of APS are to be redeemed, the Trust, not less than 17
nor more than 30 days prior to the date fixed for redemption, shall mail a
notice ("Notice of Redemption") by first-class mail, postage prepaid, to each
Holder of APS to be redeemed and to the Auction Agent. The Notice of Redemption
shall set forth (i) the redemption date, (ii) the amount of the redemption
price, (iii) the aggregate number of APS of such series to be redeemed, (iv) the
place or places where APS of such series are to be surrendered for payment of
the redemption price, (v) a statement that dividends on the shares to be
redeemed shall cease to accumulate on such redemption date (except that holders
may be entitled to Gross-up Dividends) and (vi) the

                                      -34-

<PAGE>

provision of these Bylaws pursuant to which such shares are being redeemed. No
defect in the Notice of Redemption or in the mailing or publication thereof
shall affect the validity of the redemption proceedings, except as required by
applicable law.

     If the Notice of Redemption shall have been given as aforesaid and,
concurrently or thereafter, the Trust shall have deposited in trust with the
Auction Agent, or segregated in an account at the Trust's custodian bank for the
benefit of the Auction Agent, Deposit Securities (with a right of substitution)
having an aggregate Discounted Value equal to the redemption payment for the APS
as to which such Notice of Redemption has been given with irrevocable
instructions and authority to pay the redemption price to the Holders of such
shares, then upon the date of such deposit or, if no such deposit is made, then
upon such date fixed for redemption (unless the Trust shall default in making
the redemption payment), all rights (including without limitation voting rights)
of the Holders of such shares as shareholders of the Trust by reason of the
ownership of such shares will cease and terminate (except their right to receive
the redemption price in respect thereof and any Gross-up Dividends, but without
interest), and such shares shall no longer be deemed Outstanding. The Trust
shall be entitled to receive, from time to time, from the Auction Agent the
interest, if any, on such Deposit Securities deposited with it and the Holders
of any shares so redeemed shall have no claim to any of such interest. In case
the Holder of any shares so called for redemption shall not claim the redemption
payment for his shares within one year after the date of redemption, the Auction
Agent shall, upon demand, pay over to the Trust such amount remaining on deposit
and the Auction Agent shall thereupon be relieved of all responsibility to the
Holder of such shares called for redemption and such Holder thereafter shall
look only to the Trust for the redemption payment.

     11.5 Voting Rights. (a) General. Except as otherwise provided in the
Declaration of Trust or Bylaws, each Holder of APS shall be entitled to one vote
for each share held on each matter submitted to a vote of shareholders of the
Trust, and the holders of outstanding shares of Preferred Shares, including APS,
and of shares of Common Shares shall vote together as a single class; provided
that, at any meeting of the shareholders of the Trust held for the election of
trustees, the holders of outstanding shares of Preferred Shares, including APS,
shall be entitled, as a class, to the exclusion of the holders of all other
securities and classes of capital stock of the Trust, to elect two trustees of
the Trust. Subject to Section 11.5(b) hereof, the holders of outstanding shares
of beneficial interest of the Trust, including the holders of outstanding shares
of Preferred Shares, including APS, voting as a single class, shall elect the
balance of the trustees.

     (b) Right to Elect Majority of Board of Trustees of the Trust. During any
period in which any one or more of the conditions described below shall exist
(such period being referred to herein as a "Voting Period"), the number of
trustees constituting the Board of Trustees of the Trust shall be automatically
increased by the smallest number that, when added to the two trustees elected
exclusively by the holders of shares of Preferred Shares, would constitute a
majority of the Board of Trustees of the Trust as so increased by such smallest
number; and the holders of Preferred Shares shall be entitled, voting separately
as one class (to the exclusion of the holders of all other securities and
classes of shares of beneficial interest of the Trust), to elect

                                      -35-

<PAGE>

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:

     (i)  if at any time accumulated dividends (whether or not earned or
declared, and whether or not funds are then legally available in an amount
sufficient therefor) on the outstanding APS 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

     (ii) if at any time holders of any Preferred Shares, including the holders
of APS, are entitled to elect a majority of the trustees of the Trust under the
1940 Act.

     Upon the termination of a Voting Period, the voting rights described in
this Section 11.5(b) shall cease, subject always, however, to the reverting of
such voting rights in the Holders upon the further occurrence of any of the
events described in Section 11.5(b).

     (c) Right to Vote with Respect to Certain Other Matters. So long as any
shares of APS are outstanding, the Trust shall not, without the affirmative vote
of the holders of a majority of the shares of Preferred Shares Outstanding at
the time, voting separately as one class: (i) authorize, create or issue any
class or series of shares of beneficial interest ranking prior to the APS or any
other series of Preferred Shares with respect to payment of dividends or the
distribution of assets on liquidation; provided, however, that no vote is
required to authorize the issuance of another series of APS or another class of
Preferred Shares that is substantially identical in all respects to the APS, or
(ii) amend, alter or repeal the provisions of the Declaration of Trust or
Bylaws, whether by merger, consolidation or otherwise, so as to adversely affect
any of the contract rights expressly set forth in the Declaration of Trust or
Bylaws of holders of APS or any other Preferred Shares. To the extent permitted
under the 1940 Act, in the event shares of more than one series of APS are
outstanding, the Trust shall not approve any of the actions set forth in clause
(i) or (ii) which adversely affects the contract rights expressly set forth in
the Declaration of Trust or Bylaws of a Holder of a series of APS differently
than those of a Holder of any other series of APS without the affirmative vote
of the holders of at least a majority of the APS of each series adversely
affected and Outstanding at such time (each such adversely affected series
voting separately as a class). Unless a higher percentage is provided for under
the Declaration of Trust, the affirmative vote of the holders of a majority of
the outstanding shares of Preferred Shares, including APS, voting together as a
single class, will be required to approve any plan of reorganization (including
bankruptcy proceedings) adversely affecting such shares or any action requiring
a vote of security holders under Section 13(a) of the 1940 Act. To the extent
permitted under the 1940 Act, in the event shares of more than one series of APS
are outstanding, with respect to any action requiring Shareholder approval
pursuant to the operation of Section 2 or Section 3 of Article V of the
Declaration of Trust, the affirmative vote of at least seventy-five percent of
the APS of each series Outstanding at such time (each such series voting
separately as a class) shall also be required. The class (and where applicable,
series) vote of holders of Preferred Shares, including APS, described above will
in each case be in addition to a

                                      -36-

<PAGE>

separate vote of the requisite percentage of Common Shares and Preferred Shares,
including APS, voting together as a single class necessary to authorize the
action in question.

     (d) Voting Procedures.

     (i)   As soon as practicable after the accrual of any right of the holders
of Preferred Shares to elect additional trustees as described in Section 11.5(b)
above, the Trust shall call a special meeting of such holders and instruct the
Auction Agent and any other registrar for Preferred Shares to mail 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 and any other applicable
registrar, or if the Trust 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 held during a
Voting Period, 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 directors prescribed in
Section 11.5(b) above. At any such meeting or adjournment thereof in the absence
of a quorum, a majority of such holders present in person or by proxy shall have
the power to adjourn the meeting without notice, other than by an announcement
at the meeting, to a date not more than 120 days after the original record date.

     (ii)  Except as otherwise required by applicable law, for purposes of
determining any rights of the Holders to vote on any matter or the number of
shares required to constitute a quorum, whether such right is created by these
Bylaws, by the other provisions of the Declaration of Trust, by statute or
otherwise, a share of APS which is not Outstanding shall not be counted.

     (iii) 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)  Simultaneously with the expiration of a Voting Period, the terms of
office of the additional trustees elected by the Holders and holders of other
Preferred Shares pursuant to Section 11.5(b) above 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 Section 11.5(b) above shall cease, subject to the provisions of the
last sentence of Section 11.5(b).

     (e) Exclusive Remedy. Unless otherwise required by law, the Holders of APS
shall not have any rights or preferences other than those specifically set forth
herein. The Holders of APS

                                      -37-

<PAGE>

shall have no preemptive rights or rights to cumulative voting. In the event
that the Trust fails to pay any dividends on the APS, the exclusive remedy of
the Holders shall be the right to vote for trustees pursuant to the provisions
of this Section 11.5.

     11.6 1940 Act APS Asset Coverage. The Trust shall maintain, as of the last
Business Day of each month in which any APS are outstanding, the 1940 Act APS
Asset Coverage.

     11.7 APS Basic Maintenance Amount. (a) The Trust shall maintain, on each
Valuation Date, and shall verify to its satisfaction that it is maintaining on
such Valuation Date Moody's Eligible Assets having an aggregate Discounted Value
equal to or greater than the APS Basic Maintenance Amount. Upon any failure to
maintain the required Discounted Value, the Trust will use its best efforts to
alter the composition of its portfolio to retain a Discounted Value at least
equal to the APS Basic Maintenance Amount on or prior to the APS Basic
Maintenance Cure Date.

     (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 APS Basic
Maintenance Amount, the Trust shall complete and deliver to the Auction Agent
and Moody's a complete APS Basic Maintenance Report as of the date of such
failure, which will be deemed to have been delivered to such recipient if the
recipient receives a copy or telecopy, telex or other electronic transcription
thereof and on the same day the Trust mails to the recipient for delivery on the
next Business Day the complete APS Basic Maintenance Report. The Trust will
deliver an APS Basic Maintenance Report to the Auction Agent and Moody's, on or
before 5:00 p.m., New York City time, on the third Business Day after a
Valuation Date on which the Trust cures its failure to maintain Moody's Eligible
Assets with an aggregate Discounted Value equal to or greater than the APS Basic
Maintenance Amount or on which the Trust fails to maintain Moody's Eligible
Assets with an aggregate Discounted Value which exceeds the APS Basic
Maintenance Amount by 5% or more. The Trust will also deliver an APS Basic
Maintenance Report to the Auction Agent and Moody's as of each Quarterly
Valuation Date on or before the third Business Day after such date.
Additionally, on or before 5:00 p.m., New York City time, on the third Business
Day after the first day of a Special Dividend Period, the Trust will deliver an
APS Basic Maintenance Report to Moody's and the Auction Agent. The Trust shall
also provide Moody's with an APS Basic Maintenance Report when specifically
requested by Moody's.

     (c) Within ten Business Days after the date of delivery of an APS Basic
Maintenance Report in accordance with Section 11.7(b) above relating to a
Quarterly Valuation Date, the Independent Accountant will confirm in writing to
the Auction Agent and Moody's (i) the mathematical accuracy of the calculations
reflected in such Report (and in any other APS Basic Maintenance Report,
randomly selected by the Independent Accountant, that was delivered by the Trust
during the quarter ending on such Quarterly Valuation Date), (ii) that, in such
Report (and in such randomly selected Report), the Trust correctly determined
the assets of the Trust which constitute Moody's Eligible Assets at such
Quarterly Valuation Date in accordance with these Bylaws, (iii) that, in such
Report (and in such randomly selected Report), the Trust determined whether the
Trust had, at such Quarterly Valuation Date (and at the Valuation Date addressed
in such randomly selected Report) in accordance with these Bylaws, Moody's
Eligible

                                      -38-

<PAGE>

Assets of an aggregate Discounted Value at least equal to the APS Basic
Maintenance Amount, (iv) with respect to the S&P ratings on Municipal
Obligations, the issuer name, issue size and coupon rate listed in such Report,
that the Independent Accountant has requested that S&P verify such information
and the Independent Accountant shall provide a listing in its letter of any
differences, (v) with respect to the Moody's ratings on Municipal Obligations,
the issuer name, issue size and coupon rate listed in such Report, that such
information has been verified by Moody's (in the event such information is not
verified by Moody's, the Independent Accountant will inquire of Moody's what
such information is, and provide a listing in its letter of any differences) and
(vi) with respect to the bid or mean price (or such alternative permissible
factor used in calculating the Market Value) provided by the custodian of the
Trust's assets to the Trust for purposes of valuing securities in the Trust's
portfolio, the Independent Accountant has traced the price used in such Report
to the bid or mean price listed in such Report as provided to the Trust and
verified that such information agrees (in the event such information does not
agree, the Independent Accountant will provide a listing in its letter of such
differences) (such confirmation is herein called the "Accountant's
Confirmation").

     (d) Within ten Business Days after the date of delivery to the Auction
Agent and Moody's of an APS Basic Maintenance Report in accordance with Section
11.7(b) above relating to any Valuation Date on which the Trust failed to
maintain Moody's Eligible Assets with an aggregate Discounted Value equal to or
greater than the APS Basic Maintenance Amount, and relating to the APS Basic
Maintenance Cure Date with respect to such failure, the Independent Accountant
will provide to the Auction Agent and Moody's an Accountant's Confirmation as to
such APS Basic Maintenance Report.

     (e) If any Accountant's Confirmation delivered pursuant to subparagraph (c)
or (d) of this Section 11.7 shows that an error was made in the APS Basic
Maintenance Report for a particular Valuation Date for which such Accountant's
Confirmation as required to be delivered, or shows that a lower aggregate
Discounted Value for the aggregate of all Moody's Eligible Assets 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 APS
Basic Maintenance Report to the Auction Agent and 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 the APS, the Trust will complete and deliver
to Moody's an APS Basic Maintenance Report as of the close of business on such
Date of original issue. Also, on or before 5:00 p.m., New York City time, on the
first Business Day after shares of Common Shares are repurchased by the Trust,
the Trust will complete and deliver to Moody's an APS Basic Maintenance Report
as of the close of business on such date that Common Shares are repurchased.

     11.8 Certain Other Restrictions. (a) For so long as any APS are rated by
Moody's, the Trust will not buy or sell financial futures contracts, write,
purchase or sell call options on financial futures contracts or purchase put
options on financial futures contracts or write call

                                      -39-

<PAGE>

options (except covered call options) on portfolio securities unless it receives
written confirmation from Moody's that engaging in such transactions would not
impair the ratings then assigned to the APS by Moody's, except that the Trust
may purchase or sell exchange-traded financial futures contracts based on the
Municipal Index or Treasury Bonds, and purchase, write or sell exchange-traded
put options on such financial futures contracts, the Municipal Index or Treasury
Bonds, and purchase, write or sell exchange-traded call options on such
financial futures contracts, the Municipal Index or Treasury Bonds (collectively
"Moody's Hedging Transactions"), subject to the following limitations:

          (i)    the Trust will not engage in any Moody's Hedging Transaction
     based on the Municipal Index (other than transactions that terminate a
     futures contract or option held by the Trust by the Trust's taking the
     opposite position thereto ("Closing Transactions")) that would cause the
     Trust at the time of such transaction to own or have sold:

                 (A)  outstanding financial futures contracts based on the
          Municipal Index exceeding in number 10% (or such higher percentage as
          Moody's may approve) of the average number of daily traded financial
          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; or

                 (B)  outstanding financial futures contracts based on the
          Municipal Index having a Market Value exceeding 50% (or such higher
          percentage as Moody's may approve) of the Market Value of all
          Municipal Obligations constituting Moody's Eligible Assets owned by
          the Trust (other than Moody's Eligible Assets already subject to a
          Moody's Hedging Transaction);

          (ii)   the Trust will not engage in any Moody's Hedging Transaction
     based on Treasury Bonds (other than Closing Transactions) that would cause
     the Trust at the time of such transaction to own or have sold:

                 (A)  outstanding financial futures contracts based on Treasury
          Bonds with such contracts having an aggregate Market Value exceeding
          20% (or such higher percentage as Moody's may approve) of the
          aggregate Market Value of Moody's Eligible Assets owned by the Trust
          and rated Aa or higher by Moody's (or, if not rated by Moody's but
          rated by S&P, rated AAA by S&P); or

                 (B)  outstanding financial futures contracts based on Treasury
          Bonds with such contracts having an aggregate Market Value exceeding
          80% of the aggregate Market Value of all Municipal Obligations
          constituting Moody's Eligible Assets owned by the Trust (other than
          Moody's Eligible Assets already subject to a Moody's Hedging
          Transaction) and rated Baa or A by Moody's (or, if not rated by
          Moody's but rated by S&P, rated A or AA by S&P)

     (for purposes of the foregoing clauses (i) and (ii), the Trust shall be
     deemed to own the number of financial futures contracts that underlie any
     outstanding options written by the Trust);

                                      -40-

<PAGE>

              (iii)  the Trust will engage in Closing Transactions to close out
       any outstanding financial futures contract based on the Municipal Index
       if the amount of open interest in the Municipal Index as reported by The
       Wall Street Journal is less than 5,000 (or such lower number as Moody's
       may approve);

              (iv)   the Trust will engage in a Closing Transaction to close out
       any outstanding financial futures contract by no later than the fifth
       Business Day of the month in which such contract expires and will engage
       in a Closing Transaction to close out any outstanding option on a
       financial futures contract by no later than the first Business Day of the
       month in which such option expires;

              (v)    the Trust will engage in Moody's Hedging Transactions only
       with respect to financial futures contracts or options thereon having the
       next settlement date or the settlement date immediately thereafter;

              (vi)   the Trust (A) will not engage in options and futures
       transactions for leveraging or speculative purposes, except that an
       option or futures transaction shall not for these purposes be considered
       a leveraged position or speculative so long as the combination of the
       Fund's non-derivative positions, together with the relevant option or
       futures transaction, produces a synthetic investment position, or the
       same economic result, that could be achieved by an investment, consistent
       with the Fund's investment objective and policies, in a security that is
       not an option or futures transaction, and (B) will not write any call
       options or sell any financial futures contracts for the purpose of
       hedging the anticipated purchase of an asset prior to completion of such
       purchase; and

              (vii)  while the Trust may use futures and options transactions
       for hedging and risk management purposes, it will not enter into an
       option or futures transaction unless, after giving effect thereto, the
       Trust would continue to have Moody's Eligible Assets with an aggregate
       Discounted Value equal to or greater than the APS Basic Maintenance
       Amount.

       (b)    For purposes of determining whether the Trust has Moody's Eligible
Assets with an aggregate Discounted Value that equals or exceeds the APS Basic
Maintenance Amount, the Discounted Value of Moody's Eligible Assets that the
Trust is obligated to deliver or receive pursuant to an outstanding futures
contract or option shall be as follows:

              (i)    assets subject to call options written by the Trust that
       are either exchange-traded and "readily reversible" or that expire within
       49 days after the date as of which such valuation is made shall be valued
       at the lesser of (A) Discounted Value and (B) the exercise price of the
       call option written by the Trust;

              (ii)   assets subject to call options written by the Trust not
       meeting the requirements of clause (i) of this sentence shall have no
       value;

              (iii)  assets subject to put options written by the Trust shall be
       valued at the lesser of (A) the exercise price and (B) the Discounted
       Value of the assets subject to the option;

                                      -41-

<PAGE>

              (iv)   futures contracts shall be valued at the lesser of (A)
       settlement price and (B) the Discounted Value of the assets subject to
       the futures contract, provided that, if a contract matures within 49 days
       after the date as of which such valuation is made, where the Trust is the
       seller the contract may be valued at the settlement price and where the
       Trust is the buyer the contract may be valued at the Discounted Value of
       the assets subject to the futures contract; and

              (v)    where delivery may be made to the Trust with any security
       of a class of securities, the Trust shall assume that it will take
       delivery of the security with the lowest Discounted Value.

       (c)    For purposes of determining whether the Trust has Moody's Eligible
Assets with an aggregate Discounted Value that equals or exceeds the APS Basic
Maintenance Amount, the following amounts shall be subtracted from the aggregate
Discounted Value of the Moody's Eligible Assets held by the Trust to the extent
the relevant asset is a Moody's Eligible Asset:

              (i)    10% of the exercise price of a written call option;

              (ii)   the exercise price of any written put option;

              (iii)  where the Trust is the seller under a financial futures
       contract, 10% of the settlement price of the financial futures contract;

              (iv)   where the Trust is the purchaser under a financial futures
       contract, any amounts payable by the Trust under such financial futures
       contract;

              (v)    the settlement price of the underlying financial futures
       contract if the Trust writes put options on a financial futures contract;
       and

              (vi)   105% of the Market Value of the underlying financial
       futures contract if the Trust writes call options on a financial futures
       contract and does not own the underlying contract.

       (d)    For so long as any APS are rated by Moody's, the Trust will not
enter into any "Forward Commitment," herein defined as any contract to purchase
securities for a fixed price at a future date beyond customary settlement time
(other than such contracts that constitute Moody's Hedging Transactions), except
that the Trust may enter into Forward Commitments subject to the following
limitations:

              (i)    for each Forward Commitment, the Trust will maintain with
       its custodian (A) cash, cash equivalents or short-term, fixed-income
       securities rated P-1, MIG-1 or VMIG-1 by Moody's or A-1 by S&P and
       maturing in one year or less with a fair market value that equals or
       exceeds the amount by which the Trust's obligations under any Forward
       Commitments to which it is from time to time a party exceed obligations
       to the Trust arising from securities sales by the Trust that are
       scheduled to settle at a future date, or (B) long-term, fixed-income
       securities with a then current market value that equals or

                                      -42-

<PAGE>

       exceeds the amount by which the Trust's obligations under any Forward
       Commitments to which it is from time to time a party exceed obligations
       to the Trust arising from securities sales by the Trust that are
       scheduled to settle on a future date, or (C) a combination of assets
       described in (A) and (B) above that in the aggregate equals or exceeds
       the amount by which the Trust's obligations under any Forward Commitments
       to which it is from time to time a party exceed obligations to the Trust
       arising from securities sales by the Trust that are scheduled to settle
       on a future date; and

              (ii)   the Trust will not enter into a Forward Commitment unless,
       after giving effect thereto, the Trust would continue to have Moody's
       Eligible Assets with an aggregate Discounted Value equal to or greater
       than the APS Basic Maintenance Amount.

For purposes of determining whether the Trust has Moody's Eligible Assets with
an aggregate Discounted Value that equals or exceeds the APS Basic Maintenance
Amount, the Discounted Value of all Forward Commitments to which the Trust is a
party and of all securities deliverable to the Trust pursuant to such Forward
Commitments shall be zero.

       (e)    For so long as APS are Outstanding and rated by Moody's, the
       Trust, unless it has received written confirmation from Moody's that such
       action would not impair the ratings then assigned to the APS by Moody's,
       will not:

              (i)    borrow money except for the purpose of clearing
       transactions in portfolio securities (which borrowings under any
       circumstances shall be limited to an amount equal to 5% of the Market
       Value of the Trust's assets at the time of such borrowings and which
       borrowings shall be repaid within 60 days and not be extended or renewed
       and shall not cause the aggregate Discounted Value of Moody's Eligible
       Assets to be less than the APS Basic Maintenance Amount);

              (ii)   engage in short sales of securities;

              (iii)  lend any securities;

              (iv)   issue any class or series of shares of beneficial interest
       ranking prior to or on a parity with the APS with respect to the payment
       of dividends or the distribution of assets upon dissolution, liquidation
       or winding up of the Trust;

              (v)    merge or consolidate into or with any other corporation or
       entity; and

              (vi)   change the Trust's Pricing Service.

       11.9   Notice. All notices or communications, unless otherwise specified
in these Bylaws, shall be sufficiently given if in writing and delivered in
person or mailed by first-class mail, postage prepaid. Notice shall be deemed
given on the earlier of the date received or the date seven days after which
such notice is mailed.

                                      -43-

<PAGE>

       11.10  Auction Procedures. (a) Certain Definitions. As used in this
Section 11.10, the following terms shall have the following meanings, unless the
context otherwise requires:

              (i)    "APS" means the shares of APS being auctioned pursuant to
       this Section 11.10.

              (ii)   "Auction Date" means the first Business Day preceding the
       first day of a Dividend Period.

              (iii)  "Available APS" has the meaning specified in Section
       11.10(d)(i) below.

              (iv)   "Bid" has the meaning specified in Section 11.10(b)(i)
       below.

              (v)    "Bidder" has the meaning specified in Section 11.10(b)(i)
       below.

              (vi)   "Hold Order" has the meaning specified in Section
       11.10(b)(i) below.

              (vii)  "Maximum Applicable Rate" for any Dividend Period will be
       the Applicable Percentage of the Reference Rate. The Auction Agent will
       round each applicable Maximum Applicable Rate to the nearest
       one-thousandth (0.001) of one percent per annum, with any such number
       ending in five ten-thousandths of one percent being rounded upwards to
       the nearest one-thousandth (0.001) of one percent. The Auction Agent will
       not round the applicable Reference Rate as part of its calculation of the
       Maximum Applicable Rate. The "Applicable Percentage" shall be the
       percentage determined based on (i) the credit rating assigned on such
       date to such shares by Moody's (or, if Moody's shall not make such rating
       available, the equivalent of such rating by a Substitute Rating Agency)
       and (ii) whether the Trust has provided notification to the Auction Agent
       prior to the Auction establishing the Applicable Rate for any dividend
       that net capital gains or other taxable income will be included in such
       dividend on shares of APS as follows:


                                        Percentage of             Percentage of
                                      Reference Rate -          Reference Rate -
Moody's Credit Ratings on APS          No Notification            Notification
- -----------------------------          ---------------            ------------

Aa3 or higher                               110%                      150%

A                                           125%                      160%

Baa                                         150%                      250%

Below Baa                                   200%                      275%

       The Trust shall take all reasonable action necessary to enable Moody's to
provide a rating for each series of APS. If Moody's shall not make such a rating
available, UBS Warburg LLC or its affiliates and successors, after consultation
with the Trust, shall select another Rating Agency to act as a Substitute Rating
Agency.

                                      -44-

<PAGE>

              (viii) "Order" has the meaning specified in Section 11.10(b)(i)
       below.

              (ix)   "Sell Order" has the meaning specified in Section
       11.10(b)(i) below.

              (x)    "Submission Deadline" means 1:00 p.m., New York City time,
       on any Auction Date or such other time on any Auction Date as may be
       specified by the Auction Agent from time to time as the time by which
       each Broker-Dealer must submit to the Auction Agent in writing all Orders
       obtained by it for the Auction to be conducted on such Auction Date.

              (xi)   "Submitted Bid" has the meaning specified in Section
       11.10(d)(i) below.

              (xii)  "Submitted Hold Order" has the meaning specified in Section
       11.10(d)(i) below.

              (xiii) "Submitted Order" has the meaning specified in Section
       11.10(d)(i) below.

              (xiv)  "Submitted Sell Order" has the meaning specified in Section
       11.10(d)(i) below.

              (xv)   "Sufficient Clearing Bids" has the meaning specified in
       Section 11.10(d)(i) below.

              (xvi)  "Winning Bid Rate" has the meaning specified in Section
       11.10(d)(i) below.

       (b)    Orders by Beneficial Owners, Potential Beneficial Owners, Existing
Holders and Potential Holders.

              (i) Unless otherwise permitted by the Trust, Beneficial Owners and
       Potential Beneficial Owners may only participate in Auctions through
       their Broker-Dealers. Broker-Dealers will submit the Orders of their
       respective customers who are Beneficial Owners and Potential Beneficial
       Owners to the Auction Agent, designating themselves 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. A
       Broker-Dealer may also hold shares of APS in its own account as a
       Beneficial Owner. A Broker-Dealer may thus submit Orders to the Auction
       Agent as a Beneficial Owner or a Potential Beneficial Owner and therefore
       participate in an Auction as an Existing Holder or Potential Holder on
       behalf of both itself and its customers. On or prior to the Submission
       Deadline on each Auction Date:

                  (A)   each Beneficial Owner may submit to its Broker-Dealer
              information as to:

                        (1) the number of Outstanding shares, if any, of APS
                  held by such Beneficial Owner which such Beneficial Owner
                  desires to continue to hold without regard to the Applicable
                  Rate for the next succeeding Dividend Period for such shares;

                                      -45-

<PAGE>

                  (2) the number of Outstanding shares, if any, of APS held by
         such Beneficial Owner which such Beneficial Owner desires to continue
         to hold, provided that the Applicable Rate for the next succeeding
         Dividend Period for such shares shall not be less than the rate per
         annum specified by such Beneficial Owner; and/or

                  (3) the number of Outstanding shares, if any, of APS held by
         such Beneficial Owner which such Beneficial Owner offers to sell
         without regard to the Applicable Rate for the next succeeding Dividend
         Period; and

         (B) each Broker-Dealer, using a list of Potential Beneficial Owners
     that shall be maintained in good faith for the purpose of conducting a
     competitive Auction, shall contact Potential Beneficial Owners, including
     Persons that are not Beneficial Owners, on such list to determine the
     number of Outstanding shares, if any, of APS which each such Potential
     Beneficial Owner offers to purchase, provided that the Applicable Rate for
     the next succeeding Dividend Period shall not be less than the rate per
     annum specified by such Potential Beneficial Owner.

         For the purposes hereof, the communication by a Beneficial Owner or
     Potential Beneficial Owner to a Broker-Dealer, or the communication by a
     Broker-Dealer acting for its own account to the Auction Agent, of
     information referred to in clause (A) or (B) of this Section 11.10(b)(i) is
     hereinafter referred to as an "Order" and each Beneficial Owner and each
     Potential Beneficial Owner placing an Order, including a Broker-Dealer
     acting in such capacity for its own account, is hereinafter referred to as
     a "Bidder"; an Order containing the information referred to in clause
     (A)(1) of this Section 11.10(b)(i) is hereinafter referred to as a "Hold
     Order"; an Order containing the information referred to in clause (A)(2) or
     (B) of this Section 11.10(b)(i) is hereinafter referred to as a "Bid"; and
     an Order containing the information referred to in clause (A)(3) of this
     Section 11.10(b)(i) is hereinafter referred to as a "Sell Order". Inasmuch
     as a Broker-Dealer participates in an Auction as an Existing Holder or a
     Potential Holder only to represent the interests of a Beneficial Owner or
     Potential Beneficial Owner, whether it be its customers or itself, all
     discussion herein relating to the consequences of an Auction for Existing
     Holders and Potential Holders also applies to the underlying beneficial
     ownership interests represented.

     (ii)(A) A Bid by an Existing Holder shall constitute an irrevocable offer
     to sell:

                  (1) the number of Outstanding shares of APS specified in such
         Bid if the Applicable Rate determined on such Auction Date shall be
         less than the rate per annum specified in such Bid; or

                  (2) such number or a lesser number of Outstanding shares of
         APS to be determined as set forth in Section 11.10(e)(i)(D) if the
         Applicable Rate determined on such Auction Date shall be equal to the
         rate per annum specified therein; or

                                      -46-

<PAGE>

              (3) a lesser number of Outstanding shares of APS to be determined
         as set forth in Section 11.10(e)(ii)(C) if such specified rate per
         annum shall be higher than the Maximum Applicable Rate and Sufficient
         Clearing Bids do not exist.

         (B)  A Sell Order by an Existing Holder shall constitute an irrevocable
      offer to sell:

              (1) the number of Outstanding shares of APS specified in such Sell
         Order; or

              (2) such number or a lesser number of Outstanding shares of APS to
         be determined as set forth in Section 11.10(e)(ii)(C) if Sufficient
         Clearing Bids do not exist.

         (C)  A Bid by a Potential Holder shall constitute an irrevocable offer
      to purchase:

              (1) the number of Outstanding shares of APS specified in such Bid
         if the Applicable Rate determined on such Auction Date shall be higher
         than the rate per annum specified in such Bid; or

              (2) such number or a lesser number of Outstanding shares of APS to
         be determined as set forth in Section 11.10(e)(i)(E) if the Applicable
         Rate determined on such Auction Date shall be equal to the rate per
         annum specified therein.

      (c)Submission of Orders by Broker-Dealers to Auction Agent.

         (i)  Each Broker-Dealer shall submit in writing or through the Auction
      Agent's auction processing system to the Auction Agent prior to the
      Submission Deadline on each Auction Date all Orders 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 specifying with respect to each Order:

              (A) the name of the Bidder placing such Order (which shall be the
         Broker-Dealer unless otherwise permitted by the Trust);

              (B) the aggregate number of Outstanding shares of APS that are the
         subject of such Order;

              (C) to the extent that such Bidder is an Existing Holder:

                  (1) the number of Outstanding shares, if any, of APS subject
              to any Hold Order placed by such Existing Holder;

                                      -47-

<PAGE>

                  (2) the number of Outstanding shares, if any, of APS subject
         to any Bid placed by such Existing Holder and the rate per annum
         specified in such Bid; and

                  (3) the number of Outstandintg shares, if any, of APS subject
         to any Sell Order placed by such Existing Holder; and

         (D) to the extent such Bidder is a Potential Holder, the rate per annum
   specified in such Potential Holder's Bid.

   (ii)  If any rate per annum 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%.

   (iii) If an Order or Orders covering all of the Outstanding shares of APS
held by an Existing Holder are not submitted to the Auction Agent prior to the
Submission Deadline, the Auction Agent shall deem a Hold Order (in the case of
an Auction relating to a Special Dividend Period of 91 days or less) or a Sell
Order (in the case of an Auction relating to a Special Dividend Period of longer
than 91 days) to have been submitted on behalf of such Existing Holder covering
the number of Outstanding shares of APS held by such Existing Holder and not
subject to Orders submitted to the Auction Agent.

   (iv)  If one or more Orders on behalf of an Existing Holder covering in the
aggregate more than the number of Outstanding shares of APS held by such
Existing Holder are submitted to the Auction Agent, such Order shall be
considered valid as follows and in the following order of priority:

         (A)  any Hold Order submitted on behalf of such Existing Holder shall
   be considered valid up to and including the number of Outstanding shares of
   APS held by such Existing Holder; provided that if more than one Hold Order
   is submitted on behalf of such Existing Holder and the number of shares of
   APS subject to such Hold Orders exceeds the number of Outstanding shares of
   APS held by such Existing Holder, the number of shares of APS subject to each
   of such Hold Orders shall be reduced pro rata so that such Hold Orders, in
   the aggregate, will cover exactly the number of Outstanding shares of APS
   held by such Existing Holder;

         (B)  any Bids submitted on behalf of such Existing Holder shall be
   considered valid, in the ascending order of their respective rates per annum
   if more than one Bid is submitted on behalf of such Existing Holder, up to
   and including the excess of the number of Outstanding shares of APS held by
   such Existing Holder over the number of shares of APS subject to any Hold
   Order referred to in Section 11.10(c)(iv)(A) above (and if more than one Bid
   submitted on behalf of such Existing Holder specifies the same rate per annum
   and together they cover more than the remaining number of shares that can be
   the subject of valid Bids after application of Section 11.10(c)(iv)(A) above
   and of the foregoing portion of this Section 11.10(c)(iv)(B) to any Bid or
   Bids specifying a lower rate or rates per annum, the number of shares subject
   to each of such Bids shall be reduced pro rata so that such

                                      -48-

<PAGE>

         Bids, in the aggregate, cover exactly such remaining number of shares);
         and the number of shares, if any, subject to Bids not valid under this
         Section 11.10(c)(iv)(B) shall be treated as the subject of a Bid by a
         Potential Holder; and

               (C) any Sell Order shall be considered valid up to and including
         the excess of the number of Outstanding shares of APS held by such
         Existing Holder over the number of shares of APS subject to Hold Orders
         referred to in Section 11.10(c)(iv)(A) and Bids referred to in Section
         11.10(c)(iv)(B); provided that if more than one Sell Order is submitted
         on behalf of any Existing Holder and the number of shares of APS
         subject to such Sell Orders is greater than such excess, the number of
         shares of APS subject to each of such Sell Orders shall be reduced pro
         rata so that such Sell Orders, in the aggregate, cover exactly the
         number of shares of APS equal to such excess.

         (v)   If more than one Bid is submitted on behalf of any Potential
   Holder, each Bid submitted shall be a separate Bid with the rate per annum
   and number of shares of APS therein specified.

         (vi)  Any Order submitted by a Beneficial Owner as 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.

         (vii) The Trust shall not be responsible for a Broker-Dealer's failure
   to act in accordance with the instructions of Beneficial Owners or Potential
   Beneficial Owners or failure to comply with the provisions of this Section
   11.10.

   (d)   Determination of Sufficient Clearing Bids, Winning Bid Rate and
         Applicable Rate.

         (i)   Not earlier than the Submission Deadline on each Auction Date,
   the Auction Agent shall assemble all Orders submitted or deemed submitted to
   it by the Broker-Dealers (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 shall determine:

               (A) the excess of the total number of Outstanding shares of APS
         over the number of Outstanding shares of APS that are the subject of
         Submitted Hold Orders (such excess being hereinafter referred to as the
         "Available APS");

               (B) from the Submitted Orders whether the number of Outstanding
         shares of APS that are the subject of Submitted Bids by Potential
         Holders specifying one or more rates per annum equal to or lower than
         the Maximum Applicable Rate exceeds or is equal to the sum of:

                   (1) the number of Outstanding shares of APS that are the
               subject of Submitted Bids by Existing Holders specifying one or
               more rates per annum higher than the Maximum Applicable Rate, and

                                      -49-

<PAGE>

               (2) the number of Outstanding shares of APS that are subject to
         Submitted Sell Orders (if such excess or such equality exists (other
         than because the number of Outstanding shares of APS in clause (1)
         above and this clause (2) are each zero because all of the Outstanding
         shares of APS are the subject of Submitted Hold Orders), such Submitted
         Bids by Potential Holders being hereinafter referred to collectively as
         "Sufficient Clearing Bids"); and

         (C)   if Sufficient Clearing Bids exist, the lowest rate per annum
   specified in the Submitted Bids (the "Winning Bid Rate") that if:

               (1) each Submitted Bid from Existing Holders specifying the
         Winning Bid Rate and all other Submitted Bids from Existing Holders
         specifying lower rates per annum were rejected, thus entitling such
         Existing Holders to continue to hold the shares of APS that are the
         subject of such Submitted Bids, and

               (2) each Submitted Bid from Potential Holders specifying the
         Winning Bid Rate and all other Submitted Bids from Potential Holders
         specifying lower rates per annum were accepted, thus entitling the
         Potential Holders to purchase the shares of APS that are the subject of
         such Submitted Bids, would result in the number of shares subject to
         all Submitted Bids specifying the Winning Bid Rate or a lower rate per
         annum being at least equal to the Available APS.

   (ii)  Promptly after the Auction Agent has made the determinations pursuant
to Section 11.10(d)(i), the Auction Agent shall advise the Trust of the Maximum
Applicable Rate and, based on such determinations, the Applicable Rate for the
next succeeding Dividend Period as follows:

         (A)   if Sufficient Clearing Bids exist, that the Applicable Rate for
   the next succeeding Dividend Period shall be equal to the Winning Bid Rate;

         (B)   if Sufficient Clearing Bids do not exist (other than because all
   of the Outstanding shares of APS are the subject of Submitted Hold Orders),
   that the Applicable Rate for the next succeeding Dividend Period shall be
   equal to the Maximum Applicable Rate; or

         (C)   if all of the Outstanding shares of APS are the subject of
   Submitted Hold Orders, that the Dividend Period next succeeding the Auction
   shall automatically be the same length as the immediately preceding Dividend
   Period and the Applicable Rate for the next succeeding Dividend Period shall
   be equal to 40% of the Reference Rate (or 60% of such rate if the Trust has
   provided notification to the Auction Agent prior to the Auction establishing
   the Applicable Rate for any dividend pursuant to Section 11.2(f) hereof that
   net capital gains or other taxable income will be included in such dividend
   on shares of APS) on the date of the Auction.

   (e)   Acceptance and Rejection of Submitted Bids and Submitted Sell Orders
and Allocation of Shares. Based on the determinations made pursuant to Section
11.10(d)(i), the

                                      -50-

<PAGE>

Submitted Bids and Submitted Sell Orders shall be accepted or rejected and the
Auction Agent shall take such other action as set forth below:

         (i)  If Sufficient Clearing Bids have been made, subject to the
     provisions of Section 11.10(e)(iii) and Section 11.10(e)(iv), Submitted
     Bids and Submitted Sell Orders shall be accepted or rejected in the
     following order of priority and all other Submitted Bids shall be rejected:

              (A) the Submitted Sell Orders of Existing Holders shall be
         accepted and the Submitted Bid of each of the Existing Holders
         specifying any rate per annum that is higher than the Winning Bid Rate
         shall be accepted, thus requiring each such Existing Holder to sell the
         Outstanding shares of APS that are the subject of such Submitted Sell
         Order or Submitted Bid;

              (B) the Submitted Bid of each of the Existing Holders specifying
         any rate per annum that is lower than the Winning Bid Rate shall be
         rejected, thus entitling each such Existing Holder to continue to hold
         the Outstanding shares of APS that are the subject of such Submitted
         Bid;

              (C) the Submitted Bid of each of the Potential Holders specifying
         any rate per annum that is lower than the Winning Bid Rate shall be
         accepted;

              (D) the Submitted Bid of each of the Existing Holders specifying a
         rate per annum that is equal to the Winning Bid Rate shall be rejected,
         thus entitling each such Existing Holder to continue to hold the
         Outstanding shares of APS that are the subject of such Submitted Bid,
         unless the number of Outstanding shares of APS subject to all such
         Submitted Bids shall be greater than the number of Outstanding shares
         of APS ("Remaining Shares") equal to the excess of the Available APS
         over the number of Outstanding shares of APS subject to Submitted Bids
         described in Section 11.10(e)(i)(B) and Section 11.10(e)(i)(C), in
         which event the Submitted Bids of each such Existing Holder shall be
         accepted, and each such Existing Holder shall be required to sell
         Outstanding shares of APS, but only in an amount equal to the
         difference between (1) the number of Outstanding shares of APS then
         held by such Existing Holder subject to such Submitted Bid and (2) the
         number of shares of APS obtained by multiplying (x) the number of
         Remaining Shares by (y) a fraction the numerator of which shall be the
         number of Outstanding shares of APS held by such Existing Holder
         subject to such Submitted Bid and the denominator of which shall be the
         sum of the number of Outstanding shares of APS subject to such
         Submitted Bids made by all such Existing Holders that specified a rate
         per annum equal to the Winning Bid Rate; and

              (E) the Submitted Bid of each of the Potential Holders specifying
         a rate per annum that is equal to the Winning Bid Rate shall be
         accepted but only in an amount equal to the number of Outstanding
         shares of APS obtained by multiplying (x) the difference between the
         Available APS and the number of Outstanding shares of APS

                                      -51-

<PAGE>

         subject to Submitted Bids described in Section 11.10(e)(i)(B), Section
         11.10(e)(i)(C) and Section 11.10(e)(i)(D) by (y) a fraction the
         numerator of which shall be the number of Outstanding shares of APS
         subject to such Submitted Bid and the denominator of which shall be the
         sum of the number of Outstanding shares of APS subject to such
         Submitted Bids made by all such Potential Holders that specified rates
         per annum equal to the Winning Bid Rate.

         (ii) If Sufficient Clearing Bids have not been made (other than because
     all of the Outstanding shares of APS are subject to Submitted Hold Orders),
     subject to the provisions of Section 11.10(e)(iii), Submitted Orders shall
     be accepted or rejected as follows in the following order of priority and
     all other Submitted Bids shall be rejected:

              (A) the Submitted Bid of each Existing Holder specifying any rate
         per annum that is equal to or lower than the Maximum Applicable Rate
         shall be rejected, thus entitling such Existing Holder to continue to
         hold the Outstanding shares of APS that are the subject of such
         Submitted Bid;

              (B) the Submitted Bid of each Potential Holder specifying any rate
         per annum that is equal to or lower than the Maximum Applicable Rate
         shall be accepted, thus requiring such Potential Holder to purchase the
         Outstanding shares of APS that are the subject of such Submitted Bid;
         and

              (C) the Submitted Bids of each Existing Holder specifying any rate
         per annum that is higher than the Maximum Applicable Rate shall be
         accepted and the Submitted Sell Orders of each Existing Holder shall be
         accepted, in both cases only in an amount equal to the difference
         between (1) the number of Outstanding shares of APS then held by such
         Existing Holder subject to such Submitted Bid or Submitted Sell Order
         and (2) the number of shares of APS obtained by multiplying (x) the
         difference between the Available APS and the aggregate number of
         Outstanding shares of APS subject to Submitted Bids described in
         Section 11.10(e)(ii)(A) and Section 11.10(e)(ii)(B) by (y) a fraction
         the numerator of which shall be the number of Outstanding shares of APS
         held by such Existing Holder subject to such Submitted Bid or Submitted
         Sell Order and the denominator of which shall be the number of
         Outstanding shares of APS subject to all such Submitted Bids and
         Submitted Sell Orders.

         (iii) If, as a result of the procedures described in Section 11.10(e),
     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
     APS on any Auction Date, the Auction Agent shall, in such manner as in its
     sole discretion it shall determine, round up or down the number of shares
     of APS to be purchased or sold by any Existing Holder or Potential Holder
     on such Auction Date so that each Outstanding share of APS purchased or
     sold by each Existing Holder or Potential Holder on such Auction Date shall
     be a whole share of APS.

                                      -52-

<PAGE>

         (iv)  If, as a result of the procedures described in Section 11.10(e),
     any Potential Holder would be entitled or required to purchase less than a
     whole share of APS on any Auction Date, the Auction Agent shall, in such
     manner as in its sole discretion it shall determine, allocate shares of APS
     for purchase among Potential Holders so that only whole shares of APS are
     purchased on such Auction Date by any Potential Holder, even if such
     allocation results in one or more of such Potential Holders not purchasing
     any shares of APS on such Auction Date.

         (v)   Based on the results of each Auction, the Auction Agent shall
     determine, with respect to each Broker-Dealer that submitted Bids or Sell
     Orders on behalf of Existing Holders or Potential Holders, the aggregate
     number of Outstanding shares of APS to be purchased and the aggregate
     number of the Outstanding shares of APS to be sold by such Potential
     Holders and Existing Holders and, to the extent that such aggregate number
     of Outstanding shares to be purchased and such aggregate number of
     Outstanding shares to be sold differ, the Auction Agent shall determine to
     which other Broker-Dealer or Broker-Dealers acting for one or more
     purchasers such Broker-Dealer shall deliver, or from which other
     Broker-Dealer or Broker-Dealers acting for one or more sellers such
     Broker-Dealer shall receive, as the case may be, Outstanding shares of APS.

     (f) Miscellaneous.

         (i)   The Trust may interpret the provisions of this Section 11.10 to
     resolve any inconsistency or ambiguity, remedy any formal defect or make
     any other change or modification that does not substantially adversely
     affect the rights of Beneficial Owners of APS.

         (ii)  A Beneficial Owner or an Existing Holder (A) may sell, transfer
     or otherwise dispose of shares of APS only pursuant to a Bid or Sell Order
     in accordance with the procedures described in this Section 11.10 or to or
     through a Broker-Dealer or to such other persons as may be permitted by the
     Fund, provided that in the case of all transfers other than pursuant to
     Auctions such Beneficial Owner or Existing Holder, its Broker-Dealer, if
     applicable, or its Agent Member advises the Auction Agent of such transfer
     and (B) except as otherwise required by law, shall have the ownership of
     the shares of APS held by it maintained in book entry form by the
     Securities Depository in the account of its Agent Member, which in turn
     will maintain records of such Beneficial Owner's beneficial ownership. The
     Trust may not submit an Order in any Auction.

         (iii) All of the Outstanding shares of APS of a series shall be
     registered in the name of the nominee of the Securities Depository unless
     otherwise required by law or unless there is no Securities Depository. If
     there is no Securities Depository, at the Trust's option and upon its
     receipt of such documents as it deems appropriate, any shares of APS may be
     registered in the Stock Register in the name of the Beneficial Owner
     thereof and such Beneficial Owner thereupon will be entitled to receive
     certificates therefor and required to deliver certificates therefor upon
     transfer or exchange thereof.

                                      -53-

<PAGE>

         11.11 Securities Depository; Stock Certificates. (a) If there is a
     Securities Depository, all of the shares of APS of each series shall be
     issued to the Securities Depository and registered in the name of the
     Securities Depository or its nominee. Certificates may be issued as
     necessary to represent shares of APS. All such certificates shall bear a
     legend to the effect that such certificates are issued subject to the
     provisions restricting the transfer of shares of APS contained in these
     Bylaws. Unless the Trust shall have elected, during a Non-Payment Period,
     to waive this requirement, the Trust will also issue stop-transfer
     instructions to the Auction Agent for the shares of APS. Except as provided
     in paragraph (b) below, the Securities Depository or its nominee will be
     the Holder, and no Beneficial Owner shall receive certificates representing
     its ownership interest in such shares.

         (b)   If the Applicable Rate applicable to all shares of APS of a
     series shall be the Non-Payment Period Rate or there is no Securities
     Depository, the Trust may at its option issue one or more new certificates
     with respect to such shares (without the legend referred to in Section
     11.11(a)) registered in the names of the Beneficial Owners or their
     nominees and rescind the stop-transfer instructions referred to in Section
     11.11(a) with respect to such shares.

                                   ARTICLE 12
                             Amendment to the Bylaws

         12.1  General. Except to the extent that the Declaration of Trust or
     applicable law requires a vote or consent of Shareholders or a higher vote
     or consent by the Trustees and/or the Continuing Trustees, these Bylaws may
     be amended, changed, altered or repealed, in whole or part, only by
     resolution of a majority of the Trustees and a majority of the Continuing
     Trustees then in office at any meeting of the Trustees, or by one or more
     writings signed by such Trustees and Continuing Trustees.

         12.2  Article 11. Without limiting the provisions of Section 12.1, the
     Board of Trustees of the Trust may, by resolution duly adopted, without
     shareholder approval (except as otherwise required by Article 11 or
     required by applicable law), amend Article 11 to (a) reflect any amendments
     hereto which the Board of Trustees of the Trust is entitled to adopt
     pursuant to the terms of Article 11 without shareholder approval or (b) add
     additional series of APS or additional shares of a series of APS (and terms
     relating thereto) to the series and shares of APS described herein. Each
     such additional series and all such additional APS shall be governed by the
     terms of Article 11.

                                      -54-

</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-99. (H) (2)
<SEQUENCE>4
<FILENAME>dex99h2.txt
<DESCRIPTION>FORM OF MASTER AGREEMENT AMONG UNDERWRITERS
<TEXT>
<PAGE>

                                                                     Exhibit h.2

                       Master Agreement Among Underwriters

UBS Warburg LLC
299 Park Avenue
New York, New York 10171-0026

Ladies and Gentlemen:

We hereby agree that this Master Agreement Among Underwriters (this "Agreement")
will apply to our participation in offerings of securities where you act as
Manager or one of the Managers of the underwriting syndicate (including
offerings subject to competitive bidding where you act as Representative of a
group of bidders or purchasers). The issuer of the securities is referred to as
the "Company", the seller of any such securities other than the Company is
referred to as the "Seller" and such securities are referred to as the
"Securities".

1.     Applicability

This Agreement as amended or supplemented by the Terms Communication (as defined
below) will apply to any offering of Securities, pursuant to a registration
statement filed under the Securities Act of 1933, as amended, and the rules and
regulations thereunder (collectively, the "Securities Act"), or exempt from such
registration, where you have informed us that this Agreement applies. Any such
offering in which we participate as an Underwriter is referred to as an
"Offering".

You may, from time to time, invite us to participate in an Offering by sending a
wire, telex, facsimile or other means of invitation relating to that Offering
(an "Invitation"). As to any such Offering, you will promptly advise us of the
following as applicable: the amount of Securities to be underwritten by us, the
expected offering and closing dates, the offering price and the purchase price,
the interest or dividend rate (or the method by which such rate is to be
determined), the conversion price, the underwriting discount, the management
fee, the concession and the reallowance. If the offering price is to be
determined by a formula based upon the market price of certain securities
("Formula Pricing"), you will so indicate and specify the maximum underwriting
discount, management fee and concession. You will also advise us if the Offering
includes Delayed Delivery Contracts or if the Underwriting Agreement (as defined
below) grants the Underwriters an option to purchase additional Securi-

<PAGE>

ties (the "Option Securities"). The foregoing information may be conveyed in the
Invitation or in a Terms Wire substantially in the forms of Exhibits A and B
hereto, respectively (collectively, the "Terms Communication"). The Terms
Communication may also supplement or amend the terms of this Agreement
applicable to an Offering.

Receipt of our acceptance substantially in the form set forth in Exhibit A
without receipt of our written revocation before the time specified in the Terms
Communication constitutes our "Final Acceptance". By our Final Acceptance, we
agree that this Agreement will be incorporated by reference in such Terms
Communication as though set forth in its entirety and will govern our
participation in such Offering.

2.     Underwriting Agreement and Master Underwriters' Questionnaire

For each Offering, the Company, any Seller and/or any guarantor of such
Securities will enter into an underwriting or purchase agreement or similar
agreement (the "Underwriting Agreement"), which will be sent to us, available
for review in your office or in publicly available form with the Securities and
Exchange Commission (the "Commission"). By our Final Acceptance, we authorize
you to purchase on our behalf the amount of the Securities set forth in the
Terms Communication (our "Initial Commitment") plus our share of any Option
Securities less any amount of our Securities to be sold pursuant to Delayed
Delivery Contracts under Section 7 below. The Securities we are obligated to
purchase after any such adjustment are referred to as "Our Securities." If the
Securities are debt obligations maturing serially, our allocation of the
maturities will be proportionate to our underwriting obligation.

Our Final Acceptance will also constitute (i) our representation that our
commitment with respect to the Offering will not violate any applicable capital
requirements of the Securities Exchange Act of 1934, as amended, and the rules
and regulations thereunder (collectively, the "Exchange Act"), the National
Association of Securities Dealers, Inc. ("NASD") or any securities exchange and
(ii) our confirmation that the information given or deemed given in response to
the Master Underwriters' Questionnaire attached as Exhibit C is correct. We will
notify you immediately whenever such information becomes inaccurate or
incomplete during an Offering.

3.     Offering Documents

Registered Offerings. For an Offering of Securities registered under the
Securities Act ("Registered Offering"), you will provide the file number(s) of
the Registration Statement (as defined below) filed with the Commission or, to
the extent made

                                       2

<PAGE>

available by the Company, send us or make available for our review in your
office a copy of such Registration Statement except for any exhibits and
documents incorporated therein by reference. As soon as practicable after
sufficient quantities of the final prospectus (excluding documents incorporated
by reference therein) are made available to you by the Company to be used in
connection with the Offering of the Securities, you will furnish to us
sufficient copies thereof or arrange to have such copies furnished to us. We
understand that we are not authorized to give any information or make any
representation not contained in the Prospectus (including documents incorporated
by reference therein), as amended or supplemented, in connection with the
Offering.

Our Final Acceptance will constitute (i) our acknowledgment that we are familiar
with such Registration Statement, as amended to the date of the Offering,
including any exhibits or documents incorporated therein by reference (the
"Registration Statement"), and with any preliminary prospectus, final
prospectus, or prospectus supplement filed with the Commission (collectively,
the "Prospectus") and the forms of Underwriting Agreement and indenture or other
document describing the terms of the Securities filed as exhibits thereto or
otherwise made available to us, (ii) our representation that the information
relating to us in such Registration Statement and Prospectus is correct and not
misleading, (iii) our consent to be named as an Underwriter therein, and (iv)
our representation that we will furnish a Prospectus to each person to whom we
sell Securities or to whom we furnished a previous Prospectus as required by
applicable regulation or as requested by you. We will maintain accurate records
of our distribution of the Registration Statement and the Prospectus.

Where specified in the Terms Communication, we will not without your consent
sell any of the Securities to an account over which we have investment
discretion.

Offerings Pursuant to Offering Circular. For other than a Registered Offering,
you will provide or make available to us for our review in your office, to the
extent made available by the Company, copies of any preliminary and final
offering circulars or other offering materials and any amendments thereto (the
"Offering Circular"). As soon as practicable after sufficient quantities of the
final offering circular (excluding documents incorporated by reference therein)
are made available to you by the Company to be used in connection with the
Offering of the Securities, you will furnish to us sufficient copies thereof or
arrange to have such copies furnished to us. We understand that we are not
authorized to give any information or make any representation not contained in
the Offering Circular (including documents incorporated by reference therein),
as amended or supplemented, in connection with the Offering.

                                       3

<PAGE>

Our Final Acceptance will also constitute (i) our acknowledgment that we are
familiar with the Offering Circular, and the forms of Underwriting Agreement and
indenture or other document describing the terms of the Securities made
available to us (ii) our representation that the information relating to us in
the Offering Circular is correct and not misleading, (iii) our consent to being
named as an Underwriter therein, and (iv) our representation that we will
furnish an Offering Circular to each person to whom we sell Securities or to
whom we furnish a previous Offering Circular as required by any regulation or as
requested by you. We will maintain accurate records of our distribution of the
Offering Circular.

4.     Manager's Authority

We authorize you, acting as Manager, to (i) negotiate, execute and deliver the
Underwriting Agreement, (ii) exercise all authority and discretion granted by
the Underwriting Agreement and take all action you deem desirable in connection
with this Agreement and the Underwriting Agreement including, but not limited
to, waiving performance or satisfaction by the Company, any selling security
holder or any other party to the Underwriting Agreement of its or their
obligations or conditions included in the Underwriting Agreement or the Terms
Communication (including this Agreement), if in your judgment such waiver will
not have a material adverse effect upon the interests of the Underwriters and
exercising any right of cancellation or termination, (iii) modify, vary or waive
any provision in the Underwriting Agreement except the amount of Our Securities
or the purchase price (except you may determine the price by Formula Pricing
where applicable), (iv) determine the timing and the terms of the Offering
(including varying the offering terms and the concessions and discounts to
dealers), (v) exercise any option relating to the purchase of Option Securities,
and (vi) take all action you deem desirable in connection with the Offering and
the purchase, carrying, sale and distribution of the Securities. If there are
other Managers with respect to an Offering, you may take any action hereunder
alone on behalf of the Managers, and our representations, agreements and
authorizations given herein shall also be for the benefit of such other Manager
to whom you may grant any of your authority to act hereunder.

You may arrange for the purchase by others, who may include your or other
Underwriters, of any Securities not taken up by an Underwriter in respect of its
obligations hereunder who defaults under this Agreement and/or the Underwriting
Agreement. We will assume our proportionate share of all defaulted obligations
not assumed by others and any Securities so assumed shall be included in Our
Securities. However, nothing in this paragraph will affect our liability or
obligations in the event of a default by us or any other Underwriter(s).

                                       4

<PAGE>

You may advertise the Offering as you determine and determine all matters
relating to communications with dealers or others. We will not advertise the
Offering without your consent, and we assume all expense and risk with respect
to any advertising by us.

Notwithstanding any information you furnish as to jurisdictions where you
believe the Securities may be sold, you have no obligation for qualification of
the Securities for sale under the laws of any jurisdiction. You may file a New
York Further State Notice. You have no liability to us except for your own lack
of good faith in meeting obligations expressly assumed by you hereunder.

5.     Management Fee

We will pay and authorize you to charge our account with our share of the
Management Fee set forth in the Terms Communication and calculated without
deduction in respect of any Delayed Delivery Securities. Such compensation may
be divided among the Managers as you decide.

6.     Offering

We will comply with any applicable requirement of the Securities Act, the
Exchange Act and any other applicable Federal or state statute and the rules and
regulations thereunder. We will make no sales of Securities until you release us
to do so. Any Securities released to us for public offering will be promptly
offered in conformity with the Prospectus or Offering Circular and we will not
allow any discount except as permitted by this Agreement. If we offer Securities
outside the United States, its territories or possessions, we will take all
action necessary to comply with all applicable laws at our own expense and risk.
You may reserve for sale, sell and deliver for our account any of Our Securities
(i) to customers, (ii) to dealers (including Underwriters) who are members of
the NASD and agree to comply with the terms of Section 16 below and (iii) to
foreign dealers or other institutions (including Underwriters) not eligible for
NASD membership who agree to comply with the terms of Section 16 below. Sales of
Securities to customers for the account of Underwriters will be as nearly as
practicable in proportion to their respective Initial Commitments, and sales of
Securities to dealers for the account of Underwriters will be as nearly as
practicable in proportion to each Underwriter's pro rata share of Securities
reserved for such sales. You will advise us of the amount of Our Securities
which we will retain for direct sale. Any Securities reserved by you for sale
for our account but not sold may be released by you to us for direct sale, in
which event the amount of Securities so reserved shall be correspondingly
reduced. We will obtain an

                                       5

<PAGE>

agreement containing the representations in Section 16 below from dealers to
whom we sell Securities.

In connection with any Offering of Securities that are registered under the Act
and issued by a company that was not, immediately prior to the filing of the
Registration Statement, subject to the requirements of Section 13(a) or 15(d) of
the Exchange Act, we agree that unless otherwise advised by you and disclosed in
the Prospectus we will not make sales to any account over which we exercise
discretionary authority with respect to that sale (discretionary accounts). We
will advise you on request of the unsold amount of Our Securities. You may at
any time (i) reserve such Securities for sale by you for our account, (ii)
purchase any such Securities to make deliveries for the Underwriters (at the
public offering price or at such price less all or part of the concession) or
(iii) reserve such Securities for sale by the Company pursuant to Delayed
Delivery Contracts. If the total of the unsold Securities does not exceed 15% of
all Securities, you may sell the unsold Securities for the Underwriters as you
determine.

If prior to the termination of this Agreement with respect to the offering of
the Securities, you shall purchase or contract to purchase any of Our Securities
sold or loaned directly by us, in your discretion you may (i) sell for our
account the Securities so purchased and debit or credit our account for the loss
or profit resulting from such sale, (ii) charge our account with an amount not
in excess of the concession to dealers with respect thereto and credit such
amount against the cost thereof or (iii) require us to purchase such Securities
at a price equal to the total cost of such purchase, including commissions,
accrued interest, amortization of original issue discount or dividends and
transfer taxes on redelivery.

7.       Arrangements for Delayed Delivery

Arrangements for Delayed Delivery Securities will be made only through you
directly, or through dealers (which may be Underwriters) to whom you may pay a
commission. Our Initial Commitment will be reduced by the Delayed Delivery
Securities attributed to us. Delayed Delivery Securities will be attributed in
the same manner and proportions as provided in Section 6 above.

The fee payable to us will be credited to our account based on the amount by
which our Initial Commitment is reduced in accordance with the above paragraph,
less the commission paid on Delayed Delivery Securities that are sold through
dealers and attributed to us. We will be treated as only a dealer and receive
only the concession

                                       6

<PAGE>

with respect to the Securities, if any, by which the aggregate of the Delayed
Delivery Securities attributable to us exceeds our Initial Commitment.

8.       Stabilization and Over-Allotment

During an Offering, and longer if necessary to cover any short position, you may
buy and sell for either long or short account in the open market or otherwise
(i) the Securities, (ii) if the Securities are common stock or a security
convertible into or exchangeable or exercisable for common stock (including any
option on common stock), the common stock of the Company and any security
convertible into or exchangeable or exercisable for common stock including any
option on such common stock (referred to as "Equivalent Securities"), and (iii)
any other securities that you may designate in the Terms Communication. In
arranging for sales of Securities, you may also over-allot and cover such
over-allotment on such terms as you deem advisable. At no time (except for
over-allotments which may be covered by an over-allotment option and except as a
result of a default by an Underwriter) shall our net commitment pursuant to this
Section exceed 20% of our Initial Commitment. All transactions pursuant to this
Section shall be made for the respective accounts of the Underwriters as nearly
as practicable in proportion to their Initial Commitments. Any securities
purchased by you for stabilizing purposes prior to our Final Acceptance will
also be subject to this Section. On demand, we will (x) pay for any Securities
purchased, deliver any Securities sold or over-allotted, or pay any losses or
expenses incurred for our account pursuant to this Section and (y) advise you of
the Securities retained by us and unsold and will sell to you for the account of
one or more of the Underwriters such of our unsold Securities at such price, not
less than the net price to selected dealers nor more than the public offering
price, as you determine.

You will notify us promptly of any transaction which in your judgment may be a
"stabilizing purchase" within the meaning of the applicable rules of the
Commission and will also notify us of the date and time when any such
stabilizing was terminated. If stabilization is effected we will provide you not
later than the fifth full business day following the termination of
stabilization, with such information and reports as are required in relation to
such stabilization pursuant to the rules and regulations of the Commission under
the Exchange Act.

9.       Open Market Transactions

Until notified by you to the contrary, we will not buy, sell, deal or trade in
Securities, any Equivalent Securities, or any other securities designated in the
Terms Communication. However, such restrictions will not apply to unsolicited
brokerage orders

                                       7

<PAGE>

received in the ordinary course of business. We may, with your prior consent,
make purchases of the Securities from and sales to other Underwriters at the
public offering price, less all or any part of the concession to dealers. We
will also comply with the provisions of Regulation M under the Exchange Act if
applicable to us.

10.      Payment, Delivery and Settlement

In payment for the Securities we are obligated to purchase, we will deliver a
federal funds wire transfer to your order in accordance with your instructions
as to time and place of delivery and amount of funds. As our agent you may pay
the Company and any Seller the amount due against delivery of the Securities.
Unless we promptly provide contrary instructions, transactions may be settled
through The Depository Trust Company if we or our correspondent is a member. If
you do not receive our payment as instructed, you may make payment for our
account without relieving us of our obligations under this Agreement and, we
will repay promptly on demand the amount advanced plus interest at current
rates.

You may deliver to us from time to time against payment, for carrying purposes
only, the unsold amount of Our Securities except that if the aggregate amount of
reserved but unsold Securities upon termination in accordance with the second
paragraph of Section 13 below does not exceed 10% of the total amount of
Securities, you may in your discretion sell such Securities for the accounts of
the Underwriters, at such prices and in such manner as you determine. On demand,
we will redeliver against payment any Securities so delivered.

As soon as practicable after any Offering, the net credit or debit balance in
our account shall be paid to or collected from us; provided, however, that you
may reserve any amount for possible additional expenses chargeable to the
Underwriters. No statement by you regarding a balance in our account or the
establishment of any reserve shall constitute a representation as to the
existence or nonexistence of amounts chargeable to us. Notwithstanding any
distribution to us, we will remain liable for and pay on demand (i) any transfer
taxes paid after settlement of our account, and (ii) our proportionate share
based on our Initial Commitment of all expenses and liability incurred for the
Underwriters, including any liability based on the claim that the Underwriters
constitute an association, unincorporated business, partnership or any separate
entity. You may at any time make partial distribution of credit balances or
require partial payment of debit balances.

11.      Authority to Borrow

                                       8

<PAGE>

In carrying out this Agreement, you may arrange loans from yourself or others
for our account. In connection with any such loan, you may hold or pledge the
Securities or any other securities and execute and deliver any notes, agreements
or other instruments you deem appropriate. Any lender is authorized to accept
your instructions as Manager in all matters relating to such loans. Any
Securities or such other securities held by you for our account may be delivered
to us for carrying purposes, and if so delivered will be redelivered to you upon
demand.

12.      Expenses

All expenses incurred by you in connection with an Offering and with this
Agreement are to be charged to the Underwriters' accounts in proportion to their
respective Initial Commitments except that any transfer taxes on sales made by
you to dealers are to be charged to the Underwriter for whose account such sales
were made. Any of our funds may be held with your general funds without
interest. Your determination, apportionment and distribution of profits, losses
and expenses will be final and conclusive.

13.      Termination

This Agreement may be terminated by either party on five business days' prior
written notice except that our notice is not effective as to any Offering where
such notice is received by you after our Final Acceptance. Further, the third
paragraph of Section 10 and Sections 12, 14, 15, and 17 and your representations
hereunder will in all circumstances survive as to all Offerings.

Except as otherwise provided in the foregoing paragraph, with respect to any
Offering this Agreement will terminate at the close of business on the thirtieth
day after the Securities are released for public sale, unless you either
terminate this Agreement earlier or extend it for up to thirty additional days.

This Agreement will continue in full force and effect regardless of (i) any
termination of any Underwriting Agreement, (ii) any investigation relating to
any Securities or any Offering and (iii) the delivery of and payment for any
Securities. No termination pursuant to this Section will affect your authority
or our obligations under Sections 8 and 10. No termination will relieve any
defaulting Underwriter.

14.      Underwriters' Status

                                       9

<PAGE>

Nothing herein is to constitute any of the Underwriters a partnership,
association, unincorporated business or other separate entity or is to render
you or us liable (except as provided herein or in the Underwriting Agreement)
for any obligation of any other Underwriters; and the obligations and
liabilities of each of the Underwriters are several and not joint. In no event
will the Underwriters elect to be treated as a partnership for Federal income
tax purposes, and will not take any position inconsistent with this sentence. If
for Federal income tax purposes the Underwriters should be deemed to constitute
a partnership, then each Underwriter elects to be excluded from the application
of Subchapter K, Chapter 1, Subtitle A of the Internal Revenue Code and
authorizes UBS Warburg LLC, in its discretion, on behalf of such Underwriter, to
execute such evidence of such election as may be required by the Internal
Revenue Services.

15.      Default by Underwriters

Default by one or more Underwriters hereunder or under the Underwriting
Agreement will not release the other Underwriters from their respective
obligations or affect the liability of any defaulting Underwriters to the other
Underwriters for damages resulting from such default.

16.      Indemnity and Contribution

We will indemnify, hold harmless and reimburse you and each other Underwriter
(and your respective controlling persons within the meaning of the Securities
Act or the Exchange Act) and the successors and assigns of all of the foregoing
persons to the extent and on the terms that each Underwriter agrees to indemnify
any person in the Underwriting Agreement.

If any inquiry or investigation is initiated or if any claim is asserted against
you as Manager or otherwise involves the Underwriters generally, or relates to
any Prospectus, Registration Statement, Offering Circular, the offering of the
Securities, or any transaction contemplated by this Agreement or any
Underwriting Agreement, you may make such investigation, retain such counsel and
take any other action you deem desirable, including settlement of any claim if
recommended by counsel retained by you. Upon your request, we will pay our
proportionate share of all expenses incurred by you or with your consent
(including, but not limited to, fees and disbursements of counsel) in
investigating and defending against such inquiry, investigation, claim or
otherwise, and, as contributions, our proportionate share of any related
liability incurred whether such liability results from a judgment, settlement or
otherwise. A claim against or liability incurred by a person who controls an
Underwriter within the

                                       10

<PAGE>

meaning of the Securities Act or Exchange Act shall be deemed incurred by such
Underwriter. You may consent to being named as the representative of a defendant
class of Underwriters. If any Underwriter or Underwriters default in their
obligation to make any payments under Section 15, each nondefaulting Underwriter
shall be obligated to pay its proportionate share of all defaulted payments,
based upon such Underwriter's underwriting obligation as related to the
underwriting obligations of all nondefaulting Underwriters, without relieving
the defaulting Underwriter or Underwriters of liability therefor. No person
guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of
the Securities Act) shall be entitled to contribution from any person who was
not guilty of such fraudulent misrepresentation.

17.      NASD

We understand that you are a member in good standing of the NASD. We represent
that (i) we are a member in good standing of the NASD and will comply with all
applicable rules of the NASD, including the NASD's Interpretation with respect
to Free Riding and Withholding and Rule 2740 of the Conduct Rules, or (ii) we
are a foreign bank, broker, dealer or other institutions not eligible for such
membership and will not make sales within the United States, its territories or
possessions or to persons who are citizens or residents thereof except through
you (except that we may participate in group sales pursuant to Section 6 above)
and that in making sales outside the United States, we will comply with the
requirements of the NASD's Interpretation with respect to Free Riding and
Withholding and comply as though a member with Rules 2420, 2730, 2740 and 2750
of the Conduct Rules of the NASD.

18.      Miscellaneous

This Agreement and any claim, counterclaim or dispute of any kind or nature
whatsoever arising out of or in any way relating to this Agreement ("Claim"),
directly or indirectly, shall be governed by, and construed in accordance with,
the laws of the State of New York without regard to the conflicts of law
provisions thereof. Except as set forth below, no Claim may be commenced,
prosecuted or continued in any court other than the courts of the State of New
York located in the City and County of New York or in the United States District
Court for the Southern District of New York, which courts shall have
jurisdiction over the adjudication of such matters, and we and you consent to
the jurisdiction of such courts and personal service with respect thereto. We
and you waive all right to trial by jury in any action, proceeding or
counterclaim (whether based upon contract, tort or otherwise) in any way arising
out of or relating to this Agreement. We agree that a final judgment in any such
action, proceeding or counterclaim brought in any such court shall be conclusive
and

                                       11

<PAGE>

binding upon us and may be enforced in any other courts to the jurisdiction of
which we are, or may be subject, by suit upon such judgment. The Section
headings in this Agreement have been inserted as a matter of convenience of
reference and are not a part of this Agreement. This Agreement may be
supplemented or amended by you by written notice to us and, except for
supplements or amendments set forth in a Terms Communication, any such
supplement or amendment to this Agreement shall be effective with respect to any
Offering to which this Agreement applies after the date of such supplement or
amendment. Each reference to "Agreement" herein shall, as appropriate, be to
this Agreement as so amended and supplemented. This Agreement may be signed by
the parties in one or more counterparts which together shall constitute one and
the same agreement among the parties.

19.      Notices

Any notice hereunder is duly given if sent from you by registered mail, telegram
or telex, to us as set forth below or if sent to you at UBS Warburg LLC, 299
Park Avenue, New York, New York 10171-0026, Attention: Corporate Syndicate
Department.

Very truly yours,

__________________________________
(Name of Firm)

__________________________________
(Address of Firm)

__________________________________
(Name and Title of Signatory)

By:____________________________

(Signature)

Facsimile No.:____________


Confirmed as of the date first above written.

UBS Warburg LLC

                                       12

<PAGE>

By: ______________________________

Executive Director

By: ______________________________

Managing Director

                                       13

<PAGE>

UBS Warburg LLC

FORM OF INVITATION TO BE USED WITH MASTER AGREEMENT AMONG UNDERWRITERS

(The following form of Invitation, adapted as appropriate for debt securities,
convertible securities, stock or units, is designed for use in all offerings to
which UBS Warburg LLC Master Agreement Among Underwriters (the "Master AAU")
will apply. In certain cases, all or a part of the following form will be
combined with the form of Terms Wire.)

(Date)

(Name and address of prospective Underwriter)

Attention:        Corporate Syndicate Department

                  Invitation Wire

(Name of Issuer)

(Title of Securities) (principal amount or number shares)

(Name of Guarantor, if any)

Registration form or application filed with (name of regulatory authority)

Seller(s): (Insert if other than or in addition to Company)

The anticipated terms are as follows:

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

Call Protection:                    (insert if applicable)
Sinking Fund:                       (insert if applicable) Starts in and
                                    retires $     per annum through
Optional Redemption Schedule:       Redeemable at     %, beginning    declining
                                    (straight-line) to 100%, beginning
Over-allotment Option:              (insert amount, if applicable)
Ratings:                            (expected-confirmed)

                                       14


<PAGE>

Listing:                       (insert if applicable) Application has been made
                               to list (insert name(s) of exchange(s))
Delayed Delivery:              (insert if applicable)
Name of Trustee:               (insert if applicable)
Name of Parent of Trustee:     (insert if applicable)
Name of Parent of Company: (insert if applicable)
Equivalent Securities and other securities subject
to stabilization pursuant to Section 8 of Master
AAU and restricted pursuant to Section 9 of Master
AAU:
                               (insert if applicable)

Other terms of the Offering or the Securities: (insert if applicable)

[The issuer is not subject to the requirements of Section 13(a) or 15(d) of the
Securities Exchange Act of 1934. We call your attention to the final paragraph
of Section 3(a) of our Master Agreement Among Underwriters and advise you that,
without our consent, Securities should not be sold to an account over which you
have investment discretion.] (insert if applicable)

You are hereby invited to participate as one of the several Underwriters in the
above-referenced Offering for (amount). Your participation as an Underwriter
shall be subject to the provisions of the Master Agreement Among Underwriters
between you and UBS Warburg LLC, as amended.

If you wish to accept this Invitation and thereby agree to its terms, the
Corporate Syndicate Department of UBS Warburg LLC : must receive a telegram,
telex or Graphic Scanning communication from you not later than _____________
M., New York City time, on ____________, ___, in substantially the following
form:

"We accept the Invitation dated _____________, ____, to participate as an
Underwriter in the Offering of Securities of (insert name of issuer). We confirm
that we agree to be bound by the Master Agreement Among Underwriters as it
relates to this Offering and that there are no exceptions to your Master
Underwriters' Questionnaire (or state exceptions)."

(Signature of firm)

UBS Warburg LLC

                                       15

<PAGE>

[Name of Co-Manager(s), if any]

By: UBS Warburg LLC

                                       16

<PAGE>

UBS Warburg LLC

FORM OF TERMS WIRE TO BE USED WITH UBS WARBURG LLC MASTER AGREEMENT AMONG
UNDERWRITERS

(The following form, adapted as appropriate for debt securities, convertible
securities, stock or units, will be used in connection with offerings to which
the UBS Warburg LLC Master Agreement Among Underwriters will apply. In certain
cases all or part of the following form will be combined with the form of
Invitation.)

(Date)

(Name and address of prospective Underwriter)

Attention:        Corporate Syndicate Department
                  Terms Wire

(Name of Issuer)

(Title of Securities) (principal amount or number of shares)

(Name of Guarantor, if any)

Your underwriting commitment shall be ____________________

<TABLE>
<S>                                           <C>
Coupon [dividend rate]                        (insert if applicable)
Initial offering price[s] (1)                 (or specify formula pricing is being used)
Yield to Maturity:
Conversion price and other terms:             (insert if applicable)
Expected Offering Date:
Expected Closing Date:
Delivery of Securities:
Type of Funds:
Gross spread:                                  (unless formula pricing is being used)
Management fee:                                (or maximum amount thereof)
Underwriting:                                  (unless formula pricing is being used)
Selling concession:                            (unless formula pricing is being used)
Reallowance:                                   (unless formula pricing is being used)
Other terms of the Offering or the Securities: (insert if applicable)
</TABLE>

                                       17

<PAGE>

NOTE:    Plus accrued interest/dividends from (insert date for fixed income
securities).

Unless a telex from you revoking your previous Acceptance of our Invitation with
respect to this offering is received by the UBS Warburg LLC Corporate Syndicate
Department, prior to New York City time on ___________, your Acceptance will
become final and our Master Agreement Among Underwriters will become effective
as to you with respect to this Offering.

UBS Warburg LLC

[Name of Co-Manager(s), if any]

By: UBS Warburg LLC

                                       18

<PAGE>

UBS Warburg LLC

MASTER UNDERWRITERS' QUESTIONNAIRE

Unless otherwise defined herein, capitalized terms used herein shall have the
meaning assigned thereto in the Master Agreement Among Underwriters between UBS
Warburg LLC and us (such agreement as amended or supplemented from time to time
being hereinafter referred to as the "Agreement"). Reference will be made to
this Master Underwriters' Questionnaire in the Terms Communication described in
Section 1 of the Agreement received by us in connection with the offerings of
securities in which UBS Warburg LLC is acting as manager of the several
underwriters. Our acceptance of any Terms Communication should respond to this
Master Underwriters' Questionnaire, and state that there are "no exceptions" or,
if there are exceptions, provide details thereof. We authorize you to furnish
such information and make such representations to appropriate authorities based
on the information provided by us pursuant to this Questionnaire.

In connection with the Offering, we advise you and the Company that, except as
indicated in our acceptance of the Terms Communication:

neither we nor any of our directors, officers or partners has, nor have we or
they had within the last three years, a "material" relationship (as the term
"material" is defined in Regulation C promulgated under the Securities Act) with
the Company, its parent, if any, any Seller or Guarantor;

neither we nor any of our officers, directors or partners, separately or as a
"group" (as that term is used in Section 13(d)(3) of the Exchange Act), owns of
record or beneficially (determined in accordance with Rule 13d-3 under the
Exchange Act) more than 5% of any class of voting securities of the Company, its
parent or any Seller or Guarantor or is affiliated (as that term is defined in
the Rules and Regulations under the Exchange Act) with any person who owns of
record or beneficially more than 5% of any such class of securities or has
knowledge that more than 5% of any such class is or is to be held subject to any
voting trust or similar arrangement;

other than as may be stated in the Agreement, the Terms Communication or the
Underwriting Agreement relating to the proposed offering or the UBS Warburg LLC
Master Dealer Agreement, we do not know of, or have any reason to believe that
there are, any arrangements (i) for any discounts or commissions to be allowed
or paid to underwriters or any other items that would be deemed by the NASD to
constitute underwriting compensation for purposes of Rule 2710 of the NASD's

                                       19

<PAGE>

Conduct Rules; (ii) for any discounts or commissions to be allowed or paid to
dealers or any cash, securities, contracts or other consideration to be received
by any dealer in connection with the sale of the Securities; (iii) for limiting
or restricting the sale of any securities of the Company or the Guarantor for
the period of distribution; (iv) for stabilizing the market for any securities
of the Company or the Guarantor; or (v) for withholding commissions or otherwise
holding each underwriter or dealer responsible for the distribution of his
participation;

neither we nor any of our directors, officers, partners or "persons associated
with" us (as defined in the By-laws of the NASD) within the last 12 months have
purchased (or intends within six months after the commencement of the offering
of the Securities to purchase) in private transactions any securities of the
Company or the Guarantor or any parent or subsidiary thereof or have had any
dealings with the Company or the Guarantor or any parent or controlling
stockholder thereof (other than relating to the proposed Underwriting
Agreement), as to which documents or information are required to be filed with
the NASD pursuant to its Conduct Rules;

no report or memorandum has been prepared by or for us for external use in
connection with the Offering, and if the Registration Statement is on Form S-1,
no engineering, management or similar report or memorandum relating to broad
aspects of the business, operations or products of the Company, the Guarantor or
any parent thereof has been prepared for or by you within the past twelve months
(except for reports solely comprised of recommendations to buy, sell or hold the
securities of the Company, the Guarantor or any parent thereof, unless such
recommendations have changed within the last six months)/1/

if the Securities are to be issued under an Indenture qualified under the Trust
Indenture Act of 1939:

we (if a corporation) do not have outstanding nor have we assumed or guaranteed
any securities issued otherwise than in our present corporate name and neither
the Trustee nor its parent is a holder of any of our securities;

neither we nor any of our directors, officers or partners is an "affiliate," as
defined in Rule 0-2 under the Trust Indenture Act of 1939, of the Trustee or its
parent, and neither the Trustee nor its parent, nor any of their directors or
executive officers is a director, officer, partner, employee, appointee or
representative of us as those terms are defined in said Act or in the relevant
instructions to the Trustee's Statement of Eligibility and Qualification on Form
T-1; and

___________

                                       20

<PAGE>

/1/      In the event of an exception to the type of materials referred to,
         three complies of each item of such material, together with a statement
         describing the actual or proposed use, the distribution thereof, and
         identifying the classes of recipients, the number of copies of such
         materials distributed to each such class and the period of distribution
         must be sent to UBS Warburg LLC, 299 Park Avenue, New York, New York
         10171-0026, Attention: Corporate Syndicate Department.

neither we nor any of our directors, executive officers, partners or parents,
separately or as a group, owns beneficially 1% or more of any class of voting
securities of the Trustee or its parent; and

if the issuer is a public utility, we are not a "holding company" or a
"subsidiary company" or an "affiliate" of a "holding company" or of a "public
utility company," each as defined in the Public Utility Holding Company Act of
1935.

                                       21

</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-99. (H) (3)
<SEQUENCE>5
<FILENAME>dex99h3.txt
<DESCRIPTION>FORM OF UNDERWRITING AGREEMENT
<TEXT>
<PAGE>

                                                                     Exhibit h.3


                     PIMCO New York Municipal Income Fund II



                            Auction Preferred Shares


                          Par Value $0.00001 Per Share


                             UNDERWRITING AGREEMENT



August 16, 2002

<PAGE>

                             UNDERWRITING AGREEMENT

                                                                 August 16, 2002



UBS Warburg LLC
Merrill Lynch, Pierce, Fenner & Smith Incorporated
A.G. Edwards & Sons, Inc.
Prudential Securities Incorporated
  as Managing Underwriters
299 Park Avenue
New York, New York  10171-0026

Ladies and Gentlemen:

          PIMCO New York Municipal Income Fund II, a voluntary association with
transferable shares organized and existing under and by virtue of the laws of
The Commonwealth of Massachusetts (commonly referred to as a Massachusetts
business trust) (the "Fund"), proposes to issue and sell to the underwriters
named in Schedule A annexed hereto (the "Underwriters") an aggregate of 1,800
preferred shares of beneficial interest of the Fund, par value $0.00001 per
share, designated Series A Auction Preferred Shares of the Fund and 1,800
preferred shares of beneficial interest of the Fund, par value $0.00001 per
share, designated Series B Auction Preferred Shares of the Fund, each with a
liquidation preference of $25,000 per share (the "APS").

          The Fund has filed with the Securities and Exchange Commission (the
"Commission"), in accordance with the provisions of the Securities Act of 1933,
as amended, and the rules and regulations thereunder (collectively called the
"Act"), and with the provisions of the Investment Company Act of 1940, as
amended, and the rules and regulations thereunder (collectively called the
"Investment Company Act"), a registration statement on Form N-2 (File Nos.
333-91740 and 811-21078), including a prospectus and a statement of additional
information, relating to the APS. The Fund has furnished to you, for use by the
Underwriters and by dealers, copies of one or more preliminary prospectuses
(including a preliminary statement of additional information) (each thereof,
including such preliminary statement of additional information, being herein
called a "Preliminary Prospectus") relating to the APS. Except where the context
otherwise requires, the registration statement, as amended when it becomes
effective (the "Effective Date"), including all documents filed as a part
thereof or incorporated by reference therein, and including any information
contained in a prospectus subsequently filed with the Commission pursuant to
Rule 497 under the Act and deemed to be part of the registration statement at
the time of effectiveness pursuant to Rule 430A under the Act is herein called
the Registration Statement, and the prospectus (including the statement of
additional information), in the form filed by the Fund with the Commission
pursuant to Rule 497 under the Act or, if no such filing is required, the form
of final prospectus (including the form of final statement of additional
information) included in the Registration Statement at the time it became
effective, is herein called the Prospectus. In addition, the Fund has filed a
Notification

<PAGE>

of Registration on Form N-8A (the "Notification") pursuant to Section 8 of the
Investment Company Act.

          PIMCO Funds Advisors LLC ("PIMCO Funds Advisors" or the "Investment
Manager") acts as the Fund's investment manager pursuant to an Investment
Management Agreement by and between the Fund and the Investment Manager, dated
as of June 28, 2002 (the "Investment Management Agreement"). Pacific Investment
Management Company LLC ("PIMCO," or the "Portfolio Manager") acts as the Fund's
portfolio manager pursuant to a Portfolio Management Agreement by and between
the Investment Manager and PIMCO, as accepted and agreed to by the Fund, dated
as of June 28, 2002. State Street Bank & Trust Co. acts as the custodian (the
"Custodian") of the Fund's cash and portfolio assets pursuant to a Custodian
Agreement, dated as of June 28, 2002 (the "Custodian Agreement"). PFPC Inc. acts
as the Fund's transfer agent, registrar, shareholder servicing agent and
dividend disbursing agent with respect to the common shares of the Fund (the
"Transfer Agent") pursuant to a Transfer Agency Services Agreement, dated as of
June 28, 2002 (the "Transfer Agency Agreement"). Deutsche Bank Trust Company
Americas will act as the Fund's auction agent (the "Auction Agent") for the APS
pursuant to an Auction Agency Agreement, dated as of August __, 2002 (the
"Auction Agency Agreement"). The Fund has entered into a Letter Agreement, dated
as of August __, 2002, with the Depository Trust Company (the "DTC Agreement").

          The Fund, the Investment Manager and the Underwriters agree as
follows:

1.   Sale and Purchase. Upon the basis of the warranties and representations and
     subject to the terms and conditions herein set forth, the Fund agrees to
     sell to the respective Underwriters and each of the Underwriters, severally
     and not jointly, agrees to purchase from the Fund the aggregate number of
     APS set forth opposite the name of such Underwriter in Schedule A attached
     hereto in each case at a purchase price per share of $______. The Fund is
     advised that the Underwriters intend (i) to make a public offering of their
     respective portions of the APS as soon after the Effective Date as is
     advisable and (ii) initially to offer the APS upon the terms set forth in
     the Prospectus. The Underwriters may from time to time increase or decrease
     the public offering price after the initial public offering to such extent
     as they may determine.

2.   Payment and Delivery. Payment of the purchase price for the APS shall be
     made by the Underwriters to the Fund by Federal Funds wire transfer,
     against delivery of the certificates for the APS to you through the
     facilities of the Depository Trust Company ("DTC") for the respective
     accounts of the Underwriters. Such payment and delivery shall be made at
     10:00 A.M., New York City time on the third business day following the date
     of this Underwriting Agreement (unless another date or time shall be agreed
     to by you and the Fund). The time at which such payment and delivery are
     actually made is hereinafter sometimes called the "Time of Purchase" or the
     "Closing Date." Certificates for the APS shall be delivered to you in
     definitive form in such names and in such denominations as you shall
     specify on the second business day preceding the Time of Purchase. For the
     purpose of expediting the checking of the certificates for the APS by you,
     the Fund agrees to make such certificates available to you for such purpose
     at least one full business day preceding the Time of Purchase.

<PAGE>

          A certificate in definitive form representing the APS registered in
     the name of Cede & Co., as nominee for DTC, shall be delivered by or on
     behalf of the Fund to DTC for the account of the Underwriters.

3.   Representations and Warranties of the Fund and the Investment Manager. Each
     of the Fund and the Investment Manager jointly and severally represents and
     warrants to each Underwriter as follows:

     (a)  On (A) the Effective Date and the date on which the Prospectus is
          first filed with the Commission pursuant to Rule 497(b) or (h) under
          the Act or a certification is first filed with the Commission pursuant
          to Rule 497(j) under the Act, as the case may be, (B) the date on
          which any post-effective amendment to the Registration Statement
          (except any post-effective amendment which is filed with the
          Commission after the later of (x) one year from the date of this
          Underwriting Agreement or (y) the date on which the distribution of
          the APS is completed) became or becomes effective or any amendment or
          supplement to the Prospectus was or is filed with the Commission and
          (C) the Closing Date, the Registration Statement, the Prospectus and
          any such amendment or supplement thereto and the Notification complied
          or will comply in all material respects with the requirements of the
          Act and the Investment Company Act, as the case may be. On the
          Effective Date and on the date that any post-effective amendment to
          the Registration Statement (except any post-effective amendment which
          is filed with the Commission after the later of (x) one year from the
          date of this Underwriting Agreement or (y) the date on which the
          distribution of the APS is completed) became or becomes effective,
          neither the Registration Statement nor any such amendment did or will
          contain any untrue statement of a material fact or omit to state a
          material fact required to be stated in it or necessary to make the
          statements in it not misleading. On the Effective Date, on the Closing
          Date, and, if applicable, on the date the Prospectus or any amendment
          or supplement to the Prospectus was or is filed with the Commission,
          the Prospectus did not or will not, as the case may be, contain any
          untrue statement of a material fact or omit to state a material fact
          required to be stated in it or necessary to make the statements in it,
          in light of the circumstances under which they were made, not
          misleading. The foregoing representations in this Section 3(a) do not
          apply to statements or omissions relating to the Underwriters made in
          reliance on and in conformity with information furnished in writing to
          the Fund by the Underwriters expressly for use in the Registration
          Statement, the Prospectus or any amendments or supplements thereto, as
          described in Section 9(f) hereof.

     (b)  The Fund has been duly formed and is validly existing as an
          unincorporated voluntary association under the laws of The
          Commonwealth of Massachusetts (commonly known as a "Massachusetts
          business trust"), with full power and authority to conduct all the
          activities conducted by it, to own or lease all assets owned or leased
          by it and to conduct its business as described in the Registration
          Statement and Prospectus, and the Fund is duly licensed and qualified
          to do business and in good standing in each jurisdiction in which its
          ownership or leasing of property or its conducting of business
          requires such qualification,

<PAGE>

     (c)  except where the failure to be so qualified or be in good standing
          would not have a material adverse effect on the Fund, and the Fund
          owns, possesses or has obtained and currently maintains all
          governmental licenses, permits, consents, orders, approvals and other
          authorizations, whether foreign or domestic, necessary to carry on its
          business as contemplated in the Prospectus. The Fund has no
          subsidiaries.

     (d)  The capitalization of the Fund is as set forth in the Registration
          Statement and the Prospectus. The common shares of beneficial interest
          of the Fund, par value $0.00001 per share (the "Common Shares"), and
          the APS conform in all material respects to the description of them in
          the Prospectus. All outstanding Common Shares have been duly
          authorized and are validly issued, fully paid and nonassessable
          (except as described in the Registration Statement). The APS to be
          issued and delivered to and paid for by the Underwriters in accordance
          with this Underwriting Agreement against payment therefor as provided
          by this Underwriting Agreement have been duly authorized and when
          issued and delivered to the Underwriters will have been validly issued
          and will be fully paid and nonassessable (except as described in the
          Registration Statement). No person is entitled to any preemptive or
          other similar rights in connection with the issuance of the APS.

     (e)  The Fund is duly registered with the Commission under the Investment
          Company Act as a non-diversified, closed-end management investment
          company, and, subject to the filing of any final amendment to the
          Registration Statement (a "Final Amendment"), if not already filed,
          all action under the Act and the Investment Company Act, as the case
          may be, necessary to make the public offering and consummate the sale
          of the APS as provided in this Underwriting Agreement has or will have
          been taken by the Fund.

     (f)  The Fund has, or at the relevant time had, full power and authority to
          enter into each of this Underwriting Agreement, the Investment
          Management Agreement, the Custodian Agreement, the Transfer Agency
          Agreement, the Auction Agency Agreement and the DTC Agreement
          (collectively, the "Fund Agreements") and to perform all of the terms
          and provisions hereof and thereof to be carried out by it and (i) each
          Fund Agreement has been duly and validly authorized, executed and
          delivered by or on behalf of the Fund, (ii) each Fund Agreement does
          not violate in any material respect any of the applicable provisions
          of the Investment Company Act or the Investment Advisers Act of 1940,
          as amended, and the rules and regulations thereunder (collectively
          called the "Advisers Act"), as the case may be, and (iii) assuming due
          authorization, execution and delivery by the other parties thereto,
          each Fund Agreement constitutes the legal, valid and binding
          obligation of the Fund enforceable in accordance with its terms, (A)
          subject, as to enforcement, to applicable bankruptcy, insolvency and
          similar laws affecting creditors' rights generally and to general
          equitable principles (regardless of whether enforcement is sought in a
          proceeding in equity or at law) and (B) except as rights to indemnity
          thereunder may be limited by federal or state securities laws.

<PAGE>

     (g)  None of (i) the execution and delivery by the Fund of the Fund
          Agreements, (ii) the issue and sale by the Fund of the APS as
          contemplated by this Underwriting Agreement and (iii) the performance
          by the Fund of its obligations under any of the Fund Agreements or
          consummation by the Fund of the other transactions contemplated by the
          Fund Agreements conflicts with or will conflict with, or results or
          will result in a breach of, the Agreement and Declaration of Trust of
          the Fund, as amended through the date hereof (the "Declaration of
          Trust"), and the Amended and Restated Bylaws of the Fund, adopted in
          connection with the issuance of the APS and as amended through the
          date hereof (the "Amended Bylaws"), or any agreement or instrument to
          which the Fund is a party or by which the Fund is bound, except where
          such violation does not have a material adverse effect on the
          condition (financial or other), business prospects, properties, net
          assets or results of operations of the Fund, or any law, rule or
          regulation, or order of any court, governmental instrumentality,
          securities exchange or association or arbitrator, whether foreign or
          domestic, applicable to the Fund, other than state securities or "blue
          sky" laws applicable in connection with the purchase and distribution
          of the APS by the Underwriters pursuant to this Underwriting
          Agreement.

     (h)  The Fund is not currently in breach of, or in default under, any
          written agreement or instrument to which it is a party or by which it
          or its property is bound or affected, except where such violation does
          not have a material adverse effect on the condition (financial or
          other), business prospects, properties, net assets or results of
          operations of the Fund.

     (i)  No person has any right to the registration of any securities of the
          Fund because of the filing of the Registration Statement.

     (j)  No consent, approval, authorization or order of any court or
          governmental agency or body or securities exchange or association,
          whether foreign or domestic, is required by the Fund for the
          consummation by the Fund of the transactions to be performed by the
          Fund or the performance by the Fund of all the terms and provisions to
          be performed by or on behalf of it in each case as contemplated in the
          Fund Agreements, except such as (i) have been obtained under the Act,
          the Investment Company Act or the Advisers Act, and (ii) may be
          required under state securities or "blue sky" laws, in connection with
          the purchase and distribution of the APS by the Underwriters pursuant
          to this Underwriting Agreement.

     (k)  To the knowledge of the Fund and the Investment Manager after due
          inquiry, based on representations from PricewaterhouseCoopers LLP,
          whose report appears in the Prospectus, PricewaterhouseCoopers LLP are
          independent public accountants with respect to the Fund as required by
          the Act and the Investment Company Act.

     (l)  The statement of assets and liabilities included in the Registration
          Statement and the Prospectus presents fairly in all material respects,
          in accordance with

<PAGE>

          generally accepted accounting principles in the United States applied
          on a consistent basis, the financial position of the Fund as of the
          date indicated.

     (m)  The Fund will maintain a system of internal accounting controls
          sufficient to provide reasonable assurances that (i) transactions are
          executed in accordance with management's general or specific
          authorization; (ii) transactions are recorded as necessary to permit
          preparation of financial statements in conformity with generally
          accepted accounting principles and to maintain accountability for
          assets; (iii) access to assets is permitted only in accordance with
          management's general or specific authorization; and (iv) the recorded
          accountability for assets is compared with existing assets through an
          asset reconciliation procedure or otherwise at reasonable intervals
          and appropriate action is taken with respect to any differences.

     (n)  Since the date as of which information is given in the Registration
          Statement and the Prospectus, except as otherwise stated therein, (i)
          there has been no material adverse change in the condition, financial
          or otherwise, business affairs or business of the Fund, whether or not
          arising in the ordinary course of business, (ii) there have been no
          transactions entered into by the Fund other than those in the ordinary
          course of its business and (iii) there has been no dividend or
          distribution of any kind declared, paid or made on any class of its
          capital shares.

     (o)  There is no action, suit or proceeding before or by any court,
          commission, regulatory body, administrative agency or other
          governmental agency or body, foreign or domestic, now pending, or, to
          the knowledge of the Fund, threatened against or affecting the Fund,
          which (i) might result in any material adverse change in the
          condition, financial or otherwise, business affairs or business
          prospects of the Fund or might materially adversely affect the
          properties or assets of the Fund or (ii) is of a character required to
          be described in the Registration Statement or the Prospectus; and
          there are no contracts, franchises or other documents that are of a
          character required to be described in, or that are required to be
          filed as exhibits to, the Registration Statement that have not been
          described or filed as required.

     (p)  The Fund intends to direct the investment of the proceeds of the
          offering of the APS in such a manner as to comply with the
          requirements of Subchapter M of the Internal Revenue Code of 1986, as
          amended (the "Code").

     (q)  The Common Shares are listed on the New York Stock Exchange.

     (r)  The APS have been, or prior to the Closing Date will be, assigned a
          rating of "Aaa" by Moody's Investors Service, Inc.

     (s)  No advertising, sales literature or other promotional materials
          (excluding road show slides or road show tapes) were authorized or
          prepared by or on behalf of the Fund, the Investment Manager or the
          Portfolio Manager or any representative thereof for use in connection
          with the public offering or sale of the APS

<PAGE>

          (collectively referred to as the "Sales Materials"); any road show
          slides or road show tapes complied and comply in all material respects
          with the applicable requirements of the Act and the rules and
          interpretations of the National Association of Securities Dealers,
          Inc.; and no broker kits, road show slides, road show tapes or sales
          materials authorized or prepared by the Fund or authorized or prepared
          on behalf of the Fund by the Investment Manager, the Portfolio Manager
          or any representative thereof for use in connection with the public
          offering or sale of the APS contained or contains any untrue statement
          of a material fact or omitted or omits to state any material fact
          required to be stated therein or necessary in order to make the
          statements therein not misleading.

4.   Representations and Warranties of the Investment Manager. The Investment
     Manager represents to each Underwriter and, in the case of paragraph (f)
     also to the Fund, as follows:

     (a)  The Investment Manager has been duly formed, is validly existing as a
          limited liability company under the laws of the State of Delaware with
          full power and authority to conduct all of the activities conducted by
          it, to own or lease all of the assets owned or leased by it and to
          conduct its business as described in the Registration Statement and
          Prospectus, and the Investment Manager is duly licensed and qualified
          to do business and in good standing in each jurisdiction in which it
          is required to be so qualified, except to the extent that failure to
          be so qualified or be in good standing would not have a material
          adverse effect on the Investment Manager's ability to provide services
          to the Fund; and the Investment Manager owns, possesses or has
          obtained and currently maintains all governmental licenses, permits,
          consents, orders, approvals and other authorizations, whether foreign
          or domestic, necessary to carry on its business as contemplated in the
          Registration Statement and the Prospectus.

     (b)  The Investment Manager is (i) duly registered as an investment adviser
          under the Advisers Act and (ii) not prohibited by the Advisers Act or
          the Investment Company Act from acting as the investment adviser for
          the Fund as contemplated by the Investment Management Agreement, the
          Registration Statement and the Prospectus.

     (c)  The Investment Manager has, or at the relevant time had, full power
          and authority to enter into each of this Underwriting Agreement, the
          Investment Management Agreement and the Portfolio Management Agreement
          (collectively, this Underwriting Agreement, the Investment Management
          Agreement and the Portfolio Management Agreement being referred to as
          the "Investment Manager Agreements") and to carry out all the terms
          and provisions hereof and thereof to be carried out by it; and each
          Investment Manager Agreement has been duly and validly authorized,
          executed and delivered by the Investment Manager; none of the
          Investment Manager Agreements violates in any material respect any of
          the applicable provisions of the Investment Company Act or the
          Advisers Act; and assuming due authorization, execution and delivery
          by the other parties thereto, each Investment Manager Agreement
          constitutes a legal, valid and binding

<PAGE>

          obligation of the Investment Manager, enforceable in accordance with
          its terms, (i) subject, as to enforcement, to applicable bankruptcy,
          insolvency and similar laws affecting creditors' rights generally and
          to general equitable principles (regardless of whether enforcement is
          sought in a proceeding in equity or at law) and (ii) except as rights
          to indemnity thereunder may be limited by federal or state securities
          laws.

     (d)  Neither (i) the execution and delivery by the Investment Manager of
          any Investment Manager Agreement nor (ii) the consummation by the
          Investment Manager of the transactions contemplated by, or the
          performance of its obligations under, any Investment Manager Agreement
          conflicts or will conflict with, or results or will result in a breach
          of, the limited liability company agreement or other organizational
          documents of the Investment Manager or any agreement or instrument to
          which the Investment Manager is a party or by which the Investment
          Manager is bound, or any law, rule or regulation, or order of any
          court, governmental instrumentality, securities exchange or
          association or arbitrator, whether foreign or domestic, applicable to
          the Investment Manager.

     (e)  No consent, approval, authorization or order of any court,
          governmental agency or body or securities exchange or association,
          whether foreign or domestic, is required for the consummation of the
          transactions contemplated in, or the performance by the Investment
          Manager of its obligations under, any Investment Manager Agreement, as
          the case may be, except such as (i) have been obtained under the Act,
          the Investment Company Act or the Advisers Act, and (ii) may be
          required under state securities or "blue sky" laws, in connection with
          the purchase and distribution of the APS by the Underwriters pursuant
          to this Underwriting Agreement.

     (f)  The description of the Investment Manager and its business, and the
          statements attributable to the Investment Manager, in the Registration
          Statement and the Prospectus comply with the requirements of the Act
          and the Investment Company Act and do not contain any untrue statement
          of a material fact or omit to state any material fact required to be
          stated therein or necessary in order to make the statements therein
          not misleading.

     (g)  There is no action, suit or proceeding before or by any court,
          commission, regulatory body, administrative agency or other
          governmental agency or body, foreign or domestic, now pending or, to
          the knowledge of the Investment Manager, threatened against or
          affecting the Investment Manager of a nature required to be disclosed
          in the Registration Statement or Prospectus or that might reasonably
          be expected to result in any material adverse change in the ability of
          the Investment Manager to fulfill its respective obligations under any
          Investment Manager Agreement.

     (h)  None of the Fund, the Investment Manager or the Portfolio Manager has
          made available any promotional materials intended for use only by
          qualified broker-

<PAGE>

          dealers and registered representatives thereof by means of an Internet
          web site or similar electronic means.

     (i)  The Portfolio Manager has been duly formed, is validly existing as a
          limited liability company under the laws of Delaware with full power
          and authority to conduct all of the activities conducted by it, to own
          or lease all of the assets owned or leased by it and to conduct its
          business as described in the Registration Statement and Prospectus,
          and the Portfolio Manager is duly licensed and qualified to do
          business and in good standing in each jurisdiction in which it is
          required to be so qualified, except to the extent that failure to be
          so qualified or be in good standing would not have a material adverse
          affect on the Portfolio Manager's ability to provide services to the
          Fund; and the Portfolio Manager owns, possesses or has obtained and
          currently maintains all governmental licenses, permits, consents,
          orders, approvals and other authorizations, whether foreign or
          domestic, necessary to carry on its business as contemplated in the
          Registration Statement and the Prospectus.

     (j)  The Portfolio Manager is (i) duly registered as an investment adviser
          under the Advisers Act and (ii) not prohibited by the Advisers Act or
          the Investment Company Act from acting as the investment sub-adviser
          for the Fund as contemplated by the Portfolio Management Agreement,
          the Registration Statement and the Prospectus.

     (k)  The Portfolio Manager has, or at the relevant time had, full power and
          authority to enter into each of this Underwriting Agreement and the
          Portfolio Management Agreement (collectively, this Underwriting
          Agreement and the Portfolio Management Agreement being referred to as
          the "Portfolio Manager Agreements") and to carry out all the terms and
          provisions hereof and thereof to be carried out by it; and each
          Portfolio Manager Agreement has been duly and validly authorized,
          executed and delivered by the Portfolio Manager; none of the Portfolio
          Manager Agreements violates in any material respect any of the
          applicable provisions of the Investment Company Act or the Advisers
          Act; and assuming due authorization, execution and delivery by the
          other parties thereto, each Portfolio Manager Agreement constitutes a
          legal, valid and binding obligation of the Portfolio Manager,
          enforceable in accordance with its terms, (i) subject, as to
          enforcement, to applicable bankruptcy, insolvency and similar laws
          affecting creditors' rights generally and to general equitable
          principles (regardless of whether enforcement is sought in a
          proceeding in equity or at law) and (ii) except as rights to indemnity
          thereunder may be limited by federal or state securities laws.

     (l)  Neither (i) the execution and delivery by the Portfolio Manager of any
          Portfolio Manager Agreement nor (ii) the consummation by the Portfolio
          Manager of the transactions contemplated by, or the performance of its
          obligations under, any Portfolio Manager Agreement conflicts or will
          conflict with, or results or will result in a breach of, the limited
          liability company agreement or other organizational documents of the
          Portfolio Manager or any agreement or

<PAGE>

          instrument to which the Portfolio Manager is a party or by which the
          Portfolio Manager is bound, or any law, rule or regulation, or order
          of any court, governmental instrumentality, securities exchange or
          association or arbitrator, whether foreign or domestic, applicable to
          the Portfolio Manager.

     (m)  No consent, approval, authorization or order of any court,
          governmental agency or body or securities exchange or association,
          whether foreign or domestic, is required for the consummation of the
          transactions contemplated in, or the performance by the Portfolio
          Manager of its obligations under, any Portfolio Manager Agreement, as
          the case may be, except such as (i) have been obtained under the Act,
          the Investment Company Act or the Advisers Act, and (ii) may be
          required under state securities or "blue sky" laws, in connection with
          the purchase and distribution of the APS by the Underwriters pursuant
          to this Underwriting Agreement.

     (n)  The description of the Portfolio Manager and its business, and the
          statements attributable to the Portfolio Manager, in the Registration
          Statement and the Prospectus comply with the requirements of the Act
          and the Investment Company Act and do not contain any untrue statement
          of a material fact or omit to state any material fact required to be
          stated therein or necessary in order to make the statements therein
          not misleading.

     (o)  There is no action, suit or proceeding before or by any court,
          commission, regulatory body, administrative agency or other
          governmental agency or body, foreign or domestic, now pending or, to
          the knowledge of the Portfolio Manager, threatened against or
          affecting the Portfolio Manager of a nature required to be disclosed
          in the Registration Statement or Prospectus or that might reasonably
          be expected to result in any material adverse change in the ability of
          the Portfolio Manager to fulfill its respective obligations under any
          Portfolio Manager Agreement.

5.   Agreements of the Parties.

     (a)  If the registration statement relating to the APS has not yet become
          effective, the Fund will promptly file any Final Amendment, if not
          previously filed, with the Commission, and will use its best efforts
          to cause such registration statement to become effective and, as soon
          as the Fund is advised, will advise UBS Warburg LLC (the "Managing
          Representative") when the Registration Statement or any amendment
          thereto has become effective. If the Registration Statement has become
          effective and the Prospectus contained therein omits certain
          information at the time of effectiveness pursuant to Rule 430A under
          the Act, the Fund will file a 430A prospectus pursuant to Rule 497(h)
          under the Act as promptly as practicable, but no later than the second
          business day following the earlier of the date of the determination of
          the offering price of the APS or the date the Prospectus is first used
          after the Effective Date. If the Registration Statement has become
          effective and the Prospectus contained therein does not so omit such
          information, the Fund will file a prospectus pursuant to Rule 497(b)
          or a

<PAGE>

          certification pursuant to Rule 497(j) under the Act as promptly as
          practicable, but no later than the fifth business day following the
          date of the later of the Effective Date or the commencement of the
          public offering of the APS after the Effective Date. In either case,
          the Fund will provide you satisfactory evidence of the filing. The
          Fund will not file with the Commission any Prospectus or any other
          amendment (except any post-effective amendment which is filed with the
          Commission after the later of (x) one year from the date of this
          Underwriting Agreement or (y) the date on which distribution of the
          APS is completed) or supplement to the Registration Statement or the
          Prospectus unless a copy has first been submitted to the Managing
          Representative a reasonable time before its filing and the Managing
          Representative has not objected to it in writing within a reasonable
          time after receiving the copy.

     (b)  For the period of three years from the date hereof, the Fund will
          advise the Managing Representative promptly of (1) the issuance by the
          Commission of any order in respect of the Fund, the Investment Manager
          or the Portfolio Manager which relates to the Fund, or which relates
          to any material arrangements or proposed material arrangements
          involving the Fund, the Investment Manager or the Portfolio Manager,
          (2) the initiation or threatening of any proceedings for, or receipt
          by the Fund of any notice with respect to, any suspension of the
          qualification of the APS for sale in any jurisdiction or the issuance
          of any order by the Commission suspending the effectiveness of the
          Registration Statement, (3) receipt by the Fund, or any representative
          or attorney of the Fund, of any other communication from the
          Commission relating in any material way to the Fund, the Registration
          Statement, the Notification, any Preliminary Prospectus, the
          Prospectus or to the transactions contemplated by this Underwriting
          Agreement and (4) the issuance by any court, regulatory body,
          administrative agency or other governmental agency or body, whether
          foreign or domestic, of any order, ruling or decree, or the threat to
          initiate any proceedings with respect thereto, regarding the Fund,
          which relates in any material way to the Fund or any material
          arrangements or proposed material arrangements involving the Fund. The
          Fund will make every reasonable effort to prevent the issuance of any
          order suspending the effectiveness of the Registration Statement and,
          if any such order is issued, to obtain its lifting as soon as
          possible.

     (c)  If not delivered prior to the date of this Underwriting Agreement, the
          Fund will deliver to the Managing Representative, without charge, a
          signed copy of the Registration Statement and the Notification and of
          any amendments (except any post-effective amendment which is filed
          with the Commission after the later of (x) one year from the date of
          this Underwriting Agreement or (y) the date on which the distribution
          of the APS is completed) to either the Registration Statement or the
          Notification (including all exhibits filed with any such document) and
          as many conformed copies of the Registration Statement and any
          amendments thereto (except any post-effective amendment which is filed
          with the Commission after the later of (x) one year from the date of
          this Underwriting Agreement or (y) the date on which the distribution
          of the APS is completed) (excluding exhibits) as the Managing
          Representative may reasonably request.

<PAGE>

     (d)  During such period as a prospectus is required by law to be delivered
          by an underwriter or a dealer, the Fund will deliver, without charge,
          to you, the Underwriters and any dealers, at such office or offices as
          you may designate, as many copies of the Prospectus as you may
          reasonably request, and, if any event occurs during such period as a
          result of which it is necessary to amend or supplement the Prospectus,
          in order to make the statements therein, in light of the circumstances
          under which they were made, not misleading in any material respect, or
          if during such period it is necessary to amend or supplement the
          Prospectus to comply with the Act or the Investment Company Act, the
          Fund promptly will prepare, submit to the Managing Representative,
          file with the Commission and deliver, without charge, to the
          Underwriters and to dealers (whose names and addresses the Managing
          Representative will furnish to the Fund) to whom APS may have been
          sold by the Underwriters, and to other dealers on request, amendments
          or supplements to the Prospectus so that the statements in such
          Prospectus, as so amended or supplemented, will not, in light of the
          circumstances under which they were made, be misleading in any
          material respect and will comply with the Act and the Investment
          Company Act; provided that if the amendment or supplement is required
          exclusively as a result of a misstatement in or omission from the
          information provided to the Fund in writing by the Underwriters
          expressly for use in the Prospectus, the Fund may deliver such
          amendment or supplement to the Underwriters and dealers at a
          reasonable charge not to exceed the actual cost thereof to the Fund.
          Delivery by the Underwriters of any such amendments or supplements to
          the Prospectus will not constitute a waiver of any of the conditions
          in Section 6 hereof.

     (e)  The Fund will make generally available to holders of the Fund's
          securities, as soon as practicable but in no event later than the last
          day of the 18th full calendar month following the calendar quarter in
          which the Effective Date falls, an earnings statement, if applicable,
          satisfying the provisions of the last paragraph of Section 11(a) of
          the Act and, at the option of the Fund, Rule 158 under the Act.

     (f)  The Fund will pay or cause to be paid the following: (i) the fees,
          disbursements and expenses of the Fund's counsel and accountants in
          connection with the registration of the APS and all other expenses in
          connection with the preparation, printing and filing of the
          Registration Statement, any Preliminary Prospectus and the Prospectus
          and amendments and supplements thereto and the mailing and delivering
          of copies thereof to the Underwriters and dealers; (ii) the cost of
          printing or reproducing this Underwriting Agreement and any other
          documents in connection with the offering, purchase, sale and delivery
          of the APS (including advertising expenses of the Underwriters, if
          any); (iii) the cost of preparing share certificates; (iv) the
          expenses (including, but not limited to, travel, hotels and other
          accommodations) incurred by the Fund's directors, officers, employees
          and other personnel in connection with meetings held with registered
          brokers in connection with the offering of the APS, the preparing to
          market and the marketing of the APS; (v) any fees charged by
          securities rating services for rating the APS; (vi) the fees and
          expenses of the DTC and its nominee, the Custodian and the Auction
          Agent; and (vii) all other costs and expenses incident to the

<PAGE>

          performance of its obligations hereunder which are not otherwise
          specifically provided for. It is understood, however, that, except as
          provided in this Section 5 and Section 7 hereof, the Underwriters will
          pay all of their own costs and expenses, including the fees of their
          counsel and stock transfer taxes, if any, on resale of any of the APS
          by them, except any advertising expenses connected with any offers
          they may make.

     (g)  If the transactions contemplated by this Underwriting Agreement are
          not consummated, except as otherwise provided herein, no party will be
          under any liability to any other party, except that (i) if this
          Underwriting Agreement is terminated by (A) the Fund or the Investment
          Manager pursuant to any of the provisions hereof or (B) by you or the
          Underwriters because of any inability, failure or refusal on the part
          of the Fund or the Investment Manager to comply with any material
          terms or because any of the conditions in Section 6 are not satisfied,
          the Investment Manager or an affiliate and the Fund, jointly and
          severally, will reimburse the Underwriters for all out-of-pocket
          expenses (including the reasonable fees, disbursements and other
          charges of their counsel) reasonably incurred by them in connection
          with the proposed purchase and sale of the APS and (ii) no Underwriter
          who has failed or refused to purchase the APS agreed to be purchased
          by it under this Underwriting Agreement, in breach of its obligations
          pursuant to this Underwriting Agreement, will be relieved of liability
          to the Fund, the Investment Manager and the other Underwriters for
          damages occasioned by its default.

     (h)  Without the prior written consent of the Managing Representative, the
          Fund will not offer, sell or register with the Commission, or announce
          an offering of, any equity securities of the Fund, within 180 days
          after the Effective Date, except for the APS as described in the
          Prospectus and any issuance of Common Shares pursuant to the dividend
          reinvestment plan established by the Fund.

     (i)  The Fund will direct the investment of the net proceeds of the
          offering of the APS in such a manner as to comply with the investment
          objective and policies of the Fund as described in the Prospectus.

     (j)  No later than the Closing Date, the Underwriters will provide, and
          will cause any selling group member to whom they have sold APS to
          provide, the Auction Agent with a list of the record names of the
          persons to whom they have sold APS, the number of APS sold to each
          such person, and the number of APS they are holding as of the Closing
          Date; provided that in lieu of thereof, an Underwriter may provide the
          Auction Agent with a list indicating itself as the sole holder of all
          the APS sold by such Underwriter.

6.   Conditions of the Underwriters' Obligations. The obligations of the
     Underwriters to purchase the APS are subject to the accuracy on the date of
     this Underwriting Agreement, and on the Closing Date, of the
     representations of the Fund and the Investment Manager in this Underwriting
     Agreement, to the accuracy and completeness of all material statements made
     by the Fund and the Investment Manager or any of their respective

<PAGE>

     officers in any certificate delivered to the Managing Representative or its
     counsel pursuant to this Underwriting Agreement, to the performance by the
     Fund and the Investment Manager of their respective obligations under this
     Underwriting Agreement and to each of the following additional conditions:

     (a)  The Registration Statement must have become effective by 5:30 p.m.,
          New York City time, on the date of this Underwriting Agreement or such
          later date and time as the Managing Representative consents to in
          writing. The Prospectus must have been filed in accordance with Rule
          497(b) or (h) or a certificate must have been filed in accordance with
          Rule 497(j), as the case may be, under the Act.

     (b)  No order suspending the effectiveness of the Registration Statement
          may be in effect and no proceedings for such purpose may be pending
          before or, to the knowledge of counsel to the Underwriters, threatened
          by the Commission, and any requests for additional information on the
          part of the Commission (to be included in the Registration Statement
          or the Prospectus or otherwise) must be complied with or waived to the
          reasonable satisfaction of the Managing Representative.

     (c)  Since the dates as of which information is given in the Registration
          Statement and the Prospectus, (i) there must not have been any
          material change in the Common Shares, the APS or the liabilities of
          the Fund except as set forth in or contemplated by the Prospectus;
          (ii) there must not have been any material adverse change in the
          general affairs, prospects, management, business, financial condition
          or results of operations of the Fund, the Investment Manager or the
          Portfolio Manager whether or not arising from transactions in the
          ordinary course of business as set forth in or contemplated by the
          Prospectus which in the opinion of the Managing Representative would
          materially adversely affect the market for the APS; (iii) the Fund
          must not have sustained any material loss or interference with its
          business from any court or from legislative or other governmental
          action, order or decree, whether foreign or domestic, or from any
          other occurrence not described in the Registration Statement and
          Prospectus; and (iv) there must not have occurred any event that makes
          untrue or incorrect in any material respect any statement or
          information contained in the Registration Statement or Prospectus or
          that is not reflected in the Registration Statement or Prospectus but
          should be reflected therein in order to make the statements or
          information therein (in the case of the Prospectus, in light of the
          circumstances in which they were made) not misleading in any material
          respect.

     (d)  The Managing Representative must have received on the Closing Date a
          certificate, dated such date, of the President, a Vice President or
          Managing Director and the chief financial or accounting officer of
          each of the Fund and the Investment Manager certifying that (i) the
          signers have carefully examined the Registration Statement, the
          Prospectus, and this Underwriting Agreement, (ii) the representations
          of the Fund (with respect to the certificates from such Fund officers)
          and the representations of the Investment Manager (with respect to the
          certificates from such officers of the Investment Manager) in this
          Underwriting

<PAGE>

          Agreement are accurate on and as of the date of the certificate, (iii)
          there has not been any material adverse change in the general affairs,
          prospects, management, business, financial condition or results of
          operations of the Fund (with respect to the certificates from such
          Fund officers) or the Investment Manager (with respect to the
          certificates from such officers of the Investment Manager), which
          change would materially and adversely affect the ability of the Fund
          or the Investment Manager, as the case may be, to fulfill its
          obligations under this Underwriting Agreement or the Investment
          Management Agreement, whether or not arising from transactions in the
          ordinary course of business, (iv) with respect to the Fund only, to
          the knowledge of such officers after reasonable investigation, no
          order suspending the effectiveness of the Registration Statement,
          prohibiting the sale of any of the APS or otherwise having a material
          adverse effect on the Fund has been issued and no proceedings for any
          such purpose are pending before or threatened by the Commission or any
          other regulatory body, whether foreign or domestic, (v) to the
          knowledge of the officers of the Investment Manager, after reasonable
          investigation, no order having a material adverse effect on the
          ability of the Investment Manager to fulfill its obligations under
          this Underwriting Agreement or the Investment Management Agreement, as
          the case may be, has been issued and no proceedings for any such
          purpose are pending before or threatened by the Commission or any
          other regulatory body, whether foreign or domestic, and (vi) each of
          the Fund (with respect to the certificates from such Fund officers)
          and the Investment Manager (with respect to the certificates from such
          officers of the Investment Manager) has performed all of its
          respective agreements that this Underwriting Agreement requires it to
          perform by the Closing Date (to the extent not waived in writing by
          the Managing Representative).

     (e)  You must have received on the Closing Date the opinions, dated the
          Closing Date, substantially in the form of Schedules B, C, D and E to
          this Underwriting Agreement from the counsel identified in each such
          Schedule, or in such other form as is acceptable to counsel for the
          Underwriters.

     (f)  You must have received on the Closing Date from Skadden, Arps, Slate,
          Meagher & Flom (Illinois) an opinion, dated the Closing Date, with
          respect to the Fund, the APS, the Registration Statement and the
          Prospectus, this Underwriting Agreement and the form and sufficiency
          of all proceedings taken in connection with the sale and delivery of
          the APS. Such opinion and proceedings shall fulfill the requirements
          of this Section 6(f) only if such opinion and proceedings are
          satisfactory in all respects to the Managing Representative. The Fund,
          the Investment Manager and the Portfolio Manager must have furnished
          to such counsel such documents as counsel may reasonably request for
          the purpose of enabling them to render such opinion.

     (g)  The Managing Representative must have received on the date this
          Underwriting Agreement is signed and delivered by you a signed letter,
          dated such date, substantially in the form of Schedule F to this
          Underwriting Agreement from the firm of accountants designated in such
          Schedule. The Managing Representative

<PAGE>

          also must have received on the Closing Date a signed letter from such
          accountants, dated as of the Closing Date, confirming on the basis of
          a review in accordance with the procedures set forth in their earlier
          letter that nothing has come to their attention during the period from
          a date not more than five business days before the date of this
          Underwriting Agreement, specified in the letter, to a date not more
          than five business days before the Closing Date, that would require
          any change in their letter referred to in the foregoing sentence.

     (h)  The APS shall have been accorded a rating of "Aaa" by Moody's
          Investors Service, Inc., and a letter to such effect, dated on or
          before the Closing Date, shall have been delivered to the Managing
          Representative.

     (i)  As of the Closing Date, and assuming the receipt of the net proceeds
          from the sale of the APS, the 1940 Act APS Asset Coverage and the APS
          Basic Maintenance Amount (each as defined in the Prospectus) each will
          be met.

          All opinions, letters, evidence and certificates mentioned above or
     elsewhere in this Underwriting Agreement will comply only if they are in
     form and scope reasonably satisfactory to counsel for the Underwriters,
     provided that any such documents, forms of which are annexed hereto, shall
     be deemed satisfactory to such counsel if substantially in such form.

7.   Termination. This Underwriting Agreement may be terminated by the Managing
     Representative by notifying the Fund at any time:

     (a)  before the later of the effectiveness of the Registration Statement
          and the time when any of the APS are first generally offered pursuant
          to this Underwriting Agreement by the Managing Representative to
          dealers by letter or telegram;

     (b)  at or before the Closing Date if, in the sole judgment of the Managing
          Representative, payment for and delivery of any APS is rendered
          impracticable or inadvisable because (i) trading in the APS or the
          Common Shares of the Fund is suspended by the Commission or the
          principal exchange that lists the Common Shares, (ii) trading in
          securities generally on the New York Stock Exchange or the Nasdaq
          Stock Market shall have been suspended or limited or minimum or
          maximum prices shall have been generally established on such exchange
          or over-the-counter market, (iii) additional material governmental
          restrictions, not in force on the date of this Underwriting Agreement,
          have been imposed upon trading in securities or trading has been
          suspended on any U.S. securities exchange, (iv) a general banking
          moratorium has been established by U.S. federal or New York
          authorities or (v) any material adverse change in the financial or
          securities markets in the United States or in political, financial or
          economic conditions in the United States or any outbreak or material
          escalation of hostilities or declaration by the United States of a
          national emergency or war or other calamity or crisis shall have
          occurred the effect of any of which is such as to make it, in the sole
          judgment of the Managing Representative, impracticable or inadvisable
          to

<PAGE>

          market the APS on the terms and in the manner contemplated by the
          Prospectus; or

     (c)  at or before the Closing Date, if any of the conditions specified in
          Section 6 have not been fulfilled when and as required by this
          Underwriting Agreement.

8.   Substitution of Underwriters. If one or more of the Underwriters fails
     (other than for a reason sufficient to justify the termination of this
     Underwriting Agreement) to purchase on the Closing Date the APS agreed to
     be purchased on the Closing Date by such Underwriter or Underwriters, the
     Managing Representative may find one or more substitute underwriters to
     purchase such APS or make such other arrangements as the Managing
     Representative deems advisable, or one or more of the remaining
     Underwriters may agree to purchase such APS in such proportions as may be
     approved by the Managing Representative, in each case upon the terms set
     forth in this Underwriting Agreement. If no such arrangements have been
     made within 36 hours after the Closing Date, and

     (a)  the number of APS to be purchased by the defaulting Underwriters on
          the Closing Date does not exceed 10% of the APS that the Underwriters
          are obligated to purchase on such Closing Date, each of the
          nondefaulting Underwriters will be obligated to purchase such APS on
          the terms set forth in this Underwriting Agreement in proportion to
          their respective obligations under this Underwriting Agreement, or

     (b)  the number of APS to be purchased by the defaulting Underwriters on
          the Closing Date exceeds 10% of the APS to be purchased by all the
          Underwriters on the Closing Date, the Fund will be entitled to an
          additional period of 24 hours within which to find one or more
          substitute underwriters reasonably satisfactory to the Managing
          Representative to purchase such APS on the terms set forth in this
          Underwriting Agreement.

          Upon the occurrence of the circumstances described in the foregoing
     paragraph (b), either the Managing Representative or the Fund will have the
     right to postpone the Closing Date for not more than five business days in
     order that necessary changes and arrangements (including any necessary
     amendments or supplements to the Registration Statement or the Prospectus)
     may be effected by the Managing Representative and the Fund. If the number
     of APS to be purchased on the Closing Date by such defaulting Underwriter
     or Underwriters exceeds 10% of the APS that the Underwriters are obligated
     to purchase on the Closing Date, and none of the nondefaulting Underwriters
     or the Fund makes arrangements pursuant to this Section within the period
     stated for the purchase of the APS that the defaulting Underwriters agreed
     to purchase, this Underwriting Agreement will terminate without liability
     on the part of any nondefaulting Underwriter, the Fund, the Investment
     Manager or the Portfolio Manager, except as provided in Sections 5(g) and 9
     hereof. Any action taken under this Section will not affect the liability
     of any defaulting Underwriter to the Fund or to the nondefaulting
     Underwriters arising out of such default. A substitute underwriter will
     become an Underwriter for all purposes of this Underwriting Agreement.

<PAGE>

9.   Indemnity and Contribution.

     (a)  Each of the Fund and the Investment Manager, jointly and severally,
          agrees to indemnify, defend and hold harmless each Underwriter, its
          partners, directors and officers, and any person who controls any
          Underwriter within the meaning of Section 15 of the Act or Section 20
          of the Exchange Act, and the successors and assigns of all of the
          foregoing persons from and against any loss, damage, expense,
          liability or claim (including the reasonable cost of investigation)
          which, jointly or severally, any such Underwriter or any such person
          may incur under the Act, the Exchange Act, the Investment Company Act,
          the Advisers Act, the common law or otherwise, insofar as such loss,
          damage, expense, liability or claim arises out of or is based upon any
          untrue statement or alleged untrue statement of a material fact
          contained in the Registration Statement (or in the Registration
          Statement as amended by any post-effective amendment thereof by the
          Fund) or in a Prospectus (the term "Prospectus" for the purpose of
          this Section 9 being deemed to include any Preliminary Prospectus, any
          Sales Materials, the Prospectus and the Prospectus as amended or
          supplemented by the Fund), or arises out of or is based upon any
          omission or alleged omission to state a material fact required to be
          stated in either such Registration Statement or Prospectus or
          necessary to make the statements made therein (with respect to the
          Prospectus, in light of the circumstances under which they were made)
          not misleading, except insofar as any such loss, damage, expense,
          liability or claim arises out of or is based upon any untrue statement
          or alleged untrue statement of a material fact contained in and in
          conformity with information furnished in writing by or on behalf of
          any Underwriter to the Fund, the Investment Manager or the Portfolio
          Manager expressly for use with reference to any Underwriter in such
          Registration Statement or such Prospectus or arises out of or is based
          upon any omission or alleged omission to state a material fact in
          connection with such information required to be stated in such
          Registration Statement or such Prospectus or necessary to make such
          information (with respect to the Prospectus, in light of the
          circumstances under which they were made) not misleading, provided,
          however, that the indemnity agreement contained in this subsection (a)
          with respect to any Preliminary Prospectus or amended Preliminary
          Prospectus shall not inure to the benefit of any Underwriter (or to
          the benefit of any person controlling such Underwriter) from whom the
          person asserting any such loss, damage, expense, liability or claim
          purchased the APS which is the subject thereof if the Prospectus
          corrected any such alleged untrue statement or omission and if such
          Underwriter failed to send or give a copy of the Prospectus to such
          person at or prior to the written confirmation of the sale of such APS
          to such person, unless the failure is the result of noncompliance by
          the Fund with Section 5(d) hereof.

               If any action, suit or proceeding (together, a "Proceeding") is
          brought against an Underwriter or any such person in respect of which
          indemnity may be sought against the Fund or the Investment Manager
          pursuant to the foregoing paragraph, such Underwriter or such person
          shall promptly notify the Fund and the Investment Manager in writing
          of the institution of such Proceeding and the

<PAGE>

          Fund or the Investment Manager shall assume the defense of such
          Proceeding, including the employment of counsel reasonably
          satisfactory to such indemnified party and payment of all fees and
          expenses; provided, however, that the omission to so notify the Fund
          or the Investment Manager shall not relieve the Fund or the Investment
          Manager from any liability which the Fund or the Investment Manager
          may have to any Underwriter or any such person or otherwise. Such
          Underwriter or such person shall have the right to employ its or their
          own counsel in any such case, but the reasonable fees and expenses of
          such counsel shall be at the expense of such Underwriter or of such
          person unless the employment of such counsel shall have been
          authorized in writing by the Fund or the Investment Manager, as the
          case may be, in connection with the defense of such Proceeding or the
          Fund or the Investment Manager shall not have, within a reasonable
          period of time in light of the circumstances, employed counsel to have
          charge of the defense of such Proceeding or such indemnified party or
          parties shall have reasonably concluded that there may be defenses
          available to it or them which are different from, additional to or in
          conflict with those available to the Fund or the Investment Manager
          (in which case neither the Fund nor the Investment Manager shall have
          the right to direct the defense of such Proceeding on behalf of the
          indemnified party or parties, but the Fund or the Investment Manager,
          as the case may be, may employ counsel and participate in the defense
          thereof at the expense of the Fund or the Investment Manager, as the
          case may be), in any of which events such reasonable fees and expenses
          shall be borne by the Fund or the Investment Manager and paid as
          incurred (it being understood, however, that the Fund or the
          Investment Manager shall not be liable for the expenses of more than
          one separate counsel (in addition to any local counsel) in any one
          Proceeding or series of related Proceedings in the same jurisdiction
          representing the indemnified parties who are parties to such
          Proceeding). Neither the Fund nor the Investment Manager shall be
          liable for any settlement of any Proceeding effected without its
          written consent but if settled with the written consent of the Fund or
          the Investment Manager, the Fund or the Investment Manager, as the
          case may be, agrees to indemnify and hold harmless any Underwriter and
          any such person from and against any loss or liability by reason of
          such settlement. Notwithstanding the foregoing sentence, if at any
          time an indemnified party shall have requested an indemnifying party
          to reimburse the indemnified party for reasonable fees and expenses of
          counsel as contemplated by the second sentence of this paragraph, then
          the indemnifying party agrees that it shall be liable for any
          settlement of any Proceeding effected without its written consent if
          (i) such settlement is entered into more than 60 business days after
          receipt by such indemnifying party of the aforesaid request, (ii) such
          indemnifying party shall not have reimbursed the indemnified party in
          accordance with such request prior to the date of such settlement and
          (iii) such indemnified party shall have given the indemnifying party
          at least 30 days' prior notice of its intention to settle. No
          indemnifying party shall, without the prior written consent of the
          indemnified party, effect any settlement of any pending or threatened
          Proceeding in respect of which any indemnified party is or could have
          been a party and indemnity could have been sought hereunder by such
          indemnified party, unless such settlement includes an

<PAGE>

          unconditional release of such indemnified party from all liability on
          claims that are the subject matter of such Proceeding and does not
          include an admission of fault, culpability or a failure to act, by or
          on behalf of such indemnified party.

     (b)  Each Underwriter severally agrees to indemnify, defend and hold
          harmless the Fund and the Investment Manager, and each of their
          respective shareholders, partners, managers, members, trustees,
          directors and officers, and any person who controls the Fund or the
          Investment Manager within the meaning of Section 15 of the Act or
          Section 20 of the Exchange Act, and the successors and assigns of all
          of the foregoing persons from and against any loss, damage, expense,
          liability or claim (including the reasonable cost of investigation)
          which, jointly or severally, the Fund or the Investment Manager or any
          such person may incur under the Act, the Exchange Act, the Investment
          Company Act, the Advisers Act, the common law or otherwise, insofar as
          such loss, damage, expense, liability or claim arises out of or is
          based upon any untrue statement or alleged untrue statement of a
          material fact contained in and in conformity with information
          furnished in writing by or on behalf of such Underwriter to the Fund
          or the Investment Manager expressly for use with reference to such
          Underwriter in the Registration Statement (or in the Registration
          Statement as amended by any post-effective amendment thereof by the
          Fund) or in a Prospectus, or arises out of or is based upon any
          omission or alleged omission to state a material fact in connection
          with such information required to be stated in such Registration
          Statement or such Prospectus or necessary to make such information not
          misleading (with respect to the Prospectus, in light of the
          circumstances under which they were made).

               If any Proceeding is brought against the Fund, the Investment
          Manager or any such person in respect of which indemnity may be sought
          against any Underwriter pursuant to the foregoing paragraph, the Fund,
          the Investment Manager or such person shall promptly notify such
          Underwriter in writing of the institution of such Proceeding and such
          Underwriter shall assume the defense of such Proceeding, including the
          employment of counsel reasonably satisfactory to such indemnified
          party and payment of all fees and expenses; provided, however, that
          the omission to so notify such Underwriter shall not relieve such
          Underwriter from any liability which such Underwriter may have to the
          Fund, the Investment Manager or any such person or otherwise. The
          Fund, the Investment Manager or such person shall have the right to
          employ its or their own counsel in any such case, but the fees and
          expenses of such counsel shall be at the expense of the Fund, the
          Investment Manager or such person, as the case may be, unless the
          employment of such counsel shall have been authorized in writing by
          such Underwriter in connection with the defense of such Proceeding or
          such Underwriter shall not have, within a reasonable period of time in
          light of the circumstances, employed counsel to have charge of the
          defense of such Proceeding or such indemnified party or parties shall
          have reasonably concluded that there may be defenses available to it
          or them which are different from or additional to or in conflict with
          those available to such Underwriter (in which case such Underwriter
          shall not have the right to direct the defense of such Proceeding on
          behalf of the indemnified party or parties, but such Underwriter may
          employ

<PAGE>

          counsel and participate in the defense thereof at the expense of such
          Underwriter), in any of which events such fees and expenses shall be
          borne by such Underwriter and paid as incurred (it being understood,
          however, that such Underwriter shall not be liable for the expenses of
          more than one separate counsel (in addition to any local counsel) in
          any one Proceeding or series of related Proceedings in the same
          jurisdiction representing the indemnified parties who are parties to
          such Proceeding). No Underwriter shall be liable for any settlement of
          any such Proceeding effected without the written consent of such
          Underwriter but if settled with the written consent of such
          Underwriter, such Underwriter agrees to indemnify and hold harmless
          the Fund, the Investment Manager and any such person from and against
          any loss or liability by reason of such settlement. Notwithstanding
          the foregoing sentence, if at any time an indemnified party shall have
          requested an indemnifying party to reimburse the indemnified party for
          fees and expenses of counsel as contemplated by the second sentence of
          this paragraph, then the indemnifying party agrees that it shall be
          liable for any settlement of any Proceeding effected without its
          written consent if (i) such settlement is entered into more than 60
          business days after receipt by such indemnifying party of the
          aforesaid request, (ii) such indemnifying party shall not have
          reimbursed the indemnified party in accordance with such request prior
          to the date of such settlement and (iii) such indemnified party shall
          have given the indemnifying party at least 30 days' prior notice of
          its intention to settle. No indemnifying party shall, without the
          prior written consent of the indemnified party, effect any settlement
          of any pending or threatened Proceeding in respect of which any
          indemnified party is or could have been a party and indemnity could
          have been sought hereunder by such indemnified party, unless such
          settlement includes an unconditional release of such indemnified party
          from all liability on claims that are the subject matter of such
          Proceeding and does not include an admission of fault, culpability or
          a failure to act, by or on behalf of such indemnified party.

     (c)  If the indemnification provided for in this Section 9 is unavailable
          to an indemnified party under subsections (a) and (b) of this Section
          9 in respect of any losses, damages, expenses, liabilities or claims
          referred to therein, then each applicable indemnifying party, in lieu
          of indemnifying such indemnified party, shall contribute to the amount
          paid or payable by such indemnified party as a result of such losses,
          damages, expenses, liabilities or claims (i) in such proportion as is
          appropriate to reflect the relative benefits received by the Fund and
          the Investment Manager on the one hand and the Underwriters on the
          other hand from the offering of the APS or (ii) if the allocation
          provided by clause (i) above is not permitted by applicable law, in
          such proportion as is appropriate to reflect not only the relative
          benefits referred to in clause (i) above but also the relative fault
          of the Fund and the Investment Manager on the one hand and of the
          Underwriters on the other in connection with the statements or
          omissions which resulted in such losses, damages, expenses,
          liabilities or claims, as well as any other relevant equitable
          considerations. The relative benefits received by the Fund and the
          Investment Manager on the one hand and the Underwriters on the

<PAGE>

          other shall be deemed to be in the same respective proportions as the
          total proceeds from the offering (net of underwriting discounts and
          commissions but before deducting expenses) received by the Fund and
          the total underwriting discounts and commissions received by the
          Underwriters, bear to the aggregate public offering price of the APS.
          The relative fault of the Fund and the Investment Manager on the one
          hand and of the Underwriters on the other shall be determined by
          reference to, among other things, whether the untrue statement or
          alleged untrue statement of a material fact or omission or alleged
          omission relates to information supplied by the Fund or the Investment
          Manager or by the Underwriters and the parties' relative intent,
          knowledge, access to information and opportunity to correct or prevent
          such statement or omission. The amount paid or payable by a party as a
          result of the losses, damages, expenses, liabilities and claims
          referred to in this subsection shall be deemed to include any legal or
          other fees or expenses reasonably incurred by such party in connection
          with investigating, preparing to defend or defending any Proceeding.

     (d)  The Fund, the Investment Manager and the Underwriters agree that it
          would not be just and equitable if contribution pursuant to this
          Section 9 were determined by pro rata allocation (even if the
          Underwriters were treated as one entity for such purpose) or by any
          other method of allocation that does not take account of the equitable
          considerations referred to in subsection (c) above. Notwithstanding
          the provisions of this Section 9, no Underwriter shall be required to
          contribute any amount in excess of the fees and commissions received
          by such Underwriter. No person guilty of fraudulent misrepresentation
          (within the meaning of Section 11(f) of the Act) shall be entitled to
          contribution from any person who was not guilty of such fraudulent
          misrepresentation. The Underwriters' obligations to contribute
          pursuant to this Section 9 are several in proportion to their
          respective underwriting commitments and not joint.

     (e)  The indemnity and contribution agreements contained in this Section 9
          and the covenants, warranties and representations of the Fund
          contained in this Agreement shall remain in full force and effect
          regardless of any investigation made by or on behalf of any
          Underwriter, its partners, directors or officers or any person
          (including each partner, officer or director of such person) who
          controls any Underwriter within the meaning of Section 15 of the Act
          or Section 20 of the Exchange Act, or by or on behalf of the Fund or
          the Investment Manager, its shareholders, partners, managers, members,
          trustees, directors or officers or any person who controls the Fund or
          the Investment Manager within the meaning of Section 15 of the Act or
          Section 20 of the Exchange Act, and shall survive any termination of
          this Agreement or the issuance and delivery of the APS. The Fund and
          the Investment Manager and each Underwriter agree promptly to notify
          each other of the commencement of any Proceeding against it and, in
          the case of the Fund or the Investment Manager, against any of the
          Fund's or the Investment Manager's shareholders, partners, managers,
          members, trustees, directors or officers in connection with the
          issuance and sale of the APS, or in connection with the Registration
          Statement or Prospectus.

<PAGE>

     (f)  The Fund and the Investment Manager each acknowledge that the
          statements with respect to (1) the public offering of the APS as set
          forth on the cover page of, and (2) selling concessions and
          reallowances of selling concessions under the caption "Underwriting"
          in, the Prospectus constitute the only information furnished in
          writing to the Fund by the Underwriters expressly for use in such
          document. The Underwriters severally confirm that these statements are
          correct in all material respects and were so furnished by or on behalf
          of the Underwriters severally for use in the Prospectus.

     (g)  Notwithstanding any other provisions in this Section 9, no party shall
          be entitled to indemnification or contribution under this Underwriting
          Agreement against any loss, claim, liability, expense or damage
          arising by reason of such person's willful misfeasance, bad faith,
          gross negligence or reckless disregard of its duties in the
          performance of its duties hereunder.

10.  Notices. Except as otherwise herein provided, all statements, requests,
     notices and agreements shall be in writing or by telegram and, if to the
     Underwriters, shall be sufficient in all respects if delivered or sent to
     UBS Warburg LLC, 299 Park Avenue, New York, NY 10171-0026, Attention:
     Syndicate Department and, if to the Fund or the Investment Manager, shall
     be sufficient in all respects if delivered or sent to the Fund or the
     Investment Manager, as the case may be, at the offices of the Fund or the
     Investment Manager at 1345 Avenue of the Americas, New York, New York
     10105.

11.  Governing Law; Construction. This Agreement and any claim, counterclaim or
     dispute of any kind or nature whatsoever arising out of or in any way
     relating to this Agreement ("Claim"), directly or indirectly, shall be
     governed by, and construed in accordance with, the laws of the State of New
     York. The Section headings in this Agreement have been inserted as a matter
     of convenience of reference and are not a part of this Agreement.

12.  Submission to Jurisdiction. Except as set forth below, no Claim may be
     commenced, prosecuted or continued in any court other than the courts of
     the State of New York located in the City and County of New York or in the
     United States District Court for the Southern District of New York, which
     courts shall have jurisdiction over the adjudication of such matters, and
     the Fund and UBS Warburg LLC each consent to the jurisdiction of such
     courts and personal service with respect thereto. The Fund and UBS Warburg
     hereby consent to personal jurisdiction, service and venue in any court in
     which any Claim arising out of or in any way relating to this Agreement is
     brought by any third party against UBS Warburg LLC or any indemnified
     party. Each of UBS Warburg LLC, the Fund (on its behalf and, to the extent
     permitted by applicable law, on behalf of its stockholders and affiliates)
     and the Investment Manager (on its behalf and, to the extent permitted by
     applicable law, on behalf of its unitholders and affiliates) waives all
     right to trial by jury in any action, proceeding or counterclaim (whether
     based upon contract, tort or otherwise) in any way arising out of or
     relating to this Agreement. Each of the Fund and the Investment Manager
     agrees that a final judgment in any such action, proceeding or counterclaim
     brought in any such court shall be conclusive and binding upon the Fund and
     the Investment Manager, as the case may be, and may be enforced in any
     other courts

<PAGE>

     in the jurisdiction of which the Fund or the Investment Manager, as the
     case may be, is or may be subject, by suit upon such judgment.

13.  Parties at Interest. The Agreement herein set forth has been and is made
     solely for the benefit of the Underwriters, the Fund and the Investment
     Manager and to the extent provided in Section 9 hereof the controlling
     persons, shareholders, partners, members, trustees, managers, directors and
     officers referred to in such section, and their respective successors,
     assigns, heirs, personal representatives and executors and administrators.
     No other person, partnership, association or corporation (including a
     purchaser, as such purchaser, from any of the Underwriters) shall acquire
     or have any right under or by virtue of this Agreement.

14.  Counterparts. This Agreement may be signed by the parties in one or more
     counterparts which together shall constitute one and the same agreement
     among the parties.

15.  Successors and Assigns. This Agreement shall be binding upon the
     Underwriters, the Fund and the Investment Manager, and any successor or
     assign of any substantial portion of the Fund's, the Investment Manager's,
     or any of the Underwriters' respective businesses and/or assets.

16.  Disclaimer of Liability of Trustees and Beneficiaries. A copy of the
     Declaration of Trust is on file with the Secretary of State of The
     Commonwealth of Massachusetts, and notice hereby is given that this
     Underwriting Agreement is executed on behalf of the Fund by an officer or
     Trustee of the Fund in his or her capacity as an officer or Trustee of the
     Fund and not individually and that the obligations under or arising out of
     this Underwriting Agreement are not binding upon any of the Trustees,
     officers or shareholders individually but are binding only upon the assets
     and properties of the Fund.

<PAGE>

               If the foregoing correctly sets forth the understanding among the
Fund, the Investment Manager and the Underwriters, please so indicate in the
space provided below, whereupon this letter and your acceptance shall constitute
a binding agreement among the Fund, the Investment Manager and the Underwriters,
severally.

                                                 Very truly yours,

                                                 PIMCO NEW YORK MUNICIPAL INCOME
                                                 FUND II


                                                 ________________________
                                                 By:
                                                 Title:


                                                 PIMCO FUNDS ADVISORS LLC


                                                 ________________________
                                                 By:
                                                 Title:

<PAGE>

Accepted and agreed to as of the
date first above written, on
behalf of themselves and
the other several Underwriters
named in Schedule A

UBS WARBURG LLC
MERRILL LYNCH, PIERCE, FENNER & SMITH INCORPORATED
A.G. EDWARDS & SONS, INC.
PRUDENTIAL SECURITIES INCORPORATED


By:  UBS WARBURG LLC


__________________________
By:  Todd A. Reit
Title:  Executive Director


__________________________
By:  John A. Key
Title:  Director

<PAGE>

                                   SCHEDULE A

                                                                Number of Shares
Name                                                             to be Purchased
- ----                                                             ---------------


UBS Warburg LLC
Merrill Lynch, Pierce, Fenner & Smith Incorporated
A.G. Edwards & Sons, Inc.
Prudential Securities Incorporated




Total

                                      A-1

<PAGE>

                                   SCHEDULE B

                               FORM OF OPINION OF
                         ROPES & GRAY REGARDING THE FUND

                                                                 August __, 2002


UBS Warburg LLC
Merrill Lynch, Pierce, Fenner & Smith Incorporated
A.G. Edwards & Sons, Inc.
Prudential Securities Incorporated
   c/o UBS Warburg LLC
   299 Park Avenue
   New York, New York  10171-0026

Ladies and Gentlemen:

     We have acted as counsel to PIMCO New York Municipal Income Fund II (the
"Fund") in connection with the proposed issuance of 1,800 Auction Preferred
Shares, Series A, and 1,800 Auction Preferred Shares, Series B (together, the
"APS"). This opinion is furnished to you pursuant to Section 6(e) of the
Underwriting Agreement dated as of August 16, 2002 (the "Underwriting
Agreement") among the Fund, PIMCO Funds Advisors LLC (the "Investment Manager")
and UBS Warburg LLC, on behalf of itself and the other underwriters named
therein (the "Underwriters"). Capitalized terms used in this opinion, unless
otherwise defined, have the meanings specified in the Underwriting Agreement.

     We have examined signed copies of the registration statement of the Fund on
Form N-2 (File No. 333-91740) under the Securities Act of 1933, as amended (the
"Securities Act") (which also constitutes Amendment No. 4 to the Fund's
Registration Statement on Form N-2 (File No. 811-21078) under the Investment
Company Act of 1940, as amended (the "Investment Company Act")), including all
exhibits thereto, as filed with the Securities and Exchange Commission (the
"Commission") on July 2, 2002 (the "Original Registration Statement"),
Pre-Effective Amendment No. 1 to the Original Registration Statement, including
all exhibits thereto, as filed with the Commission on August 12, 2002
("Pre-Effective Amendment No. 1") and Pre-Effective Amendment No. 2 to the
Original Registration Statement, including all exhibits thereto, as filed with
the Commission on August 16, 2002 ("Pre-Effective Amendment No. 2," and together
with Pre-Effective Amendment No. 1 and the Original Registration Statement, the
"Registration Statement"); the Fund's Notification of Registration on Form N-8A
(File No. 811-_____) under the Investment Company Act, as filed with the
Commission on April 15, 2002 (the "Notification of Registration"); the Fund's
Agreement and Declaration of Trust, as amended to the date hereof (the
"Declaration of Trust"), on file in the offices of the Secretary of State of The
Commonwealth of Massachusetts and the Clerk of the City of Boston; the Amended
and Restated Bylaws of the Fund, as amended to the date hereof (the "Amended
Bylaws"); a copy of the Prospectus dated August __, 2002, relating to the APS
and the Statement of Additional Information of the Fund dated August __, 2002,
each as filed with the Commission pursuant to Rule 497 under the Securities Act
on August __, 2002 (together, the "Prospectus"); the

                                      B-1

<PAGE>

Investment Management Agreement dated as of June 18, 2002, between the Fund and
the Investment Manager (the "Investment Management Agreement"); the Portfolio
Management Agreement dated as of June 18, 2002, between Pacific Investment
Management Company LLC (the "Portfolio Manager") and the Investment Manager (the
"Portfolio Management Agreement"), as agreed to and accepted by the Fund; the
Custodian Agreement dated as of June 27, 2002, between the Fund and State Street
Bank and Trust Company (the "Custodian Agreement"); the Auction Agency Agreement
dated as of August __, 2002, between the Fund and Bankers Trust Company (the
"Auction Agency Agreement," and together with the Custodian Agreement, the "Fund
Agreements"); and the Underwriting Agreement. Additionally, we have relied upon
the oral representation of Mr. Keith O'Connell of the staff of the Commission to
the effect that the Registration Statement became effective as of ____ on August
__, 2002, and the oral representation by a member of the staff of the Commission
on the date hereof that as of _____ a.m., no stop order suspending the
effectiveness of the Registration Statement had been issued and no proceeding
for any such purpose was pending or threatened.

     We have also examined and relied upon the original or copies of minutes of
the meetings or written consents of the shareholders and the Board of Trustees
of the Fund, the documents delivered to the Underwriters by the Fund and the
Investment Manager dated as of the date hereof pursuant to the Underwriting
Agreement and such other documents, including certificates of officers of the
Fund, as we have deemed necessary for purposes of rendering our opinions below.
For purposes of paragraph 2 below, we have relied solely on (1) the certificate
of recent date of the Secretary of State of the State of California as to the
entitlement of the Fund to transact intrastate business in the State of
California, (2) a Certificate of the Special Deputy Secretary of State of the
State of New York dated June 27, 2002, certifying copies of (a) a Certificate of
Designation by the Fund dated June 18, 2002 and (b) a Statement under Section 18
of the New York General Associations Law, (3) a Filing Receipt of the Department
of State of the State of New York dated June 21, 2002 relating to the Fund and
(4) a LEXIS search on August __, 2002, of the New York Department of State,
Corporate Record, showing the "status" of the Fund as "active" and noting that
"good standing status can only be determined by performing a search in the
records of both the Department of State Corporation Records and the Department
of Tax and Franchise." We have assumed the genuineness of the signatures on all
documents examined by us, the authenticity of all documents submitted to us as
originals and the conformity to the corresponding originals of all documents
submitted to us as copies. For purposes of our opinion regarding the
effectiveness of the Registration Statement, we are relying solely on the oral
representations of the staff of the Commission.

     We express no opinion as to the laws of any jurisdiction other than The
Commonwealth of Massachusetts and the United States of America. We call your
attention to the fact that each of the Underwriting Agreement and the Auction
Agency Agreement provides that it is to be governed by and construed in
accordance with the laws of the State of New York and to the fact that the
Investment Management Agreement does not provide that it is to be governed by
the laws of any particular jurisdiction. In rendering the opinion as to
enforceability expressed in paragraph 5 below, we have limited the scope of our
opinion to the conclusions that would be reached by a Massachusetts court that
had determined that each of the Fund Agreements would be governed by, and
construed in accordance with, the internal laws of The Commonwealth of

                                      B-2

<PAGE>

Massachusetts. Further, we express no opinion as to the state securities or Blue
Sky laws of any jurisdiction, including The Commonwealth of Massachusetts.

         For purposes of our opinion set forth in paragraph 2 below with respect
to the power and authority of the Fund to own, lease and operate its properties
and conduct its business, we have relied upon certificates of officers of the
Fund as to the states in which the Fund leases or owns real property or in which
it conducts material operations.

         Insofar as this opinion relates to factual matters, we have made
inquiries to officers of the Fund, the Investment Manager and the Portfolio
Manager to the extent we believe reasonable with respect to such matters and
have relied inter alia upon representations made by the Fund and the Investment
Manager in the Underwriting Agreement, representations made by the Portfolio
Manager to the Investment Manager and representations made to us by one or more
officers of the Fund, the Investment Manager or the Portfolio Manager. We have
not independently verified the accuracy of such representations. Where our
opinion relates to our "knowledge," that term means the conscious awareness of
facts or other information by any lawyer in our firm giving substantive
attention to the representation of the Fund with respect to the transactions
contemplated by the Underwriting Agreement, and does not require or imply (i)
any examination of this firm's, any such lawyer's or any other person's or
entity's files, or (ii) that any inquiry was made of any lawyer (other than the
lawyers described above). In respect of our opinions set forth in paragraphs 7,
9 and 10 below, we have not searched the dockets of any court, administrative
body or other filing office in any jurisdiction.

         Based upon and subject to the foregoing, we are of the opinion that:

         1. The Registration Statement is effective under the Securities Act;
the filing of the Prospectus pursuant to Rule 497 under the Securities Act has
been made in the manner and within the time period required by Rule 497; and
based upon oral inquiries to the Commission staff on the date hereof, no stop
order suspending the effectiveness of the Registration Statement has been issued
and no proceeding for any such purpose is pending or threatened by the
Commission.

         2. The Fund has been duly organized and is validly existing and in good
standing as an unincorporated voluntary association under and by virtue of the
laws of The Commonwealth of Massachusetts and has full power and authority to
own or lease its properties and to conduct its business as described in the
Registration Statement and the Prospectus. The Certificate of Designation
relating to the Fund's conduct of business in the State of New York is on file
with the Department of State of the State of New York, and the Fund is entitled
to transact intrastate business in the State of California.

         3. The Fund's authorized capitalization is as set forth in the
Registration Statement and the Prospectus. The Fund has an indefinite number of
authorized common shares of beneficial interest, par value $0.00001 per share.
The APS conform in all material respects as to legal matters to the description
of them under the caption entitled "Description of APS" and "Description of
capital structure" in the Prospectus. All outstanding common shares of
beneficial interest of the Fund have been duly authorized and are validly
issued, fully paid and,

                                      B-3

<PAGE>

subject to the penultimate paragraph of this opinion letter, non-assessable. The
APS have been duly authorized and, when issued and delivered to the Underwriters
against payment therefor in accordance with the terms of the Underwriting
Agreement, will be validly issued, fully paid and, subject to the penultimate
paragraph of this opinion letter, non-assessable. No person is entitled to any
preemptive or other similar rights with respect to the APS.

         4. The Fund was deemed to be registered with the Commission under
Section 8(a) of the Investment Company Act upon receipt by the Commission of the
Notification of Registration. To our knowledge, the Commission has not issued to
the Fund notice of any hearing or other proceeding to consider suspension or
revocation of any such registration. All required action has been taken by the
Fund under the Securities Act, the Investment Company Act and the rules and
regulations thereunder in connection with the issuance and sale of the APS to
make the public offering and consummate the sale of the APS pursuant to the
Underwriting Agreement.

         5. The Fund has, or at the relevant time had, full power and authority
to enter into each of the Fund Agreements and to perform all of the terms and
provisions thereof to be carried out by it. Each Fund Agreement has been duly
and validly authorized, executed and delivered by the Fund. Each Fund Agreement
complies in all material respects with all applicable provisions of the
Investment Company Act and the Investment Advisers Act of 1940, as amended, as
the case may be. Assuming due authorization, execution and delivery by the other
parties thereto, each Fund Agreement constitutes the legal, valid and binding
obligation of the Fund enforceable in accordance with its terms, subject as to
enforcement to bankruptcy, insolvency, moratorium, reorganization and other laws
of general applicability relating to or affecting creditors' rights and to
general equity principles (regardless of whether enforceability is considered in
a proceeding in equity or at law).

         6. The Fund has, or at the relevant time had, full power and authority
to enter into each of the Investment Management Agreement and the Underwriting
Agreement and to perform all of the terms and provisions thereof to be carried
out by it. The Investment Management Agreement and the Underwriting Agreement
have been duly and validly authorized, executed and delivered by the Fund.

         7. None of (a) the execution and delivery by the Fund of the Investment
Management Agreement, the Underwriting Agreement or any of the Fund Agreements,
(b) the issue and sale by the Fund of the APS as contemplated by the
Underwriting Agreement and (c) the performance by the Fund of its obligations
under the Investment Management Agreement, the Underwriting Agreement or any of
the Fund Agreements or the consummation by the Fund of the other transactions
contemplated by the Investment Management Agreement, the Underwriting Agreement
or any of the Fund Agreements conflicts or will conflict with, or results or
will result in a breach of, the Declaration of Trust or the Amended Bylaws or,
to our knowledge, any agreement or instrument to which the Fund is a party or by
which the Fund is bound, or violates or will violate any federal statute, law or
regulation or any judgment, injunction, order or decree of any federal
governmental agency or body that is applicable to the Fund and that is known to
us, which violation would have a material adverse effect on the condition or
business of the Fund.

                                       B-4

<PAGE>

         8.  To our knowledge, the Fund is not currently in breach of, or in
default under, any material written agreement or instrument to which it is a
party or by which it or its property is bound or affected.

         9.  No consent, approval, authorization or order of any court or
governmental agency or body or securities exchange or securities association is
required by the Fund for the consummation by the Fund of the transactions
contemplated in the Investment Management Agreement, the Underwriting Agreement
and the Fund Agreements, except such as (a) have been obtained under the
Securities Act, the Investment Company Act or the Exchange Act and (b) may be
required by the New York Stock Exchange or the National Association of
Securities Dealers, Inc. or under state securities or Blue Sky laws in
connection with the purchase and distribution of the APS by the Underwriters
pursuant to the Underwriting Agreement.

         10. To our knowledge, there are no legal or governmental proceedings
pending or threatened against the Fund, or to which the Fund or any of its
properties is subject, that are required to be described in the Registration
Statement or the Prospectus but are not described therein as required.

         11. To our knowledge, there are no agreements, contracts, indentures,
leases or other instruments that are required to be described in the
Registration Statement or the Prospectus or to be filed as an exhibit to the
Registration Statement which have not been so described or filed as an exhibit
or incorporated therein by reference.

         12. Each of the sections in the Prospectus entitled "Taxes" and "Tax
matters," to the extent that it states matters of United States law or legal
conclusions with respect thereto, presents a fair summary of the principal
federal income tax rules currently in effect applicable to the Fund and to the
purchase, ownership and disposition of the APS.

         13. The Registration Statement (except for the financial statements and
schedules, the notes thereto and any schedules and other financial data
contained or incorporated by reference therein or omitted therefrom, as to which
we express no opinion), at the effective time set forth above, and the
Prospectus (except as aforesaid), as of the date thereof, complied as to form in
all material respects to the applicable requirements of the Securities Act and
the Investment Company Act.

         We have not independently verified the accuracy, completeness or
fairness of the statements made or the information contained in the Registration
Statement or the Prospectus and, except in the respects and to the extent set
forth in paragraphs 3 and 13 above, we are not passing upon and do not assume
any responsibility therefor. In the course of the preparation by the Fund of the
Registration Statement and the Prospectus, we have participated in discussions
with your representatives and employees and officers of the Fund, the Investment
Manager and the Portfolio Manager and in discussions with the Fund's independent
accountants, in which the business and the affairs of the Fund, the Investment
Manager and the Portfolio Manager and the contents of the Registration Statement
and the Prospectus were discussed. There is no assurance that all material facts
as to the Fund, the Investment Manager, the Portfolio Manager and their

                                      B-5

<PAGE>

affairs were disclosed to us or that our familiarity with the Fund, the
Investment Manager or the Portfolio Manager is such that we would have
necessarily recognized the materiality of such facts as were disclosed to us,
and we have to a large extent relied upon statements of representatives of the
Fund, the Investment Manager and the Portfolio Manager as to the materiality of
the facts disclosed to us. On the basis of information that we have gained in
the course of our representation of the Fund in connection with its preparation
of the Registration Statement and the Prospectus and our participation in the
discussions referred to above, no facts have come to our attention that would
lead us to believe that as of August __, 2002, the Registration Statement
contained any untrue statement of a material fact or omitted to state any
material fact required to be stated therein or necessary in order to make the
statements therein not misleading, or that as of the date of the Prospectus and
the date hereof the Prospectus contained an untrue statement of material fact or
omitted to state a material fact required to be stated therein or necessary to
make the statements therein, in light, in each case, of the circumstances under
which they were made, not misleading (in each case, other than the financial
statements and schedules, the notes thereto and any schedules and other
financial data contained or incorporated by reference therein or omitted
therefrom, as to which we express no opinion).

         Under Massachusetts law, shareholders could, under certain
circumstances, be held personally liable for the obligations of the Fund.
However, the Fund's Declaration of Trust disclaims shareholder liability for
acts or obligations of the Fund and requires that notice of such disclaimer be
given in each agreement, obligation, and instrument entered into or executed by
the Fund or the Trustees. The Declaration of Trust provides for indemnification
out of the property of the Fund for all loss and expense of any shareholder held
personally liable solely by reason of being or having been a shareholder of the
Fund. Thus, the risk of a shareholder's incurring financial loss on account of
being a shareholder is limited to circumstances in which the Fund itself would
be unable to meet its obligations.

         This letter and the opinions expressed herein are furnished by us to
you and are solely for benefit of the Underwriters, except that Skadden, Arps,
Slate, Meagher & Flom (Illinois) may rely on this letter as to all matters
governed by the laws of The Commonwealth of Massachusetts in delivering its
opinion to you on the date hereof.

                                        Very truly yours,



                                        Ropes & Gray

                                      B-6

<PAGE>

                                   SCHEDULE C

                       FORM OF OPINION OF INTERNAL COUNSEL
                       REGARDING PIMCO FUNDS ADVISORS LLC

                                 August __, 2002

UBS Warburg LLC
Merrill Lynch, Pierce, Fenner & Smith
   Incorporated
A.G. Edwards & Sons, Inc.
Prudential Securities Incorporated
   as Managing Underwriters
c/o UBS Warburg LLC
299 Park Avenue
New York, New York  10171-0026

                  Re:   PIMCO Funds Advisors LLC

Ladies and Gentlemen:

                  I am the Chief Legal Officer of PIMCO Funds Advisors LLC, a
Delaware limited liability company ("PFA"), and have counseled PFA in such
capacity in connection with the sale to you by PIMCO New York Municipal Income
Fund II, a voluntary association with transferable shares organized and existing
under and by virtue of the laws of The Commonwealth of Massachusetts (commonly
referred to as a Massachusetts business trust) (the "Fund"), of 1,800 Auction
Preferred Shares, Series A, and 1,800 Auction Preferred Shares, Series B, of the
Fund (the "APS"), pursuant to a registration statement on Form N-2 under the
Securities Act of 1933, as amended (the "Act") and the Investment Company Act of
1940, as amended (the "Investment Company Act"), filed with the Securities and
Exchange Commission (the "Commission") on July 2, 2002 (Act File No. 333-91740,
and Investment Company Act File No. 811-21078), as amended by Pre-Effective
Amendment No. 1 filed with the Commission on August 12, 2002, and Pre-Effective
Amendment No. 2 filed with the Commission on August __, 2002 (the "Registration
Statement"), and an underwriting agreement dated August __, 2002 by and among
you, the Fund and PFA (the "Underwriting Agreement") relating to the issuance
and sale by the Fund of the APS.

                  This opinion is rendered to you pursuant to Section 6(e) of
the Underwriting Agreement. Capitalized terms used herein without definition
have the meanings assigned to them in the Underwriting Agreement.

                  As such legal officer, I have examined such matters of fact
and questions of law as I have considered appropriate for purposes of rendering
the opinions expressed below, except

                                       C-1

<PAGE>

where a statement is qualified as to knowledge or awareness, in which case I
have made no or limited inquiry as specified below. I have examined, among other
things, the following:

                           (a)  the Underwriting Agreement;

                           (b)  that certain Investment Management Agreement by
         and between the Fund and PFA, dated as of June 18, 2002; and

                           (c)  that certain Portfolio Management Agreement by
         and between Pacific Investment Management Company LLC and PFA, as
         accepted and agreed to by the Fund, dated as of June 18, 2002.

                  The documents described in subsections (a)-(c) above are
referred to herein collectively as the "Transaction Documents."

                  In my examination, I have assumed the genuineness of all
signatures (other than those of officers of PFA on the Transaction Documents),
the authenticity of all documents submitted to me as originals, and the
conformity to authentic original documents of all documents submitted to me as
copies.

                  I have been furnished with, and with your consent have relied
upon, certificates of officers of PFA with respect to certain factual matters.
In addition, I have obtained and relied upon such certificates and assurances
from public officials as I have deemed necessary.

                  I am opining herein as to the effect of the federal laws of
the United States, the internal laws of the State of New York and the internal
laws of the State of Delaware, and I express no opinion with respect to the
applicability thereto, or the effect thereon, of the laws of any other
jurisdiction or country or as to any matters of municipal law or the laws of any
other local agencies within any state or country. My opinions set forth in
paragraph 4 below are based upon my consideration of only those statutes, rules
and regulations which, in my experience, are normally applicable to transactions
similar to those contemplated by the Transaction Documents, generally.

                  Whenever a statement herein is qualified by "to my knowledge"
or a similar phrase, it is intended to indicate that I do not have current
actual knowledge of the inaccuracy of such statement. However, except as
otherwise expressly indicated, I have not undertaken any independent
investigation to determine the accuracy of any such statement, and no inference
that I have any knowledge of any matters pertaining to such statement should be
drawn from my position as Chief Legal Officer of PFA.

                  Subject to the foregoing and the other matters set forth
herein, it is my opinion that, as of the date hereof:

                  1.       PFA is a limited liability company and is validly
existing and in good standing under the Delaware Limited Liability Company Act
(6 Del. C(S). 18-101, et seq.) with all necessary limited liability company
power and authority to enter into and deliver the Transaction Documents and
perform its obligations thereunder and to carry on its business as it is now
being conducted and as described in the Registration Statement. Based solely on

                                      C-2

<PAGE>

certificates from public officials, I confirm that PFA is qualified to do
business in the following States: California, New York and Connecticut, such
States being those in which its ownership or leasing of property or its
conducting of business may require such qualification and where failure to so
qualify would have a material adverse effect on the ability of PFA to perform
its obligations under the Investment Management Agreement and the Portfolio
Management Agreement.

                  2. The execution, delivery and performance of the Transaction
Documents by PFA have been duly authorized by all necessary limited liability
company action of PFA and no other actions on the part of PFA or its unitholders
or any subsidiary of PFA or its unitholders is necessary to authorize and
consummate the transactions contemplated thereby, and the Transaction Documents
have been duly executed and delivered by PFA.

                  3. Each of the Investment Management Agreement and the
Portfolio Management Agreement constitutes a legally valid and binding agreement
of PFA, enforceable against PFA in accordance with its terms.

                  4. Neither the execution and delivery of the Transaction
Documents by PFA, nor the consummation by PFA of transactions contemplated
thereby, nor compliance by PFA with any of the terms and provisions thereof
will:

                     (i)   violate any provision of the Limited Liability
         Company Agreement of PFA, effective May 23, 2000, as amended on July 1,
         2001 and December 12, 2001, which is still in full force and effect and
         which has not been further amended or supplemented through the date
         hereof,

                     (ii)  violate any federal, Delaware or New York statute,
         rule or regulation applicable to PFA (other than federal and state
         securities or blue sky laws, the Investment Company Act, and the
         Investment Advisers Act of 1940, as amended (the "Advisers Act"), as to
         which I express no opinion),

                     (iii) violate any agreement to which PFA is a party or by
         which it is bound and which is material to PFA's businesses taken as a
         whole (the "Material Agreements"),

                     (iv)  violate any order, writ, injunction or decree, known
         to me and applicable to PFA, or

                     (v)   to the best of my knowledge, require any consents,
         approvals, authorizations, registrations, declarations or filings by
         PFA under any federal or Delaware statute, rule or regulation
         applicable to PFA, except as have been obtained under the Act, the
         Investment Company Act or the Advisers Act.

                  No opinion is expressed in this paragraph 4 as to the
application of Section 548 of the federal Bankruptcy Code and comparable
provisions of state or foreign law or of any antifraud laws, antitrust or trade
regulation laws. No opinion is expressed in this paragraph 4 with respect to the
operating licenses necessary for PFA's businesses.

                                       C-3

<PAGE>

                  5. PFA is duly registered as an investment adviser under the
Advisers Act and is not prohibited by the Advisers Act or the Investment Company
Act from acting as investment adviser for the Fund as contemplated by the
Investment Management Agreement, the Registration Statement and the Prospectus.

                  6. The description of PFA and its business, and the statements
attributable to PFA, set forth in the Registration Statement or the Prospectus
under the headings "Prospectus Summary - Investment Manager" and "Management of
the Fund" do not contain any untrue statement of a material fact or omit to
state any material fact required to be stated therein or necessary in order to
make the statements therein, in light of the circumstances under which they were
made, not misleading.

                  7. There is no action, suit or proceeding before or by any
court, commission, regulatory body, administrative agency or other governmental
agency or body, foreign or domestic, now pending or, to my knowledge, threatened
against PFA of a nature required to be disclosed in the Registration Statement
or Prospectus or that might reasonably result in any material adverse change in
the ability of PFA to fulfill its obligations under either the Investment
Management Agreement or the Portfolio Management Agreement.

                  The opinions expressed in paragraph 3 above are subject to the
following limitations, qualifications and exceptions:

                     (a)  the effect of bankruptcy, insolvency, reorganization,
         moratorium or other similar laws now or hereafter in effect relating to
         or affecting the rights or remedies of creditors generally;

                     (b)  the effect of general principles of equity, whether
         enforcement is considered in a proceeding in equity or at law, and the
         discretion of the court before which any proceeding therefor may be
         brought;

                     (c)  the unenforceability under certain circumstances under
         law or court decisions of provisions providing for the indemnification
         of or contribution to a party with respect to a liability where such
         indemnification or contribution is contrary to public policy; and

                     (d)  the unenforceability of any provision requiring the
         payment of attorney's fees, except to the extent that a court
         determines such fees to be reasonable.

                  In rendering the opinions expressed in paragraph 4 insofar as
they require interpretation of the Material Agreements (i) I have assumed with
your permission that all courts of competent jurisdiction would enforce such
agreements as written but would apply the internal laws of the State of New York
without giving effect to any choice of law provisions contained therein or any
choice of law principles which would result in application of the internal laws
of any other state and (ii) to the extent that any questions of legality or
legal construction have arisen in connection with my review, I have applied the
laws of the State of New York in resolving such questions. I advise you that
certain of the Material Agreements may be governed by other laws, that such laws
may vary substantially from the law assumed to govern for

                                       C-4

<PAGE>

purposes of this opinion, and that this opinion may not be relied upon as to
whether or not a breach or default would occur under the law actually governing
such Material Agreements.

                  To the extent that the obligations of PFA may be dependent
upon such matters, I assume for purposes of this opinion that: (i) all parties
to the Transaction Documents other than PFA are duly incorporated or organized,
validly existing and in good standing under the laws of their respective
jurisdictions of incorporation or organization; (ii) all parties to the
Transaction Documents other than PFA have the requisite power and authority and,
in the case of natural persons, legal capacity to execute and deliver the
Transaction Documents and to perform their respective obligations under the
Transaction Documents to which they are a party; and (iii) the Transaction
Documents to which such parties other than PFA are a party have been duly
authorized, executed and delivered by such parties and, other than PFA,
constitute their legally valid and binding obligations, enforceable against them
in accordance with their terms. I express no opinion as to compliance by any
parties to the Transaction Documents with any state or federal laws or
regulations applicable to the subject transactions because of the nature of
their business and I express no opinion as to compliance by any parties to the
Transaction Documents with any foreign laws or regulations applicable to the
transactions contemplated by the Transaction Documents or which may affect the
Transaction Documents' enforceability.

                  This opinion is rendered only to you and is solely for your
benefit in connection with the transactions covered hereby. This opinion may not
be relied upon by you for any other purpose, or furnished to, quoted to or
relied upon by any other person, firm or corporation for any purpose, without my
prior written consent.

                                                          Very truly yours,



                                                       * * *

Special Counsel for the Investment Manager shall separately opine that, assuming
the Investment Manager is duly registered as an investment adviser under the
Advisers Act and is not prohibited by the Advisers Act or the Investment Company
Act from acting as investment adviser for the Fund as contemplated by the
Investment Management Agreement, the Registration Statement and the Prospectus,
neither the execution and delivery of the Underwriting Agreement, the Investment
Management Agreement or the Portfolio Management Agreement by the Investment
Manager, nor the consummation by the Investment Manager of the transactions
contemplated thereby, nor compliance by the Investment Manager with any of the
terms and provisions thereof will violate the provisions of the Investment
Company Act or the Advisers Act; provided, however, that such opinion may
specifically disclaim any opinion as to (a) the reasonableness of the fees to be
paid to the Investment Manager under the Investment Management Agreement and (b)
the compliance by the Investment Manager with its indemnification and
contribution obligations set forth in the Underwriting Agreement.

                                       C-5

<PAGE>

                                   SCHEDULE D

                       FORM OF OPINION OF INTERNAL COUNSEL
                                 REGARDING PIMCO

                                 August __, 2002

UBS Warburg LLC
Merrill Lynch, Pierce, Fenner & Smith
   Incorporated
A.G. Edwards & Sons, Inc.
Prudential Securities Incorporated
   as Managing Underwriters
c/o UBS Warburg LLC
299 Park Avenue
New York, New York  10171-0026

                  Re:      Pacific Investment Management Company LLC

Ladies and Gentlemen:

                  I am the Chief Legal Officer of PIMCO Funds Advisors LLC, a
Delaware limited liability company. PFA is an affiliate of and under common
control with Pacific Investment Management Company LLC, a Delaware limited
liability company ("PIMCO"). I have discussed the matters covered by this
opinion with internal counsel at PIMCO. In my capacity as Chief Legal Officer of
PFA, I am rendering this opinion on behalf of PIMCO in connection with the sale
to you by PIMCO New York Municipal Income Fund II, a voluntary association with
transferable shares organized and existing under and by virtue of the laws of
The Commonwealth of Massachusetts (commonly referred to as a Massachusetts
business trust) (the "Fund"), of _____ Auction Preferred Shares, Series A, and
_____ Auction Preferred Shares, Series B, of the Fund (the "APS"), pursuant to a
registration statement on Form N-2 under the Securities Act of 1933, as amended
(the "Act") and the Investment Company Act of 1940, as amended (the "Investment
Company Act"), filed with the Securities and Exchange Commission (the
"Commission") on July 2, 2002 (Act File No. 333-91740 and Investment Company Act
File No. 811-21078), as amended by Pre-Effective Amendment No. 1 filed with the
Commission on August 12, 2002, and Pre-Effective Amendment No. 2 filed with the
Commission on August __, 2002 (the "Registration Statement"), and an
underwriting agreement dated August __, 2002, by and among you, the Fund and PFA
(the "Underwriting Agreement") relating to the issuance and sale by the Fund of
the APS.

                  This opinion is rendered to you pursuant to Section 6(e) of
the Underwriting Agreement. Capitalized terms used herein without definition
have the meanings assigned to them in the Underwriting Agreement.

                  As Chief Legal Officer of PFA, I have examined such matters of
fact and questions of law as I have considered appropriate for purposes of
rendering the opinions

                                       D-1

<PAGE>

expressed below, except where a statement is qualified as to knowledge or
awareness, in which case I have made no or limited inquiry as specified below. I
have examined, among other things, that certain Portfolio Management Agreement
by and between PIMCO and PFA, as accepted and agreed to by the Fund, dated as of
June 18, 2002 (the "Portfolio Management Agreement").

          In my examination, I have assumed the genuineness of all signatures
(other than those of officers of PIMCO on the Portfolio Management Agreement),
the authenticity of all documents submitted to me as originals, and the
conformity to authentic original documents of all documents submitted to me as
copies.

          I have been furnished with, and with your consent have relied upon,
certificates of officers of PIMCO with respect to certain factual matters. In
addition, I have obtained and relied upon such certificates and assurances from
public officials as I have deemed necessary.

          I am opining herein as to the effect of the federal laws of the United
States, the internal laws of the State of New York and the internal laws of the
State of Delaware, and I express no opinion with respect to the applicability
thereto, or the effect thereon, of the laws of any other jurisdiction or country
or as to any matters of municipal law or the laws of any other local agencies
within any state or country. My opinions set forth in paragraph 4 below are
based upon my consideration of only those statutes, rules and regulations which,
in my experience, are normally applicable to transactions similar to those
contemplated by the Portfolio Management Agreement, generally.

          Whenever a statement herein is qualified by "to my knowledge" or a
similar phrase, it is intended to indicate that I do not have current actual
knowledge of the inaccuracy of such statement. However, except as otherwise
expressly indicated, I have not undertaken any independent investigation to
determine the accuracy of any such statement, and no inference that I have any
knowledge of any matters pertaining to such statement should be drawn from my
position as Chief Legal Officer of PFA.

          Subject to the foregoing and the other matters set forth herein, it is
my opinion that, as of the date hereof:

          1. PIMCO is a limited liability company and is validly existing and in
good standing under the Delaware Limited Liability Company Act (6 Del. C (S)
18-101, et seq.) with all necessary limited liability company power and
authority to enter into and deliver the Portfolio Management Agreement and
perform its obligations thereunder and to carry on its business as it is now
being conducted and as described in the Registration Statement. Based solely on
certificates from public officials, I confirm that PIMCO is qualified to do
business in the following States: California and New York, such States being
those in which its ownership or leasing of property or its conducting of
business may require such qualification and where failure to so qualify would
have a material adverse effect on the ability of PIMCO to perform its
obligations under the Portfolio Management Agreement.

          2. The execution, delivery and performance of the Portfolio
Management Agreement by PIMCO have been duly authorized by all necessary limited
liability company action of PIMCO and no other actions on the part of PIMCO or
its unitholders or any subsidiary

                                       D-2

<PAGE>

of PIMCO or its unitholders is necessary to authorize and consummate the
transactions contemplated thereby, and the Portfolio Management Agreement has
been duly executed and delivered by PIMCO.

          3.   The Portfolio Management Agreement constitutes a legally valid
and binding agreement of PIMCO, enforceable against PIMCO in accordance with its
terms.

          4.   Neither the execution and delivery of the Portfolio Management
Agreement by PIMCO, nor the consummation by PIMCO of transactions contemplated
thereby, nor compliance by PIMCO with any of the terms and provisions thereof
will:

               (i)   violate any provision of the Limited Liability Company
Agreement of PIMCO, effective May 5, 2000,

               (ii)  violate any federal, Delaware or New York statute, rule or
regulation applicable to PIMCO (other than federal and state securities or blue
sky laws, the Investment Company Act, and the Investment Advisers Act of 1940,
as amended (the "Advisers Act"), as to which I express no opinion),

               (iii) violate any agreement to which PIMCO is a party or by which
it is bound and which is material to PIMCO's businesses taken as a whole (the
"Material Agreements"),

               (iv)  violate any order, writ, injunction or decree, known to me
and applicable to PIMCO, or

               (v)   to the best of my knowledge, require any consents,
approvals, authorizations, registrations, declarations or filings by PIMCO under
any federal statute, rule or regulation applicable to PIMCO, except as have been
obtained under the Act, the Investment Company Act or the Advisers Act.

          No opinion is expressed in this paragraph 4 as to the application of
Section 548 of the federal Bankruptcy Code and comparable provisions of state or
foreign law or of any antifraud laws, antitrust or trade regulation laws. No
opinion is expressed in this paragraph 4 with respect to the operating licenses
necessary for PIMCO's businesses.

          5.   PIMCO is duly registered as an investment adviser under the
Advisers Act and is not prohibited by the Advisers Act or the Investment Company
Act from acting as investment sub-adviser for the Fund as contemplated by the
Portfolio Management Agreement, the Registration Statement and the Prospectus.

          6.   The description of PIMCO and its business, and the statements
attributable to PIMCO, set forth in the Registration Statement and the
Prospectus under the headings "Prospectus Summary - Portfolio Manager" and
"Management of the Fund" do not contain any untrue statement of a material fact
or omit to state any material fact required to be stated therein or necessary in
order to make the statements therein, in light of the circumstances under which
they were made, not misleading.

                                      D-3

<PAGE>

               7.   There is no action, suit or proceeding before or by any
court, commission, regulatory body, administrative agency or other governmental
agency or body, foreign or domestic, now pending or, to my knowledge, threatened
against PIMCO of a nature required to be disclosed in the Registration Statement
or Prospectus or that might reasonably result in any material adverse change in
the ability of PIMCO to fulfill its obligations under the Portfolio Management
Agreement.

               The opinions expressed in paragraph 3 above are subject to the
following limitations, qualifications and exceptions:

                    (a) the effect of bankruptcy, insolvency, reorganization,
          moratorium or other similar laws now or hereafter in effect relating
          to or affecting the rights or remedies of creditors generally;

                    (b) the effect of general principles of equity, whether
          enforcement is considered in a proceeding in equity or at law, and the
          discretion of the court before which any proceeding therefor may be
          brought;

                    (c) the unenforceability under certain circumstances under
          law or court decisions of provisions providing for the indemnification
          of or contribution to a party with respect to a liability where such
          indemnification or contribution is contrary to public policy; and

                    (d) the unenforceability of any provision requiring the
          payment of attorney's fees, except to the extent that a court
          determines such fees to be reasonable.

               In rendering the opinions expressed in paragraph 4 insofar as
they require interpretation of the Material Agreements (i) I have assumed with
your permission that all courts of competent jurisdiction would enforce such
agreements as written but would apply the internal laws of the State of New York
without giving effect to any choice of law provisions contained therein or any
choice of law principles which would result in application of the internal laws
of any other state and (ii) to the extent that any questions of legality or
legal construction have arisen in connection with my review, I have applied the
laws of the State of New York in resolving such questions. I advise you that
certain of the Material Agreements may be governed by other laws, that such laws
may vary substantially from the law assumed to govern for purposes of this
opinion, and that this opinion may not be relied upon as to whether or not a
breach or default would occur under the law actually governing such Material
Agreements.

               To the extent that the obligations of PIMCO may be dependent upon
such matters, I assume for purposes of this opinion that: (i) all parties to the
Portfolio Management Agreement other than PIMCO are duly incorporated or
organized, validly existing and in good standing under the laws of their
respective jurisdictions of incorporation or organization; (ii) all parties to
the Portfolio Management Agreement other than PIMCO have the requisite power and
authority and, in the case of natural persons, legal capacity to execute and
deliver the Portfolio Management Agreement and to perform their respective
obligations under the Portfolio Management Agreement; and (iii) the Portfolio
Management Agreement has been duly authorized, executed and delivered by such
parties other than PIMCO and, other than PIMCO,

                                      D-4

<PAGE>

constitutes their legally valid and binding obligations, enforceable against
them in accordance with their terms. I express no opinion as to compliance by
any parties to the Portfolio Management Agreement with any state or federal laws
or regulations applicable to the subject transactions because of the nature of
their business and I express no opinion as to compliance by any parties to the
Portfolio Management Agreement with any foreign laws or regulations applicable
to the transactions contemplated by the Portfolio Management Agreement or which
may affect the Portfolio Management Agreement's enforceability.

               This opinion is rendered only to you and is solely for your
benefit in connection with the transactions covered hereby. This opinion may not
be relied upon by you for any other purpose, or furnished to, quoted to or
relied upon by any other person, firm or corporation for any purpose, without my
prior written consent.

                                           Very truly yours,

                                      D-5

<PAGE>

                                   SCHEDULE E

                    FORM OF OPINION OF EDWARDS & ANGELL, LLP


August _____, 2002

UBS Warburg LLC
Merrill Lynch, Pierce, Fenner & Smith Incorporated
A.G. Edwards & Sons, Inc.
Prudential Securities Incorporated
   as Managing Underwriters
299 Park Avenue
New York, New York  10171-0026

     RE:  PIMCO New York Municipal Income Fund II

Ladies and Gentlemen:

     We have acted as local counsel, with respect to New York State and New York
City matters, to PIMCO New York Municipal Income Fund II, a Massachusetts
business trust (the "Fund"), concerning a Registration Statement (Nos. 333-91740
and 811-21078) on Form N-2 under the Securities Act of 1933, as amended (the
"Act"), and the Investment Company Act of 1940, as amended (the "Registration
Statement"), and the Prospectus (including the Statement of Additional
Information incorporated by reference therein), as filed with the Securities and
Exchange Commission (the "SEC") pursuant to Rule 497 under the Act on August
_____, 2002 (the "Prospectus"), covering the issuance by the Fund of 1,800
Series A Auction Preferred Shares (the "Series A Shares") and 1,800 Series B
Auction Preferred Shares (the "Series B Shares") of beneficial interest, no par
value, at $$25,000 per share, of the Fund, (the Series A Shares and the Series B
Shares are collectively, the "Shares") and the purchase of the Shares from the
Fund by you, as the several underwriters (collectively the "Underwriters") named
in Schedule A to the Underwriting Agreement dated August 16, 2002 (the
"Underwriting Agreement") among the Fund, PIMCO Funds Advisors LLC, and you, as
the representatives of the several Underwriters. This opinion is furnished to
you pursuant to Section 6(e) of the Underwriting Agreement.

     We have been furnished with a copy of the Registration Statement and the
Prospectus. For purposes of rendering our opinion, we have assumed that the
proposed offer and sale of the Shares will be carried out in the same manner and
upon the same terms and conditions as are described in the Registration
Statement and that the affairs of the Fund will be administered as described in
the Registration Statement.

     We have assumed with your permission that: (i) the opinion of Ropes & Gray
as to the statements under the caption "Taxes - Federal Income Tax Matters" in
the Prospectus was delivered as called for by the Underwriting Agreement; and
(ii) such statements accurately describe the Federal income tax consequences
applicable to the Fund and holders of the Shares.

     In addition, we have examined applicable New York State and New York City
law, administrative interpretations thereof and court decisions and made such
other investigations of fact and law as we deemed necessary as the basis of the
opinions set forth below.

     As New York counsel for the Fund, we have participated in the preparation
of the statements set forth in the Prospectus under the captions "Risks -
State-Specific Risk," "Taxes - New York Tax Matters" and in Appendix B to the
Statement of Additional Information, incorporated by reference therein.

     In connection therewith, we have examined such official statements and
prospectuses issued by, and other information reported by, the State of New
York, its various public bodies, and by such other entities located within the
state, including the City of New York, in connection with the issuance of their
respective securities, and such other information reported by others, as we have
deemed appropriate in order to enable us to make the statement hereinafter set
forth. We have not independently verified, and for the purposes of making the
statement hereinafter set forth we have assumed, the accuracy of the information
contained in such official statements, prospectuses and reports. Our
participation was not intended to enable us to pass upon, and we are not passing
upon, the accuracy, completeness or fairness of the statements contained in the
Prospectus, other than as set forth herein.

<PAGE>

PIMCO New York Municipal Income Fund II
August ____, 2002
Page 2


     Based solely on the foregoing and subject to the limitations and
assumptions set forth herein, it is our opinion that under existing law the
statements made in the Registration Statement and the Prospectus (a) under the
caption "Risks - State-Specific Risk" and under the caption "Taxes - New York
Tax Matters", and (b) in Appendix B to the Statement of Additional Information
included in the Registration Statement, insofar as they constitute matters of
law or legal conclusions, constitute fair and accurate statements of any such
matters of law or legal conclusions, and fairly present the information called
for with respect thereto by Form N-2 as of the date hereof.

     We have acted for the Fund in connection with the preparation of, and have
had discussions with representatives of the Fund concerning, the statements
contained in the Registration Statement and Prospectus under (a) the caption
"Risks - State-Specific Risk," (b) the caption "Taxes - New York Tax Matters"
and (c) Appendix B to the Statement of Additional Information and based on the
foregoing and subject to the limitations and assumptions set forth herein, no
facts have come to our attention which would lead us to believe that the
statements contained in the Registration Statement under such captions as set
forth above, as of its date and as of the date hereof, contained any untrue
statement of a material fact or omitted to state any material fact required to
be stated therein or necessary in order to make the statements therein not
misleading or that the statements contained in the Prospectus as of its date and
as of the date hereof under such captions as set forth above contain any untrue
statement of a material fact or omitted to state any material fact required to
be stated therein or necessary in order to make the statements therein, in light
of the circumstances under which they were made, not misleading.

     In connection with the issuance of the Shares, we have not examined any of
the obligations to be acquired by the Fund and express no opinion whether the
interest on any such obligations is, in fact, exempt from Federal, New York
State or New York City income taxation, or that such interest would be
tax-exempt under Federal, New York State or New York City law if directly
received by a shareholder of the Fund nor have we made any review of the
proceedings relating to the issuance of any such obligations.

     The foregoing opinions are limited to matters involving the laws of the
State of New York, and we do not express any opinion as to the laws of any other
jurisdiction.

     This opinion is limited to the matters set forth herein. No opinion may be
inferred or implied beyond the matters expressly contained herein. We undertake
no continuing obligation to inform you of changes in law or fact subsequent to
the date hereof or of facts of which we become aware after the date hereof. We
reserve the right to dispute any interpretation of, or reliance on, this opinion
that we deem to be inaccurate or improper.

     This opinion is intended for solely your use, and may be relied upon only
by you, the Underwriters, Ropes & Gray and Simpson, Thacher & Bartlett and its
affiliated entities solely in connection with the Registration Statement and
Prospectus and the purchase and sale of the Shares. No other person shall be
entitled to rely on any matter set forth herein without our prior written
consent.


                                             Very truly yours,




                                            Edwards & Angell, LLP


                                            By
                                              ---------------------------
                                            Geoffrey Etherington III
                                             Authorized Signatory

<PAGE>

                                   SCHEDULE F

                           FORM OF ACCOUNTANT'S LETTER

August __, 2002

The Board of Trustees of
PIMCO New York Municipal Income Fund II
840 Newport Center Drive
Suite 300
Newport Beach, California  92660

UBS Warburg LLC
299 Park Avenue
New York, New York  10171
  as Managing Representative of the Underwriters

Ladies and Gentlemen:

          We have audited the statement of assets and liabilities of PIMCO New
York Municipal Income Fund II (the "Fund") as of July 31, 2002 included in the
Registration Statement on Form N-2 filed by the Fund under the Securities Act of
1933, as amended (the "Act") (File No. 333-91740), and under the Investment
Company Act of 1940, as amended (the "1940 Act") (File No. 811-21078); such
statement and our report with respect to such statement are included in the
Registration Statement.

In connection with the Registration Statement:

          1. We are independent public accountants with respect to the Fund
     within the meaning of the Act and the applicable rules and regulations
     thereunder.

          2. In our opinion, the statement of assets and liabilities included in
     the Registration Statement and audited by us complies as to form in all
     respects with the applicable accounting requirements of the Act, the 1940
     Act and the respective rules and regulations thereunder.

          3. For purposes of this letter we have read the minutes of all
     meetings of the Shareholders, the Board of Trustees and all Committees of
     the Board of Trustees of the Fund as set forth in the minute books at the
     offices of the Fund, officials of the Fund having advised us that the
     minutes of all such meetings through _____________, 2002, were set forth
     therein.

          4. Fund officials have advised us that no financial statements as of
     any date subsequent to July 31, 2002, are available. We have made inquiries
     of certain officials of the Fund who have responsibility for financial and
     accounting matters regarding whether

                                      F-1

<PAGE>

     there was any change at ________, 2002, in the capital shares or net assets
     of the Fund as compared with amounts shown in the July 31, 2002, statement
     of assets and liabilities included in the Registration Statement, except
     for changes that the Registration Statement discloses have occurred or may
     occur. On the basis of our inquiries and our reading of the minutes as
     described in Paragraph 3, nothing came to our attention that caused us to
     believe that there were any such changes.

     The foregoing procedures do not constitute an audit made in accordance with
generally accepted auditing standards. Accordingly, we make no representations
as to the sufficiency of the foregoing procedures for your purposes.

     This letter is solely for the information of the addressees and to assist
the underwriters in conducting and documenting their investigation of the
affairs of the Fund in connection with the offering of the securities covered by
the Registration Statement, and is not to be used, circulated, quoted or
otherwise referred to within or without the underwriting group for any other
purpose, including but not limited to the registration, purchase or sale of
securities, nor is it to be filed with or referred to in whole or in part in the
Registration Statement or any other document, except that reference may be made
to it in the underwriting agreement or in any list of closing documents
pertaining to the offering of the securities covered by the Registration
Statement.

                                      Very Truly Yours,



                                      PRICEWATERHOUSECOOPERS LLP

                                      F-2

</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-99. (L)
<SEQUENCE>6
<FILENAME>dex99l.txt
<DESCRIPTION>OPINION AND CONSENT OF ROPES & GRAY
<TEXT>
<PAGE>

                                                                       Exhibit l

                                                                 August 16, 2002

PIMCO New York Municipal Income Fund II
c/o PIMCO Advisory Services
1345 Avenue of the Americas
New York, New York 10105

Ladies and Gentlemen:

         We have acted as counsel to PIMCO New York Municipal Income Fund II
(the "Fund") in connection with the Registration Statement of the Fund on Form
N-2 (File No. 333-91740) under the Securities Act of 1933 and the Investment
Company Act of 1940 (File No. 811-21078) (as amended, the "Registration
Statement"), relating to the proposed sale of an aggregate of 1,800 Auction
Preferred Shares, Series A, and 1,800 Auction Preferred Shares, Series B
(together, the "Preferred Shares"). The Preferred Shares are to be sold pursuant
to an Underwriting Agreement substantially in the form filed as an exhibit to
the Registration Statement (the "Underwriting Agreement") among the Fund, PIMCO
Funds Advisors LLC and UBS Warburg LLC, on behalf of itself and the other
underwriters named therein.

         We have examined the Fund's Agreement and Declaration of Trust on file
in the office of the Secretary of State of The Commonwealth of Massachusetts, as
amended (the "Declaration of Trust"), and the Fund's Amended and Restated
Bylaws, and are familiar with the actions taken by the Fund in connection with
the issuance and sale of the Preferred Shares. We have also examined such other
documents and records as we have deemed necessary for the purposes of this
opinion.

         Based upon the foregoing, we are of the opinion that:

         1.   The Fund has been duly organized and is a validly existing
              unincorporated association under and by virtue of the laws of The
              Commonwealth of Massachusetts.

<PAGE>

PIMCO New York Municipal Income Fund II -2-                     August 16, 2002



         2.   The Preferred Shares have been duly authorized and, assuming the
              due execution and delivery of the Underwriting Agreement by an
              authorized officer of the Fund, when issued and paid for in
              accordance with the Underwriting Agreement, will be validly
              issued, fully paid and, except as described in the following
              paragraph, nonassessable by the Fund.

         The Fund is an entity of the type commonly known as a "Massachusetts
business trust." Under Massachusetts law, shareholders could, under certain
circumstances, be held personally liable for the obligations of the Fund.
However, the Declaration of Trust disclaims shareholder liability for acts or
obligations of the Fund and requires that a notice of such disclaimer be given
in each note, bond, contract, instrument, certificate or undertaking entered
into or executed by the Fund or its Trustees. The Declaration of Trust provides
for indemnification out of the property of the Fund for all loss and expense of
any shareholder of the Fund held personally liable solely by reason of his being
or having been a shareholder. Thus, the risk of a shareholder's incurring
financial loss on account of being a shareholder is limited to circumstances in
which the Fund itself would be unable to meet its obligations.

         We understand that this opinion is to be used in connection with the
registration of the Preferred Shares for offering and sale pursuant to the
Securities Act of 1933, as amended. We consent to the filing of this opinion
with and as part of the Registration Statement and to the references to our firm
in the related prospectus under the captions "Taxes" and "Legal matters" in the
Prospectus contained in the Registration Statement.

                                                     Very truly yours,

                                                     /s/ Ropes & Gray

                                                     Ropes & Gray

</TEXT>
</DOCUMENT>
</SEC-DOCUMENT>
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