Two World Financial Center, 225 Liberty Street, New York, New York 10281-1008

o This post-effective amendment designates a new effective date for a previously filed post-effective amendment.

Investment Objective. The Fund seeks as high a level of income exempt from federal income tax and California individual income taxes as is consistent with its investment policies and prudent investment management.

Fees and Expenses of the Fund. This table describes the fees and expenses that you may pay if you buy and hold or redeem shares of the Fund. You may qualify for sales charge discounts if you (or you and your spouse) invest, or agree to invest in the future, at least $100,000 in certain funds in the Oppenheimer family of funds. More information about these and other discounts is available from your financial professional and in the section "About Your Account" beginning on page 15 of the prospectus and in the sections "How to Buy Shares" beginning on page 55 and "Appendix A" in the Fund's Statement of Additional Information.

Example. The following Example is intended to help you compare the cost of investing in the Fund with the cost of investing in other mutual funds. The Example assumes that you invest $10,000 in a class of shares of the Fund for the time periods indicated. The Example also assumes that your investment has a 5% return each year and that the Fund's operating expenses remain the same. Although your actual costs may be higher or lower, based on these assumptions your expenses would be as follows:

Portfolio Turnover. The Fund pays transaction costs, such as commissions, when it buys and sells securities (or "turns over" its portfolio). A higher portfolio turnover rate may indicate higher transaction costs and may result in higher taxes when Fund shares are held in a taxable account. These costs, which are not reflected in the annual fund operating expenses or in the Example, affect the Fund's performance. During the most recent fiscal year, the Fund's portfolio turnover rate was 32% of the average value of its portfolio.

Principal Investment Strategies. Under normal market conditions, the Fund invests at least 80% of its net assets (plus borrowings for investment purposes) in California municipal securities that, in the opinion of counsel to the issuer of the securities, are exempt from federal and California individual income taxes. These securities primarily include municipal bonds, municipal notes and interests in municipal leases. California municipal securities also include debt obligations of the governments of certain territories, possessions and commonwealths of the United States, if the interest is not subject to California and federal income tax. These securities are "California municipal securities" for purposes of this prospectus. The Fund seeks to maintain a dollar-weighted average effective portfolio maturity of five years or less, however, it can buy securities with maturities of more than five years. The Fund may invest a substantial percentage of its assets in "callable" securities, which allow the issuer to redeem them before their maturity date.

Securities whose interest is exempt from California taxes are included for purposes of the Fund's 80% requirement discussed above, even if the issuer is located outside of California. A substantial portion of the Fund's California municipal securities may pay interest that is subject to the federal alternative minimum tax. Securities that generate income subject to alternative minimum tax (AMT) will count towards the Fund's 80% requirement. The Fund selects investments without regard to this type of tax treatment. The Fund may invest in obligations that pay interest at fixed or variable rates.

Most of the securities the Fund buys are "investment-grade," although it can invest as much as 5% of its total assets in below-investment-grade securities (sometimes called "junk bonds"). Investment-grade securities are rated in one of the four highest rating categories of nationally recognized statistical rating organizations, such as Standard & Poor's (or, in the case of unrated securities, determined by the Fund's investment adviser to be comparable to securities rated investment-grade). The Fund also invests in unrated securities, in which case the Fund's investment adviser, OppenheimerFunds, Inc., internally assigns ratings to those securities, after assessing their credit quality and other factors, in investment-grade or below-investment-grade categories similar to those of nationally recognized rating organizations. There can be no assurance, nor is it intended, that the Manager's credit analysis process is consistent or comparable with the credit analysis process used by a nationally recognized statistical rating organization.

The Fund can invest in inverse floaters, a variable rate obligation and form of derivative, to seek increased income and return. The Fund's investment in inverse floaters entails a degree of leverage. The Fund can expose up to 20% of its total assets to the effects of leverage from its investments in inverse floaters.

The Fund can borrow money to purchase additional securities, another form of leverage. Although the amount of borrowing will vary from time to time, the amount of leveraging from borrowings will not exceed one-third of the Fund's total assets.

In selecting investments for the Fund, the portfolio managers generally look at a wide range of California municipal securities from different issuers, including state agencies and municipalities, as well as unrated bonds and securities of smaller issuers that provide high current income and might be overlooked by other investors. The portfolio managers also look at coupon interest or accretion rates, current market interest rates, callability and call prices that might change the effective maturity of particular securities and the overall portfolio, and securities with various maturities so that portions of the portfolio will mature at different times to reduce share price volatility and reinvestment risk. The portfolio managers may consider selling a security if any of these factors no longer applies to a security purchased for the Fund, but are not required to do so.

Principal Risks. The price of the Fund's shares can go up and down substantially. The value of the Fund's investments may change because of broad changes in the markets in which the Fund invests or because of poor security selection, which could cause the Fund to underperform other funds with similar investment objectives. There is no assurance that the Fund will achieve its investment objective. When you redeem your shares, they may be worth more or less than what you paid for them. These risks mean that you can lose money by investing in the Fund.

Main Risks of Investing in Municipal Securities. Municipal securities may be subject to interest rate risk, credit risk, credit spread risk, extension risk, reinvestment risk and prepayment risk. Interest rate risk is the risk that when prevailing interest rates fall, the values of already-issued debt securities generally rise; and when prevailing interest rates rise, the values of already-issued debt securities generally fall, and they may be worth less than the amount the Fund paid for them. When interest rates change, the values of longer-term debt securities usually change more than the values of shorter-term debt securities. Credit risk is the risk that the issuer of a security might not make interest and principal payments on the security as they become due. If an issuer fails to pay interest or repay principal, the Fund's income or share value might be reduced. Adverse news about an issuer or a downgrade in an issuer's credit rating, for any reason, can also reduce the market value of the issuer's securities. "Credit spread" is the difference in yield between securities that is due to differences in their credit quality. There is a risk that credit spreads may increase when the market expects lower-grade bonds to default more frequently. Widening credit spreads may quickly reduce the market values of the Fund's lower-rated and unrated securities. Extension risk is the risk that an increase in interest rates could cause principal payments on a debt security to be repaid at a slower rate than expected. Extension risk is particularly prevalent for a callable security where an increase in interest rates could result in the issuer of that security choosing not to redeem the security as anticipated on the security's call date. Such a decision by the issuer could have the effect of lengthening the debt security's expected maturity, making it more vulnerable to interest rate risk and reducing its market value. Reinvestment risk is the risk that when interest rates fall the Fund may be required to reinvest the proceeds from a security's sale or redemption at a lower interest rate. Callable bonds are generally subject to greater reinvestment risk than non-callable bonds. Prepayment risk is the risk that the issuer may repay the security prior to the expected maturity or that borrowers may repay the loans that underlie these securities more quickly than expected, thereby causing the issuer of the security to repay the principal prior to the expected maturity. The Fund may need to reinvest the proceeds at a lower interest rate, reducing its income.

Special Risks of Below-Investment-Grade Securities. Below-investment-grade debt securities may be subject to greater price fluctuations and have a greater risk that the issuer might not be able to pay interest and principal when due. The market for below-investment-grade securities may be less liquid and they may be harder to value or to sell at an acceptable price, especially during times of market volatility or decline.

The Fund can invest up to 5% of its total assets in below-investment-grade securities.

Special Risks of California Municipal Securities. Because the Fund invests primarily in California municipal securities, the value of its portfolio investments will be highly sensitive to events affecting the financial stability of the State of California and its municipalities, agencies, authorities and other instrumentalities that issue those securities. Changes in legislation or policy, erosion of the tax base, the effects of terrorist acts or natural disasters, or other economic or credit problems may have a significant negative impact on the value of state or local securities.

Special Risks of Investing in U.S. Territories, Commonwealths and Possessions. The Fund also invests in obligations of the governments of the U.S. territories, commonwealths and possessions such as Puerto Rico, the Virgin Islands, Guam and the Northern Mariana Islands to the extent such obligations are exempt from state income taxes. These investments also are considered to be "California municipal securities" for purposes of this prospectus. Accordingly, the Fund may be adversely affected by local political and economic conditions and developments within these U.S. territories, commonwealths and possessions affecting the issuers of such obligations.

The municipalities in the jurisdictions in which the Fund invests currently experience significant financial difficulties. A credit rating downgrade relating to, default by, or insolvency or bankruptcy of one or several municipal security issuers of a state, territory, commonwealth or possession could affect the market values and marketability of many or all municipal obligations of such a state, territory, commonwealth or possession.

Main Risks of Shorter-Term Securities. Normally, when interest rates change, the values of shorter-term debt securities change less than the values of securities with longer maturities. The Fund tries to reduce the volatility of its share prices by seeking to maintain a shorter average effective portfolio maturity. However, shorter-term securities may have lower yields than longer-term securities. Shorter-term securities are also subject to extension and reinvestment risk. The Fund is subject to extension risk when principal payments on a debt security occur at a slower rate than expected, potentially extending the average life of the security. For securities with a call date in the near future, there is the risk that an increase in interest rates could result in the issuer of that security choosing not to redeem the security as anticipated on the security's call date. Such a decision by the issuer may effectively change a short- or intermediate-term security into a longer term security, which could have the effect of locking in a below-market interest rate on the security, increasing the security's duration, making the security more vulnerable to interest rate risk, reducing the security's market value and increasing the Fund's average effective portfolio maturity. Under such circumstances, because the values of longer term securities generally fluctuate more widely in response to interest rate changes than shorter term securities, the Fund's volatility could increase. Reinvestment risk is the risk that if interest rates fall the Fund may need to invest the proceeds of redeemed securities in securities with lower interest rates.

Municipal Market Volatility and Illiquidity. The municipal bond market can be susceptible to unusual volatility, particularly for lower-rated and unrated securities. Liquidity can be reduced unpredictably in response to overall economic conditions or credit tightening. During times of reduced market liquidity, the Fund may not be able to readily sell bonds at the prices at which they are carried on the Fund's books. If the Fund needed to sell large blocks of bonds to meet shareholder redemption requests or to raise cash, those sales could further reduce the bonds' prices.

Municipal Sector Concentration. While the Fund does not invest more than 25% of its total assets in a single industry, certain types of municipal securities (such as general obligation, government appropriation, municipal leases, special assessment and special tax bonds) are not considered a part of any "industry" for purposes of this policy. Therefore, the Fund may invest more than 25% of its total assets in these types of municipal securities. These types of municipal securities may finance, or pay interest from the revenues of, projects that tend to be impacted in the same way by economic, business or political developments which would increase credit risk. For example, legislation on the financing of a project or a declining economic need for the project would likely affect all similar projects.

Risks of Tobacco Related Bonds. In 1998, the largest U.S. tobacco manufacturers reached an out of court agreement, known as the Master Settlement Agreement (the "MSA"), to settle claims against them by 46 states and six other U.S. jurisdictions. The tobacco manufacturers agreed to make annual payments to the government entities in exchange for the release of all litigation claims. A number of the states have sold bonds that are backed by those future payments. The Fund may invest in two types of those bonds: (i) bonds that make payments only from a state's interest in the MSA and (ii) bonds that make payments from both the MSA revenue and from an "appropriation pledge" by the state. An "appropriation pledge" requires the state to pass a specific periodic appropriation to make the payments and is generally not an unconditional guarantee of payment by a state.

The settlement payments are based on factors, including, but not limited to, annual domestic cigarette shipments, cigarette consumption, inflation and the financial capability of participating tobacco companies. Payments could be reduced if consumption decreases, if market share is lost to non-MSA manufacturers, or if there is a negative outcome in litigation regarding the MSA, including challenges by participating tobacco manufacturers regarding the amount of annual payments owed under the MSA.

The Fund can invest up to 25% of its total assets in tobacco-related bonds without an appropriation pledge that make payments only from a state's interest in the MSA.

Risks of Land-Secured or "Dirt" Bonds. These special assessment or special tax bonds are issued to promote residential, commercial or industrial growth and redevelopment. They are exposed to real estate development-related risks. The bonds could default if the developments failed to progress as anticipated or if taxpayers failed to pay the assessments, fees and taxes specified in the financing plans for a project.

Main Risks of Borrowing and Leverage. The Fund can borrow up to one-third of the value of its total assets (including the amount borrowed) from banks, as permitted by the Investment Company Act of 1940. It can use those borrowings for a number of purposes, including for purchasing securities, which can create "leverage." In that case, changes in the value of the Fund's investments will have a larger effect on its share price than if it did not borrow. Borrowing results in interest payments to the lenders and related expenses. Borrowing for investment purposes might reduce the Fund's return if the yield on the securities purchased is less than those borrowing costs. The Fund may also borrow to meet redemption obligations, for temporary and emergency purposes, or to unwind or contribute to trusts in connection with the Fund's investment in inverse floaters. The Fund currently participates in a line of credit with other Oppenheimer funds for its borrowing.

The Fund can participate in a committed reverse repurchase agreement program with other Oppenheimer funds. Reverse repurchase agreements that the Fund may engage in also create leverage. A reverse repurchase agreement is the sale by the Fund of a debt obligation to a party for a specified price, with the simultaneous agreement by the Fund to repurchase that debt obligation from that party on a future date at a higher price. Similar to a borrowing, reverse repurchase agreements provide the Fund with cash for investment and operational purposes. When the Fund engages in reverse repurchase agreements, changes in the value of the Fund's investments will have a larger effect on its share price than if it did not engage in these transactions due to the effect of leverage. Reverse repurchase agreements create fund expenses and require that the Fund have sufficient cash available to repurchase the debt obligation when required. Reverse repurchase agreements also involve the risk that the market value of the debt obligation that is the subject of the reverse repurchase agreement could decline significantly below the price at which the Fund is obligated to repurchase the security.

Risks of Non-Diversification. The Fund is classified as a "non-diversified" fund under the Investment Company Act of 1940. Accordingly, the Fund may invest a greater portion of its assets in the securities of a single issuer than if it were a "diversified" fund. To the extent that the Fund invests a higher percentage of its assets in the securities of a single issuer, the Fund is more subject to the risks associated with and developments affecting that issuer than a fund that invests more widely.

Risks of Derivatives. A "derivative" is an investment whose value depends on (or is derived from) the value of an underlying security, asset, interest rate, index or currency. Derivatives may be volatile and involve significant risks. Derivative transactions may require the payment of premiums and can increase portfolio turnover. Certain derivative investments may be illiquid. The underlying security or other reference on which a derivative is based, or the derivative itself, may not perform the way the Fund expects it to. The Fund could realize little or no income or lose principal from a derivative investment or a hedge might be unsuccessful. The Fund may also lose money if the issuer of a derivative fails to pay the amount due.

Inverse Floaters. The Fund invests in inverse floaters because, under ordinary circumstances, they offer higher yields and thus provide higher income than fixed-rate bonds of comparable maturity and credit quality. An inverse floater is a derivative instrument, typically created by a trust established by a counterparty, that divides a municipal security into two securities: a short-term floating rate security and a long-term floating rate security which is referred to as an "inverse floater." The inverse floater pays interest at rates that move in the opposite direction of those on the short-term floating rate security. Inverse floaters produce less income when short-term interest rates rise (and may pay no income) and more income when short-term interest rates fall. Thus, if short-term interest rates rise after the issuance of the floater, any yield advantage is reduced or eliminated. Under certain circumstances a trust may be collapsed and the Fund may be required to repay the principal amount due on the short-term securities or the difference between the liquidation value of the underlying municipal bond and the principal amount due on those securities. Inverse floaters can be more volatile than conventional fixed-rate bonds. They also entail a degree of leverage and certain inverse floaters may require the Fund to provide collateral for payments on the short-term securities or to "unwind" the transaction.

The Fund will not expose more than 20% of its total assets to the effects of leverage from its investments in inverse floaters.

Who Is The Fund Designed For? The Fund is designed for investors seeking income exempt from federal and California personal income taxes in a Fund that invests primarily in investment-grade securities and seeks to maintain an intermediate effective average maturity. The Fund does not seek capital gains or growth. Investors should be willing to assume credit and interest rate risks. Because it invests in tax-exempt securities, the Fund is not appropriate for a retirement plan or other tax-exempt or tax-deferred account. The Fund is not a complete investment program. You should carefully consider your own investment goals and risk tolerance before investing in the Fund.

The Fund's Past Performance. The bar chart and table below provide some indication of the risks of investing in the Fund by showing changes in the Fund's performance from year to year and by showing how the Fund's average annual returns for 1, 5 and 10 years compare with those of a broad measure of market performance. The Fund's past investment performance (before and after taxes) is not necessarily an indication of how the Fund will perform in the future. More recent performance information is available by calling the toll-free number on the back of this prospectus and on the Fund's website:
https://www.oppenheimerfunds.com/fund/LimitedTermCaliforniaMunicipal

Sales charges and taxes are not included and the returns would be lower if they were. During the period shown, the highest return for a calendar quarter was 7.88% (3rd Qtr 09) and the lowest return was -9.22% (4th Qtr 08). For the period from January 1, 2011 through September 30, 2011 the cumulative return before sales charges and taxes was 5.13%.

The following table shows the average annual total returns for each class of the Fund's shares. After-tax returns are calculated using the highest individual federal marginal income tax rates and do not reflect the impact of state or local taxes. Your actual after-tax returns, depending on your individual tax situation, may differ from those shown and after-tax returns shown are not relevant to investors who hold their Fund shares through tax-deferred arrangements, such as 401(k) plans or individual retirement accounts. After-tax returns are shown for only one class and after-tax returns for other classes will vary.

No performance information is included for Class Y shares because they do not yet have one calendar year of performance.

Investment Adviser. OppenheimerFunds, Inc. is the Fund's investment adviser (the "Manager").

Portfolio Managers. Daniel G. Loughran, Scott S. Cottier and Troy E. Willis are each a Vice President of the Fund and have been portfolio managers of the Fund since its inception. Mark R. DeMitry has been a Vice President of the Fund and has been a portfolio manager of the Fund since 2006. Michael L. Camarella is a Vice President of the Fund and has been a portfolio manager of the Fund since 2008. Charles S. Pulire has been a Vice President of the Fund and has been a portfolio manager of the Fund since December 2010.

Purchase and Sale of Fund Shares. In most cases, you can buy Fund shares with a minimum initial investment of $1,000 and make additional investments with as little as $50. For certain investment plans and retirement accounts, the minimum initial investment is $500 and, for some, the minimum additional investment is $25. For certain fee based programs the minimum initial investment is $250.

Shares may be purchased through a financial intermediary or the Distributor and redeemed through a financial intermediary or the Transfer Agent on days the New York Stock Exchange is open for trading. Shareholders may purchase or redeem shares by mail, through the website at www.oppenheimerfunds.com or by calling 1.800.225.5677. Share transactions may be paid by check, by Federal Funds wire or directly from or into your bank account.

Taxes. Dividends paid from net investment income on tax-exempt municipal securities will be excludable from gross income for federal individual income tax purposes. Dividends that are derived from interest paid on certain "private activity bonds" may be an item of tax preference if you are subject to the federal alternative minimum tax. Certain distributions may be taxable as ordinary income or as capital gains. The tax treatment of dividends is the same whether they are taken in cash or reinvested.

Payments to Broker-Dealers and Other Financial Intermediaries. If you purchase Fund shares through a broker-dealer or other financial intermediary (such as a bank), the Fund, the Manager, or their related companies may pay the intermediary for the sale of Fund shares and related services. These payments may create a conflict of interest by influencing the broker-dealer or other intermediary and your salesperson to recommend the Fund over another investment. Ask your salesperson or visit your financial intermediary's website for more information.

The allocation of the Fund's portfolio among different types of investments will vary over time and the Fund's portfolio might not always include all of the different types of investments described below. The Statement of Additional Information contains more detailed information about the Fund's investment policies and risks.

The Fund's Principal Investment Strategies and Risks. The strategies and types of investments discussed in the Fund Summary are the ones that the Fund considers to be the most important in seeking to achieve its investment objective. Additionally, the following strategies and risks are those the Fund expects its portfolio to be subject to as a whole.

The Manager tries to reduce risks by selecting a wide variety of municipal investments and by carefully researching securities before they are purchased. However, changes in the overall market prices of municipal securities and the income they pay can occur at any time. The yield and share prices of the Fund can change daily based on changes in interest rates and market conditions and in response to other economic events.

Unless this prospectus or the Statement of Additional Information states that an investment percentage restriction applies on an ongoing basis, it applies only at the time the Fund makes an investment (except for borrowing and investments in illiquid securities).

Municipal Securities. Municipal securities are issued to raise money for a variety of public or private purposes, including financing state or local governments, financing specific projects or financing public facilities. These debt obligations are issued by the state governments, as well as their political subdivisions (such as cities, towns, and counties) and their agencies and authorities. The Fund buys municipal bonds and notes, tax-exempt commercial paper, certificates of participation in municipal leases and other debt obligations. Municipal securities generally are classified as general or revenue obligations. General obligations are secured by the issuer's pledge of its full faith, credit and taxing power for the payment of principal and interest. Revenue obligations are bonds whose interest is payable only from the revenues derived from a particular facility or class of facilities, or a specific excise tax or other revenue source. Some revenue obligations are private activity bonds that pay interest that may be a tax preference item for investors subject to the federal alternative minimum tax. The Fund selects investments without regard to this type of tax treatment.

Additionally, there are times when an issuer will pledge its taxing power to offer additional security to a revenue bond. These securities are sometimes called "double-barreled bonds." See, for example, tobacco bonds with an appropriation pledge as discussed in this prospectus.

California municipal securities are municipal securities that are not subject (in the opinion of bond counsel to the issuer at the time they are issued) to California individual income tax. The term "California municipal securities" also includes debt securities of the governments of certain possessions, territories and commonwealths of the United States if the interest is not subject to federal and California individual income tax. For additional discussion of the special considerations relating to the Fund's investments in California and the U.S. territories, commonwealths and possessions, see the Statement of Additional Information. Some debt securities, such as zero-coupon securities, do not pay current interest. Other securities may be subject to calls by the issuer (to redeem the debt) or to prepayment prior to their stated maturity.

Tax-Exempt Commercial Paper. Tax-exempt commercial paper is a short-term obligation with a stated maturity of usually 270 days or less. It is issued by state and local governments or their agencies to finance seasonal working capital needs or as short-term financing in anticipation of longer-term financing. While tax-exempt commercial paper is intended to be repaid from general revenues or refinanced, it frequently is backed by a letter of credit, lending arrangement, note, repurchase agreement or other credit facility agreement offered by a bank or financial institution. Because tax-exempt issuers may constantly reissue their commercial paper and use the proceeds (or other sources) to repay maturing paper, the commercial paper of a tax-exempt issuer that is unable to continue to obtain liquidity in that manner may default. There may be a limited secondary market for issues of tax-exempt commercial paper.

Municipal Lease Obligations. Municipal leases are used by state and local governments to obtain funds to acquire land, equipment or facilities. The Fund can invest in certificates of participation that represent a proportionate interest in payments made under municipal lease obligations. Most municipal leases, while secured by the leased property, are not general obligations of the issuing municipality. They often contain "non-appropriation" clauses under which the municipal government has no obligation to make lease or installment payments in future years unless money is appropriated on a yearly basis.

If the municipal government stops making payments or transfers its payment obligations to a private entity, the obligation could lose value or become taxable. Although the obligation may be secured by the leased equipment or facilities, the disposition of the property in the event of non-appropriation or foreclosure might prove difficult, time consuming and costly, and may result in a delay in recovering or the failure to recover the original investment. Some lease obligations may not have an active trading market, making it difficult for the Fund to sell them quickly at an acceptable price.

Tobacco Related Bonds. The Fund may invest in two types of tobacco related bonds: (i) tobacco settlement revenue bonds, for which payments of interest and principal are made solely from a state's interest in the Master Settlement Agreement ("MSA") and (ii) tobacco bonds subject to a state's appropriation pledge, for which payments may come from both the MSA revenue and the applicable state's appropriation pledge.

A number of states have securitized the future flow of those payments by selling bonds, some through distinct governmental entities created for such purpose. The bonds are backed by the future revenue flows from the tobacco manufacturers. Annual payments on the bonds, and thus the risk to the Fund, are highly dependent on the receipt of future settlement payments. The amount of future settlement payments is dependent on many factors including, but not limited to, annual domestic cigarette shipments, cigarette consumption, inflation and the financial capability of participating tobacco companies. As a result, payments made by tobacco manufacturers could be reduced if the decrease in tobacco consumption is significantly greater than the forecasted decline. A market share loss by the MSA companies to non-MSA participating tobacco manufacturers could also cause a downward adjustment in the payment amounts. A participating manufacturer filing for bankruptcy also could cause delays or reductions in bond payments, which could affect the Fund's net asset value.

The MSA and tobacco manufacturers have been and continue to be subject to various legal claims, including challenges by participating tobacco manufacturers regarding the amount of annual payments owed under the MSA, and an adverse outcome could affect the payment streams associated with the MSA or cause delays or reductions in bond payments. The MSA itself has been subject to legal challenges and has, to date, withstood those challenges. The Statement of Additional Information contains more detailed information about the litigation related to the tobacco industry and the MSA.

Appropriation debt differs from a state's general obligation debt in that general obligation debt is backed by the state's full faith, credit and taxing power, while appropriation debt requires the state to pass a specific periodic appropriation to pay interest and/or principal on the bonds. The appropriation is usually made annually. While STA Tobacco Bonds offer an enhanced credit support feature, that feature is generally not an unconditional guarantee of payment by a state and states generally do not pledge the full faith, credit or taxing power of the state. The Fund considers STA Tobacco Bonds to be "municipal securities" for purposes of its concentration policies.

Municipal Sector Concentration. While the Fund's fundamental policies do not allow it to concentrate its investments (that is, to invest more than 25% of its total assets) in a single industry, certain types of municipal securities are not considered a part of any "industry" under that policy. Examples of these types of municipal securities include: general obligation, government appropriation, municipal leases, special assessment and special tax bonds. Therefore, the Fund may invest more than 25% of its total assets in these types of municipal securities, which may finance similar types of projects or from which the interest is paid from revenues of similar types of projects. "Similar types of projects" are projects that are related in such a way that economic, business or political developments tend to have the same impact on each similar project. For example, a change that affects one project, such as proposed legislation on the financing of the project, a shortage of the materials needed for the project, or a declining economic need for the project, would likely affect all similar projects, thereby increasing market risk. Thus, market or economic changes that affect a security issued in connection with one project also would affect securities issued in connection with similar types of projects.

Although these types of municipal securities may be related to certain industries, because they are issued by governments or their political subdivisions, these types of municipal securities are not considered a part of any industry for purposes of the Fund's industry concentration policy.

Land-Secured or "Dirt" Bonds (Special Tax or Special Assessment Bonds). The Fund can invest more than 25% of its total assets in municipal securities for similar types of projects that are issued in connection with special taxing districts that are organized to plan and finance infrastructure development to induce residential, commercial and industrial growth and redevelopment. The bonds financed by these methods, such as tax assessment, special tax or tax increment financing generally are payable solely from taxes or other revenues attributable to the specific projects financed by the bonds without recourse to the credit or taxing power of related or overlapping municipalities. These projects often are exposed to real estate development-related risks, such as the failure of property development, availability of financing, extended vacancies of properties, increased competition, limitations on rents, changes in neighborhood values and the demand of properties to tenants, and changes in interest rates. These real estate risks may be heightened in the event that these projects are in foreclosure. Additionally, upon foreclosure the Fund may pay certain maintenance or operating expenses or taxes relating to such projects. These expenses may increase the overall expenses of the Fund and reduce its returns.

In addition, these projects can have more taxpayer concentration risk than general tax-supported bonds, such as general obligation bonds. Further, the fees, special taxes, or tax allocations and other revenues that are established to secure such financings generally are limited as to the rate or amount that may be levied or assessed and are not subject to increase pursuant to rate covenants or municipal or corporate guarantees. The bonds could default if development failed to progress as anticipated or if larger taxpayers failed to pay the assessments, fees and taxes as provided in the financing plans of the projects.

In California, these special tax or special assessment bonds also are referred to as Mello-Roos Bonds. The bonds are issued under the California Mello-Roos Community Facilities Act to finance the building of roads, sewage treatment plants and other projects designed to improve the infrastructure of a community. Mello-Roos bonds are primarily secured by real estate taxes levied on property located in the community. The timely payment of principal and interest on the bonds depends on the property owner's continuing ability to pay the real estate taxes. Various factors could negatively affect this ability including a declining economy or real estate market in California.

Ratings of Municipal Securities the Fund Buys. The Manager may rely to some extent on credit ratings by nationally recognized statistical rating organizations in evaluating the credit risk of securities selected for the Fund's portfolio. Credit ratings evaluate the expectation that scheduled interest and principal payments will be made in a timely manner. They do not reflect any judgment of market risk.

Rating organizations might not always change their credit rating of an issuer in a timely manner to reflect events that could affect the issuer's ability to make timely payments on its obligations. In selecting securities for its portfolio and evaluating their income potential and credit risk, the Fund does not rely solely on ratings by rating organizations but evaluates business, economic and other factors affecting issuers as well. Many factors affect an issuer's ability to make timely payments, and the credit risk of a particular security may change over time. The Manager also may use its own research and analysis. If a bond is insured, it will usually be rated by the rating organizations based on the financial strength of the insurer. The rating categories are described in an Appendix to the Statement of Additional Information.

The Fund can invest as much as 5% of its total assets in securities that are not "investment grade" (measured at the time of purchase) to seek higher income. The Fund considers the following securities to be "investment-grade" under its credit quality guidelines:

In evaluating the credit quality of a particular security, whether rated or unrated, the Manager will normally take into consideration a number of factors including, but not limited to, the financial resources of the issuer, the underlying source of funds for debt service on a security, the issuer's sensitivity to economic conditions and trends, any operating history of the facility financed by the obligation, the degree of community support for the financed facility, the capabilities of the issuer's management, and regulatory factors affecting the issuer or the particular facility.

A reduction in the rating of a security after the Fund buys it will not require the Fund to dispose of the security. However, the Manager will evaluate such downgraded securities to determine whether to keep them in the Fund's portfolio.

Determining the "Average Effective Maturity" of the Fund's Portfolio. In general, when interest rates change, debt securities having shorter maturities fluctuate in value less than securities with longer maturities. The Fund tries to reduce the volatility of its share prices by seeking to maintain an average effective portfolio maturity of five years or less. Because of events affecting the bond markets and interest rate changes, the maturity of the portfolio might not meet the target at all times. The average effective portfolio maturity rate measures the "average" maturity of all of its securities on a "dollar-weighted" basis, meaning that larger securities holdings have a greater effect on overall portfolio maturity than smaller holdings. The Fund can therefore hold securities with stated and effective maturities of more or less than five years. Generally, the Manager does not buy securities with stated maturities of more than five years if the Fund's average effective portfolio maturity is more than five years.

The "effective" maturity of a security is not always the same as the stated maturity date. A number of factors may cause the "effective" maturity to be shorter than the stated maturity. For example, a bond's effective maturity might be deemed to be shorter (for pricing and trading purposes) than its stated maturity as a result of differences between its coupon interest rate and current market interest rates, whether the bond is callable (that means the issuer can pay off the bond prior to its stated maturity), the rate of accretion of discounts on the bond, and other factors such as mandatory put provisions and scheduled sinking fund payments.

When interest rates change, securities that have an effective maturity that is shorter than their stated maturity tend to behave like securities having those shorter maturity dates. However, those securities might not behave as expected, and the Fund might not always be successful in maintaining its average effective portfolio maturity at five years or less or in reducing the volatility of its share prices.

Special Risks of Derivative Investments. The Fund can invest in different types of "derivative" investments that are consistent with its investment strategies. A derivative is an investment whose value depends on (or is derived from) the value of an underlying security, asset, interest rate, index or currency. Inverse floaters are the primary type of derivative the Fund can use.

The Fund may use derivatives to seek income or capital gain or to hedge against the risks of other investments. Derivatives may allow the Fund to increase or decrease its exposure to certain markets or risks. Examples include, but are not limited to, interest rate swaps or municipal bond swaps. While the Fund may use derivatives for hedging purposes, it typically does not use hedging instruments, such as options, to hedge investment risks.

Derivatives may be volatile and may involve significant risks. The underlying security or other instrument on which a derivative is based, or the derivative itself, may not perform the way the Manager expects it to. Some derivatives have the potential for unlimited loss, regardless of the size of the Fund's initial investment. The Fund may also lose money on a derivative investment if the issuer fails to pay the amount due. Certain derivative investments held by the Fund may be illiquid, making it difficult to close out an unfavorable position. Derivative transactions may require the payment of premiums and can increase portfolio turnover. As a result of these risks, the Fund could realize little or no income or lose money from its investment, or a hedge might be unsuccessful.

The Fund can invest up to one third of its total assets in derivatives to seek increased income or to try to hedge investment risks.

Inverse Floaters. The Fund may invest in inverse floaters to seek greater income and total return. Inverse floaters, under ordinary circumstances, offer higher yields and thus provide higher income than fixed-rate bonds of comparable maturity and credit quality. An inverse floater is a derivative instrument, typically created by a trust, that divides a municipal security into two securities: a short-term tax-exempt floating rate security (sometimes referred to as a "tender option bond") and a long-term tax-exempt floating rate security (referred to as a "residual certificate" or "inverse floater") that pays interest at rates that move in the opposite direction of the yield on the short-term floating rate security. The purchaser of a "tender option bond" has the right to tender the security periodically for repayment of the principal value. As short-term interest rates rise, inverse floaters produce less current income (and, in extreme cases, may pay no income) and as short-term interest rates fall, inverse floaters produce more current income. Thus, if short-term interest rates rise after the issuance of the floater, any yield advantage is reduced or eliminated.

To facilitate the creation of inverse floaters, the Fund may purchase a municipal security and subsequently transfer it to a broker-dealer (the sponsor), which deposits the municipal security in a trust. The trust issues the residual certificates and short-term floating rate securities. The trust documents enable the Fund to withdraw the underlying bond to unwind or "collapse" the trust (upon tendering the residual certificate and paying the value of the short-term bonds and certain other costs). The Fund may also purchase inverse floaters created by municipal issuers directly or by other parties that have deposited municipal bonds into a sponsored trust.

The Fund's investments in inverse floaters involve certain risks. The market value of an inverse floater residual certificate can be more volatile than that of a conventional fixed-rate bond having similar credit quality, maturity and redemption provisions. Typically, inverse floater residual certificates tend to underperform fixed-rate bonds when long-term interest rates are rising but tend to outperform fixed-rate bonds when long-term interest rates are stable or falling. Inverse floater residual certificates entail a degree of leverage because the trust issues short-term securities in a ratio to the residual certificates with the underlying long-term bond providing collateral for the obligation to pay the principal value of the short-term securities if and when they are tendered. If the Fund has created the inverse floater by depositing a long-term bond into a trust, it may be required to provide additional collateral for the short-term securities if the value of the underlying bond deposited in the trust falls.

An inverse floater that has a higher degree of leverage is typically more volatile with respect to its price and income than an inverse floater having a lower degree of leverage. Under inverse floater arrangements, if the remarketing agent that offers the short-term securities for sale is unable to sell them, or if the holders tender (or put) them for repayment of principal and the remarketing agent is unable to remarket them, the remarketing agent may cause the trust to be collapsed, and in the case of floaters created by the Fund, the Fund will then be required to repay the principal amount of the tendered securities. During times of market volatility, illiquidity or uncertainty, the Fund could be required to sell other portfolio holdings at a disadvantageous time to raise cash to meet that obligation.

Some inverse floaters may have a "cap," so that if interest rates rise above the cap, the security pays additional interest income. If rates do not rise above the cap, the Fund will have paid an additional amount for that feature that has proved worthless.

The Fund may also enter into "shortfall and forbearance" agreements with respect to inverse floaters. Under those agreements, upon liquidation of the trust, the Fund is committed to pay the trust the difference between the liquidation value of the underlying municipal bond on which the inverse floater is based and the principal amount payable to the holders of the short-term floating rate security that is based on the same underlying municipal security. Although the Fund has the risk that it may be required to make such additional payment, these agreements may offer higher interest payments than a standard inverse floater.

Accounting Treatment of Inverse Floaters. Because of the accounting treatment for inverse floaters created by the Fund's transfer of a municipal bond to a trust, the Fund's financial statements will reflect these transactions as "secured borrowings," which affects the Fund's expense ratios, statements of income and assets and liabilities and causes the Fund's Statement of Investments to include the underlying municipal bond. The Fund's annual fund operating expenses, shown earlier in this prospectus, include certain expenses and fees related to the Fund's investments in inverse floaters. Some of those expenses are liabilities with respect to interest paid on short-term floating rate notes issued by the trusts whose inverse floater certificates are held by the Fund. Under accounting rules, the Fund also recognizes additional income in an amount that directly corresponds to these expenses and, as a result the Fund's net asset values per share and total returns have not been affected by these additional expenses.

Floating Rate/Variable Rate Obligations. Some municipal securities have variable or floating interest rates. Variable rates are adjustable at stated periodic intervals. Floating rates are automatically adjusted according to a specified market rate for those investments, such as, for example, the percentage of LIBOR, the SIFMA Municipal Swap Index or the percentage of the prime rate of a bank. These obligations may be secured by bank letters of credit or other credit support arrangements. Inverse floaters, discussed in this prospectus, are a type of variable rate obligation.

Borrowing and Leverage. The Fund can borrow from banks, a technique referred to as "leverage," in amounts up to one-third of the Fund's total assets (including the amount borrowed) less all liabilities and indebtedness other than borrowings. The Fund can use those borrowings for investment-related purposes such as purchasing securities believed to be desirable by the Manager when available, funding amounts necessary to unwind or "collapse" trusts that issued "inverse floaters" to the Fund (an investment vehicle used by the Fund as described in this prospectus), or to contribute to such trusts to enable them to meet tenders of their other securities by the holders. The Fund currently participates in a line of credit with other Oppenheimer funds for those purposes. The Fund may also borrow to meet redemption obligations or for temporary and emergency purposes.

Borrowing for leverage will subject the Fund to greater costs (for interest payments to the lender, origination fees and related expenses) than funds that do not borrow for leverage and these other purposes. The interest on borrowed money is an expense that might reduce the Fund's yield, especially if the cost of borrowing to buy securities exceeds the yield on the securities purchased with the proceeds of a loan. Using leverage may also make the Fund's share price more sensitive, i.e. volatile, to interest rate changes than if the Fund did not use leverage due to the tendency to exaggerate the effect of any increase or decrease in the value of the Fund's portfolio securities. The use of leverage may also cause the Fund to liquidate portfolio positions when it may not be advantageous to do so to satisfy its obligations or meet segregation requirements under the Investment Company Act of 1940.

Taxability Risk. The Fund's investments in municipal securities rely on the opinion of the issuer's bond counsel that the interest paid on those securities will not be subject to federal and state income tax. Tax opinions are generally provided at the time the municipal security is initially issued. However, after the Fund buys a security, the Internal Revenue Service may determine that a bond issued as tax-exempt should in fact be taxable and the Fund's dividends with respect to that bond might be subject to federal income tax.

Other Investment Strategies and Risks. The Fund can also use the investment techniques and strategies described below. The Fund might not use all of these techniques or strategies or might only use them from time to time.

When-Issued and Delayed-Delivery Transactions. The Fund may purchase municipal securities on a "when-issued" basis and may purchase or sell such securities on a "delayed-delivery" basis. "When-issued" or "delayed-delivery" refers to securities whose terms and indenture are available and for which a market exists, but which are not available for immediate delivery. During the period between the purchase and the settlement dates, the buyer makes no payment for the security and receives no interest. When-issued or delayed-delivery securities the Fund buys are subject to changes in value as a result of market fluctuations during that period and the value of the security on the delivery date may be more or less than the Fund paid. The Fund may lose money if the value of the security has declined below the purchase price.

The Fund will not invest more than 5% of its total assets in "when-issued" and "delayed-delivery" transactions.

Percentage of LIBOR Notes (PLNs). The Fund may invest in Percentage of LIBOR Notes ("PLNs") which are variable rate municipal securities based on the London Interbank Offered Rate ("LIBOR"), a widely used benchmark for short-term interest rates and used by banks for interbank loans with other banks. A PLN typically pays interest based on a percentage of a LIBOR rate for a specified time plus an established yield premium. Due to their variable rate features, PLNs will generally pay higher levels of income in a rising short-term interest rate environment and lower levels of income as short-term interest rates decline. In times of substantial market volatility, however, PLNs may not perform as anticipated. The value of a PLN also may decline due to other factors, such as changes in credit quality of the underlying bond.

The Fund's ability to engage in transactions using PLNs may be limited due to market factors. There is no assurance that a liquid secondary market will exist for any particular PLN or at any particular time, and so the Fund may not be able to close a position in a PLN when it is advantageous to do so. The Fund may also transfer a PLN to a sponsor to create an inverse floater, which may further increase the volatility of the market value of a PLN or the inverse floater.

Defaulted Securities. The Fund may purchase defaulted securities if the Manager believes that there is potential for resumption of income payments or realization of income on the sale of the securities or the collateral or other advantageous developments appear likely in the near future. Notwithstanding the Manager's belief about the resumption of income payments or realization of income, the purchase of defaulted securities is highly speculative and involves a high degree of risk, including the risk of a substantial or complete loss of the Fund's investment. Defaulted securities are subject to the Fund's limitation on holding below-investment-grade securities. The Manager does not expect that this will be a significant investment strategy of the Fund.

Zero-Coupon Securities. The Fund can invest without limit in zero-coupon securities. These debt obligations do not pay interest prior to their maturity date or else they do not start to pay interest at a stated coupon rate until a future date. They are issued and traded at a discount from their face amount. The discount varies as the securities approach their maturity date (or the date interest payments are scheduled to begin). When interest rates change, zero-coupon securities are subject to greater fluctuations in their value than securities that pay current interest. The Fund accrues the discount on zero-coupon bonds as tax-free income on a current basis. The Fund may have to pay out the imputed income on zero-coupon securities without receiving actual cash payments currently.

Illiquid Securities. Investments may be illiquid because they do not have an active trading market, making it difficult to value them or dispose of them promptly at an acceptable price. The Manager monitors holdings of illiquid securities on an ongoing basis to determine whether to sell any holdings.

The Fund will not invest more than 15% of its net assets in illiquid securities.

Taxable Investments. The Fund can invest up to 20% of its net assets (plus borrowings for investment purposes) in investments that generate income subject to income taxes. Taxable investments include, for example, hedging instruments, repurchase agreements, and many of the types of securities the Fund would buy for temporary defensive purposes. The Fund does not anticipate investing substantial amounts of its assets in taxable investments under normal market conditions or as part of its normal trading strategies and policies.

Temporary Defensive and Interim Investments. For temporary defensive purposes in times of adverse or unstable market, economic or political conditions, the Fund can invest up to 100% of its total assets in investments that may be inconsistent with the Fund's principal investment strategies. Generally, the Fund would invest in short-term municipal securities, but could also invest in U.S. Government securities or highly-rated corporate debt securities. The Fund might also hold these types of securities as interim investments pending the investment of proceeds from the sale of Fund shares or the sale of Fund portfolio securities or to meet anticipated redemptions of Fund shares. The income from some temporary defensive investments may not be tax-exempt, and therefore to the extent the Fund invests in these securities, it might not achieve its investment objective.

Portfolio Turnover. A change in the securities held by the Fund is known as "portfolio turnover." The Fund may engage in active and frequent trading to try to achieve its investment objective and may have a portfolio turnover rate of over 100% annually. Increased portfolio turnover may result in higher brokerage fees or other transaction costs, which can reduce performance. However, the Fund ordinarily incurs little or no brokerage expense because most of the Fund's portfolio transactions are principal trades that do not require payment of brokerage commission. If the Fund realizes capital gains when it sells investments, it generally must pay those gains to shareholders, increasing its taxable distributions. The Financial Highlights table at the end of this prospectus shows the Fund's portfolio turnover rates during past fiscal years.

Conflicts of Interest. The investment activities of the Manager and its affiliates in regard to other funds and accounts they manage may present conflicts of interest that could disadvantage the Fund and its shareholders. The Manager or its affiliates may provide investment advisory services to other funds and accounts that have investment objectives or strategies that differ from, or are contrary to, those of the Fund. That may result in another fund or account holding investment positions that are adverse to the Fund's investment strategies or activities. Other funds or accounts advised by the Manager or its affiliates may have conflicting interests arising from investment objectives that are similar to those of the Fund. Those funds and accounts may engage in, and compete for, the same types of securities or other investments as the Fund or invest in securities of the same issuers that have different, and possibly conflicting, characteristics. The trading and other investment activities of those other funds or accounts may be carried out without regard to the investment activities of the Fund and, as a result, the value of securities held by the Fund or the Fund's investment strategies may be adversely affected. The Fund's investment performance will usually differ from the performance of other accounts advised by the Manager or its affiliates and the Fund may experience losses during periods in which other accounts advised by the Manager or its affiliates achieve gains. The Manager has adopted policies and procedures designed to address potential conflicts of interest identified by the Manager; however, such policies and procedures may also limit the Fund's investment activities and affect its performance.

Changes To The Fund's Investment Policies. The Fund's fundamental investment policies cannot be changed without the approval of a majority of the Fund's outstanding voting shares, however, the Fund's Board can change non-fundamental policies without a shareholder vote. Significant policy changes will be described in supplements to this prospectus. The Fund's investment objective is not a fundamental policy but will not be changed by the Board without advance notice to shareholders. Investment restrictions that are fundamental policies are listed in the Fund's Statement of Additional Information. An investment policy is not fundamental unless this prospectus or the Statement of Additional Information states that it is.

Portfolio Holdings. The Fund's portfolio holdings are included in its semi-annual and annual reports that are distributed to its shareholders within 60 days after the close of the applicable reporting period. The Fund also discloses its portfolio holdings in its Statements of Investments on Form N-Q, which are public filings that are required to be made with the Securities and Exchange Commission within 60 days after the end of the Fund's first and third fiscal quarters. Therefore, the Fund's portfolio holdings are made publicly available no later than 60 days after the end of each of its fiscal quarters. In addition, the Fund's portfolio holdings information, as of the end of each calendar month, may be posted and available on the Fund's website no sooner than 30 days after the end of each calendar month.

A description of the Fund's policies and procedures with respect to the disclosure of its portfolio holdings is available in the Fund's Statement of Additional Information.

THE MANAGER. OppenheimerFunds, Inc., the Manager, chooses the Fund's investments and handles its day-to-day business. The Manager carries out its duties, subject to the policies established by the Fund's Board of Trustees, under an investment advisory agreement that states the Manager's responsibilities. The agreement sets the fees the Fund pays to the Manager and describes the expenses that the Fund is responsible to pay to conduct its business.

The Manager has been an investment adviser since 1960. The Manager is located at Two World Financial Center, 225 Liberty Street, 11th Floor, New York, New York 10281-1008.

Advisory Fees. Under the Investment Advisory Agreement, the Fund pays the Manager an advisory fee at an annual rate, which declines on additional assets as the Fund grows: 0.50% of the first $100 million of average daily net assets, 0.45% of the next $150 million of average daily net assets, 0.40% of the next $1.75 billion of average daily net assets, and 0.39% of average daily net assets in excess of $2 billion. The Fund's management fee for its last fiscal year ended July 31, 2011 was 0.46% of average annual net assets for each class of shares.

The Fund's transfer agent has voluntarily agreed to limit its fees for Classes B, C and Y shares to 0.35% of average annual net assets per class per fiscal year; this limit also applied to Class A prior to October 1, 2011. Effective October 1, 2011, the Fund's transfer agent has voluntarily agreed to limit its fees for Class A shares to 0.30% of average net assets per fiscal year. These voluntary limitations may be amended or withdrawn at any time. For the Fund's fiscal year ended July 31, 2011, the transfer agent's fees did not exceed 0.01% and therefore are not reflected in the Annual Fund Operating Expenses table shown earlier in this prospectus. The total annual fund operating expenses shown in the Annual Fund Operating Expenses table include certain interest and related expenses from the Fund's investment in inverse floaters. Under accounting rules, the Fund recognized additional income in an amount that offsets those expenses. Therefore, the Fund's total returns and net asset values were not affected. If the interest and related expenses from the Fund's investment in inverse floaters were excluded the expense ratios for the Fund would be 0.89% for Class A, 1.84% for Class B, 1.68% for Class C and 0.68% for Class Y. The Fund's management fee and other annual operating expenses may vary in future years.

A discussion regarding the basis for the Board of Trustees' approval of the investment advisory contracts for the Fund is available in the Fund's Semi-Annual Report to shareholders for the period ended January 31, 2011.

Portfolio Managers. The Fund's portfolio is managed by a team of investment professionals, including Daniel G. Loughran, Scott S. Cottier, Troy E. Willis, Mark R. DeMitry, Michael L. Camarella and Charles S. Pulire, who are primarily responsible for the day-to-day management of the Fund's investments. Messrs. Loughran, Cottier and Willis are each a Vice President of the Fund and have been portfolio managers for the Fund since its inception. Mr. DeMitry has been a Vice President of the Fund since July 2009 and portfolio manager for the Fund since September 2006. Mr. Camarella has been a Vice President of the Fund since July 2009 and a portfolio manager for the Fund since January 2008. Mr. Pulire is a Vice President of the Fund and has been a portfolio manager for the Fund since December 2010.

Mr. Loughran has been a Senior Vice President of the Manager since July 2007 and a Senior Portfolio Manager of the Manager since December 2001. He was a Vice President of the Manager from April 2001 to June 2007. Mr. Loughran is a team leader, a portfolio manager, an officer, and a trader for the Fund and other Oppenheimer funds.

Mr. Cottier has been a Vice President and Senior Portfolio Manager of the Manager since September 2002. He is a portfolio manager, an officer, and a trader for the Fund and other Oppenheimer funds.

Mr. Willis has been a Vice President of the Manager since July 2009 and a Senior Portfolio Manager of the Manager since January 2006. He was an Assistant Vice President of the Manager from July 2005 to June 2009 and an Associate Portfolio Manager of the Manager from June 2003 to December 2005. Mr. Willis is a portfolio manager, an officer, and a trader for the Fund and other Oppenheimer funds.

Mr. DeMitry has been a Vice President and Senior Portfolio Manager of the Manager since July 2009. He was an Associate Portfolio Manager with the Manager from September 2006 to June 2009. He was a research analyst with the Manager from June 2003 to August 2006. He was a credit analyst with the Manager from June 2001 to May 2003. Mr. DeMitry is a portfolio manager, an officer and a trader for the Fund and other Oppenheimer funds.

Mr. Camarella has been a Vice President of the Manager since February 2011. He has been a Senior Portfolio Manager of the Manager since February 2011. He was a Portfolio Manager with the Manager since January 2008. He was a research analyst with the Manager from April 2006 to December 2007. He was a credit analyst with the Manager from June 2003 to March 2006. Mr. Camarella is a portfolio manager, an officer and a trader for the Fund and other Oppenheimer funds.

Mr. Pulire has been an Assistant Vice President and a Portfolio Manager of the Manager since December 2010. He was a research analyst with the Manager from February 2008 to November 2010 and was a credit analyst with the Manager from May 2006 to January 2008. Mr. Pulire is a portfolio manager, trader and officer for the Fund and other Oppenheimer funds.

The Statement of Additional Information provides additional information about the portfolio managers' compensation, other accounts they manage and their ownership of Fund shares.

Where Can You Buy Fund Shares? Oppenheimer funds may be purchased either directly or through a variety of "financial intermediaries" that offer Fund shares to their clients. Financial intermediaries include securities dealers, financial advisers, brokers, banks, trust companies, insurance companies and the sponsors of fund "supermarkets," fee-based advisory or wrap fee programs.

Certain sales charge waivers may apply to purchases or redemptions of Class A, Class B, or Class C shares. More information about those waivers is available in the Fund's Statement of Additional Information, or by clicking on the hyperlink "Sales Charge Waivers" under the heading "Fund Information" on the OppenheimerFunds website at "www.oppenheimerfunds.com."

What is the Minimum Investment? In most cases, you can buy Fund shares with a minimum initial investment of $1,000 and make additional investments with as little as $50. The minimum additional investment requirement does not apply to reinvested dividends from the Fund or from other Oppenheimer funds or to omnibus account purchases. A $25 minimum applies to additional investments through an Asset Builder Plan, an Automatic Exchange Plan or a government allotment plan established before November 1, 2002. Reduced initial minimums are available in certain circumstances, including under the following investment plans:

Minimum Account Balance. A $12 annual "minimum balance fee" is assessed on Fund accounts with a value of less than $500. The fee is automatically deducted from each applicable Fund account annually in September. See the Statement of Additional Information for information about the circumstances under which this fee will not be assessed. Small accounts may be involuntarily redeemed by the Fund if the value has fallen below $500 for reasons other than a decline in the market value of the shares.

Choosing a Share Class. Once you decide that the Fund is an appropriate investment for you, deciding which class of shares is best suited to your needs depends on a number of factors that you should discuss with your financial advisor. The Fund's operating costs that apply to a share class and the effect of the different types of sales charges on your investment will affect your investment results over time. For example, expenses such as the distribution or service fees will reduce the net asset value and the dividends on share classes that are subject to those expenses.

Two of the factors to consider are how much you plan to invest and, while future financial needs cannot be predicted with certainty, how long you plan to hold your investment. For example, with larger purchases that qualify for a reduced initial sales charge on Class A shares, the effect of paying an initial sales charge on purchases of Class A shares may be less over time than the effect of the distribution fees on other share classes. If your goals and objectives change over time and you plan to purchase additional shares, you should re-evaluate each of the factors to see if you should consider a different class of shares.

The discussion below is not intended to be investment advice or a recommendation, because each investor's financial considerations are different. The discussion below assumes that you will purchase only one class of shares and not a combination of shares of different classes. These examples are based on approximations of the effects of current sales charges and expenses projected over time, and do not detail all of the considerations in selecting a class of shares. You should analyze your options carefully with your financial advisor before making that choice.

The Distributor normally will not accept purchase orders from a single investor for more than $100,000 of Class B shares or for $250,000 or more of Class C shares. Dealers or other financial intermediaries are responsible for determining the suitability of a particular share class for an investor.

Are There Differences in Account Features That Matter to You? Some account features may not be available for all share classes. Other features may not be advisable because of the effect of the contingent deferred sales charge. Therefore, you should carefully review how you plan to use your investment account before deciding which class of shares to buy.

How Do Share Classes Affect Payments to Your Financial Intermediary? The Class B and Class C contingent deferred sales charges and asset-based sales charges have the same purpose as the front-end sales charge or contingent deferred sales charge on Class A shares: to compensate the Distributor for concessions and expenses it pays to brokers, dealers and other financial intermediaries for selling Fund shares. Those financial intermediaries may receive different compensation for selling different classes of shares. The Manager or Distributor may also pay dealers or other financial intermediaries additional amounts from their own resources based on the value of Fund shares held by the intermediary for its own account or held for its customers' accounts. For more information about those payments, see "Payments to Financial Intermediaries and Service Providers" below.

About Class A Shares. Class A shares are sold at their offering price, which is the net asset value of the shares (described below) plus, in most cases, an initial sales charge. The Fund receives the amount of your investment, minus the sales charge, to invest for your account. In some cases, Class A purchases may qualify for a reduced sales charge or a sales charge waiver, as described below and in the Statement of Additional Information.

The Class A sales charge rate varies depending on the amount of your purchase. A portion or all of the sales charge may be retained by the Distributor or paid to your broker, dealer or other financial intermediary as a concession. The current sales charge rates and concessions paid are shown in the table below. For purchases above $250,000, shares will be sold without an initial sales charge but they may continue to be subject to a contingent deferred sales charge of 0.50% if they are redeemed within 18 months of the date of purchase. The Distributor will pay concessions from its own resources on certain purchases of Class A shares of one or more of the Funds that, in the aggregate, total $250,000 or more. If purchases of a Fund's Class A shares are included in any such purchase, the Distributor will continue to pay the concession on those Fund shares at the rate of 0.50% of their net asset value.

Due to rounding, the actual sales charge for a particular transaction may be higher or lower than the rates listed above.

Reduced Class A Sales Charges. Under a "Right of Accumulation" or a "Letter of Intent" you may be eligible to buy Class A shares of the Fund at the reduced sales charge rate that would apply to a larger purchase. Purchases of "qualified shares" of the Fund and certain other Oppenheimer funds may be added to your Class A share purchases for calculating the applicable sales charge.

Class A, Class B and Class C shares of most Oppenheimer funds (including shares of the Fund), and Class A, Class B, Class C, Class G and Class H units owned in adviser sold Section 529 plans, for which the Manager or the Distributor serves as the "Program Manager" or "Program Distributor" are "qualified shares" for satisfying the terms of a Right of Accumulation or a Letter of Intent. Purchases of Class N, Class Y or Class I shares of Oppenheimer funds, purchases made by reinvestment of dividends or capital gains distributions, purchases under the "reinvestment privilege" described below, and purchases of Class A shares of Oppenheimer Money Market Fund, Inc. or Oppenheimer Cash Reserves on which a sales charge has not been paid do not count as "qualified shares" for those purposes. The Fund reserves the right to modify or to cease offering these programs at any time.

A fiduciary can apply a right of accumulation to all shares purchased for a trust, estate or other fiduciary account that has multiple accounts (including employee benefit plans for the same employer and Single K plans for the benefit of a sole proprietor).

If you are buying shares directly from the Fund, you must inform the Distributor of your eligibility and holdings at the time of your purchase in order to qualify for the Right of Accumulation. If you are buying shares through a financial intermediary you must notify the intermediary of your eligibility for the Right of Accumulation at the time of your purchase.

To count shares held in accounts at other firms, you may be requested to provide the Distributor or your current financial intermediary with a copy of account statements showing your current qualified share holdings. Shares purchased under a Letter of Intent may also qualify as eligible holdings under a Right of Accumulation.

Submitting a Letter of Intent does not obligate you to purchase the specified amount of shares. If you do not complete the anticipated purchases, you will be charged the difference between the sales charge that you paid and the sales charge that would apply to the actual value of shares you purchased. A certain portion of your shares will be held in escrow by the Fund's Transfer Agent for this purpose. Please refer to "How to Buy Shares – Letters of Intent" in the Fund's Statement of Additional Information for more complete information. You may also be able to apply the Right of Accumulation to purchases you make under a Letter of Intent.

Class A Contingent Deferred Sales Charge. There is no initial sales charge on Class A share purchases totaling $250,000 or more of one or more of the Oppenheimer funds. However, those Class A shares may be subject to a 0.50% contingent deferred sales charge if they are redeemed within an 18-month "holding period" measured from the beginning of the calendar month in which they were purchased (except for shares in certain retirement plans). That sales charge will be calculated on the lesser of the original net asset value of the redeemed shares or the aggregate net asset value of the redeemed shares at the time of redemption.

The Class A contingent deferred sales charge does not apply to shares purchased by the reinvestment of dividends or capital gain distributions and will not exceed the aggregate amount of the concessions the Distributor pays on all of your purchases of Class A shares, of all Oppenheimer funds, that are subject to the contingent deferred sales charge.

The Distributor will pay concessions from its own resources on certain purchases of Class A shares of one or more of the Funds that, in the aggregate, total $250,000 (or $1 million for certain Oppenheimer funds) or more. If purchases of a Fund's Class A shares are included in any such purchase, the Distributor will pay the concession on those Fund shares at the rate of 0.50% of their net asset value. A concession will not be paid on shares purchased by exchange or shares that were previously subject to a front-end sales charge and dealer concession.

About Class B Shares. Class B shares are sold at net asset value per share without an initial sales charge. However, if Class B shares are redeemed within five years from the beginning of the calendar month in which they were purchased, a contingent deferred sales charge will be deducted from the redemption proceeds. Class B shares are also subject to an asset-based sales charge that is calculated daily based on an annual rate of 0.75%. The Class B contingent deferred sales charge and asset-based sales charge are paid to compensate the Distributor for providing distribution-related services to the Fund in connection with the sale of Class B shares.

The amount of the Class B contingent deferred sales charge will depend on the number of years since you invested, according to the following schedule:

In the table, a "year" is a 12-month period. In applying the contingent deferred sales charge, all purchases are considered to have been made on the first regular business day of the month in which the purchase was made.

Automatic Conversion of Class B Shares. Class B shares automatically convert to Class A shares six years (72 months) after you purchase them. This conversion eliminates the Class B asset-based sales charge, however, the shares will be subject to the ongoing Class A fees and expenses. The conversion is based on the relative net asset value of the two classes, and no sales load or other charge is imposed. When any Class B shares that you hold convert to Class A shares, all other Class B shares that were acquired by reinvesting dividends and distributions on the converted shares will also convert.

Effective July 1, 2011, Class B shares held in certain retirement plan accounts were converted to Class A shares, or to another share class selected by the plan sponsor. For further information on the conversion feature and its tax implications, see "Class B Conversion" in the Statement of Additional Information.

Class B Shares Will No Longer Be Offered For Sale After June 29, 2012. Investors can continue to purchase Class B shares through June 29, 2012, but will need to designate a different share class for subsequent purchases, including for any automatic purchases. After June 29, 2012, Class B shares will continue to mature and convert to Class A shares according to their established conversion schedule. Dividend and/or capital gains distributions will continue to be made in Class B shares, and exchanges of Class B shares into and from accounts holding Class B shares will be permitted until the conversion to Class A shares.

About Class C Shares. Class C shares are sold at net asset value per share without an initial sales charge. However, if Class C shares are redeemed within a 12 month "holding period" from the beginning of the calendar month in which they were purchased, a contingent deferred sales charge of 1.00% may be deducted from the redemption proceeds. Class C shares are also subject to an asset-based sales charge that is calculated daily based on an annual rate of 0.75%. The Class C contingent deferred sales charge and asset-based sales charge are paid to compensate the Distributor for providing distribution-related services to the Fund in connection with the sale of Class C shares.

About Class Y Shares. Class Y shares are sold at net asset value per share without a sales charge directly to institutional investors that have special agreements with the Distributor for that purpose. They may include insurance companies, registered investment companies, employee benefit plans and Section 529 plans, among others.

An institutional investor that buys Class Y shares for its customers' accounts may impose charges on those accounts. The procedures for buying, selling, exchanging and transferring the Fund's other classes of shares (other than the time those orders must be received by the Distributor or Transfer Agent at their Colorado office) and some of the special account features available to investors buying other classes of shares do not apply to Class Y shares. Instructions for buying, selling, exchanging or transferring Class Y shares must be submitted by the institutional investor, not by its customers for whose benefit the shares are held.

Present and former officers, directors, trustees and employees (and their eligible family members) of the Fund, the Manager, its affiliates, its parent company and the subsidiaries of its parent company, and retirement plans established for the benefit of such individuals, are also permitted to purchase Class Y shares of the Fund.

The Price of Fund Shares. Shares may be purchased at their offering price which is the net asset value per share plus any initial sales charge that applies. Shares are redeemed at their net asset value per share less any contingent deferred sales charge that applies. The net asset value that applies to a purchase or redemption order is the next one calculated after the Distributor receives the order, in proper form as described in this prospectus, or after any agent appointed by the Distributor receives the order in proper form as described in this prospectus. Your financial intermediary can provide you with more information regarding the time you must submit your purchase order and whether the intermediary is an authorized agent for the receipt of purchase and redemption orders.

Net Asset Value. The Fund calculates the net asset value of each class of shares as of the close of the New York Stock Exchange (NYSE), on each day the NYSE is open for trading (referred to in this prospectus as a "regular business day"). The NYSE normally closes at 4:00 p.m., Eastern time, but may close earlier on some days. All references to time in this prospectus are to "Eastern time."

The net asset value per share for a class of shares on a "regular business day" is determined by dividing the value of the Fund's net assets attributable to that class by the number of shares of that class outstanding on that day. The Fund's assets generally trade in the over-the-counter market rather than on a securities exchange. Therefore, to determine net asset values, the Fund assets are generally valued at the mean between the bid and asked prices as determined by a pricing service. If the prices determined by the pricing service do not accurately reflect fair value for a security (in the Manager's judgment) or if a security's value has been materially affected by events occurring after the price is received from the pricing service and before the time as of which the Fund's net asset values are calculated that day, that security may be valued by another method that the Board of Trustees believes accurately reflects the fair value.

The Board has adopted valuation procedures for the Fund and has delegated the day-to-day responsibility for fair value determinations to the Manager's Valuation Committee. Fair value determinations by the Manager are subject to review, approval and ratification by the Board at its next scheduled meeting after the fair valuations are determined. In determining whether prices received from the pricing services are reliable, the Manager monitors the information it receives in the ordinary course of its investment management responsibilities for significant events that it believes in good faith will affect the prices of the securities of issuers held by the Fund. Those may include events affecting specific issuers or events affecting securities markets (for example, a securities market closes early because of a natural disaster). The Fund uses fair value pricing procedures to reflect what the Manager and the Board believe to be more accurate values for the Fund's portfolio securities, although it may not always be able to accurately determine such values. There can be no assurance that the Fund could obtain the fair value assigned to a security if it were to sell the security at the same time at which the Fund determines its net asset value per share.

Contingent Deferred Sales Charge. If you redeem shares during their applicable contingent deferred sales charge holding period, the contingent deferred sales charge generally will be deducted from the redemption proceeds. In some circumstances you may be eligible for one of the waivers described in "Sales Charge Waivers" below and in the "Special Sales Charge Arrangements and Waivers" Appendix to the Statement of Additional Information. You must advise the Transfer Agent or your financial intermediary of your eligibility for a waiver when you place your redemption request.

A contingent deferred sales charge will be based on the net asset value of the redeemed shares at the time of redemption or the original net asset value, whichever is lower. A contingent deferred sales charge is not imposed on:

You are not charged a contingent deferred sales charge when you exchange shares of the Fund for shares of other Oppenheimer funds. However, if you exchange your shares within the applicable holding period, your original holding period will carry over to the shares you acquire, even if the new fund has a different holding period.

Sales Charge Waivers. The Fund and the Distributor offer the following opportunities to purchase shares without front-end or contingent deferred sales charges. The Fund reserves the right to amend or discontinue these programs at any time without prior notice.

In addition, the "Special Sales Charge Arrangements and Waivers" Appendix to the Statement of Additional Information provides detailed information about certain other initial sales charge and contingent deferred sales charge waivers and arrangements. A description of those sales charge waivers and arrangements is available for viewing on the OppenheimerFunds website at www.oppenheimerfunds.com (follow the hyperlink "Sales Charges & Breakpoints," under the heading "Fund Information") and may also be ordered by calling 1.800.225.5677. You must advise the Distributor, the Transfer Agent or your financial intermediary that you qualify for one of those waivers at the time you submit your purchase order or redemption request.

Buying Shares. You can buy shares in several ways. The Distributor has appointed certain financial intermediaries, including brokers, dealers and others, as servicing agents to accept purchase and redemption orders. The Distributor or servicing agent must receive your order, in proper form, by the close of the NYSE for you to receive that day's offering price. If your order is received on a day when the NYSE is closed or after it has closed, the order will receive the next offering price that is determined. To be in proper form, your purchase order must comply with the procedures described below. The Distributor, in its sole discretion, may reject any purchase order for the Fund's shares.

Buying Shares Through a Financial Intermediary. You can buy shares through any servicing agent (a broker, dealer, or other financial intermediary) that has a sales agreement with the Distributor. Your servicing agent will place your order with the Distributor on your behalf. A servicing agent may charge a processing fee for that service. Your account information will be shared with the financial intermediary designated as the dealer of record for the account.

Buying Shares Through the Distributor. We recommend that you discuss your investment with a financial advisor before you make a purchase to be sure that the Fund is appropriate for you. If you want to purchase shares directly from the Distributor, complete an OppenheimerFunds new account application and mail it with a check payable in U.S. dollars to "OppenheimerFunds Distributor, Inc." at the address shown on the back cover. If you do not list a dealer on your application, the Distributor is designated as the broker-dealer of record, but solely for the purpose of acting as your agent to purchase the shares. For new investors who do not designate a broker dealer, Class A shares (and Class Y shares for institutional investors) are the only purchase option. Other share classes may not be purchased by a new investor directly from the Distributor without the investor designating another registered broker-dealer. If a current investor no longer has a broker-dealer of record for an existing account, the Distributor is automatically designated as the broker-dealer of record, but solely for the purpose of acting as the investor's agent to purchase the shares. If you submit a purchase request to the Distributor without designating which Oppenheimer fund you wish to invest in, your investments will be made in Class A shares of Oppenheimer Money Market Fund, Inc. This policy does not apply to purchases by or for certain retirement plans or accounts. For more information regarding undesignated investments, please call the Transfer Agent at the number on the back cover of this prospectus.

Identification Requirements. Federal regulations may require the Fund to obtain your name, your date of birth (for a natural person), your residential street address or principal place of business, and your Social Security Number, Employer Identification Number or other government-issued identification when you open an account. Additional information may be required to open a corporate account or in certain other circumstances. The Fund or the Transfer Agent may use this information to verify your identity. The Fund may not be able to establish an account if the necessary information is not received. The Fund may also place limits on account transactions while it is in the process of verifying your identity. Additionally, if the Fund is unable to verify your identity after your account is established, the Fund may be required to redeem your shares and close your account.

Suspension of Share Offering. The offering of Fund shares may be suspended during any period in which the determination of net asset value is suspended, and may be suspended by the Board at any time the Board believes it is in the Fund's best interest to do so.

Selling Shares. You can generally redeem (sell) some or all of your shares on any regular business day. You may redeem your shares by writing a letter, by wire, by telephone or on the Internet. You can also set up an Automatic Withdrawal Plan to redeem shares on a regular basis. The redemption of Fund shares may be suspended under certain circumstances described in the Statement of Additional Information. If you have questions about any of these procedures, and especially if you are redeeming shares in a special situation, such as due to the death of the owner or from a retirement plan account, please call your financial intermediary or the Transfer Agent for assistance.

Redemption Price. Your shares will be redeemed at net asset value less any applicable sales charge or other fees. The net asset value used will be the next one calculated after your order is received, in proper form, by the Transfer Agent or your authorized financial intermediary. To be in proper form, your redemption order must comply with the procedures described below. The redemption price for shares will change from day-to-day because the value of the securities in the Fund's portfolio and the Fund's expenses fluctuate. The redemption price will normally differ for each class of shares. The redemption price of your shares may be more or less than their original cost.

Redemptions "In-Kind." Shares may be "redeemed in-kind" under certain circumstances (such as a lack of liquidity in the Fund's portfolio to meet redemptions). That means that the redemption proceeds will be paid in securities from the Fund's portfolio on a pro-rata basis, possibly including illiquid securities. If the Fund redeems your shares in-kind, you may bear transaction costs and will bear market risks until such securities are converted into cash.

Payment Delays. Payment for redeemed shares is usually made within seven days after the Transfer Agent receives redemption instructions in proper form. For accounts registered in the name of a broker-dealer, payment will normally be forwarded to the broker-dealer within three business days. The Transfer Agent may delay processing redemption payments for recently purchased shares until the purchase payment has cleared. That delay may be as much as five business days from the date the shares were purchased. That delay may be avoided if you purchase shares by Federal Funds wire or certified check. Under unusual circumstances, the right to redeem shares or the payment of redemption proceeds may be delayed or suspended as permitted under the Investment Company Act of 1940.

The Oppenheimer Exchange Privilege. You can exchange all or part of your Fund shares for shares of the same class of other Oppenheimer funds that offer the exchange privilege. For example, you can exchange Class A shares of the Fund only for Class A shares of another fund. You can obtain a list of the Oppenheimer funds that are currently available for exchanges by calling a service representative at the telephone number on the back of this prospectus. The funds available for exchange can change from time to time. The Fund may amend, suspend or terminate the exchange privilege at any time. You will receive 60 days' notice of any material change in the exchange privilege unless applicable law allows otherwise.

The OppenheimerFunds exchange privilege affords investors the ability to switch their investments among Oppenheimer funds if their investment needs change. However, there are limits on that privilege. Frequent purchases, redemptions and exchanges of Fund shares may interfere with the Manager's ability to manage the Fund's investments efficiently, increase its transaction and administrative costs and/or affect its performance, depending on various factors, such as the size of the Fund, the nature of its investments, the amount of Fund assets a portfolio manager maintains in cash or cash equivalents, the aggregate dollar amount and the number and frequency of trades.

If large dollar amounts are involved in exchange or redemption transactions, the Fund might be required to sell portfolio securities at unfavorable times to meet those transaction requests, and the Fund's brokerage or administrative expenses might be increased. Therefore, the Manager and the Fund's Board have adopted the following policies and procedures to detect and prevent frequent and/or excessive exchanges or purchase and redemption activity, while addressing the needs of investors who seek liquidity in their investment and the ability to exchange shares as their investment needs change. There is no guarantee that those policies and procedures, described below, will be sufficient to identify and deter all excessive short-term trading.

30-Day Hold. If a direct shareholder exchanges shares of another Oppenheimer fund account for shares of the Fund, his or her Fund account will be "blocked" from exchanges into any other fund for a period of 30 calendar days from the date of the exchange, subject to certain exceptions described below. Likewise, if a Fund shareholder exchanges Fund shares for shares of another eligible Oppenheimer fund, that fund account will be "blocked" from further exchanges for 30 calendar days, subject to the exception described below. The block will apply to the full account balance and not just to the amount exchanged into the account. For example, if a shareholder exchanged $2,000 from one fund into another fund in which the shareholder already owned shares worth $10,000, then, following the exchange and assuming no exception applied, the full account balance ($12,000 in this example) would be blocked from exchanges into another fund for a period of 30 calendar days. A shareholder whose account is registered on the Fund's books showing the name, address and tax ID number of the beneficial owner is a "direct shareholder."

Limitations on Exchanges in Omnibus Accounts. If you hold your Fund shares through a financial advisor or other firm such as a broker-dealer, a bank, an insurance company separate account, an investment adviser, an administrator or a trustee of a retirement plan that holds your shares in an account under its name (these are sometimes referred to as "omnibus" or "street name" accounts), that financial intermediary may impose its own restrictions or limitations to discourage short-term or excessive trading. You should consult your financial intermediary to find out what trading restrictions, including limitations on exchanges, may apply. The Fund, the Distributor, the Manager and the Transfer Agent encourage those financial intermediaries to apply the Fund's policies to their customers who invest indirectly in the Fund. However, the Transfer Agent may not be able to detect excessive short-term trading activity in accounts maintained in "omnibus" or "street name" form where the underlying beneficial owners are not identified. The Transfer Agent will attempt to monitor overall purchase and redemption activity in those accounts to seek to identify patterns that may suggest excessive trading by the underlying owners. If evidence of possible excessive trading activity is observed by the Transfer Agent, the financial intermediary that is the registered owner will be asked to review the account activity, and to confirm to the Transfer Agent and the Fund that appropriate action has been taken to curtail any excessive trading activity.

Other Limitations on Exchanges. There are a number of other special conditions and limitations that apply to certain types of exchanges. Those conditions and circumstances are described in the section "How to Exchange Shares" in the Statement of Additional Information. For information about sales charges that may apply to exchanges of shares see the sections "Contingent Deferred Sales Charge" and "Sales Charge Waivers" in this prospectus.

Requirements for Exchanges of Shares. To exchange shares of the Fund, you must meet several conditions. The Fund may amend the following requirements at any time:

Timing of Exchange Transactions. Exchanged shares are normally redeemed from one fund and the proceeds are reinvested in the fund selected for exchange on the same regular business day on which the Transfer Agent or its agent (such as a financial intermediary holding the investor's shares in an "omnibus" or "street name" account) receives an exchange request that conforms to these policies. The request must be received by the close of the NYSE that day in order to receive that day's net asset value on the exchanged shares. For requests received after the close of the NYSE the shares being exchanged will be valued at the next net asset value calculated after the request is received. The Transfer Agent may delay transmitting the proceeds from an exchange for up to five business days, however, if it determines, in its discretion, that an earlier transmittal of the redemption proceeds would be detrimental to either the fund from which shares are being exchanged or the fund into which the exchange is being made. The exchange proceeds will be invested in the new fund at the next net asset value calculated after the proceeds are received. In the event that a delay in the reinvestment of proceeds occurs, the Transfer Agent will notify you or your financial intermediary.

Taxes on Exchanges. For tax purposes, an exchange of shares of the Fund is considered a sale of those shares and a purchase of the shares of the fund into which you are exchanging. Therefore, an exchange may result in a capital gain or loss for tax purposes.

Other Limits on Share Transactions. The Fund may impose other limits on transactions that it believes would be disruptive and may refuse any purchase or exchange order.

Submitting Share Transaction Requests. Share transactions may be requested by telephone or internet, in writing, through your financial intermediary, or by establishing one of the Investor Services plans described below. Certain transactions may also be submitted by fax. If an account has more than one owner, the Fund and the Transfer Agent may rely on instructions from any one owner or from the financial intermediary's representative of record for the account, unless that authority has been revoked. Class Y share transactions may only be submitted in writing, by fax, by phone through a service representative, or through an investor's designated financial intermediary.

Internet and Telephone Transaction Requests. Purchase, redemption and exchange requests may be submitted on the OppenheimerFunds website, www.oppenheimerfunds.com. Those requests may also be made by calling the telephone number on the back cover and either speaking to a service representative or accessing PhoneLink, the OppenheimerFunds automated telephone system that enables shareholders to perform certain account transactions automatically using a touch-tone phone.

You will need to obtain a user I.D. and password to execute transactions through PhoneLink or on the internet. Some internet and telephone transactions require the Oppenheimer AccountLink feature, described below, that links your Fund account with an account at a U.S. bank or other financial institution. The Transfer Agent will record any telephone calls to verify data concerning transactions.

The Transfer Agent has adopted procedures to confirm that telephone and internet instructions are genuine. Callers are required to provide service representatives with tax identification numbers and other account data and PhoneLink and internet users are required to use PIN numbers. The Transfer Agent will also send you written confirmations of share transactions. The Transfer Agent and the Fund will not be liable for losses or expenses that occur from telephone or internet instructions reasonably believed to be genuine.

Telephone or internet transaction privileges may be modified, suspended or terminated by the Fund at any time. The Fund will provide you notice of such changes whenever it is required to do so by applicable law.

Purchases and Redemptions by Federal Funds Wire. Shares purchased through the Distributor may be paid for by Federal Funds wire. Redemption proceeds may also be transmitted by wire. The minimum wire purchase or redemption is $2,500. There is a $10 fee for each wire redemption request. Before sending a wire purchase, call the Distributor's Wire Department at 1.800.225.5677 to notify the Distributor of the wire and to receive further instructions. To set up wire redemptions on your account or to arrange for a wire redemption, call the Transfer Agent at the telephone number on the back of this prospectus for information.

Written Transaction Requests. You can send purchase, exchange or redemption requests to the Transfer Agent at the address on the back cover. Your request must include:

Certain Requests Require a Signature Guarantee. To protect you and the Fund from fraud, certain redemption requests must be in writing and must include a signature guarantee. A notary public seal will not be accepted for these requests (other situations might also require a signature guarantee):

Where Can You Have Your Signature Guaranteed? The Transfer Agent will accept a signature guarantee from a number of financial institutions, including:

Fax Requests. You may send requests for certain types of account transactions to the Transfer Agent by fax. Please call the number on the back of this prospectus for information about which transactions may be handled this way. Transaction requests submitted by fax are subject to the same rules and restrictions as the written, telephone and internet requests described in this prospectus. However, requests that require a signature guarantee may not be submitted by fax.

Submitting Transaction Requests Through Your Financial Intermediary. You can submit purchase, redemption or exchange requests through any broker, dealer or other financial intermediary that has a special agreement with the Distributor. The broker, dealer or other intermediary will place the order with the Distributor on your behalf. A broker or dealer may charge a processing fee for that service. If your shares are held in the name of your financial intermediary, you must redeem them through that intermediary.

Intermediaries that perform account transactions for their clients by participating in "Networking" through the National Securities Clearing Corporation are responsible for obtaining their clients' permission to perform those transactions, and are responsible to their clients who are shareholders of the Fund if the intermediary performs any transaction erroneously or improperly.

Client Account Exchanges by Financial Intermediaries. The Fund and the Transfer Agent permit brokers, dealers and other financial intermediaries to submit exchange requests on behalf of their customers, unless that authority has been revoked. The Fund or the Transfer Agent may limit or refuse exchange requests submitted by such financial intermediaries if, in the Transfer Agent's judgment, exercised in its discretion, the exchanges would be disruptive to any of the funds involved in the transaction.

AccountLink. You can use our AccountLink feature to link your Fund account with an account at a U.S. bank or other financial institution that is an Automated Clearing House (ACH) member. AccountLink lets you:

AccountLink privileges should be requested on your account application or on your broker-dealer's settlement instructions if you buy your shares through a broker-dealer. For an established account, you can request AccountLink privileges by sending signature-guaranteed instructions and proper documentation to the Transfer Agent. AccountLink privileges will apply to each shareholder listed in the registration on the account as well as to the financial intermediary's representative of record unless and until the Transfer Agent terminates or receives written instructions terminating or changing those privileges. After you establish AccountLink for your account, any change you make to your bank account information must be made by signature-guaranteed instructions to the Transfer Agent signed by all shareholders on the account. Please call the Transfer Agent for more information.

Asset Builder Plan. Under an Asset Builder Plan, you may purchase shares of the Fund automatically. An Asset Builder Plan is available only if you have established AccountLink with a bank or other financial institution. Payments to purchase Fund shares will be debited from your linked account.

To establish an Asset Builder Plan at the time you initially purchase Fund shares, complete the "Asset Builder Plan" information on the account application. To add an Asset Builder Plan to an existing account, use the Asset Builder Enrollment Form. You may change the amount of your Asset Builder payment or you can terminate your automatic investments at any time by writing to the Transfer Agent. The Transfer Agent requires a reasonable period (approximately 10 days) after receipt of your instructions to implement the requested changes. For more details, see the account application, the Asset Builder Enrollment Form and the Statement of Additional Information. Those documents are available by contacting the Distributor or may be downloaded from our website at www.oppenheimerfunds.com. The Fund reserves the right to amend, suspend or discontinue offering Asset Builder Plans at any time without prior notice.

Automatic Redemption and Exchange Plans. The Fund has several plans that enable you to redeem shares automatically or exchange them for shares of another Oppenheimer fund on a regular basis. Please call the Transfer Agent or consult the Statement of Additional Information for details.

Less Paper, Less Waste. To avoid sending duplicate copies of Fund materials to households, the Fund will mail only one copy of each prospectus, annual and semi-annual report and annual notice of the Fund's privacy policy to shareholders having the same last name and address on the Fund's records. The consolidation of these mailings, called "householding," benefits the Fund through lower printing costs and reduced mailing expense.

If you prefer to receive multiple copies of these materials, you may call the Transfer Agent at the number on the back of this prospectus or you may notify the Transfer Agent in writing. Multiple copies of prospectuses, reports and privacy notices will be sent to you commencing within 30 days after the Transfer Agent receives your request to stop householding.

You may also choose to receive your account documents electronically via eDocs Direct. Visit our website at www.oppenheimerfunds.com and click the hyperlink "Sign Up for Electronic Document Delivery" under the heading "I want to..." in the left hand column, or call 1.888.470.0862 for information and instructions.

Service Plan for Class A Shares. The Fund has adopted a Service Plan for Class A shares that reimburses the Distributor for a portion of the costs of maintaining accounts and providing services to Class A shareholders. Reimbursement is made periodically at an annual rate of up to 0.25% of the Class A shares daily net assets. The Distributor currently uses all of those fees to pay brokers, dealers, banks and other financial intermediaries for providing personal service and maintaining the accounts of their customers that hold Class A shares. Any unreimbursed expenses the Distributor incurs with respect to Class A shares in any fiscal year cannot be recovered in subsequent periods. Because the service fee is paid out of the Fund's assets on an ongoing basis, over time it will increase the cost of your investment.

Distribution and Service Plans for Class B and Class C Shares. The Fund has adopted Distribution and Service Plans for Class B and Class C shares to pay the Distributor for distributing those share classes, maintaining accounts and providing shareholder services. Under the plans, the Fund pays the Distributor an asset-based sales charge for Class B and Class C shares calculated at an annual rate of 0.75% of the daily net assets of those classes. The Fund also pays a service fee under the plans at an annual rate of 0.25% of the daily net assets of Class B and Class C. Altogether, these fees increase the Class B and Class C annual expenses by 1.00%, calculated on the daily net assets of the applicable class. Because these fees are paid out of the Fund's assets on an on going basis, over time they will increase the cost of your investment and may cost you more than other types of sales charges.

Use of Plan Fees: The Distributor uses the service fees to compensate brokers, dealers, banks and other financial intermediaries for maintaining accounts and providing personal services to Class B and Class C shareholders in the applicable share class. The Distributor normally pays intermediaries the 0.25% service fee in advance for the first year after shares are purchased and then pays that fee periodically.

Class B Shares: The Distributor currently pays a sales concession of 2.75% of the purchase price of Class B shares to dealers from its own resources at the time of sale. Including the advance of the service fee, the total amount paid by the Distributor to the dealer at the time of sale of Class B shares is therefore 3.00% of the purchase price. The Distributor normally retains the Class B asset-based sales charge. However, for ongoing purchases of Class B shares by OppenheimerFunds Single K plans, the Distributor may pay the intermediary the asset-based sales charge and service fee during the first year after purchase instead of paying a sales concession and the first year's service fees at the time of purchase. See the Statement of Additional Information for exceptions.

Class C Shares: At the time of a Class C share purchase, the Distributor generally pays financial intermediaries a sales concession of 0.75% of the purchase price from its own resources. Therefore, the total amount, including the advance of the service fee, that the Distributor pays the intermediary at the time of a Class C share purchase is 1.00% of the purchase price. The Distributor normally retains the asset-based sales charge on Class C share purchases during the first year and then pays that fee to the intermediary as an ongoing concession. See the Statement of Additional Information for exceptions to these arrangements.

Payments to Financial Intermediaries and Service Providers. The Manager and the Distributor, in their discretion, may also make payments to brokers, dealers and other financial intermediaries or to service providers for distribution and/or shareholder servicing activities. Those payments are made out of the Manager's and/or the Distributor's own resources and/or assets, including from the revenues or profits derived from the advisory fees the Manager receives from the Fund. Those cash payments, which may be substantial, are paid to many firms having business relationships with the Manager and Distributor and are in addition to any distribution fees, servicing fees, or transfer agency fees paid directly or indirectly by the Fund to these financial intermediaries and any commissions the Distributor pays to these firms out of the sales charges paid by investors. Payments by the Manager or Distributor from their own resources are not reflected in the tables in the "Fees and Expenses of the Fund" section of this prospectus because they are not paid by the Fund.

The financial intermediaries that may receive those payments include firms that offer and sell Fund shares to their clients, or provide shareholder services to the Fund, or both, and receive compensation for those activities. The financial intermediaries that may receive payments include your securities broker, dealer or financial advisor, sponsors of fund "supermarkets," sponsors of fee-based advisory or wrap fee programs, sponsors of college and retirement savings programs, banks, trust companies and other intermediaries offering products that hold Fund shares, and insurance companies that offer variable annuity or variable life insurance products.

In general, these payments to financial intermediaries can be categorized as "distribution-related" or "servicing" payments. Payments for distribution-related expenses, such as marketing or promotional expenses, are often referred to as "revenue sharing." Revenue sharing payments may be made on the basis of the sales of shares attributable to that intermediary, the average net assets of the Fund and other Oppenheimer funds attributable to the accounts of that intermediary and its clients, negotiated lump sum payments for distribution services provided, or similar fees. In some circumstances, revenue sharing payments may create an incentive for a financial intermediary or its representatives to recommend or offer shares of the Fund or other Oppenheimer funds to its customers. These payments also may give an intermediary an incentive to cooperate with the Distributor's marketing efforts. A revenue sharing payment may, for example, qualify the Fund for preferred status with the intermediary receiving the payment or provide representatives of the Distributor with access to representatives of the intermediary's sales force, in some cases on a preferential basis over funds of competitors. Additionally, as firm support, the Manager or Distributor may reimburse expenses related to educational seminars and "due diligence" or training meetings (to the extent permitted by applicable laws or the rules of the Financial Industry Regulatory Authority ("FINRA")) designed to increase sales representatives' awareness about Oppenheimer funds, including travel and lodging expenditures. However, the Manager does not consider a financial intermediary's sale of shares of the Fund or other Oppenheimer funds when selecting brokers or dealers to effect portfolio transactions for the funds.

Various factors are used to determine whether to make revenue sharing payments. Possible considerations include, without limitation, the types of services provided by the intermediary, sales of Fund shares, the redemption rates on accounts of clients of the intermediary or overall asset levels of Oppenheimer funds held for or by clients of the intermediary, the willingness of the intermediary to allow the Distributor to provide educational and training support for the intermediary's sales personnel relating to the Oppenheimer funds, the availability of the Oppenheimer funds on the intermediary's sales system, as well as the overall quality of the services provided by the intermediary and the Manager or Distributor's relationship with the intermediary. The Manager and Distributor have adopted guidelines for assessing and implementing each prospective revenue sharing arrangement. To the extent that financial intermediaries receiving distribution-related payments from the Manager or Distributor sell more shares of the Oppenheimer funds or retain more shares of the funds in their client accounts, the Manager and Distributor benefit from the incremental management and other fees they receive with respect to those assets.

Payments may also be made by the Manager, the Distributor or the Transfer Agent to financial intermediaries to compensate or reimburse them for administrative or other client services provided such as sub-transfer agency services for shareholders or retirement plan participants, omnibus accounting or sub-accounting, participation in networking arrangements, account set-up, recordkeeping and other shareholder services. Payments may also be made for administrative services related to the distribution of Fund shares through the intermediary. Firms that may receive servicing fees include retirement plan administrators, qualified tuition program sponsors, banks and trust companies, and others. These fees may be used by the service provider to offset or reduce fees that would otherwise be paid directly to them by certain account holders, such as retirement plans.

The Statement of Additional Information contains more information about revenue sharing and service payments made by the Manager or the Distributor. Your broker, dealer or other financial intermediary may charge you fees or commissions in addition to those disclosed in this prospectus. You should ask your financial intermediary for details about any such payments it receives from the Manager or the Distributor and their affiliates, or any other fees or expenses it charges.

Dividends. The Fund intends to declare dividends separately for each class of shares from net tax-exempt income and/or net taxable investment income each regular business day and to pay those dividends monthly. Daily dividends will not be declared or paid on newly-purchased shares until Federal Funds are available to the Fund from the purchase payment for such shares.

The Fund attempts to pay dividends on Class A shares at a constant level. There is no assurance that it will be able to do so. The Board of Trustees may change the targeted dividend level at any time, without prior notice to shareholders. The amount of those dividends and any other distributions paid on other classes of shares may vary over time, depending on market conditions, the composition of the Fund's portfolio, and expenses borne by the particular class of shares. Dividends and other distributions paid on Class A and Class Y shares will generally be higher than dividends for Class B and Class C shares, which normally have higher expenses than Class A or Class Y. The Fund cannot guarantee that it will pay any dividends or other distributions.

Capital Gains. Although the Fund does not seek capital gains, it may realize capital gains on the sale of portfolio securities. If it does, it may make distributions out of any net short-term or long-term capital gains annually. The Fund may also make supplemental distributions of ordinary income and exempt-interest dividends and capital gains following the end of its fiscal year. There can be no assurance that the Fund will pay any capital gains distributions in a particular year. Long-term capital gains will be separately identified in the tax information the Fund sends you after the end of the calendar year.

Options for Receiving Dividends and Distributions. When you open your Fund account, you can specify on your application how you want to receive distributions of dividends and capital gains. To change that option, you must notify the Transfer Agent. There are four payment options available:

Taxes. Dividends paid from net investment income earned by the Fund on tax-exempt municipal securities will be excludable from gross income for federal income tax purposes. All or a portion of the dividends paid by the Fund that are derived from interest paid on certain "private activity bonds" may be an item of tax preference if you are subject to the federal alternative minimum tax. The portion of the Fund's exempt-interest dividends that was a tax preference item for the most recent calendar year is available on the OppenheimerFunds website at www.oppenheimerfunds.com/redir/tax_table_amt.jsp. The tax preference amount will vary from year to year.

Dividends and capital gains distributions may be subject to federal, state or local taxes. Any short-term capital gain distributions are taxable to you as ordinary income. Any long-term capital gain distributions are taxable to you as long-term capital gains, no matter how long you have owned shares in the Fund. The Fund may derive gains in part from municipal obligations the Fund purchased below their principal or face values. All, or a portion of these gains may be taxable to you as ordinary income rather than capital gains. Whether you reinvest your distributions in additional shares or take them in cash, the tax treatment is the same.

After the end of each calendar year the Fund will send you and the Internal Revenue Service statements showing the amount of any taxable distributions you received in the previous year and will separately identify any portion of these distributions that qualify for taxation as long-term capital gains or for any other special tax treatment.

If you are neither a lawful permanent resident nor a citizen of the United States, or if you are a foreign entity, the Fund's ordinary income dividends (which include distributions of net short-term capital gain) generally will be subject to a 30% U.S. withholding tax, unless a lower rate applies under an income tax treaty. For taxable years of the Fund beginning before 2012, certain distributions that are reported by the Fund as interest-related dividends or short-term gain dividends and paid to a foreign shareholder may be eligible for an exemption from U.S. withholding tax. To the extent the Fund's distributions are derived from dividends, they will not be eligible for this exemption.

By law, your dividends and redemption proceeds will be subject to a backup withholding tax if you are not a corporation and have not provided a taxpayer identification number or social security number or if the number you have provided is incorrect.

Avoid "Buying a Distribution." If you buy shares on or just before the ex-dividend date, or just before the Fund declares a capital gains distribution, you will pay the full price for the shares, and then receive a portion of the price back as a taxable dividend or capital gain.

Remember, There May be Taxes on Transactions. Because the Fund's share prices fluctuate, you may have a capital gain or loss when you sell or exchange your shares. A capital gain or loss is the difference between the price you paid for the shares and the price you receive when you sell or exchange them. Any capital gain is subject to capital gains tax.

Returns of Capital Can Occur. In certain cases, distributions made by the Fund may be considered a non-taxable return of capital to shareholders, resulting in a reduction in the basis in their shares. If this occurs, the Fund will notify you.

Cost Basis Reporting. The Fund will be required report to the Internal Revenue Service ("IRS"), and furnish to Fund shareholders, detailed "cost basis" and "holding period" information for Fund shares acquired on or after January 1, 2012 ("covered shares") that are redeemed on or after that date. These requirements do not apply to investments through a tax-deferred arrangement, such as a 401(k) plan or an individual retirement plan. If you redeem covered shares during any year, the Fund will report the following information to the IRS and to you on Form 1099-B: (i) the "cost basis" of such shares, (ii) the gross proceeds you received on the redemption and (iii) the "holding period" for the redeemed shares.

The default method for calculating the cost basis of covered shares will be based on the average cost of all Fund shares you purchased on or after January 1, 2012 and prior to a particular redemption. If you and your financial or tax advisor determine that another calculation method to be more beneficial for your individual tax situation, you will be able to elect another IRS-accepted method via the OppenheimerFunds website, www.oppenheimerfunds.com, or by notifying the Fund's Transfer Agent in writing.

You should contact your financial or tax advisor about the application of the cost basis reporting rules to you, particularly whether you should elect a cost basis calculation method or use the default average basis.

This information is only a summary of certain federal income tax information about your investment. You are encouraged to consult your tax adviser about the effect of an investment in the Fund on your particular tax situation and about any changes to the Internal Revenue Code that may occur from time to time. Additional information about the tax effects of investing in the Fund is contained in the Statement of Additional Information.

Qualification as a Regulated Investment Company. The Fund intends to qualify each year as a "regulated investment company" under the Internal Revenue Code, by satisfying certain income, asset diversification and income distribution requirements, but it reserves the right not to qualify. The Fund qualified during its most recent fiscal year. The Fund, as a regulated investment company, will not be subject to federal income taxes on any of its income, provided that it satisfies certain income, diversification and distribution requirements.

Other Taxability Risk Considerations. It is possible that, because of events occurring after the date of its issuance, a municipal security owned by the Fund will be determined to pay interest that is includable in gross income for purposes of the federal income tax, and that determination could be retroactive to the date of issuance. Such a determination may cause a portion of prior distributions to shareholders to be taxable to shareholders in the year of receipt.

Legislation affecting tax-exempt municipal securities is often considered by the United States Congress and legislation affecting the exemption of interest or other income thereon for purposes of taxation by a state may be considered by the state's legislature. Court proceedings may also be filed, the outcome of which could modify the tax treatment of a state's municipal securities. There can be no assurance that legislation enacted or proposed, or actions by a court, after the date of issuance of a municipal security will not have an adverse effect on the tax status of interest or other income or the market value of that municipal security. Please consult your tax adviser regarding pending or proposed federal and state tax legislation, court proceedings and other tax considerations.

California Tax Considerations. Under California law, provided that at least 50% of the assets of the Fund at the close of each quarter of its taxable year consist of obligations the interest on which is exempt from taxation by the State of California, dividends (i) paid by the Fund in an amount not exceeding the interest received by the Fund on such obligations during the Fund's taxable year, and (ii) reported by the Fund as exempt-interest dividends in written statements furnished to shareholders are treated as exempt-interest dividends, which are exempt from California personal income tax on individuals. All other distributions, including distributions of capital gains, are taxable under the California personal income tax. Distributions made by the Fund, including both exempt-interest dividends and capital gains, are included in the tax base for purposes of the California franchise tax on corporations. Additional information about the California tax effects of investing in the Fund is contained in the Statement of Additional Information.

The Financial Highlights Table is presented to help you understand the Fund's financial performance for the past five fiscal years. Certain information reflects financial results for a single Fund share. The total returns in the table represent the rate that an investor would have earned (or lost) on an investment in the Fund (assuming reinvestment of all dividends and distributions). This information has been audited by KPMG LLP, the Fund's independent registered public accounting firm, whose report, along with the Fund's financial statements, is included in the Statement of Additional Information, which is available upon request.

STATEMENT OF ADDITIONAL INFORMATION. This document includes additional information about the Fund's investment policies, risks, and operations. It is incorporated by reference into this prospectus (it is legally part of this prospectus).
ANNUAL AND SEMI-ANNUAL REPORTS. The Fund's Annual and Semi-Annual Reports provide additional information about the Fund's investments and performance. The Annual Report includes a discussion of market conditions and investment strategies that significantly affected the Fund's performance during its last fiscal year.

You can request the above documents, the notice explaining the Fund's privacy policy, and other information about the Fund, without charge, by:

Information about the Fund including the Statement of Additional Information can be reviewed and copied at the SEC's Public Reference Room in Washington, D.C. Information on the operation of the Public Reference Room may be obtained by calling the SEC at 1.202.551.8090. Reports and other information about the Fund are available on the EDGAR database on the SEC's website at www.sec.gov. Copies may be obtained after payment of a duplicating fee by electronic request at the SEC's e-mail address: publicinfo@sec.gov or by writing to the SEC's Public Reference Section, Washington, D.C. 20549-1520.

No one has been authorized to provide any information about the Fund or to make any representations about the Fund other than what is contained in this prospectus. This prospectus is not an offer to sell shares of the Fund, nor a solicitation of an offer to buy shares of the Fund, to any person in any state or other jurisdiction where it is unlawful to make such an offer.

The investment objective, the principal investment policies and the principal risks of the Fund are described in the Prospectus. This SAI contains supplemental information about those policies and risks and the types of securities that the Fund's investment adviser, OppenheimerFunds, Inc. (the "Manager"), can select for the Fund. Additional information is also provided about the strategies that the Fund may use to try to achieve its investment objective.

The composition of the Fund's portfolio and the techniques and strategies that the Fund uses in selecting portfolio securities may vary over time. The Fund is not required to use all of the investment techniques and strategies described below in seeking its investment objective. It may use some of the investment techniques and strategies only at some times or it may not use them at all.

The municipal securities that the Fund holds to maturity are redeemable by the security's issuer at their full principal value plus any accrued interest. During the time they are held in the Fund's portfolio, however, the values of those securities may be affected by changes in general interest rates and other factors. The current values of debt securities vary inversely with changes in prevailing interest rates, meaning that after a security is purchased if interest rates increase, the security will normally decline in value and if interest rates decrease, normally its value would increase. Those changes in value generally will not result in realized gains or losses unless the Fund sells a security prior to its maturity. However, if the Fund disposes of a security prior to its maturity, the Fund could realize a capital gain or loss on the sale.

There are variations in the credit quality of municipal securities, both within a particular rating category and between categories. These variations depend on numerous factors. The factors affecting the yields of municipal securities include: general conditions in the municipal securities market, the size of a particular offering, the maturity of the obligation and the rating of the issue (if any).

Unless the Prospectus or SAI states that an investment percentage restriction applies on an ongoing basis, it applies only at the time the Fund makes an investment (except for borrowing and investments in illiquid securities). That means the Fund does not have to buy or sell securities solely to meet percentage limits if those limits were exceeded because the value of the investment changed in proportion to the size of the Fund.

In selecting securities for the Fund's portfolio, the Manager evaluates the merits of particular securities primarily through the exercise of its own investment analysis. For example, with respect to inflation-indexed government bonds, that process may include, among other things, evaluation of the government's economic and monetary policy, the country's economic condition, and current inflation and interest rates.

Average Effective Portfolio Maturity of the Fund's Portfolio. In seeking to maintain a dollar-weighted average effective portfolio maturity of less than five years, the Fund may purchase individual securities that have effective maturities of more or less than five years. The goal is to try to manage the sensitivity of the Fund's portfolio to changes in interest rates, and in doing so to manage the volatility of the Fund's share prices in response to those changes. The effective maturity of a bond might lengthen if market interest rates increase, and the effective maturity might shorten if market interest rates decline. Increasing market interest rates therefore could cause the average effective maturity of the portfolio to lengthen beyond five years, absent any portfolio transactions.

In computing the Fund's average effective portfolio maturity, the Manager intends to use the same effective maturity dates that are shorter than the bond's stated maturity as are used in the marketplace for evaluating a bond for trading and pricing purposes. That date might be the date of a mandatory put, pre-refunded call, optional call or the average life to which a bond is priced. A bond having a variable coupon rate or anticipated principal prepayment may be assigned an effective maturity that is shorter than a stated call date, put date or average life, to reflect more closely the reduced price volatility expectations as to that bond.

Municipal Securities. The types of municipal securities in which the Fund may invest and the Fund's principal investment strategies are described in the Prospectus under "Principal Investment Strategies" and "About the Fund's Investments". Municipal securities are generally classified as general obligation bonds, revenue bonds and notes. A discussion of the general characteristics of these principal types of municipal securities follows below.

Municipal Bonds. Long-term municipal securities which have a maturity of more than one year (when issued) are classified as "municipal bonds." The principal classifications of long-term municipal bonds are "general obligation" bonds and "revenue" bonds (including "private activity" bonds). They may have fixed, variable or floating rates of interest or may be "zero-coupon" bonds, as described below.

Some bonds may be "callable," allowing the issuer to redeem them before their maturity date. To protect bondholders, callable bonds may be issued with provisions that prevent them from being called for a period of time. Typically, that is 5 to 10 years from the issuance date. When interest rates decline, if the call protection on a bond has expired, it is more likely that the issuer may call the bond. If that occurs, the Fund might have to reinvest the proceeds of the called bond in investments that pay a lower rate of return, which could reduce the Fund's yield.

General Obligation Bonds. The basic security behind general obligation bonds is the issuer's pledge of its full faith and credit and taxing power, if any, for the repayment of principal and the payment of interest. Issuers of general obligation bonds include states, counties, cities, towns, and regional districts. The proceeds of these obligations are used to fund a wide range of public projects, including construction or improvement of schools, highways and roads, and water and sewer systems. The rate of taxes that can be levied for the payment of debt service on these bonds may be limited or unlimited. Additionally, there may be limits on the rate or amount of special assessments that can be levied to meet these obligations.

Revenue Bonds. The principal security for a revenue bond is generally the net revenues derived from a particular facility, group of facilities, or, in some cases, the proceeds of a special excise tax or other specific revenue source, such as a state's or local government's proportionate share of the tobacco Master Settlement Agreement ("MSA") (as described in the section titled "Tobacco Related Bonds"). Revenue bonds are issued to finance a wide variety of capital projects. Examples include electric, gas, water and sewer systems; highways, bridges, and tunnels; port and airport facilities; colleges and universities; and hospitals.

Although the principal security for revenue bonds may vary from bond to bond, many provide additional security in the form of a debt service reserve fund that may be used to make principal and interest payments on the issuer's obligations. Housing finance authorities have a wide range of security, including partially or fully insured mortgages, rent subsidized and/or collateralized mortgages, and/or the net revenues from housing or other public projects. Some authorities provide further security in the form of a state's ability (without obligation) to make up deficiencies in the debt service reserve fund.

Private Activity Bonds. The Internal Revenue Code of 1986, as amended (the "Internal Revenue Code"), includes rules governing tax-exemption for interest paid on certain types of municipal securities known as "private activity bonds" (referred to as "industrial development bonds" under pre-1986 law). The proceeds from private activity bonds are used to finance various non-governmental privately owned and/or operated facilities. Under the Internal Revenue Code, interest on private activity bonds can be excluded from gross income for federal income tax purposes if (i) the financed activities fall into one of seven categories of "qualified private activity bonds," consisting of mortgage bonds, veterans mortgage bonds, small issue bonds, student loan bonds, redevelopment bonds, "exempt facility bonds" and "501(c)(3) bonds," and (ii) certain tests are met. The types of facilities that may be financed with exempt facility bonds include airports, docks and wharves, water furnishing facilities, sewage facilities, solid waste disposal facilities, qualified residential rental projects, hazardous waste facilities and high speed intercity rail facilities. The types of facilities that may be financed with 501(c)(3) bonds include hospitals and educational facilities that are owned by 501(c)(3) tax-exempt organizations. The payment of the principal and interest on such qualified private activity bonds is dependant solely on the ability of the facility's user to meet its financial obligations, generally from the revenues derived from the operation of the financed facility, and the pledge, if any, of real and personal property financed by the bond as security for those payments.

Whether a municipal security is a private activity bond (the interest on which is taxable unless it is a qualified private activity bond) depends on whether (i) more than a certain percentage (generally 10%) of (a) the proceeds of the security are used in a trade or business carried on by a non-governmental person and (b) the payment of principal or interest on the security is directly or indirectly derived from such private use, or is secured by privately used property or payments in respect of such property, or (ii) more than the lesser of 5% of the issue or $5 million is used to make or finance loans to non-governmental persons.

Under Internal Revenue Code Section 147(a), certain types of private activity bonds that would otherwise be qualified tax-exempt private activity bonds will not be qualified for any period during which the bond is held by a person who is a "substantial user" of the facilities financed by the bond, or a "related person" of such a substantial user. Generally a "substantial user" is a non-exempt person who regularly uses part of a facility in a trade or business.

Therefore, certain municipal securities could lose their tax-exempt status retroactively if the issuer or user fails to meet certain continuing requirements regarding the use and operation of the bond-financed facilities and the use and expenditure of the proceeds of such securities for the entire period during which the securities are outstanding. The Fund makes no independent investigation into the use of such facilities or the expenditure of such proceeds. If the Fund should hold a bond that loses its tax-exempt status retroactively, there might be an adjustment to the tax-exempt income previously distributed to shareholders.

Tax-exempt interest on certain qualified private activity bonds may nonetheless be treated as a "tax preference" item subject to the alternative minimum tax (the "AMT"). If such qualified private activity bonds are held by the Fund, a proportionate share of the exempt-interest dividends paid by the Fund would constitute an item of tax preference to shareholders that are subject to the AMT.

Limitations on the amount of private activity bonds that each state may issue may reduce the supply of such bonds. The value of the Fund's portfolio could be affected by these limitations if they reduce the availability of such bonds.

Municipal Notes. Municipal securities that have a maturity of less than one year (when the security is issued) are generally known as "municipal notes." Municipal notes generally are used to provide for short-term working capital needs. Some of the types of municipal notes the Fund can invest in are described below.

Tax Anticipation Notes. These are issued to finance working capital needs of municipalities. Generally, they are issued in anticipation of various seasonal tax revenue, such as income, sales, use or other business taxes, and are payable from these specific future taxes.

Revenue Anticipation Notes. These are notes issued in expectation of receipt of other types of revenue, such as federal revenues available under federal revenue-sharing programs.

Bond Anticipation Notes. Bond anticipation notes are issued to provide interim financing until long-term financing can be arranged. The long-term bonds that are issued typically also provide the money for the repayment of the notes.

Construction Loan Notes. These are sold to provide project construction financing until permanent financing can be secured. After successful completion and acceptance of the project, it may receive permanent financing through public agencies, such as the Federal Housing Administration.

Tax-Exempt Commercial Paper. This type of short-term obligation (usually having a maturity of 270 days or less) is issued by a municipality to meet current working capital needs.

Auction Rate Securities. Auction rate securities are municipal debt instruments with long-term nominal maturities for which the interest rate is reset at specific shorter frequencies (typically every 7-35 days) through a "dutch" auction process. A dutch auction is a competitive bidding process used to determine rates on each auction date. In a dutch auction, a broker-dealer submits bids, on behalf of current and prospective investors, to the auction agent. The winning bid rate is the rate at which the auction "clears," meaning the lowest possible interest rate at which all the securities can be sold at par. This "clearing rate" is paid on the entire issue for the upcoming period and includes current holders of the auction rate securities. Investors who bid a minimum rate above the clearing rate receive no securities, while those whose minimum bid rates were at or below the clearing rate receive the clearing rate for the next period.

While the auction rate process is designed to permit the holder to sell the auction rate securities in an auction at par value at specified intervals, there is the risk that an auction will fail due to insufficient demand for the securities. Auction rate securities may be subject to changes in interest rates, including decreased interest rates. Failed auctions may impair the liquidity of auction rate securities.

Municipal Lease Obligations. The Fund's investments in municipal lease obligations may be through certificates of participation that are offered to investors by public entities. Municipal leases may take the form of a lease or an installment purchase contract issued by a state or local government authority to obtain funds to acquire a wide variety of equipment and facilities.

Some municipal lease securities may be deemed to be "illiquid" securities. The Manager may determine that certain municipal leases are liquid under guidelines that require the Manager to evaluate, among other factors, the following:

While the Fund holds such securities, the Manager will also evaluate the likelihood of a continuing market for these securities and their credit quality.

Municipal leases have special risk considerations. Although lease obligations do not constitute general obligations of the municipality for which the municipality's taxing power is pledged, a lease obligation is ordinarily backed by the municipality's covenant to budget for, appropriate and make the payments due under the lease obligation. However, certain lease obligations contain "non-appropriation" clauses which provide that the municipality has no obligation to make lease or installment purchase payments in future years unless money is appropriated for that purpose on a yearly basis. While the obligation might be secured by the lease, it might be difficult to dispose of that property in case of a default.

Projects financed with certificates of participation generally are not subject to state constitutional debt limitations or other statutory requirements that may apply to other municipal securities. Payments by the public entity on the obligation underlying the certificates are derived from available revenue sources. That revenue might be diverted to the funding of other municipal service projects. Payments of interest and/or principal with respect to the certificates are not guaranteed and do not constitute an obligation of a state or any of its political subdivisions.

Municipal leases may also be subject to "abatement risk." The leases underlying certain municipal lease obligations may state that lease payments are subject to partial or full abatement. That abatement might occur, for example, if material damage to or destruction of the leased property interferes with the lessee's use of the property. However, in some cases that risk might be reduced by insurance covering the leased property, or by the use of credit enhancements such as letters of credit to back lease payments, or perhaps by the lessee's maintenance of reserve monies for lease payments.

In addition to the risk of "non-appropriation," municipal lease securities do not have as highly liquid a market as conventional municipal bonds. Municipal leases, like other municipal debt obligations, are subject to the risk of non-payment of interest or repayment of principal by the issuer. The ability of issuers of municipal leases to make timely lease payments may be adversely affected in general economic downturns and as relative governmental cost burdens are reallocated among federal, state and local governmental units. A default in payment of income would result in a reduction of income to the Fund. It could also result in a reduction in the value of the municipal lease and that, as well as a default in repayment of principal, could result in a decrease in the net asset value of the Fund.

TOBACCO RELATED BONDS. The Fund may invest in two types of tobacco related bonds: (i) tobacco settlement revenue bonds, for which payments of interest and principal are made solely from a state's interest in the MSA described below, and (ii) tobacco bonds subject to a state's appropriation pledge, for which payments may come from both the MSA revenue and the applicable state's appropriation pledge.

Tobacco Settlement Revenue Bonds. The Fund may invest up to 25% (measured at the time of purchase) of its total assets in tobacco settlement revenue bonds. Tobacco settlement revenue bonds are secured by an issuing state's proportionate share in the MSA. The MSA is an agreement reached out of court in November 1998 between 46 states and six other U.S. jurisdictions (including Puerto Rico and Guam) and the four largest (now three) U.S. tobacco manufacturers (Philip Morris, RJ Reynolds, Brown & Williamson (merged with RJ Reynolds in 2004), and Lorillard). Subsequently, a number of smaller tobacco manufacturers signed on to the MSA. The MSA provides for payments annually by the manufacturers to the states and jurisdictions in perpetuity, in exchange for releasing all claims against the manufacturers and a pledge of no further litigation. The MSA established a base payment schedule and a formula for adjusting payments each year. Tobacco manufacturers pay into a master escrow trust based on their market share and each state receives a fixed percentage of the payment as set forth in the MSA.

A number of states have securitized the future flow of those payments by selling bonds pursuant to indentures, some through distinct governmental entities created for such purpose. The bonds are backed by the future revenue flow that is used for principal and interest payments on the bonds. Annual payments on the bonds, and thus the risk to the Fund, are highly dependent on the receipt of future settlement payments by the state or its governmental entity, as well as other factors. The actual amount of future settlement payments is dependent on many factors including, but not limited to, annual domestic cigarette shipments, cigarette consumption, inflation and the financial capability of participating tobacco companies. As a result, payments made by tobacco manufacturers could be reduced if the decrease in tobacco consumption is significantly greater than the forecasted decline.

On June 22, 2009, President Obama signed into law the "Family Smoking Prevention and Tobacco Control Act" which extends the authority of the U.S. Food and Drug Administration to encompass the regulation of tobacco products. Among other things, the legislation authorizes the FDA to adopt product standards for tobacco products, restrict advertising of tobacco products, and impose stricter warning labels. FDA regulation of tobacco products could result in greater decreases in tobacco consumption than originally forecasted. On August 31, 2009, a number of tobacco manufacturers filed suit in federal court in Kentucky alleging that certain of the provisions of the FDA Tobacco Act restricting the advertising and marketing of tobacco products are inconsistent with the freedom of speech guarantees of the First Amendment of the United States Constitution. The suit does not challenge Congress' decision to give the FDA regulatory authority over tobacco products or the vast majority of the provisions of the law.

Because tobacco settlement bonds are backed by payments from the tobacco manufacturers, and generally not by the credit of the state or local government issuing the bonds, their creditworthiness depends on the ability of tobacco manufacturers to meet their obligations. A market share loss by the MSA companies to non-MSA participating tobacco manufacturers could also cause a downward adjustment in the payment amounts. A participating manufacturer filing for bankruptcy also could cause delays or reductions in bond payments, which could affect the Fund's net asset value.

The MSA and tobacco manufacturers have been and continue to be subject to various legal claims. An adverse outcome to any litigation matters relating to the MSA or affecting tobacco manufacturers could adversely affect the payment streams associated with the MSA or cause delays or reductions in bond payments by tobacco manufacturers. The MSA itself has been subject to legal challenges and has, to date, withstood those challenges.

Tobacco Subject to Appropriation (STA) Bonds. In addition to the tobacco settlement bonds discussed above, the Fund also may invest in tobacco related bonds that are subject to a state's appropriation pledge ("STA Tobacco Bonds"). STA Tobacco Bonds rely on both the revenue source from the MSA and a state appropriation pledge.

These STA Tobacco Bonds are part of a larger category of municipal bonds that are subject to state appropriation. Although specific provisions may vary among states, "subject to appropriation bonds" (also referred to as "appropriation debt") are typically payable from two distinct sources: (i) a dedicated revenue source such as a municipal enterprise, a special tax or, in the case of tobacco bonds, the MSA funds, and (ii) the issuer's general funds. Appropriation debt differs from a state's general obligation debt in that general obligation debt is backed by the state's full faith, credit and taxing power, while appropriation debt requires the state to pass a specific periodic appropriation to pay interest and/or principal on the bonds as the payments come due. The appropriation is usually made annually. While STA Tobacco Bonds offer an enhanced credit support feature, that feature is generally not an unconditional guarantee of payment by a state and states generally do not pledge the full faith, credit or taxing power of the state. The Fund considers the STA Tobacco Bonds to be "municipal securities" for purposes of its concentration policies.

Litigation Challenging the MSA. The participating manufacturers and states in the MSA are subject to several pending lawsuits challenging the MSA and/or related state legislation or statutes adopted by the states to implement the MSA (referred to herein as the "MSA-related legislation"). One or more of the lawsuits allege, among other things, that the MSA and/or the states' MSA-related legislation are void or unenforceable under the Commerce Clause and certain other provisions of the U.S. Constitution, the federal antitrust laws, federal civil rights laws, state constitutions, consumer protection laws and unfair competition laws.

To date, challenges to the MSA or the states' MSA-related legislation have not been ultimately successful, although several such challenges have survived initial appellate review of motions to dismiss or have proceeded to a stage of litigation where the ultimate outcome may be determined by, among other things, findings of fact based on extrinsic evidence as to the operation and impact of the MSA and the states' MSA-related legislation.

The MSA and states' MSA-related legislation may also continue to be challenged in the future. A determination that the MSA or states' MSA-related legislation is void or unenforceable would have a material adverse effect on the payments made by the participating manufacturers under the MSA.

Litigation Seeking Monetary Relief from Tobacco Industry Participants. The tobacco industry has been the target of litigation for many years. Both individual and class action lawsuits have been brought by or on behalf of smokers alleging that smoking has been injurious to their health, and by non-smokers alleging harm from environmental tobacco smoke, also known as "secondhand smoke." Plaintiffs seek various forms of relief, including compensatory and punitive damages aggregating billions of dollars, treble/multiple damages and other statutory damages and penalties, creation of medical monitoring and smoking cessation funds, disgorgement of profits, legal fees, and injunctive and equitable relief.

The MSA does not release participating manufacturers from liability in either individual or class action cases. Healthcare cost recovery cases have also been brought by governmental and non-governmental healthcare providers seeking, among other things, reimbursement for healthcare expenditures incurred in connection with the treatment of medical conditions allegedly caused by smoking. The participating manufacturers are also exposed to liability in these cases, because the MSA only settled healthcare cost recovery claims of the participating states. Litigation has also been brought against certain participating manufacturers and their affiliates in foreign countries.

The ultimate outcome of any pending or future lawsuit is uncertain. Verdicts of substantial magnitude that are enforceable as to one or more participating manufacturers, if they occur, could encourage commencement of additional litigation, or could negatively affect perceptions of potential triers of fact with respect to the tobacco industry, possibly to the detriment of pending litigation. An unfavorable outcome or settlement or one or more adverse judgments could result in a decision by the affected participating manufacturers to substantially increase cigarette prices, thereby reducing cigarette consumption beyond the forecasts under the MSA. In addition, the financial condition of any or all of the participating manufacturer defendants could be materially and adversely affected by the ultimate outcome of pending litigation, including bonding and litigation costs or a verdict or verdicts awarding substantial compensatory or punitive damages. Depending upon the magnitude of any such negative financial impact (and irrespective of whether the participating manufacturer is thereby rendered insolvent), an adverse outcome in one or more of the lawsuits could substantially impair the affected participating manufacturer's ability to make payments under the MSA.

Credit Ratings of Municipal Securities.Ratings by ratings organizations such as Moody's Investors Service, Inc. ("Moody's"), Standard & Poor's Ratings Services ("S&P"), and Fitch, Inc. ("Fitch") represent the respective rating agency's opinions of the credit quality of the municipal securities they undertake to rate. However, their ratings are general opinions and are not guarantees of quality. Municipal securities that have the same maturity, coupon and rating may have different yields, while other municipal securities that have the same maturity and coupon but different ratings may have the same yield.

Below-investment-grade securities (also referred to as "junk bonds") may have a higher yield than securities rated in the higher rating categories. In addition to having a greater risk of default than higher-grade securities, there may be less of a market for these securities. As a result they may be harder to sell at an acceptable price. The additional risks mean that the Fund may not receive the anticipated level of income from these securities, and the Fund's net asset value may be affected by declines in the value of lower-grade securities.

After the Fund buys a municipal security, the security may cease to be rated or its rating may be reduced. Neither event requires the Fund to sell the security, but the Manager will consider such events in determining whether the Fund should continue to hold the security. To the extent that ratings given by Moody's, S&P, or Fitch change as a result of changes in those rating organizations or their rating systems, the Fund will attempt to use similar ratings as standards for investments in accordance with the Fund's investment policies.

The Fund may buy municipal securities that are "pre-refunded." The issuer's obligation to repay the principal value of the security is generally collateralized with U.S. Government securities placed in an escrow account. This causes the pre-refunded security to have essentially the same risks of default as a AAA-rated security.

A list of the rating categories of Moody's, S&P and Fitch for municipal securities is contained in an Appendix to this SAI.

Unrated Securities . Because the Fund purchases securities that are not rated by any nationally recognized statistical rating organization, the Manager may internally assign ratings to those securities, after assessing their credit quality and other factors, in categories similar to those of nationally recognized statistical rating organizations. Unrated securities are considered "investment-grade" or "below-investment-grade" if judged by the Manager to be comparable to rated investment-grade or below-investment-grade securities. There can be no assurance, nor is it intended, that the Manager's credit analysis process is consistent or comparable with the credit analysis process used by a nationally recognized statistical rating organization. The Manager's rating does not constitute a guarantee of the credit quality. In addition, some unrated securities may not have an active trading market, which means that the Fund might have difficulty selling them promptly at an acceptable price. In evaluating the credit quality of a particular security, whether rated or unrated, the Manager will normally take into consideration a number of factors including, but not limited to, the financial resources of the issuer, the underlying source of funds for debt service on a security, the issuer's sensitivity to economic conditions and trends, any operating history of the facility financed by the obligation, the degree of community support for the financed facility, the capabilities of the issuer's management, and regulatory factors affecting the issuer or the particular facility.

Special Risks of Below-Investment-Grade Securities. The Fund may invest in municipal securities rated below-investment-grade up to the limits described in the Prospectus. Lower-grade securities may have a higher yield than securities rated in the higher rating categories. In addition to having a greater risk of default than higher-grade securities, there may be less of a market for these securities. As a result they may be harder to sell at an acceptable price. The additional risks mean that the Fund may not receive the anticipated level of income from these securities, and the Fund's net asset value may be affected by declines in the value of lower-grade securities.

While securities rated "Baa" by Moody's, "BBB" by S&P, or the similar category by the Manager if an unrated security, are investment-grade, they may be subject to special risks and have some speculative characteristics.

U.S. Territories, Commonwealths and Possessions. The Fund also invests in municipal securities issued by certain territories, commonwealths and possessions of the United States that pay interest that is exempt (in the opinion of the issuer's legal counsel when the security is issued) from federal and state income tax. Therefore, the Fund's investments could be affected by the fiscal stability of, for example, Puerto Rico, the Virgin Islands, Guam, or the Northern Mariana Islands. Additionally, the Fund's investments could be affected by economic, legislative, regulatory or political developments affecting issuers in those territories, commonwealths or possessions. A discussion of the special considerations relating to the Fund's municipal obligations and other factors or economic conditions in those territories, commonwealths or possessions is provided in an Appendix to this SAI.

A discussion of the special considerations relating to the Fund's state municipal obligations and other factors or economic conditions in those territories, commonwealths or possessions is provided in Appendix B to this SAI.

Inverse Floaters. The Fund invests in "inverse floaters" which are derivative instruments that pay interest at rates that move in the opposite direction of yields on short-term securities. As short-term interest rates rise, the interest rate on inverse floaters falls and they produce less current income. As short-term interest rates fall, the interest rates on the inverse floaters increase and they pay more current income. Their market value can be more volatile than that of a conventional fixed-rate security having similar credit quality, redemption provisions and maturity. The Fund can expose up to 20% of its total assets to the effects of leverage from its investments in inverse floaters.

An inverse floater is typically created by a trust that divides a municipal security into two securities: a short-term tax-free floating rate security (sometimes referred to as a "tender option bond") and a long-term tax-exempt floating rate security (referred to as a residual certificate" or "inverse floater") that pays interest at rates that move in the opposite direction of the yield on the short-term floating rate security. The purchaser of a "tender option bond" has the right to tender the security periodically for repayment of the principal value. As short-term interest rates rise, inverse floaters produce less current income (and, in extreme cases, may pay no income) and as short-term interest rates fall, inverse floaters produce more current income.

The Fund may also purchase inverse floaters created when another party transfers a municipal security to a trust. The trust then issues short-term floating rate notes to third parties and sells the inverse floater to the Fund. Under some circumstances, the Manager might acquire both portions of that type of offering, to reduce the effect of the volatility of the individual securities. This provides the Manager with a flexible portfolio management tool to vary the degree of investment leverage efficiently under different market conditions.

Additionally, the Fund may be able to purchase inverse floaters created by municipal issuers directly. To provide investment leverage, a municipal issuer might issue two variable rate obligations instead of a single long-term, fixed-rate security. For example, the interest rate on one obligation reflecting short-term interest rates and the interest rate on the other instrument, the inverse floater, reflecting the approximate rate the issuer would have paid on a fixed-rate security, multiplied by a factor of two, minus the rate paid on the short-term instrument.

Inverse floaters may offer relatively high current income, reflecting the spread between long-term and short-term tax-exempt interest rates. As long as the municipal yield curve remains positively sloped, and short-term rates remain low relative to long-term rates, owners of inverse floaters will have the opportunity to earn interest at above market rates. If the yield curve flattens and shifts upward, an inverse floater will lose value more quickly than a conventional long-term security having similar credit quality, redemption provisions and maturity.

Some inverse floaters have a feature known as an interest rate "cap" as part of the terms of the investment. Investing in inverse floaters that have interest rate caps might be part of a portfolio strategy to try to maintain a high current yield for the Fund when the Fund has invested in inverse floaters that expose the Fund to the risk of short-term interest rate fluctuations. "Embedded" caps can be used to hedge a portion of the Fund's exposure to rising interest rates. When interest rates exceed a pre-determined rate, the cap generates additional cash flows that offset the decline in interest rates on the inverse floater. However, the Fund bears the risk that if interest rates do not rise above the pre-determined rate, the cap (which is purchased for additional cost) will not provide additional cash flows and will expire worthless.

The Fund may enter into a "shortfall and forbearance" agreement with the sponsor of an inverse floater held by the Fund. Under such an agreement, on liquidation of the trust, the Fund would be committed to pay the trust the difference between the liquidation value of the underlying security on which the inverse floater is based and the principal amount payable to the holders of the short-term floating rate security that is based on the same underlying security. The Fund would not be required to make such a payment under the standard terms of a more typical inverse floater. Although entering into a "shortfall and forbearance" agreement would expose the Fund to the risk that it may be required to make the payment described above, the Fund may receive higher interest payments than under a typical inverse floater.

An investment in inverse floaters may involve greater risk than an investment in a fixed-rate municipal security. All inverse floaters entail some degree of leverage. The interest rate on inverse floaters varies inversely at a pre-set multiple of the change in short-term rates. An inverse floater that has a higher multiple, and therefore more leverage, will be more volatile with respect to both price and income than an inverse floater with a lower degree of leverage or than the underlying security.

Because of the accounting treatment for inverse floaters created by the Fund's transfer of a municipal bond to a trust, the Fund's financial statements will reflect these transactions as "secured borrowings," which affects the Fund's expense ratios, statements of income and assets and liabilities and causes the Fund's Statement of Investments to include the underlying municipal bond.

Floating Rate and Variable Rate Obligations. Floating or variable rate obligations may have a demand feature that allows the Fund to tender the obligation to the issuer or a third party prior to its maturity. The tender may be at par value plus accrued interest, according to the terms of the obligations.

The interest rate on a floating rate demand note is based on a market rate, such as the percentage of LIBOR, the SIFMA Municipal Swap index or a bank's prime rate and is adjusted automatically each time such rate is adjusted. The interest rate on a variable rate demand note is also based on a specified market rate but is adjusted automatically at specified intervals of not less than one year. Generally, the changes in the interest rates on such securities reduce the fluctuation in their market value. As interest rates decrease or increase, the potential for capital appreciation or depreciation is less than that for fixed-rate obligations of the same maturity. The Manager may determine that an unrated floating rate or variable rate demand obligation meets the Fund's quality standards by reason of being backed by a letter of credit or guarantee issued by a bank that meets those quality standards.

Floating rate and variable rate demand notes that have a stated maturity in excess of one year may have features that permit the holder to recover the principal amount of the underlying security at specified intervals not exceeding one year and upon no more than 30 days' notice. The issuer of that type of note normally has a corresponding right in its discretion, after a given period, to prepay the outstanding principal amount of the note plus accrued interest. Generally the issuer must provide a specified number of days' notice to the holder. Floating rate or variable rate obligations that do not provide for the recovery of principal and interest within seven days are subject to the Fund's limitations on investments in illiquid securities.

Borrowing and Leverage. The Fund can borrow from banks, as permitted by the Investment Company Act. It can use those borrowings for a number of purposes, including for investment purposes such as purchasing securities believed to be desirable by the Manager, funding amounts necessary to unwind or "collapse" trusts that issued inverse floaters to the Fund, or to contribute to such trusts to enable them to meet tenders made by holders of other securities issued by such trusts. The Fund also can borrow from banks and other lenders to meet redemption obligations or for temporary and emergency purposes. When the Fund borrows money, it is using a speculative investment technique known as leverage and changes in the value of the Fund's investments will have a larger effect on its share price than if it did not borrow because of the effect of leverage.

Under the Fund's investment policies, the Fund may not borrow money, except to the extent permitted under the Investment Company Act, the rules or regulations thereunder or any exemption from the Investment Company Act that applies to the Fund. Under the Investment Company Act, a mutual fund may borrow only from banks (other than for emergency purposes) and the maximum amount that it may borrow is equal to one-third of its total assets (including the amount borrowed), less all liabilities and indebtedness other than borrowings (meaning that the value of those assets must be at least equal to 300% of the amount borrowed). If the value of the Fund's assets fails to meet this 300% asset coverage requirement, the Fund will reduce the amount of its borrowings within three days to meet the requirement. To do so, the Fund might have to sell a portion of its investments at a disadvantageous time and for a disadvantageous price.

The Fund may also borrow up to 5% of its total assets for temporary or emergency purposes from any lender, including a non-bank. Under the Investment Company Act, there is a rebuttable presumption that a loan is temporary if it is repaid within 60 days and not extended or renewed.

The Fund will pay interest and may pay other fees in connection with loans. Interest expense and the amount of any other fees incurred by the Fund in connection with loans will raise the overall expenses of the Fund and may reduce its returns. If the Fund does borrow, its expenses will be greater than comparable funds that do not borrow. If the Fund borrows for investment purposes, the interest and other fees paid in connection with a loan might be more (or less) than the yield on the securities purchased with the loan proceeds. If those costs are more than the yield on the securities purchased, the Fund's return will be reduced. Additionally, on the maturity date for any loan, the Fund must have sufficient cash available to pay back the lender the amount borrowed.

Loans are typically secured by assets of the Fund, meaning that the Fund will grant the lender a security interest in some or all of its assets to secure its performance under the related loan. If the Fund were to default in the payment of interest or other fees in connection with a secured loan, fail to repay the principal amount of that loan on maturity or fail to satisfy other obligations it may owe to the lender in connection with that loan, the lender would have certain rights to foreclose on, take and liquidate those assets of the Fund to which it has been granted a security interest to satisfy outstanding amounts in connection with the secured loan.

The Fund participates in a secured line of credit (the "Line of Credit") with certain commercial paper conduits, as lenders, Citibank, N.A. as a secondary lender and administrator, and other banks, each as lenders from time to time. The Line of Credit enables the Fund to participate with certain other Oppenheimer funds, as borrowers, in a committed, secured borrowing facility that permits borrowings of up to a maximum aggregate amount by the participants, as negotiated from time to time. Borrowings by the Fund under the Line of Credit can be used to purchase securities for investment or for other purposes. The Fund's Board determined that the Fund's participation in the Line of Credit is consistent with the Fund's investment objective and policies and is in the best interests of the Fund and its shareholders.

Under the Line of Credit, in the event that the commercial paper conduit lenders are unable or unwilling to make loans, Citibank, N.A. and the other bank lenders, if any, would then be required to make those loans. Under the Line of Credit, interest is charged to the Fund, based on its borrowings, at current commercial rates. Additionally, the Fund will pay its pro rata portion of a loan commitment fee for the Line of Credit, and pays additional fees annually to the lenders on its outstanding borrowings for management and administration of the facility. The Fund can prepay loans and terminate its participation in the Line of Credit at any time upon prior notice to Citibank, N.A. As a borrower under the Line of Credit, the Fund has certain rights and remedies under state and federal law comparable to those it would have with respect to a loan from a bank.

Reverse Repurchase Agreements. The Fund may engage in reverse repurchase agreements. A reverse repurchase agreement is the sale of a debt obligation to a party for a specified price, with the simultaneous agreement to repurchase it from that party on a future date at a higher price. These transactions involve the risk that the market value of the securities sold under a reverse repurchase agreement could decline below the price that the Fund is required to repurchase them. The Fund will identify liquid assets on its books to cover its obligations under reverse repurchase agreements until payment is made to the other party.

The Fund can participate in a committed reverse repurchase agreement program with J.P. Morgan Securities LLC, along with other Oppenheimer funds. Reverse repurchase agreements that the Fund may engage in also create leverage, as discussed in "Borrowing and Leverage" in this SAI. Similar to borrowing, reverse repurchase agreements provide the Fund with cash for investment and operational purposes. When the Fund engages in reverse repurchase agreements, changes in the value of the Fund's investments will have a larger effect on its share price than if it did not engage in these transactions due to the effect of leverage. Reverse repurchase agreements create fund expenses and require that the Fund have sufficient cash available to repurchase the debt obligation when required.

The Fund may also use the following types of investments and investment strategies.

Percentage of LIBOR Notes (PLNs). The Fund may invest in Percentage of LIBOR Notes ("PLNs") which are variable rate municipal securities based on the London Interbank Offered Rate ("LIBOR"), a widely used benchmark for short-term interest rates and used by banks for interbank loans with other banks. The PLN typically pays interest based on a percentage of a LIBOR rate for a specified time plus an established yield premium. Due to their variable rate features, PLNs will generally pay higher levels of income in a rising short-term interest rate environment and lower levels of income as short-term interest rates decline. In times of substantial market volatility, however, the PLNs may not perform as anticipated. The value of a PLN also may decline due to other factors, such as changes in credit quality of the underlying bond.

The Fund also may invest in PLNs that are created when a broker-dealer/sponsor deposits a municipal bond into a trust created by the sponsor. The trust issues a percentage of LIBOR floating rate certificate (i.e., the PLN) to the Fund and a residual interest certificate to third parties who receive the remaining interest on the bond after payment of the interest distribution to the PLN holder and other fees.

Defaulted Securities. The Fund may, from time to time, purchase defaulted securities if, the Manager believes that there is a potential for resumption of income payments or realization of income on the sale of the securities or the collateral or other advantageous developments appear likely in the near future. The purchase of defaulted securities is highly speculative and involves a high degree of risk. There is a risk of a substantial or complete loss of the Fund's investment in the event the issuer does not restructure or reorganize to enable it to resume paying interest and principal to holders. Issuers of defaulted securities may have substantial capital needs and may become involved in bankruptcy or reorganization proceedings and it may be difficult to obtain information about the condition of such issuers. Such bankruptcy or receivership proceedings may require participation by the Manager on behalf of the Fund. Defaulted securities may be less actively traded than other securities, making it more difficult to dispose of substantial holdings of such securities at prevailing market prices. Their market prices also are subject to abrupt and erratic movements and above-average price volatility and the spread between the bid and asked prices may be greater than normally expected.

When-Issued and Delayed-Delivery Transactions. The Fund can purchase securities on a "when-issued" basis, and may purchase or sell such securities on a "delayed-delivery" basis. "When-issued" or "delayed-delivery" refers to securities whose terms and indenture are available and for which a market exists, but which are not available for immediate delivery.

When such transactions are negotiated, the price (which is generally expressed in yield terms) is fixed at the time the commitment is made. Delivery and payment for the securities take place at a later date. Normally the settlement date is within six months of the purchase of municipal bonds and notes. However, the Fund may, from time to time, purchase municipal securities having a settlement date more than six months and possibly as long as two years or more after the trade date. The securities are subject to change in value from market fluctuation during the settlement period. The value at delivery may be less than the purchase price. For example, changes in interest rates in a direction other than that expected by the Manager before settlement will affect the value of such securities and may cause loss to the Fund. No income begins to accrue to the Fund on a when-issued security until the Fund receives the security at settlement of the trade.

The Fund will engage in when-issued transactions in order to secure what is considered to be an advantageous price and yield at the time of entering into the obligation. When the Fund engages in when-issued or delayed-delivery transactions, it relies on the buyer or seller, as the case may be, to complete the transaction. Their failure to do so may cause the Fund to lose the opportunity to obtain the security at a price and yield it considers advantageous.

When the Fund engages in when-issued and delayed-delivery transactions, it does so for the purpose of acquiring or selling securities consistent with its investment objective and policies for its portfolio or for delivery pursuant to options contracts it has entered into, and not for the purposes of investment leverage. Although the Fund will enter into when-issued or delayed-delivery purchase transactions to acquire securities, the Fund may dispose of a commitment prior to settlement. If the Fund chooses to dispose of the right to acquire a when-issued security prior to its acquisition or to dispose of its right to deliver or receive against a forward commitment, it may incur a gain or loss.

At the time the Fund makes a commitment to purchase or sell a security on a when-issued or forward commitment basis, it records the transaction on its books and reflects the value of the security purchased. In a sale transaction, it records the proceeds to be received, in determining its net asset value. In a purchase transaction the Fund will identify on its books liquid securities of any type with a value at least equal to the purchase commitments until the Fund pays for the investment.

When-issued transactions and forward commitments can be used by the Fund as a defensive technique to hedge against anticipated changes in interest rates and prices. For instance, in periods of rising interest rates and falling prices, the Fund might sell securities in its portfolio on a forward commitment basis to attempt to limit its exposure to anticipated falling prices. In periods of falling interest rates and rising prices, the Fund might sell portfolio securities and purchase the same or similar securities on a when-issued or forward commitment basis, to obtain the benefit of currently higher cash yields.

Zero-Coupon Securities. The Fund may buy zero-coupon and delayed interest municipal securities. Zero-coupon securities do not make periodic interest payments and are sold at a deep discount from their face value. The buyer recognizes a rate of return determined by the gradual appreciation of the security, which is redeemed at face value on a specified maturity date. This discount depends on the time remaining until maturity, as well as prevailing interest rates, the liquidity of the security and the credit quality of the issuer. In the absence of threats to the issuer's credit quality, the discount typically decreases as the maturity date approaches. Some zero-coupon securities are convertible, in that they are zero-coupon securities until a predetermined date, at which time they convert to a security with a specified coupon rate.

Because zero-coupon securities pay no interest and compound semi-annually at the rate fixed at the time of their issuance, their value is generally more volatile than the value of other debt securities. Their value may fall more dramatically than the value of interest-bearing securities when interest rates rise. When prevailing interest rates fall, zero-coupon securities tend to rise more rapidly in value because they have a fixed rate of return.

The Fund's investment in zero-coupon securities may cause the Fund to recognize income and be required to make distributions to shareholders before it receives any cash payments on the zero-coupon investment. To generate cash to satisfy those distribution requirements, the Fund may have to sell portfolio securities that it otherwise might have continued to hold or to use cash flows from other sources such as the sale of Fund shares.

Puts and Standby Commitments. The Fund may acquire "stand-by commitments" or "puts" with respect to municipal securities to enhance portfolio liquidity and to try to reduce the average effective portfolio maturity. These arrangements give the Fund the right to sell the securities at a set price on demand to the issuing broker-dealer or bank. However, securities having this feature may have a relatively lower interest rate.

When the Fund buys a municipal security subject to a standby commitment to repurchase the security, the Fund is entitled to same-day settlement from the purchaser. The Fund receives an exercise price equal to the amortized cost of the underlying security plus any accrued interest at the time of exercise. A put purchased in conjunction with a municipal security enables the Fund to sell the underlying security within a specified period of time at a fixed exercise price.

The Fund might purchase a standby commitment or put separately in cash or it might acquire the security subject to the standby commitment or put (at a price that reflects that additional feature). The Fund will enter into these transactions only with banks and securities dealers that, in the Manager's opinion, present minimal credit risks. The Fund's ability to exercise a put or standby commitment will depend on the ability of the bank or dealer to pay for the securities if the put or standby commitment is exercised. If the bank or dealer should default on its obligation, the Fund might not be able to recover all or a portion of any loss sustained from having to sell the security elsewhere.

Puts and standby commitments are not transferable by the Fund. They terminate if the Fund sells the underlying security to a third party. The Fund intends to enter into these arrangements to facilitate portfolio liquidity, although such arrangements might enable the Fund to sell a security at a pre-arranged price that may be higher than the prevailing market price at the time the put or standby commitment is exercised. However, the Fund might refrain from exercising a put or standby commitment if the exercise price is significantly higher than the prevailing market price, to avoid imposing a loss on the seller that could jeopardize the Fund's business relationships with the seller.

A put or standby commitment increases the cost of the security and reduces the yield otherwise available from the security. Any consideration paid by the Fund for the put or standby commitment will be reflected on the Fund's books as unrealized depreciation while the put or standby commitment is held, and a realized gain or loss when the put or commitment is exercised or expires. Interest income received by the Fund from municipal securities subject to puts or stand-by commitments may not qualify as tax-exempt in its hands if the terms of the put or stand-by commitment cause the Fund not to be treated as the tax owner of the underlying municipal securities.

Repurchase Agreements. The Fund may acquire securities subject to repurchase agreements. Repurchase agreements may be acquired for temporary defensive purposes, to maintain liquidity to meet anticipated share redemptions, pending the investment of the proceeds from sales of shares, or pending the settlement of portfolio securities transactions. In a repurchase transaction, the purchaser buys a security from, and simultaneously resells it to, an approved vendor for delivery on an agreed-upon future date. The resale price exceeds the purchase price by an amount that reflects an agreed-upon interest rate effective for the period during which the repurchase agreement is in effect. Approved vendors include U.S. commercial banks, U.S. branches of foreign banks, or broker-dealers that have been designated as primary dealers in government securities. Vendors must meet credit requirements set by the Manager from time to time.

The majority of repurchase transactions run from day to day and delivery pursuant to the resale typically occurs within one to five days of the purchase. Repurchase agreements that have a maturity beyond seven days are subject to limits on illiquid investments. There is no limit on the amount of assets that may be subject to repurchase agreements having maturities of seven days or less.

Repurchase agreements are considered "loans" under the Investment Company Act and are collateralized by the underlying security. Repurchase agreements require that at all times while the repurchase agreement is in effect, the value of the collateral must equal or exceed the repurchase price to fully collateralize the repayment obligation. However, if the vendor fails to pay the repurchase price on the delivery date, there may be costs incurred in disposing of the collateral and losses if there is a delay in the ability to do so. The Manager will monitor the vendor's creditworthiness to confirm that the vendor is financially sound and will continuously monitor the collateral's value.

Pursuant to an Exemptive Order issued by the Securities and Exchange Commission (the "SEC"), the Fund, along with the affiliated entities managed by the Manager, may transfer uninvested cash balances into one or more joint repurchase agreement accounts. These balances are invested in one or more repurchase agreements secured by U.S. Government securities. Securities that are pledged as collateral for repurchase agreements are held by a custodian bank until the agreements mature. Each joint repurchase arrangement requires that the market value of the collateral be sufficient to cover payments of interest and principal; however, in the event of default by the other party to the agreement, retention or sale of the collateral may be subject to legal proceedings.

Illiquid and Restricted Securities. Generally, an illiquid asset is an asset that cannot be sold or disposed of in the ordinary course of business within seven days at approximately the price at which it has been valued. Under the policies and procedures established by the Board, the Manager determines the liquidity of portfolio investments. The Manager monitors holdings of illiquid and restricted securities on an ongoing basis to determine whether to sell any holdings to maintain adequate liquidity. Among the types of illiquid securities are repurchase agreements maturing in more than seven days.

Restricted securities acquired through private placements have contractual restrictions on their public resale that might limit the ability to value or to dispose of the securities and might lower the price that could be realized on a sale. To sell a restricted security that is not registered under applicable securities laws, the securities might need to be registered. The expense of registering restricted securities may be negotiated with the issuer at the time of purchase. If the securities must be registered in order to be sold, a significant period may elapse between the time the decision is made to sell the security and the time the security is registered. There is a risk of downward price fluctuation during that period.

Limitations that apply to purchases of restricted securities do not limit purchases of restricted securities that are eligible for sale to qualified institutional buyers under Rule 144A of the Securities Act of 1933, if those securities have been determined to be liquid by the Manager under Board-approved guidelines. Those guidelines take into account the trading activity for the securities and the availability of reliable pricing information, among other factors. If there is a lack of trading interest in a particular Rule 144A security, holdings of that security may be considered to be illiquid.

Loans of Portfolio Securities. Securities lending pursuant to a Securities Lending Agency Agreement (the "Securities Lending Agreement") with Goldman Sachs Bank USA, doing business as Goldman Sachs Agency Lending ("Goldman Sachs"), may be used to attempt to increase income. Loans of portfolio securities must comply with all applicable regulations and with the Fund's Securities Lending Procedures adopted by the Board. The terms of any loans must also meet applicable tests under the Internal Revenue Code.

There are certain risks in connection with securities lending, including possible delays in receiving additional collateral to secure a loan, or a delay or expenses in recovery of the loaned securities. Goldman Sachs has agreed, in general, to guarantee the obligations of borrowers to return loaned securities and to be responsible for certain expenses relating to securities lending. Under the Securities Lending Agreement, the Fund's securities lending procedures and applicable regulatory requirements (which are subject to change), the Fund must receive collateral from the borrower consisting of cash, bank letters of credit or securities of the U.S. Government (or its agencies or instrumentalities). On each business day, the amount of collateral that the Fund has received must at least equal the value of the loaned securities. If the Fund receives cash collateral from the borrower, the Manager, in its capacity as the Fund's collateral administrator, may invest that cash in certain high quality, short-term investments, including in money market funds advised by the Manager. The Fund will be subject to its proportional share of the expenses of such money market funds, including the advisory fee payable to the Manager or its affiliate as adviser to such funds. The Manager may charge a collateral administration fee of 0.08% on the value of cash collateral invested in other securities. All of the Fund's collateral investments must comply with its securities lending procedures. The Fund will be responsible for the risks associated with the investment of cash collateral, including the risk that the Fund may lose money on the investment or may fail to earn sufficient income to meet its obligations to the borrower.

The terms of the loans must permit the Fund to recall loaned securities on five business days' notice and the Fund will seek to recall loaned securities in time to vote on any matters that the Manager determines would have a material effect on the Fund's investment. The Securities Lending Agreement may be terminated by either Goldman Sachs or the Fund on 30 days' written notice.

The Fund limits loans of portfolio securities to not more than 25% of its net assets.

Liquidity Facility. The Fund can participate in a program offered by ReFlow, LLC ("ReFlow") which provides additional liquidity to help the Fund meet shareholder redemptions without having to liquidate portfolio securities or borrow money, each of which imposes certain costs on the Fund. ReFlow is designed to provide an alternative source of funding to help meet shareholder redemptions while minimizing the Fund's costs and cash flow disruptions (compared to selling portfolio securities or other liquidity facilities such as a line of credit) and allowing the Fund to remain more fully invested. ReFlow provides this liquidity by being prepared to purchase Fund shares, at the Fund's closing net asset value, equal to the amount of the Fund's net redemptions on any given day. On subsequent days when the Fund experiences net subscriptions, ReFlow redeems its holdings at the Fund's net asset value on that day. When the Fund participates in the ReFlow program, it pays ReFlow a fee at a rate determined by a daily auction with other participating mutual funds in the ReFlow program. There is no assurance that ReFlow will have sufficient funds available to meet the Fund's liquidity needs on a particular day and ReFlow is prohibited from acquiring more than 3% of the outstanding shares of the Fund.

Other Derivative Investments. Certain derivatives, such as options, futures, indexed securities and entering into swap agreements, can be used to increase or decrease the Fund's exposure to changing security prices, interest rates or other factors that affect the value of securities. However, these techniques could result in losses to the Funds if the Manager judges market conditions incorrectly or employs a strategy that does not correlate well with the Fund's other investments. These techniques can cause losses if the counterparty does not perform its promises. An additional risk of investing in municipal securities that are derivative investments is that their market value could be expected to vary to a much greater extent than the market value of municipal securities that are not derivative investments but have similar credit quality, redemption provisions and maturities.

Hedging. The Fund may use hedging to attempt to protect against declines in the market value of its portfolio, to permit the Funds to retain unrealized gains in the value of portfolio securities that have appreciated, or to facilitate selling securities for investment reasons. To do so, the Fund may:

Covered calls may also be written on debt securities to attempt to increase the Fund's income, but that income would not be tax-exempt. Therefore it is unlikely that the Fund would write covered calls for that purpose.

The Fund may also use hedging to establish a position in the debt securities market as a temporary substitute for purchasing individual debt securities. In that case the Fund will normally seek to purchase the securities, and then terminate that hedging position. For this type of hedging, the Fund may:

The Fund is not obligated to use hedging instruments, even though it is permitted to use them in the Manager's discretion, as described below. The Fund's strategy of hedging with futures and options on futures will be incidental to the Fund's investment activities in the underlying cash market. The particular hedging instruments the Fund can use are described below. The Fund may employ new hedging instruments and strategies when they are developed, if those investment methods are consistent with the Fund's investment objective and are permissible under applicable regulations governing the Fund.

Futures. The Fund may buy and sell futures contracts relating to debt securities (these are called "interest rate futures"), and municipal bond indices (these are referred to as "municipal bond index futures").

An interest rate future obligates the seller to deliver (and the purchaser to take) cash or a specific type of debt security to settle the futures transaction. Either party could also enter into an offsetting contract to close out the futures position.

A "municipal bond index" assigns relative values to the municipal bonds in the index, and is used as the basis for trading long-term municipal bond futures contracts. Municipal bond index futures are similar to interest rate futures except that settlement is made only in cash. The obligation under the contract may also be satisfied by entering into an offsetting contract. The strategies which the Fund employs in using municipal bond index futures are similar to those with regard to interest rate futures.

No money is paid by or received by the Fund on the purchase or sale of a futures contract. Upon entering into a futures transaction, the Fund will be required to deposit an initial margin payment in cash or U.S. Government securities with the futures commission merchant (the "futures broker"). Initial margin payments will be deposited with the Fund's custodian bank in an account registered in the futures broker's name. However, the futures broker can gain access to that account only under certain specified conditions. As the future is marked to market (that is, its value on the Fund's books is changed) to reflect changes in its market value, subsequent margin payments, called variation margin, will be paid to or by the futures broker daily.

At any time prior to the expiration of the future, the Fund may elect to close out its position by taking an opposite position at which time a final determination of variation margin is made and additional cash is required to be paid by or released to the Fund. Any gain or loss is then realized by the Fund on the future for tax purposes. Although interest rate futures by their terms call for settlement by the delivery of debt securities, in most cases the obligation is fulfilled without such delivery by entering into an offsetting transaction. All futures transactions are effected through a clearing house associated with the exchange on which the contracts are traded.

The Fund may concurrently buy and sell futures contracts in a strategy anticipating that the future the Fund purchased will perform better than the future the Fund sold. For example, the Fund might buy municipal bond futures and concurrently sell U.S. Treasury Bond futures (a type of interest rate future). The Fund would benefit if municipal bonds outperform U.S. Treasury Bonds on a duration-adjusted basis.

Duration is a volatility measure that refers to the expected percentage change in the value of a bond resulting from a change in general interest rates (measured by each 1% change in the rates on U.S. Treasury securities). For example, if a bond has an effective duration of three years, a 1% increase in general interest rates would be expected to cause the value of the bond to decline about 3%. There are risks that this type of futures strategy will not be successful. U.S. Treasury bonds might perform better on a duration-adjusted basis than municipal bonds, and the assumptions about duration that were used might be incorrect (in this case, the duration of municipal bonds relative to U.S. Treasury Bonds might have been greater than anticipated).

Put and Call Options. Put options (sometimes referred to as "puts") give the holder the right to sell an asset for an agreed-upon price. Call options (sometimes referred to as "calls") give the holder the right to buy an asset at an agreed-upon price.

Writing Covered Call Options. The Fund may write (that is, sell) call options. The Fund's call writing is subject to a number of restrictions:

When the Fund writes a call on a security, it receives cash (a premium). The Fund agrees to sell the underlying investment to a purchaser of a corresponding call on the same security during the call period at a fixed exercise price regardless of market price changes during the call period. The call period is usually not more than nine months. The exercise price may differ from the market price of the underlying security. The Fund has retained the risk of loss that the price of the underlying security may decline during the call period. That risk may be offset to some extent by the premium the Fund receives. If the value of the investment does not rise above the call price, it is likely that the call will lapse without being exercised. In that case the Fund would keep the cash premium and the investment.

When the Fund writes a call on an index, it receives cash (a premium). If the buyer of the call exercises it, the Fund will pay an amount of cash equal to the difference between the closing price of the call and the exercise price, multiplied by the specified multiple that determines the total value of the call for each point of difference. If the value of the underlying investment does not rise above the call price, it is likely that the call will lapse without being exercised. In that case the Fund would keep the cash premium.

The Fund's custodian bank, or a securities depository acting for the custodian bank, will act as the Fund's escrow agent through the facilities of the Options Clearing Corporation ("OCC"), as to the investments on which the Fund has written calls traded on exchanges, or as to other acceptable escrow securities. In that way, no margin will be required for such transactions. OCC will release the securities on the expiration of the calls or upon the Fund's entering into a closing purchase transaction.

When the Fund writes an over-the-counter ("OTC") option, it will enter into an arrangement with a primary U.S. Government securities dealer which will establish a formula price at which the Fund will have the absolute right to repurchase that OTC option. The formula price would generally be based on a multiple of the premium received for the option, plus the amount by which the option is exercisable below the market price of the underlying security (that is, the option is "in-the-money"). When the Fund writes an OTC option, it will treat as illiquid (for purposes of its restriction on illiquid securities) the mark-to-market value of any OTC option held by it, unless the option is subject to a buy-back agreement by the executing broker.

To terminate its obligation on a call it has written, the Fund may purchase a corresponding call in a "closing purchase transaction." The Fund will then realize a profit or loss, depending upon whether the net of the amount of the option transaction costs and the premium received on the call the Fund wrote was more or less than the price of the call the Fund purchased to close out the transaction. A profit may also be realized if the call lapses unexercised, because the Fund retains the underlying investment and the premium received. Any such profits are considered short-term capital gains for federal tax purposes, as are premiums on lapsed calls. When distributed by the Funds they are taxable as ordinary income.

Writing Uncovered Call Options on Futures Contracts. The Funds may also write calls on futures contracts without owning the futures contract or securities deliverable under the contract. To do so, at the time the call is written, the Fund must cover the call by segregating in escrow an equivalent dollar value of liquid assets. The Fund will segregate additional liquid assets if the value of the escrowed assets drops below 100% of the current value of the future. Because of this escrow requirement, in no circumstances would the Fund's receipt of an exercise notice as to that future put the Fund in a "short" futures position.

Purchasing Puts and Calls. The Fund may buy calls only on securities, broadly-based municipal bond indices, municipal bond index futures and interest rate futures. It may also buy calls to close out a call it has written, as discussed above. Calls the Fund buys must be listed on a securities or commodities exchange, or quoted on NASDAQ®, or traded in the over-the-counter market. A call or put option may not be purchased if the purchase would cause the value of all the Fund's put and call options to exceed 5% of its total assets.

When the Fund purchases a call (other than in a closing purchase transaction), it pays a premium. For calls on securities that the Fund buys, it has the right to buy the underlying investment from a seller of a corresponding call on the same investment during the call period at a fixed exercise price. The Fund benefits only if (1) the call is sold at a profit or (2) the call is exercised when the market price of the underlying investment is above the sum of the exercise price plus the transaction costs and premium paid for the call. If the call is not exercised nor sold (whether or not at a profit), it will become worthless at its expiration date. In that case the Fund will lose its premium payment and the right to purchase the underlying investment.

Calls on municipal bond indices, interest rate futures and municipal bond index futures are settled in cash rather than by delivering the underlying investment. Gain or loss depends on changes in the securities included in the index in question (and thus on price movements in the debt securities market generally) rather than on changes in price of the individual futures contract.

The Fund may buy only those puts that relate to securities that it owns, broadly-based municipal bond indices, municipal bond index futures or interest rate futures (whether or not the Fund owns the futures).

When the Fund purchases a put, it pays a premium. The Fund then has the right to sell the underlying investment to a seller of a corresponding put on the same investment during the put period at a fixed exercise price. Puts on municipal bond indices are settled in cash. Buying a put on a debt security, interest rate future or municipal bond index future the Fund owns enables it to protect itself during the put period against a decline in the value of the underlying investment below the exercise price. If the market price of the underlying investment is equal to or above the exercise price and as a result the put is not exercised or resold, the put will become worthless at its expiration date. In that case the Fund will lose its premium payment and the right to sell the underlying investment. A put may be sold prior to expiration (whether or not at a profit).

Risks of Derivatives and Hedging Instruments . The use of derivatives and hedging instruments requires special skills and knowledge of investment techniques that are different than those required for normal portfolio management. These risks include the following:

Selection Risk. If the Manager uses an option at the wrong time or judges market conditions incorrectly, or if the prices of its options positions are not correlated with its other investments, a hedging strategy may reduce returns or cause losses. If a covered call option is sold on an investment that increases in value, if the call is exercised, no gain will be realized on the increase in the investment's value above the call price. A put option on a security that does not decline in value will cost the amount of the purchase price and without providing any benefit if it cannot be resold.

Liquidity Risk. Losses might also be realized if a position could not be closed out because of illiquidity in the market for an option. An option position may be closed out only on a market that provides secondary trading for options of the same series, and there is no assurance that a liquid secondary market will exist for any particular option.

Leverage Risk. Premiums paid for options are small compared to the market value of the underlying investments. Consequently, options may involve large amounts of leverage, which could result in the Fund's net asset value being more sensitive to changes in the value of the underlying investments.

Correlation Risk. If the Fund sells futures or purchases puts on broadly-based indices or futures to attempt to protect against declines in the value of its portfolio securities, it may be subject to the risk that the prices of the futures or the applicable index will not correlate with the prices of those portfolio securities. For example, the market or the index might rise but the value of the hedged portfolio securities might decline. In that case, the Fund would lose money on the hedging instruments and also experience a decline in the value of the portfolio securities. Over time, however, the value of a diversified portfolio of securities will tend to move in the same direction as the indices upon which related hedging instruments are based.

The risk of imperfect correlation increases as the composition of the portfolio diverges from the securities included in the applicable index. To compensate for the imperfect correlation of movements in the price of the portfolio securities being hedged and movements in the price of the hedging instruments, the Fund might use a greater dollar amount of hedging instruments than the dollar amount of portfolio securities being hedged, particularly if the historical price volatility of the portfolio securities being hedged is more than the historical volatility of the applicable index.

Transaction Costs. Option activities might also affect portfolio turnover rates and brokerage commissions. The portfolio turnover rate might increase if the Fund is required to sell portfolio securities that are subject to call options it has sold or if it exercises put options it has bought. Although the decision to exercise a put it holds is within the Fund's control, holding a put might create an additional reason to purchase a security. There may also be a brokerage commission on each purchase or sale of a put or call option. Those commissions may be higher on a relative basis than the commissions for direct purchases or sales of the underlying investments. A brokerage commission may also be paid for each purchase or sale of an underlying investment in connection with the exercise of a put or call.

Interest Rate Swaps. In an interest rate swap, the Fund and another party exchange their rights to receive interest payments on a security or payments based on a reference rate. For example, they might swap the right to receive floating rate payments based on a reference rate such as "LIBOR" for the right to receive fixed rate payments.

Interest rate swaps entail both interest rate risk and credit risk. There is a risk that based on movements of interest rates, the payments made by the Fund under a swap agreement will be greater than the payments it receives. Credit risk is the risk that the counterparty might default. If the counterparty defaults, the Fund may lose the net amount of contractual interest payments that it has not yet received.

Asset Coverage for Certain Investments and Trading Practices. Typically, the Fund's investments in equity and fixed-income securities do not involve any future financial obligations. However, the Fund may make investments or employ trading practices that obligate the Fund, on a fixed or contingent basis, to deliver an asset or make a cash payment to another party in the future. The Fund will comply with guidance from the U.S. Securities and Exchange Commission (the "SEC") and other applicable regulatory bodies with respect to coverage of certain investments and trading practices. This guidance may require earmarking or segregation by the Fund of cash or liquid securities with its custodian or a designated sub-custodian to the extent the Fund's obligations with respect to these strategies are not otherwise "covered" through ownership of the underlying security or financial instrument or by other portfolio positions, or by other means consistent with applicable regulatory policies. In some cases, SEC guidance permits the Fund to cover its obligation by entering into an offsetting transaction.

The Fund may cover the open positions in certain derivative instruments (e.g., futures contracts) that are not required to "cash settle" by earmarking or otherwise segregating liquid assets in an amount equal to the market value or full national amount of the derivative instrument(s). For derivative instrument(s) that are required to cash-settle, the Fund is permitted to earmark or otherwise segregate liquid assets in an amount equal to the Fund's daily marked to market (or net) obligation, if any, rather than the market value or full national amount. By setting aside or "earmarking" assets equal to only its net obligation under cash-settled derivative instruments, the Fund will have the ability to utilize these instruments to a greater extent than if the Fund were required to segregate or "earmark" assets equal to the full market value of the instrument.

The Fund's approach to asset coverage may vary among different types of swaps. With respect to most swap agreements (but excluding, for example, credit default swaps), the Fund calculates the obligations of the parties to the agreement on a "net basis" (i.e., the two payment streams are netted out with the Fund receiving or paying, as the case may be, only the net amount of the two payments). Consequently the Fund 's current obligations (or rights) under these swap agreements will generally be equal only to the net amount to be paid or received under the agreement based on the relative values of the positions held by each party to the agreement (the "net amount"). The Fund's current obligation, if any, under a swap agreement will generally be covered by earmarking or otherwise segregating cash or liquid securities having an aggregate net asset value at least equal to the accrued unpaid net amounts owed. To the extent that the obligations of the parties under these swaps are not calculated on a net basis, the amount earmarked or otherwise segregated will be the full amount of the Fund's obligations, if any. Alternatively, the Fund could cover its obligation by other means consistent with applicable regulatory policies.

Inasmuch as the Fund covers its obligations under these transactions as described above, the Manager and the Fund believe such obligations do not constitute senior securities and, accordingly, will not treat them as being subject to its borrowing restrictions. Earmarking or otherwise segregating a large percentage of the Fund's assets could impede the Manager's ability to manage the Fund's portfolio.

Regulatory Aspects of Derivatives and Hedging Instruments. The Commodity Futures Trading Commission has eliminated limitations on futures trading by certain regulated entities, including registered investment companies. Consequently, registered investment companies may engage in unlimited futures transactions and options thereon by claiming an exclusion from regulation as a commodity pool operator under the Commodity Exchange Act.

Options transactions are subject to limitations established by the option exchanges. The exchanges limit the maximum number of options that may be written or held by a single investor or group of investors acting in concert. Those limits apply regardless of whether the options were purchased, sold or held through one or more different exchanges or are held in one or more accounts or through one or more brokers. Thus, the number of options that can be sold by an investment company advised by the Manager may be affected by options written or held by other investment companies advised by the Manager or affiliated entities. The exchanges also impose position limits on futures transactions. An exchange may order the liquidation of positions found to be in violation of those limits and may impose certain other sanctions.

Temporary Defensive and Interim Investments. The securities the Fund may invest in for temporary defensive purposes include the following:

The Fund also might hold these types of securities pending the investment of proceeds from the sale of portfolio securities or to meet anticipated redemptions of Fund shares. The income from some of the temporary defensive or interim investments may not be tax-exempt. Therefore, when making those investments, the Fund might not achieve its objective.

Taxable Investments. While the Fund can invest up to 20% of its net assets (plus borrowings for investment purposes) in investments that generate income subject to income taxes, it does not anticipate investing substantial amounts of its assets in taxable investments under normal market conditions or as part of its normal trading strategies and policies. Taxable investments include, for example, hedging instruments, repurchase agreements, and many of the types of securities the Fund would buy for temporary defensive purposes.

At times, in connection with the restructuring of a municipal bond issuer either outside of bankruptcy court in a negotiated workout or in the context of bankruptcy proceedings, the Fund may determine or be required to accept equity or taxable debt securities, or the underlying collateral (which may include real estate) from the issuer in exchange for all or a portion of the Fund's holdings in the municipal security. Although the Manager will attempt to sell those assets as soon as reasonably practicable in most cases, depending upon, among other things, the Manager's valuation of the potential value of such assets in relation to the price that could be obtained by the Fund at any given time upon sale thereof, the Fund may determine to hold such securities or assets in its portfolio for limited period of time in order to liquidate the assets in a manner that maximizes their value to the Fund.

Investments in Other Investment Companies. On a temporary basis, the Fund can invest up to 5% of its total assets in shares of other investment companies that have an investment objective of seeking income exempt from federal and California personal income taxes. It can invest up to 5% of its total assets in any one investment company (but cannot own more than 3% of the outstanding voting stock of that company). These limits do not apply to shares acquired in a merger, consolidation, reorganization or acquisition of another investment company. Because the Fund would be subject to its ratable share of the other investment company's expenses in addition to its own expenses, the Fund will not make these investments unless the Manager believes that the potential investment benefits justify the added costs and expenses.

Portfolio Turnover. A change in the securities held by the Fund from buying and selling investments is known as "portfolio turnover." Short-term trading increases the rate of portfolio turnover and could increase the Fund's transaction costs. However, the Fund ordinarily incurs little or no brokerage expense because most of the Fund's portfolio transactions are principal trades that do not require payment of brokerage commissions.

The Fund ordinarily does not trade securities to achieve short-term capital gains, because such gains would not be tax-exempt income. To a limited degree, the Fund may engage in active and frequent short-term trading to attempt to take advantage of short-term market variations. It may also do so to dispose of a portfolio security prior to its maturity. That might be done if, on the basis of a revised credit evaluation of the issuer or other considerations, the Manager believes such disposition is advisable or it needs to generate cash to satisfy requests to redeem Fund shares. In those cases, the Fund may realize a capital gain or loss on its investments. The Fund's annual portfolio turnover rate normally is not expected to exceed 100%. The Financial Highlights table at the end of the Prospectus shows the Fund's portfolio turnover rates during the past five fiscal years.

Fundamental Policies. The Fund has adopted policies and restrictions to govern its investments. Under the Investment Company Act, fundamental policies are those policies that can be changed only by the vote of a "majority" of the Fund's outstanding voting securities, which is defined as the vote of the holders of the lesser of:

The Fund's investment objective is a fundamental policy. Other policies described in the Prospectus or this SAI are "fundamental" only if they are identified as such. The Fund's Board of Trustees can change non-fundamental policies without shareholder approval. However, significant changes to investment policies will be described in supplements or updates to the Prospectus or this SAI, as appropriate. The Fund's most significant investment policies are described in the Prospectus.

Other Fundamental Investment Restrictions. The following investment restrictions are fundamental policies of the Fund.

Unless the Prospectus or this SAI states that a percentage restriction applies on an ongoing basis, it applies only at the time the Fund makes an investment. That means the Fund is not required to sell securities to meet the percentage limits if the value of the investment increases in proportion to the size of the Fund. Percentage limits on borrowing and investments in illiquid securities apply on an ongoing basis.

Investment in Debt Securities Secured by Real Estate. The Investment Company Act requires each registered fund to adopt a fundamental policy regarding investments in real estate and/or commodities. The Fund does not have any restrictions on investments in real estate and/or commodities other than the information set forth in the investment restrictions above. Although the Fund is not expected to invest in real estate, to the extent consistent with its investment objective and its policies, the Fund would be permitted to invest in debt securities secured by real estate or interests in real estate, or issued by companies, including real estate investment trusts, that invest in real estate or interests in real estate. It is possible that the Fund could, as a result of an investment in debt securities of an issuer, come to hold an interest in real estate if the issuer defaulted on its debt obligations.

Non-Diversification of the Fund's Investments. The Fund is "non-diversified" as defined in the Investment Company Act. Funds that are diversified have restrictions against investing too much of their assets in the securities of any one "issuer." That means that the Fund can invest more of its assets in the securities of a single issuer than a fund that is diversified.

Being non-diversified poses additional investment risks, because if the Fund invests more of its assets in fewer issuers, the value of its shares is subject to greater fluctuations from adverse conditions affecting any one of those issuers. However, the Fund does limit its investments in the securities of any one issuer to qualify for tax purposes as a "regulated investment company" under the Internal Revenue Code. If it qualifies, the Fund does not have to pay federal income taxes if more than 90% of its earnings are distributed to shareholders. To qualify, the Fund must meet a number of conditions. First, not more than 25% of the market value of the Fund's total assets may be invested in the securities of a single issuer (other than government securities and securities of other regulated investment companies), two or more issuers that are engaged in the same or related trades or businesses and are controlled by the Fund, or one or more qualified publicly traded partnerships (i.e., publicly-traded partnerships that are treated as partnerships for tax purposes and derive at least 90% of their income from certain passive sources). Second, with respect to 50% of the market value of its total assets, (1) no more than 5% of the market value of its total assets may be invested in the securities of a single issuer, and (2) the Fund must not own more than 10% of the outstanding voting securities of a single issuer.

The identification of the issuer of a municipal security depends on the terms and conditions of the security. When the assets and revenues of an agency, authority, instrumentality or other political subdivision are separate from those of the government creating it and the security is backed only by the assets and revenues of the subdivision, agency, authority or instrumentality, the latter would be deemed to be the sole issuer. Similarly, if an industrial development bond is backed only by the assets and revenues of the non-governmental user, then that user would be deemed to be the sole issuer. However, if in either case the creating government or some other entity guarantees a security, the guarantee would be considered a separate security and would be treated as an issue of such government or other entity.

Applying the Restriction Against Concentration. In implementing the Fund's policy not to concentrate its investments, the Manager will consider a non-governmental user of facilities financed by private activity bonds as being in a particular industry. That is done even though the bonds are municipal securities, as to which the Fund has no concentration limitation. The Manager categorizes tobacco industry related municipal bonds as either tobacco settlement revenue bonds or tobacco bonds that are subject to appropriation ("STA Bonds"). For purposes of the Funds' industry concentration policies, STA Bonds are considered to be "municipal" bonds, as distinguished from "tobacco" bonds. As municipal bonds, STA Bonds are not within any industry and are not subject to the Funds' industry concentration policies.

Other types of municipal securities that are not considered a part of any "industry" under the Fund's industry concentration policy include: general obligation, government appropriation, municipal leases, special assessment and special tax bonds. Although these types of municipal securities may be related to certain industries, because they are issued by governments or their political subdivisions rather than non-governmental users, these types of municipal securities are not considered a part of an industry for purposes of the Fund's industry concentration policy.

Therefore, the Fund may invest more than 25% of its total assets in these types of municipal securities, which may finance similar types of projects or from which the interest is paid from revenues of similar types of projects. "Similar types of projects" are projects that are related in such a way that economic, business or political developments tend to have the same impact on each similar project. For example, a change that affects one project, such as proposed legislation on the financing of the project, a shortage of the materials needed for the project, or a declining economic need for the project, would likely affect all similar projects, thereby increasing market risk. Thus, market changes that affect a security issued in connection with one project also would affect securities issued in connection with similar types of projects.

For purposes of the Fund's policy not to concentrate its investments as described above, the Fund has adopted classifications of industries and groups of related industries. These classifications are not fundamental polices.

While recognizing the importance of providing Fund shareholders with information about their Fund's investments and providing portfolio information to a variety of third parties to assist with the management, distribution and administrative processes, the need for transparency must be balanced against the risk that third parties who gain access to the Fund's portfolio holdings information could attempt to use that information to trade ahead of or against the Fund, which could negatively affect the prices the Fund is able to obtain in portfolio transactions or the availability of the securities that a portfolio manager is trading on the Fund's behalf.

The Fund, the Manager, the Distributor and the Transfer Agent have therefore adopted policies and procedures regarding the dissemination of information about the Fund's portfolio holdings by employees, officers and directors or trustees of the Fund, the Manager, the Distributor and the Transfer Agent. These policies are designed to assure that non-public information about the Fund's portfolio securities holdings is distributed only for a legitimate business purpose, and is done in a manner that (a) conforms to applicable laws and regulations and (b) is designed to prevent that information from being used in a way that could negatively affect the Fund's investment program or enable third parties to use that information in a manner that is harmful to the Fund. It is a violation of the Code of Ethics for any covered person to release holdings in contravention of the portfolio holdings disclosure policies and procedures adopted by the Fund.

Portfolio Holdings Disclosure Policies. The Fund, the Manager, the Distributor and the Transfer Agent and their affiliates and subsidiaries, employees, officers, and directors or trustees, shall neither solicit nor accept any compensation or other consideration (including any agreement to maintain assets in the Fund or in other investment companies or accounts managed by the Manager or any affiliated person of the Manager) in connection with the disclosure of the Fund's non-public portfolio holdings. The receipt of investment advisory fees or other fees and compensation paid to the Manager and its subsidiaries pursuant to agreements approved by the Fund's Board shall not be deemed to be "compensation" or "consideration" for these purposes. Until publicly disclosed, the Fund's portfolio holdings are proprietary, confidential business information. After they are publicly disclosed, the Fund's portfolio holdings may be released in any appropriate manner.

The Fund's portfolio holdings information (which may include information on the Fund's entire portfolio of individual securities therein) positions may be released to the following categories of individuals or entities on an ongoing basis, provided that such individual or entity either (1) has signed an agreement to keep such information confidential and not trade on the basis of such information, or (2) as a member of the Fund's Board, or as an employee, officer or director of the Manager, the Distributor, or the Transfer Agent, or of their legal counsel, is subject to fiduciary obligations (a) not to disclose such information except in compliance with the Fund's policies and procedures and (b) not to trade for his or her personal account on the basis of such information.

Month-end lists of the Fund's complete portfolio holdings may be disclosed for legitimate business reasons, no sooner than 5 days after the relevant month end, pursuant to special requests and under limited circumstances discussed below, provided that:

Portfolio holdings information (which may include information on the Fund's entire portfolio or individual securities therein) may be provided by senior officers of the Manager or attorneys on the legal staff of the Manager, Distributor, or Transfer Agent, in the following circumstances:

Portfolio managers and analysts may, subject to the Manager's policies on communications with the press and other media, discuss portfolio information in interviews with members of the media, or in due diligence or similar meetings with clients or prospective purchasers of Fund shares or their financial representatives.

The Fund's shareholders may, under unusual circumstances (such as a lack of liquidity in the Fund's portfolio to meet redemptions), receive redemption proceeds of their Fund shares paid as pro rata shares of securities held in the Fund's portfolio. In such circumstances, disclosure of the Fund's portfolio holdings may be made to such shareholders.

Any permitted release of otherwise non-public portfolio holdings information must be in accordance with the then-current policy on approved methods for communicating confidential information.

The Chief Compliance Officer (the "CCO") of the Fund and the Manager, Distributor, and Transfer Agent shall oversee the compliance by the Manager, Distributor, Transfer Agent, and their personnel with these policies and procedures. At least annually the CCO reports to the Fund's Board any material violation of these policies and procedures during the previous period and makes recommendations to the Board as to any amendments that the CCO believes are necessary and desirable to carry out or improve these policies and procedures.

The Manager and the Fund have entered into ongoing arrangements to make available information about the Fund's portfolio holdings. One or more of the Oppenheimer funds may currently disclose portfolio holdings information based on ongoing arrangements to the following parties:

Organization and History. The Fund is an open-end, non-diversified management investment company with an unlimited number of authorized shares of beneficial interest. The Fund was organized as a Massachusetts business trust in December 2003.

Classes of Shares. The Fund's Board of Trustees (the "Board") is authorized, without shareholder approval, to:

The Fund currently has four classes of shares: Class A, Class B, Class C and Class Y. All classes invest in the same investment portfolio. Only certain institutional investors may purchase Class Y shares. Each class of shares:

Class B shares will no longer be offered for sale after June 29, 2012. See Prospectus under "More About Your Account" for details.

Class Y shares are offered to fee-based clients of dealers that have a special agreement with the Distributor to offer these shares, and to certain institutional investors who have a special agreement with the Distributor. Class Y shares are also offered to present or former officers, directors, trustees and employees (and their eligible family members) of the Fund, the Manager and its affiliates, its parent company and the subsidiaries of its parent company, and retirement plans established for the benefit of such individuals.

Voluntary Conversion to Class Y Shares. For shareholders who currently hold other classes of Fund shares, but are authorized to purchase Class Y shares, those shareholders can convert their eligible existing shares to Class Y shares of the Fund either through their dealer who has a special agreement with the Distributor or by submitting written instructions to the Transfer Agent. Shares that are subject to a CDSC are not eligible to convert to Class Y shares until the applicable CDSC period has expired. Under current interpretations of applicable federal income tax law by the Internal Revenue Service (the "IRS"), this voluntary conversion to Class Y shares is not treated as a taxable event. If those laws or the IRS interpretation of those laws should change, this voluntary conversion feature may be suspended.

Shareholder Meetings. As a Massachusetts business trust, the Fund is not required to hold regular annual meetings of shareholders and does not plan to do so. The Fund may hold shareholder meetings from time to time, however, on important matters or when required to do so by the Investment Company Act, or other applicable law.

Shareholders have the right, upon a vote or declaration in writing of two-thirds of the outstanding shares of the Fund, to remove a Trustee or to take other action described in the Fund's Declaration of Trust. The Trustees will call a meeting of shareholders to vote on the removal of a Trustee upon the written request of the record holders of 10% of its outstanding shares.

If the Trustees receive a request from at least 10 shareholders stating that they wish to communicate with other shareholders to request a meeting to remove a Trustee, the Trustees will then either make the Fund's shareholder list available to the applicants or mail their communication to all other shareholders at the applicants' expense. The shareholders making the request must have been shareholders for at least six months and must hold shares of the Fund valued at $25,000 or more or constituting at least 1% of the Fund's outstanding shares. The Trustees may also take other action as permitted by the Investment Company Act.

Shareholder and Trustee Liability. The Fund's Declaration of Trust contains an express disclaimer of shareholder and Trustee liability for the Fund's obligations. It also provides for indemnification and reimbursement of expenses out of the Fund's property for any shareholder held personally liable for its obligations. The Declaration of Trust also states that, upon request, the Fund shall assume the defense of any claim made against a shareholder for any act or obligation of the Fund and shall satisfy any judgment on that claim. The Fund's contractual arrangements state that any person doing business with the Fund (and each shareholder of the Fund) agrees under its Declaration of Trust to look solely to the assets of the Fund for satisfaction of any claim or demand that may arise out of any dealings with the Fund. Additionally, the Trustees shall have no personal liability to any such person, to the extent permitted by law. Although Massachusetts law permits a shareholder of a business trust (such as the Fund) to be held personally liable as a "partner" under certain circumstances, the risk that a Fund shareholder will incur financial loss from being held liable as a "partner" of the Fund is limited to the relatively remote circumstances in which the Fund would be unable to meet its obligations.

The Fund is governed by a Board of Trustees, which is responsible for protecting the interests of shareholders under Massachusetts and Federal law. The Board is led by Brian F. Wruble, an independent trustee, who is not an "interested person" of the Fund, as that term is defined in the Investment Company Act of 1940. The Board meets periodically throughout the year to oversee the Fund's activities, review its performance, oversee the potential conflicts that could affect the Fund, and review the actions of the Manager. The Board has an Audit Committee, a Regulatory & Oversight Committee and a Governance Committee. Each Committee is comprised solely of Trustees who are not "interested persons" under the Investment Company Act (the "Independent Trustees"). Mr. Wruble's practice is to attend all meetings of each of the three Committees of the Board where he participates in deliberation but does not have a vote.

During the Fund's fiscal year ended July 31, 2011, the Audit Committee held 4 meetings, the Regulatory & Oversight Committee held 5 meetings and the Governance Committee held 4 meetings.

The members of the Audit Committee are David K. Downes (Chairman), Phillip A. Griffiths, Mary F. Miller, Joseph M. Wikler and Peter I. Wold. The Audit Committee selects an independent registered public accounting firm (also referred to as the "independent Auditors"). Other main functions of the Audit Committee outlined in the Audit Committee Charter, include, but are not limited to: (i) reviewing the scope and results of financial statement audits and the audit fees charged; (ii) reviewing reports from the Fund's independent Auditors regarding the Fund's internal accounting procedures and controls; (iii) reviewing reports from the Manager's Internal Audit Department; (iv) maintaining a separate line of communication between the Fund's independent Auditors and the Independent Trustees/Directors; (v) reviewing the independence of the Fund's independent Auditors; and (vi) approving in advance the provision of any audit or non-audit services by the Fund's independent Auditors, including tax services, that are not prohibited by the Sarbanes-Oxley Act, to the Fund, the Manager and certain affiliates of the Manager. The Audit Committee also reviews reports concerning the valuation of certain investments.

The members of the Regulatory & Oversight Committee are Matthew P. Fink (Chairman), David K. Downes, Phillip A. Griffiths, Joel W. Motley, Mary Ann Tynan and Joseph M. Wikler. The Regulatory & Oversight Committee evaluates and reports to the Board on the Fund's contractual arrangements, including the Investment Advisory and Distribution Agreements, Transfer Agency and Shareholder Service Agreements and custodian agreements as well as the policies and procedures adopted by the Fund to comply with the Investment Company Act and other applicable law. The Regulatory & Oversight Committee also reviews reports from the Manager's Risk Management Department and Chief Compliance Officer among other duties as set forth in the Regulatory & Oversight Committee's Charter. These reports, and others concerning investment, operational and other risks to the Funds are shared with, and discussed by, the full Board.

The members of the Governance Committee are Joel W. Motley (Chairman), Matthew P. Fink, Mary F. Miller, Mary Ann Tynan and Peter I. Wold. The Governance Committee reviews the Fund's governance guidelines, the adequacy of the Fund's Codes of Ethics, and develops qualification criteria for Board members consistent with the Fund's governance guidelines, provides the Board with recommendations for voting portfolio securities held by the Fund, monitors the Fund's proxy voting, and coordinates with organizations representing the independent directors of mutual funds among other duties set forth in the Governance Committee's Charter.

The Governance Committee's functions also include the nomination of Trustees/Directors, including Independent Trustees/Directors, for election to the Board. The full Board elects new Trustees/Directors except for those instances when a shareholder vote is required.

The Governance Committee will consider nominees recommended by Independent Trustees/Directors or recommended by any other Board members including Board members affiliated with the Fund's Manager. The Governance Committee may consider the advice and recommendation of the Manager and its affiliates in selecting nominees, but need not do so. Upon Board approval, the Governance Committee may retain an executive search firm to assist in screening potential candidates and may also use the services of legal, financial, or other external counsel that it deems necessary or desirable in the screening process. To date, the Governance Committee has been able to identify from its own resources an ample number of qualified candidates. However, under the current policy of the Board, if the Board determines that a vacancy exists or is likely to exist, the Governance Committee will include candidates recommended by the Fund's shareholders in its consideration of nominees.

Shareholders wishing to submit a nominee for election to the Board may do so by mailing their submission to the offices of OppenheimerFunds, Inc., Two World Financial Center, 225 Liberty Street, 11th Floor, New York, New York 10281-1008, to the attention of the Board of Trustees/Directors of the applicable Fund, c/o the Secretary of the Fund. Submissions should, at a minimum, be accompanied by the following: (1) the name, address, and business, educational, and/or other pertinent background of the person being recommended; (2) a statement concerning whether the person is an "interested person" as defined in the Investment Company Act; (3) any other information that the Fund would be required to include in a proxy statement concerning the person if he or she was nominated; and (4) the name and address of the person submitting the recommendation and, if that person is a shareholder, the period for which that person held Fund shares. Shareholders should note that a person who owns securities issued by Massachusetts Mutual Life Insurance Company (the parent company of the Manager) would be deemed an "interested person" under the Investment Company Act. In addition, certain other relationships with Massachusetts Mutual Life Insurance Company or its subsidiaries, with registered broker-dealers, or with the Funds' outside legal counsel may cause a person to be deemed an "interested person."

The Governance Committee has not established specific qualifications that it believes must be met by a nominee. In evaluating nominees, the Governance Committee considers, among other things, an individual's background, skills, and experience; whether the individual is an "interested person" as defined in the Investment Company Act; and whether the individual would be deemed an "audit committee financial expert" within the meaning of applicable SEC rules. The Governance Committee also considers whether the individual's background, skills, and experience will complement, and add to the diversity of, the background, skills, and experience of other Trustees/Directors, and will contribute to the Board's deliberations. There is no difference in the manner in which the Governance Committee evaluates a nominee based on whether the nominee is recommended by a shareholder. Candidates are expected to provide a mix of attributes, experience, perspective and skills necessary to effectively advance the interests of shareholders.

Below is a brief discussion of the specific experience, qualifications, attributes or skills of each Board member that led the Board to conclude that he or she should serve as a Trustee/Director of the Fund.

Each independent trustee/director has served on the Board for the number of years listed below, during the course of which he or she has become familiar with the Fund's (and other Oppenheimer funds') financial, accounting, regulatory and investment matters and has contributed to the Board's deliberations. Each Trustee's/Director's outside professional experience is outlined in the table of Biographical Information, below.

All of the Trustees are Independent Trustees. All of the Trustees are also Trustees of the following Oppenheimer funds (referred to as the "New York Board Funds"):

Messrs. Loughran, Cottier, Willis, DeMitry, Camarella, Pulire, Stein, Edwards, Gabinet, Glavin, Kennedy, Legg, Petersen, Vandehey, Wixted, Zack and Mss. Bloomberg, Bullington, Nasta and Ruffle, who are officers of the Fund, hold the same offices with one or more of the other New York Board Funds.

Present or former officers, directors, trustees and employees (and their immediate family members) of the Fund, the Manager and its affiliates, and retirement plans established by them for their employees are permitted to purchase Class A shares of the Fund and the other Oppenheimer funds at net asset value without sales charge. The sales charge on Class A shares is waived for that group because of the reduced sales efforts realized by the Distributor. Present or former officers, directors, trustees and employees (and their eligible family members) of the Fund, the Manager and its affiliates, its parent company and the subsidiaries of its parent company, and retirement plans established for the benefit of such individuals, are also permitted to purchase Class Y shares of the Fund and other Oppenheimer funds that offer Class Y shares.

As of November 4, 2011, the Trustees/Directors and officers of the Fund, as a group, owned less than 1% of any class of shares of the Fund beneficially or of record.

The foregoing statement does not reflect ownership of shares held of record by an employee benefit plan for employees of the Manager, other than the shares beneficially owned under that plan by the officers of the Fund. In addition, none of the Independent Trustees/Directors (nor any of their immediate family members) owns securities of either the Manager or the Distributor or of any entity directly or indirectly controlling, controlled by or under common control with the Manager or the Distributor.

Biographical Information. The Trustees and officers, their positions with the Fund, length of service in such position(s) and principal occupations and business affiliations during at least the past five years are listed in the charts below. The address of each Independent Trustee in the chart below is 6803 S. Tucson Way, Centennial, Colorado 80112-3924. Each Trustee serves for an indefinite term, or until his or her resignation, retirement, death or removal.

The addresses of the officers in the chart below are as follows: for Messrs. Loughran, Cottier, Willis, Camarella, DeMitry, Pulire, Stein, Gabinet, Glavin, Zack, and Edwards and Mss. Bloomberg, Nasta and Ruffle, Two World Financial Center, 225 Liberty Street, 11th Floor, New York, New York 10281-1008; for Messrs. Kennedy, Petersen, Vandehey, Legg and Wixted and Ms. Bullington, 6803 S. Tucson Way, Centennial, Colorado 80112-3924. Each officer serves for an annual term or until his or her resignation, retirement, death or removal.

Trustees Share Ownership. The chart below shows information about each Trustee's beneficial share ownership in the Fund and in all of the registered investment companies that the Trustee oversees in the Oppenheimer family of funds ("Supervised Funds").

Remuneration of the Officers and Trustees. The officers of the Fund, who are affiliated with the Manager, receive no salary or fee from the Fund. The Independent Trustees' total compensation from the Fund and fund complex represents compensation for serving as a Trustee and member of a committee (if applicable) of the Boards of the Fund and other funds in the OppenheimerFunds complex during the calendar year ended December 31, 2010.

1."Aggregate Compensation From the Fund" includes fees and amounts deferred under the "Compensation Deferral Plan" (described below), if any.
2. Includes $223 deferred by Mr. Griffiths under the Compensation Deferral Plan.
3. Includes $261 deferred by Ms. Miller under the Compensation Deferral Plan.
4. Includes $65 deferred by Mr. Motley under the Compensation Deferral Plan.
5. Includes $303 deferred by Mr. Wikler under the Compensation Deferral Plan.
6. Includes $606 deferred by Mr. Wold under the Compensation Deferral Plan.

Compensation Deferral Plan. The Board of Trustees has adopted a Compensation Deferral Plan for Independent Trustees that enables them to elect to defer receipt of all or a portion of the annual fees they are entitled to receive from certain Funds. Under the plan, the compensation deferred by a Trustee is periodically adjusted as though an equivalent amount had been invested in shares of one or more Oppenheimer funds selected by the Trustee. The amount paid to the Trustee under the plan will be determined based on the amount of compensation deferred and the performance of the selected funds.

Deferral of the Trustees' fees under the plan will not materially affect a Fund's assets, liabilities or net income per share. The plan will not obligate a fund to retain the services of any Trustee or to pay any particular level of compensation to any Trustee. Pursuant to an Order issued by the SEC, a fund may invest in the funds selected by the Trustee under the plan without shareholder approval for the limited purpose of determining the value of the Trustee's deferred compensation account.

Major Shareholders. As of November 4, 2011 the only persons or entities who owned of record, or who were known by the Fund to own beneficially, 5% or more of any class of the Fund's outstanding shares were:

The Manager is wholly-owned by Oppenheimer Acquisition Corp., a holding company primarily owned by Massachusetts Mutual Life Insurance Company, a global, diversified insurance and financial services company.

Code of Ethics. The Fund, the Manager and the Distributor have a Code of Ethics. It is designed to detect and prevent improper personal trading by portfolio managers and certain other employees ("covered persons") that could compete with or take advantage of the Fund's portfolio transactions. Covered persons include persons with knowledge of the investments and investment intentions of the Fund and/or other funds advised by the Manager. The Code of Ethics does permit personnel subject to the Code to invest in securities, including securities that may be purchased or held by the Fund, subject to a number of restrictions and controls. Compliance with the Code of Ethics is carefully monitored and enforced by the Manager and the Distributor.

The Code of Ethics is an exhibit to the Fund's registration statement filed with the SEC. It can be viewed as part of the Fund's registration statement on the SEC's EDGAR database at the SEC's website at www.sec.gov and can be reviewed and copied at the SEC's Public Reference Room in Washington, D.C.

The Investment Advisory Agreement. The Manager provides investment advisory and management services to the Fund under an investment advisory agreement between the Manager and the Fund. The Manager selects securities for the Fund's portfolio and handles its day-to-day business. The portfolio managers of the Fund are employed by the Manager and are principally responsible for the day-to-day management of the Fund's portfolio. Other members of the Manager's investment teams provide the portfolio managers with counsel and support in managing the Fund's portfolio.

The advisory agreement requires the Manager, at its expense, to provide the Fund with adequate office space, facilities and equipment. It also requires the Manager to provide and supervise the activities of all administrative and clerical personnel required to provide effective administration for the Fund. Those responsibilities include the compilation and maintenance of records with respect to its operations, the preparation and filing of specified reports, and composition of proxy materials and registration statements for continuous public sale of shares of the Fund.

The Fund pays expenses not expressly assumed by the Manager under the investment advisory agreement. The investment advisory agreement lists examples of expenses paid by the Fund. The major categories relate to interest, taxes, brokerage commissions, fees to certain Board members, legal and audit expenses, custodian and transfer agent expenses, share issuance costs, certain printing and registration costs and non-recurring expenses, including litigation costs. The management fees paid by the Fund to the Manager are calculated at the rates described in the Prospectus, which are applied to the assets of the Fund as a whole. The fees are allocated to each class of shares based upon the relative proportion of the Fund's net assets represented by that class. The management fees paid by the Fund to the Manager during its last three fiscal years were:

The investment advisory agreement states that in the absence of willful misfeasance, bad faith, gross negligence in the performance of its duties or reckless disregard of its obligations and duties under the investment advisory agreement, the Manager is not liable for any loss the Fund sustains in connection with matters to which the agreement relates.

The agreement permits the Manager to act as an investment adviser for any other person, firm or corporation and to use the name "Oppenheimer" in connection with other investment companies for which it may act as investment adviser or general distributor. If the Manager shall no longer act as investment adviser to the Fund, the Manager may withdraw the right of the Fund to use the name "Oppenheimer" as part of its name.

Pending Litigation. Since 2009, a number of lawsuits have been filed in federal and state courts against the Manager, the Distributor and certain Oppenheimer mutual funds (but not including the Fund) advised by the Manager and distributed by the Distributor (the "Defendant Funds"). Several of these lawsuits also name as defendants certain officers and current and former trustees of the respective Defendant Funds. The lawsuits raise claims under federal and state securities laws and state common law and allege, among other things, that the disclosure documents of the respective Defendant Fund contained misrepresentations and omissions and that the respective Defendant Fund's investment policies were not followed. The plaintiffs in these actions seek unspecified damages, equitable relief and awards of attorneys' fees and litigation expenses. On June 1, 2011, the U.S. District Court for the District of Colorado gave preliminary approval to stipulations and agreements of settlement in certain putative class action lawsuits involving two Defendant Funds, Oppenheimer Champion Income Fund and Oppenheimer Core Bond Fund. On September 30, 2011, the court entered orders approving the settlements as fair, reasonable and adequate. Those orders are not subject to further appeal. These settlements do not resolve any of the other outstanding lawsuits relating to Oppenheimer Champion Income Fund, Oppenheimer Core Bond Fund or other Defendant Funds.

In 2009, what are claimed to be derivative lawsuits were filed in New Mexico state court against the Manager and a subsidiary (but not against the Fund) on behalf of the New Mexico Education Plan Trust. These lawsuits allege breach of contract, breach of fiduciary duty, negligence and violation of state securities laws, and seek compensatory damages, equitable relief and an award of attorneys' fees and litigation expenses. On September 9, 2011, the court denied plaintiffs' request for a hearing to determine the fairness of the settlement, finding that plaintiffs lacked standing to pursue derivative claims on behalf of the Trust. On October 27, 2011, the parties filed a joint motion for dismissal of these lawsuits with prejudice, which the court granted on October 28, 2011.

Other class action and individual lawsuits have been filed since 2008 in various state and federal courts against the Manager and certain of its affiliates by investors seeking to recover investments they allegedly lost as a result of the "Ponzi" scheme run by Bernard L. Madoff and his firm, Bernard L. Madoff Investment Securities, LLC ("BLMIS"). Plaintiffs in these suits allege that they suffered losses as a result of their investments in several funds managed by an affiliate of the Manager and assert a variety of claims, including breach of fiduciary duty, fraud, negligent misrepresentation, unjust enrichment, and violation of federal and state securities laws and regulations, among others. They seek unspecified damages, equitable relief and awards of attorneys' fees and litigation expenses. Neither the Distributor, nor any of the Oppenheimer mutual funds, their independent trustees or directors are named as defendants in these lawsuits. None of the Oppenheimer mutual funds invested in any funds or accounts managed by Mr. Madoff or BLMIS. On February 28, 2011, a stipulation of partial settlement of certain putative class action lawsuits relating to these matters was filed in the U.S. District Court for the Southern District of New York. On August 19, 2011, the court entered a final judgment and order of dismissal with prejudice approving the settlement as fair, reasonable and adequate. In September 2011, certain parties filed notices of appeal from the court's order approving the settlement. On July 29, 2011, a stipulation of settlement between certain affiliates of the Manager and the Trustee appointed under the Securities Investor Protection Act to liquidate BLMIS was filed in the U.S. Bankruptcy Court for the Southern District of New York to resolve purported preference and fraudulent transfer claims by the Trustee. On September 22, 2011, the court issued a ruling approving the settlement as fair, reasonable and adequate. In October 2011, certain parties filed notices of appeal from the court's order approving the settlement. The aforementioned settlements do not resolve any of the other outstanding lawsuits relating to these matters.

On April 16, 2010, a lawsuit was filed in New York state court against the Manager, an affiliate of the Manager and AAArdvark IV Funding Limited ("AAArdvark IV"), an entity advised by the Manager's affiliate, in connection with investments made by the plaintiffs in AAArdvark IV. Plaintiffs allege breach of contract against the defendants and seek compensatory damages, costs and disbursements, including attorney fees. On July 15, 2011, a lawsuit was filed in New York state court against the Manager, an affiliate of the Manager and AAArdvark Funding Limited ("AAArdvark I"), an entity advised by the Manager's affiliate, in connection with investments made by the plaintiffs in AAArdvark I. The complaint alleges breach of contract against the defendants and seeks compensatory damages, costs and disbursements, including attorney fees. On November 9, 2011, a lawsuit was filed in New York state court against the Manager, an affiliate of the Manager and AAArdvark XS Funding Limited ("AAArdvark XS"), an entity advised by the Manager's affiliate, in connection with investments made by the plaintiffs in AAArdvark XS. The complaint alleges breach of contract against the defendants and seeks compensatory damages, costs and disbursements, including attorney fees.

The Manager believes the lawsuits and appeals described above are without legal merit and, with the exception of actions it has settled, is defending against them vigorously. The Defendant Funds' Boards of Trustees have also engaged counsel to represent the Funds and the present and former Independent Trustees named in those suits. While it is premature to render any opinion as to the outcome in these lawsuits, or whether any costs that the Defendant Funds may bear in defending the suits might not be reimbursed by insurance, the Manager believes that these suits should not impair the ability of the Manager or the Distributor to perform their respective duties to the Fund, and that the outcome of all of the suits together should not have any material effect on the operations of any of the Oppenheimer mutual funds.

Portfolio Managers. The Fund's portfolio is managed by a team of investment professionals, including Daniel G. Loughran, Scott S. Cottier, Troy E. Willis, Mark R. DeMitry, Michael L. Camarella and Charles S. Pulire (each is referred to as a "Portfolio Manager" and collectively they are referred to as the "Portfolio Managers") who are responsible for the day-to-day management of the Fund's investments.

1. In billions.
2. In millions.
3. Does not include personal accounts of the portfolio manager and his family, which are subject to the Code of Ethics.

As indicated above, the Portfolio Managers may also manage other funds and accounts. At different times, the Fund's Portfolio Managers may manage other funds or accounts with investment objectives and strategies similar to those of the Fund, or they may manage funds or accounts with different investment objectives and strategies. At times, those responsibilities could potentially conflict with the interests of the Fund. That may occur whether the investment objectives and strategies of the other funds and accounts are the same as, or different from, the Fund's investment objectives and strategies. For example, the Portfolio Managers may need to allocate investment opportunities between the Fund and another fund or account having similar objectives or strategies, or they may need to execute transactions for another fund or account that could have a negative impact on the value of securities held by the Fund. Not all funds and accounts advised by the Manager have the same management fee. If the management fee structure of another fund or account is more advantageous to the Manager than the fee structure of the Fund, the Manager could have an incentive to favor the other fund or account. However, the Manager's compliance procedures and Code of Ethics recognize the Manager's obligation to treat all of its clients, including the Fund, fairly and equitably, and are designed to preclude the Portfolio Managers from favoring one client over another. It is possible, of course, that those compliance procedures and the Code of Ethics may not always be adequate to do so.

Compensation of the Portfolio Managers. The Fund's Portfolio Managers are employed and compensated by the Manager, not the Fund. Under the Manager's compensation program for its portfolio managers and portfolio analysts, Fund performance is the most important element of compensation with at least half of annual cash compensation based on relative investment performance results of the funds or accounts they manage, rather than on the financial success of the Manager. This is intended to align the portfolio managers and analysts' interests with the success of the funds and accounts and their shareholders. The Manager's compensation structure is designed to attract and retain highly qualified investment management professionals and to reward individual and team contributions toward creating shareholder value. As of the Fund's most recently completed year-end, the Portfolio Managers' compensation consisted of three elements: a base salary, an annual discretionary bonus and eligibility to participate in long-term awards of options and stock appreciation rights in regard to the common stock of the Manager's holding company parent, as well as restricted shares of such common stock. Senior portfolio managers may be eligible to participate in the Manager's deferred compensation plan.

The base pay component of each portfolio manager is reviewed regularly to ensure that it reflects the performance of the individual, is commensurate with the requirements of the particular portfolio, reflects any specific competence or specialty of the individual manager, and is competitive with other comparable positions. The annual discretionary bonus is determined by senior management of the Manager and is based on a number of factors, including a fund's pre-tax performance for periods of up to five years, measured against an appropriate Lipper benchmark selected by management. The majority is based on one, three and five year data, with longer periods weighted more heavily. Below median performance in all three periods' results in an extremely low, and in some cases no, performance based bonus. Other factors considered include management quality (such as style consistency, risk management, sector coverage, team leadership and coaching) and organizational development. The Portfolio Managers' compensation is not based on the total value of the Fund's portfolio assets, although the Fund's investment performance may increase those assets. The compensation structure is also intended to be internally equitable and serve to reduce potential conflicts of interest between the Fund and other funds and accounts managed by the Portfolio Managers.

The Lipper benchmark for the Portfolio Managers with respect to the Fund is Lipper - California Short-Intermediate Municipal Debt Funds. The compensation structure of the other funds and accounts managed by the Portfolio Managers are generally the same as the compensation structure of the Fund, described above.

Brokerage Provisions of the Investment Advisory Agreement. One of the duties of the Manager under the investment advisory agreement is to arrange the portfolio transactions for the Fund. The advisory agreement contains provisions relating to the employment of broker-dealers for that purpose. The advisory agreement authorizes the Manager to employ broker-dealers, including "affiliated brokers," as that term is defined in the Investment Company Act, that the Manager thinks, in its best judgment based on all relevant factors, will implement the policy of the Fund to obtain the "best execution" of the Fund's portfolio transactions. "Best execution" means executing trades in a manner such that the total costs or proceeds are the most favorable under the circumstances. Some of the circumstances that may influence this decision are: cost (brokerage commission or dealer spread), size of order, difficulty of order, and the firm's ability to provide prompt and reliable execution.

The Manager need not seek competitive commission bidding. However, the Manager is expected to be aware of the current rates of eligible brokers and to minimize the commissions paid to the extent consistent with the interests and policies of the Fund as established by its Board. The Fund is not required to pay the lowest available commission. Under the investment advisory agreement, in choosing brokers to execute portfolio transactions for the Fund, the Manager may select brokers (other than affiliates) that provide both brokerage and research services to the Fund. The commissions paid to those brokers may be higher than another qualified broker would charge, if the Manager makes a good faith determination that the commission is fair and reasonable in relation to the services provided.

Brokerage Practices Followed by the Manager. The Manager allocates brokerage for the Fund subject to the provisions of the investment advisory agreement and other applicable rules and procedures described below.

The Manager's portfolio managers directly place trades and allocate brokerage based upon their judgment as to the execution capability of the broker or dealer. The Manager's executive officers supervise the allocation of brokerage.

Most securities purchases made by the Fund are in principal transactions at net prices. (i.e., without commissions). The Fund usually deals directly with the selling or purchasing principal or market maker without incurring charges for the services of a broker on its behalf. Portfolio securities purchased from underwriters include a commission or concession paid by the issuer to the underwriter in the price of the security. Portfolio securities purchased from dealers include a spread between the bid and asked price. Therefore, the Fund generally does not incur substantial brokerage costs. On occasion, however, the Manager may determine that a better price or execution may be obtained by using the services of a broker on an agency basis. In that situation, the Fund would incur a brokerage commission.

Other funds advised by the Manager have investment policies similar to those of the Fund. Those other funds may purchase or sell the same securities as the Fund at the same time as the Fund, which could affect the supply and price of the securities. When possible, the Manager tries to combine concurrent orders to purchase or sell the same security by more than one of the funds managed by the Manager or its affiliates. The transactions under those combined orders are generally allocated on a pro rata basis based on the fund's respective net asset sizes and other factors, including the fund's cash flow requirements, investment policies and guidelines and capacity.

Rule 12b-1 under the Investment Company Act prohibits any fund from compensating a broker or dealer for promoting or selling the fund's shares by (1) directing to that broker or dealer any of the fund's portfolio transactions, or (2) directing any other remuneration to that broker or dealer, such as commissions, mark-ups, mark downs or other fees from the fund's portfolio transactions, that were effected by another broker or dealer (these latter arrangements are considered to be a type of "step-out" transaction). In other words, a fund and its investment adviser cannot use the fund's brokerage for the purpose of rewarding broker-dealers for selling a fund's shares.

However, the Rule permits funds to effect brokerage transactions through firms that also sell fund shares, provided that certain procedures are adopted to prevent a quid pro quo with respect to portfolio brokerage allocations. As permitted by the Rule, the Manager has adopted procedures (and the Fund's Board of Trustees has approved those procedures) that permit the Fund to execute portfolio securities transactions through brokers or dealers that also promote or sell shares of the Fund, subject to the "best execution" considerations discussed above. Those procedures are designed to prevent: (1) the Manager's personnel who effect the Fund's portfolio transactions from taking into account a broker's or dealer's promotion or sales of the Fund shares when allocating the Fund's portfolio transactions, and (2) the Fund, the Manager and the Distributor from entering into agreements or understandings under which the Manager directs or is expected to direct the Fund's brokerage directly, or through a "step-out" arrangement, to any broker or dealer in consideration of that broker's or dealer's promotion or sale of the Fund's shares or the shares of any of the other Oppenheimer funds.

The investment advisory agreement permits the Manager to allocate brokerage for research services. The research services provided by a particular broker may be useful both to the Fund and to one or more of the other accounts advised by the Manager or its affiliates. Investment research may be supplied to the Manager by a broker through which trades are placed or by a third party at the instance of the broker.

Investment research services include information and analysis on particular companies and industries as well as market or economic trends and portfolio strategy, market quotations for portfolio evaluations, analytical software and similar products and services. If a research service also assists the Manager in a non-research capacity (such as bookkeeping or other administrative functions), then only the percentage or component that provides assistance to the Manager in the investment decision making process may be paid in commission dollars.

Although the Manager currently does not do so, the Board of Trustees may permit the Manager to use stated commissions on secondary fixed-income agency trades to obtain research if the broker represents to the Manager that: (i) the trade is not from or for the broker's own inventory, (ii) the trade was executed by the broker on an agency basis at the stated commission, and (iii) the trade is not a riskless principal transaction. The Board may also permit the Manager to use commissions on fixed-price offerings to obtain research in the same manner as is permitted for agency transactions.

The research services provided by brokers broaden the scope and supplement the research activities of the Manager. That research provides additional views and comparisons for consideration, and helps the Manager to obtain market information for the valuation of securities that are either held in the Fund's portfolio or are being considered for purchase. The Manager provides information to the Board about the commissions paid to brokers furnishing such services, together with the Manager's representation that the amount of such commissions was reasonably related to the value or benefit of such services.

During the fiscal years ended July 31, 2009, 2010 and 2011, the Fund paid the total brokerage commissions indicated in the chart below. During the fiscal year ended July 31, 2011, the Fund paid $0 in commissions to firms that provide brokerage and research services to the Fund with respect to $0 of aggregate portfolio transactions. All such transactions were on a "best execution" basis, as described above. The provision of research services was not necessarily a factor in the placement of all such transactions.

* Amounts do not include spreads or commissions on principal transactions on a net trade basis.

The Distributor. Under its General Distributor's Agreement with the Fund, the Distributor acts as the Fund's principal underwriter in the continuous public offering of the Fund's shares. The Distributor bears the expenses normally attributable to sales, including advertising and the cost of printing and mailing prospectuses, other than those furnished to existing shareholders. The Distributor is not obligated to sell a specific number of shares.

The sales charges and concessions paid to, or retained by, the Distributor from the sale of shares and the contingent deferred sales charges ("CDSCs") retained by the Distributor on the redemption of shares during the Fund's three most recent fiscal years are shown in the tables below.

1. Includes amounts retained by a broker-dealer that is an affiliate or a parent of the Distributor.
2. The Distributor advances concession payments to financial intermediaries for certain sales of Class A shares and for sales of Class B and Class C shares from its own resources at the time of sale.

Distribution and Service (12b-1) Plans. The Fund has adopted a Service Plan for Class A shares and Distribution and Service Plans for Class B and Class C shares under Rule 12b-1 of the Investment Company Act. Under those plans the Fund pays the Distributor for all or a portion of its costs incurred in connection with the distribution and/or servicing of the shares of the particular class. Each plan has been approved by a vote of the Board, including a majority of the Independent Trustees, cast in person at a meeting called for the purpose of voting on that plan. The Independent Trustees are not "interested persons" of the Fund and do not have any direct or indirect financial interest in the operation of the distribution plan or any agreement under the plan, in accordance with Rule 12b-1 of the Investment Company Act.

Under the plans, the Manager and the Distributor may make payments to affiliates. In their sole discretion, they may also from time to time make substantial payments from their own resources, which include the profits the Manager derives from the advisory fees it receives from the Fund, to compensate brokers, dealers, financial institutions and other intermediaries for providing distribution assistance and/or administrative services or that otherwise promote sales of the Fund's shares. These payments, some of which may be referred to as "revenue sharing," may relate to the Fund's inclusion on a financial intermediary's preferred list of funds offered to its clients.

A plan continues in effect from year to year only if the Fund's Board and its Independent Trustees/Directors vote annually to approve its continuance at an in person meeting called for that purpose. A plan may be terminated at any time by the vote of a majority of the Independent Trustees/Directors or by the vote of the holders of a "majority" (as defined in the Investment Company Act) of the outstanding shares of the Class of shares to which it applies.

The Board and the Independent Trustees/Directors must approve all material amendments to a plan. An amendment to materially increase the amount of payments to be made under a plan must also be approved by shareholders of any affected class. Because Class B shares of the Fund automatically convert into Class A shares 72 months after purchase, the shareholders of both Class A and Class B, voting separately by class, must approve a proposed amendment to the Class A plan that would materially increase payments under that plan.

At least quarterly while the plans are in effect, the Treasurer of the Fund will provide the Board with separate written reports on the plans for its review. The reports will detail the amount of all payments made under a plan and the purpose for which the payments were made. Those reports are subject to the review and approval of the Independent Trustees/Directors.

While each plan is in effect, the Independent Trustees/Directors of the Fund will select and nominate any other Independent Trustees/Directors. This does not prevent the involvement of others in the selection and nomination process as long as the final decision is made by a majority of the Independent Trustees/Directors.

No payment will be made to any recipient for any share class unless, during the applicable period, the aggregate net asset value of Fund shares of the class held by the recipient (for itself and its customers) exceeds a minimum amount that may be set by a majority of the Independent Trustees/Directors from time to time.

Class A Service Plan. Under the Class A service plan, the Distributor currently uses the fees it receives from the Fund to pay brokers, dealers and other financial institutions (referred to as "recipients") for personal and account maintenance services they provide for their customers who hold Class A shares. Those services may include answering customer inquiries about the Fund, assisting in establishing and maintaining Fund accounts, making the Fund's investment plans available and providing other services at the request of the Fund or the Distributor. The Class A service plan permits the Fund to reimburse the Distributor at an annual rate of up to 0.25% of the Class A average net assets. The Distributor makes payments to recipients periodically at an annual rate of not more than 0.25% of the Class A average net assets held in the accounts of the recipient or it customers.

The Distributor does not receive or retain the service fee for Class A share accounts for which the Distributor is listed as the broker-dealer of record. While the plan permits the Board to authorize payments to the Distributor to reimburse itself for those services, the Board has not yet done so, except with respect to shares purchased prior to March 1, 2007 by certain group retirement plans that were established prior to March 1, 2001 ("grandfathered retirement plans").

Prior to March 1, 2007, the Distributor paid the 0.25% first year service fee for grandfathered retirement plans in advance and retained the service fee paid by the Fund with respect to those shares for the first year. After those shares are held for a year, the Distributor pays the ongoing service fees to recipients on a periodic basis. If those shares were redeemed within the first year after their purchase, the recipient of the service fees on those shares was obligated to repay the Distributor a pro rata portion of the advance payment of the fees. If those shares were redeemed within 18 months, they were subject to a CDSC. For Class A shares purchased in grandfathered retirement plans on or after March 1, 2007, the Distributor does not make any payment in advance and does not retain the service fee for the first year and the shares are not subject to a CDSC.

For the fiscal year ended July 31, 2011 payments under the Class A service plan totaled $470,490, of which $0 was retained by the Distributor under the arrangement described above, regarding grandfathered retirement accounts, including $11,017 paid to an affiliate of the Distributor's parent company. Any unreimbursed expenses the Distributor incurs with respect to Class A shares in any fiscal year cannot be recovered in subsequent years. The Distributor may not use payments received under the Class A plan to pay any of its interest expenses, carrying charges, or other financial costs, or allocation of overhead.

Class B and Class C Distribution and Service Plans. Under the Class B and Class C Distribution and Service Plans (each a "Plan" and together the "Plans"), the Fund pays the asset-based sales charge (the "distribution fee") to the Distributor for its services in distributing Class B and Class C shares. The distribution fee allows investors to buy Class B and Class C shares without a front-end sales charge, while allowing the Distributor to compensate dealers that sell those shares. The Distributor may use the service fees it receives under the Plans to pay recipients for providing services similar to the services provided under the Class A service plan, described above.

Distribution fees on Class B shares are generally retained by the Distributor. If a dealer has a special agreement with the Distributor, the Distributor may pay the Class B distribution fees to recipients periodically in lieu of paying the sales concession in advance at the time of purchase. The Distributor retains the distribution fee on Class C shares during the first year and then pays it as an ongoing concession to recipients.

Service fees for the first year after Class B and Class C shares are purchased, are generally paid to recipients in advance. After the first year, the Distributor pays the service fees to recipients periodically. Under the Plans, the Distributor is permitted to retain the service fees or to pay recipients the service fee on a periodic basis, without payment in advance. If a recipient has a special agreement with the Distributor, the Distributor may pay the Class B service fees to recipients periodically in lieu of paying the first year fee in advance. If Class B and Class C shares are redeemed during the first year after their purchase, a recipient of service fees on those shares will be obligated to repay a pro rata portion of the advance payment to the Distributor. Shares purchased by exchange do not qualify for the advance service fee payment.

Class B and Class C shares may not be purchased by a new investor directly from the Distributor without the investor designating another registered broker-dealer. If a current investor no longer has another broker-dealer of record for an existing account, the Distributor is automatically designated as the broker-dealer of record, but solely for the purpose of acting as the investor's agent to purchase the shares. In those cases, the Distributor retains the distribution fees paid on Class B and Class C shares, but does not retain any service fees as to the assets represented by that account.

Each Plan provides for the Distributor to be compensated at a flat rate, whether the Distributor's distribution expenses for a period are more or less than the amounts paid by the Fund under the relevant Plan. During a calendar year, the Distributor's actual expenses in selling Class B and Class C shares may be more than the distribution fees paid to the Distributor under the Plans and the CDSC's collected on redeemed shares. Those excess expenses are carried over on the Distributor's books and may be recouped from distribution fees paid by the Fund in future years. However, the Distributor has voluntarily agreed to cap the amount that may be carried over from year to year and recouped for certain categories of expenses at 0.70% of annual gross sales of shares of the Fund. The capped expenses under the Plans are (i) expenses the Distributor has incurred that represent compensation and expenses of its sales personnel and (ii) other direct distribution costs it has incurred, such as sales literature, state registration fees, advertising and prospectuses used to offer Fund shares. If those categories of expenses exceed the capped amount, the Distributor would bear the excess costs. If a Plan were to be terminated by the Fund, the Fund's Board may allow the Fund to continue payments of the distribution fees to the Distributor for its services in distributing shares before the Plan was terminated.

The distribution and service fees under each Plan are computed on the average of the net asset value of shares in the respective class, determined as of the close of each regular business day. The distribution and service fees increase the annual Class B and Class C expenses by 1.00% of net assets.

All payments under the Plans are subject to the limitations imposed by the Conduct Rules of FINRA on payments of distribution and service fees.

Financial intermediaries may receive various forms of compensation or reimbursement from the Fund in the form of distribution and service (12b-1) plan payments as described above. They may also receive payments or concessions from the Distributor, derived from sales charges paid by the financial intermediary's clients, also as described in this SAI. In addition, the Manager and the Distributor (including their affiliates) may make payments to financial intermediaries in connection with the intermediaries' offering and sales of Fund shares and shares of other Oppenheimer funds, or their provision of marketing or promotional support, transaction processing or administrative services. Among the financial intermediaries that may receive these payments are brokers or dealers who sell or hold shares of the Fund, banks (including bank trust departments), registered investment advisers, insurance companies, retirement plan or qualified tuition program administrators, third party administrators, recordkeepers or other institutions that have selling, servicing or similar arrangements with the Manager or the Distributor. The payments to financial intermediaries vary by the types of product sold, the features of the Fund share class and the role played by the intermediary.

Types of payments to financial intermediaries may include, without limitation, all or portions of the following:

Payments made by the Fund, or by an investor buying or selling shares of the Fund, including:

In addition, the Manager or Distributor may, at their discretion, make the following types of payments from their own respective resources, which may include profits the Manager derives from investment advisory fees paid by the Fund. Payments are made based on the guidelines established by the Manager and Distributor, subject to applicable law. These payments are often referred to as "revenue sharing" payments, and may include:

Although a broker or dealer that sells Fund shares may also act as a broker or dealer in connection with the purchase or sale of portfolio securities by the Fund or other Oppenheimer funds, the Manager does not consider a financial intermediary's sales of shares of the Fund or other Oppenheimer funds when choosing brokers or dealers to effect portfolio transactions for the Fund or other Oppenheimer funds.

Revenue sharing payments can pay for distribution-related or asset retention items including, without limitation:

These payments may provide an incentive to financial intermediaries to actively market or promote the sale of shares of the Fund or other Oppenheimer funds, or to support the marketing or promotional efforts of the Distributor in offering shares of the Fund or other Oppenheimer funds. In addition, some types of payments may provide a financial intermediary with an incentive to recommend the Fund or a particular share class. Financial intermediaries may earn profits on these payments, since the amount of the payments may exceed the cost of providing the services. Certain of these payments are subject to limitations under applicable law. Financial intermediaries may categorize and disclose these arrangements to their clients and to members of the public in a manner different from the disclosures in the Fund's Prospectus and this SAI. You should ask your financial intermediary for information about any payments it receives from the Fund, the Manager or the Distributor and any services it provides, as well as the fees and commissions it charges.

For the year ended December 31, 2010, the following financial intermediaries and/or their affiliates (which in some cases are broker-dealers) offered shares of the Oppenheimer funds and received revenue sharing or similar distribution-related payments (of at least $5,000) from the Manager or the Distributor for marketing or program support:

For the year ended December 31, 2010, the following firms (which in some cases are broker-dealers) received payments from the Manager or Distributor (of at least $2,500) for administrative or other services provided (other than revenue sharing arrangements), as described above:

Explanation of Performance Calculations. The use of standardized performance calculations enables an investor to compare the Fund's performance to the performance of other funds for the same periods. The Fund's performance data in advertisements must comply with rules of the SEC, which describe the types of performance data that may be used and how it is to be calculated. In general, any advertisement by the Fund of its performance data must include the average annual total returns for the advertised class of shares of the Fund. The Fund may use a variety of performance calculations, including "cumulative total return," "average annual total return," "average annual total return at net asset value," and "total return at net asset value." How these types of returns are calculated are described below.

A number of factors should be considered before using the Fund's performance information as a basis for comparison with other investments:

The performance of each class of shares is shown separately, because the performance of each class of shares will usually be different. That is because of the different kinds of expenses each class bears. The yields and total returns of each class of shares of the Fund are affected by market conditions, the quality of the Fund's investments, the maturity of debt investments, the types of investments the Fund holds, and its operating expenses that are allocated to the particular class.

Yields. The Fund uses a variety of different yields to illustrate its current returns. Each class of shares calculates its yield separately because of the different expenses that affect each class.

Standardized yield is calculated using the following formula set forth in rules adopted by the SEC, designed to assure uniformity in the way that all funds calculate their yields:

a =dividends and interest earned during the 30-day period.
b =expenses accrued for the period (net of any expense assumptions).
c =the average daily number of shares of that class outstanding during the 30-day period that were entitled to receive dividends.
d =the maximum offering price per share of that class on the last day of the period, adjusted for undistributed net investment income.

The standardized yield for a particular 30-day period may differ from the yield for other periods. The SEC formula assumes that the standardized yield for a 30-day period occurs at a constant rate for a six-month period and is annualized at the end of the six-month period. Additionally, because each class of shares is subject to different expenses, it is likely that the standardized yields of the Fund's classes of shares will differ for any 30-day period.

The maximum offering price for shares includes the applicable current maximum initial sales charge but does not include the effect of any contingent deferred sales charges. The Class A dividend yield may also be quoted without deducting the maximum initial sales charge.

The tax-equivalent yield is based on a 30-day period, and is computed by dividing the tax-exempt portion of the Fund's current yield (as calculated above) by one minus a stated income tax rate. The result is added to the portion (if any) of the Fund's current yield that is not tax-exempt.

The tax-equivalent yield may be used to compare the tax effects of income derived from the Fund with income from taxable investments at the tax rates stated. Your tax bracket is determined by your federal and state taxable income (the net amount subject to federal and state income tax after deductions and exemptions).

Total Return Information. "Total return" is the change in value of a hypothetical investment in the Fund over a given period, assuming that all dividends and capital gains distributions are reinvested in additional shares and that the investment is redeemed at the end of the period. Because of differences in expenses for each class of shares, the total returns for each class will differ and are measured separately.

There are different types of "total returns." "Cumulative total return" measures the change in value over the entire period (for example, ten years). "Average annual total return" shows the average rate of return for each year in a period that would produce the cumulative total return over the entire period. However, average annual total returns do not show actual year-by-year performance. The Fund uses the methodology prescribed by the SEC to calculate its standardized total returns.

In calculating the Fund's total returns, the sales charges described in the Fund's Prospectus are applied unless the returns are shown at "net asset value."

The Fund's returns are calculated based on the change in value of a hypothetical initial investment of $1,000 ("P" in the formulas below) held for a number of years ("n" in the formulas).

A number of factors should be considered before using the Fund's performance information as a basis for comparison with other investments:

Performance Data. The charts below show the Fund's performance as of its most recent fiscal year end. You can obtain current performance information by visiting the OppenheimerFunds website at www.oppenheimerfunds.com or by calling the Fund's Transfer Agent at the telephone number shown on the cover of this SAI.

The performance of each class of shares is shown separately, because the performance of each class of shares will usually be different. That is because of the different kinds of expenses each class bears. The total returns of each class of shares of the Fund are affected by market conditions, the quality of the Fund's investments, the maturity of those investments, the types of investments the Fund holds, and its operating expenses that are allocated to the particular class.

Total returns for any given past period represent historical performance information and are not, and should not be considered, a prediction of future returns.

Other Performance Comparisons. In its Annual Report to shareholders, the Fund compares its performance to that of one or more appropriate market indices. You can obtain that information by visiting the OppenheimerFunds website at www.oppenheimerfunds.com or by calling the Fund's Transfer Agent at the telephone number shown on the cover of this SAI. The Fund may also compare its performance to that of other investments, including other mutual funds, or use rankings of its performance by independent ranking entities. The following are examples of some of those comparisons.

Lipper Rankings. From time to time the Fund may publish the ranking of the performance of its share classes by Lipper, Inc. ("Lipper"), a widely-recognized independent mutual fund monitoring service. Lipper monitors and ranks the performance of regulated investment companies for various periods in categories based on investment styles. Lipper also publishes "peer-group" indices and averages of the performance of all mutual funds in particular categories.

Morningstar Ratings. From time to time the Fund may publish the "star ratings" of its classes of shares by Morningstar, Inc. ("Morningstar"), an independent mutual fund monitoring service that rates and ranks mutual funds within their specialized market sectors. Morningstar proprietary star ratings reflect risk-adjusted historical total investment returns for funds with at least a three-year performance history. The top 10% of funds in each category receive 5 stars, the next 22.5% receive 4 stars, the next 35% receive 3 stars, the next 22.5% receive 2 stars, and the bottom 10% receive 1 star.

Performance Rankings and Comparisons by Other Entities and Publications. From time to time the Fund may include in its advertisements and sales literature performance information about the Fund cited in newspapers and other periodicals such as The New York Times, The Wall Street Journal, Barron's or other similar publications. That information may include performance quotations from other sources, including Lipper and Morningstar or the Fund's performance may be compared to the performance of various market indices, other investments, or averages, performance rankings or other benchmarks prepared by recognized mutual fund statistical services. The Fund's advertisements and sales literature may also include, for illustrative or comparative purposes, statistical data or other information about general or specific market and economic conditions, for example:

From time to time, the Fund may publish rankings or ratings of the Manager or Transfer Agent by third parties, including comparisons of investor services provided to shareholders of the Oppenheimer funds to those provided by other mutual fund families selected by the rating or ranking services. Those comparisons may be based on the opinions of the rating or ranking service itself, using its research or judgment, or may be based on surveys of investors, brokers, shareholders or others.

Investors may also wish to compare the returns on the Fund's share classes to the return on fixed-income investments available from banks and thrift institutions, including certificates of deposit, ordinary interest-paying checking and savings accounts, and other forms of fixed or variable time deposits or instruments such as Treasury bills. However, the Fund's returns and share price are not guaranteed or insured by the FDIC or any other agency and will fluctuate daily, while bank depository obligations may be insured by the FDIC and may provide fixed rates of return. Repayment of principal and payment of interest on Treasury securities is backed by the full faith and credit of the U.S. Government.

The Fund's Prospectus describes how to buy, sell and exchange shares of the Fund and certain other Oppenheimer funds. The information below provides further details about the Fund's policies regarding those share transactions. It should be read in conjunction with the information in the Prospectus. Appendix A of this SAI provides more information about the special sales charge arrangements offered by the Fund, and the circumstances in which sales charges may be reduced or waived for certain investors and certain types of purchases or redemptions.

Determination of Net Asset Value Per Share. The net asset value ("NAV") per share for each class of shares of the Fund is determined by dividing the value of the Fund's net assets attributable to a class by the number of shares of that class that are outstanding. The NAV is determined as of the close of business on the New York Stock Exchange ("NYSE") on each day that the NYSE is open. The NYSE normally closes at 4:00 p.m., Eastern time, but may close earlier on some other days (for example, in case of weather emergencies or on days falling before a U.S. holiday). All references to time in this SAI mean "Eastern time." The NYSE's most recent annual announcement (which is subject to change) states that it will close on New Year's Day, Martin Luther King, Jr. Day, Washington's Birthday (Presidents Day), Good Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day and Christmas Day. It may also close on other days.

Dealers other than NYSE members may conduct trading in municipal securities on days that the NYSE is closed (including weekends and holidays) or after 4:00 p.m. on a regular business day. Because the Fund's net asset values will not be calculated on those days, the Fund's net asset values per share may be significantly affected on days when shareholders may not purchase or redeem shares.

Securities Valuation. The Fund's Board has established procedures for the valuation of the Fund's securities. In general those procedures are as follows:

In the case of municipal securities the Manager uses pricing services who use "matrix" comparisons to the prices for comparable instruments on the basis of quality, yield and maturity. Other special factors may be involved (such as the tax-exempt status of the interest paid by municipal securities). The Manager will monitor the accuracy of the pricing services valuations. That monitoring may include comparing prices used for portfolio valuation to the actual sale prices of selected securities.

Puts, calls, futures and municipal bond index futures are valued at the last sale price on the principal exchange on which they are traded, as determined by a pricing service.

Allocation of Expenses. The Fund pays expenses related to its daily operations, such as custodian fees, Board fees, transfer agency fees, legal fees and auditing costs. Those expenses are paid out of the Fund's assets, not directly by shareholders. However, those expenses reduce the net asset value of Fund shares, and therefore are borne indirectly by shareholders.

For calculating the Fund's net asset value, dividends and distributions, the Fund differentiates between two types of expenses. General expenses that do not pertain specifically to any one class are allocated pro rata to the shares of all classes. Those expenses are first allocated based on the percentage of the Fund's total assets that is represented by the assets of each share class. Such general expenses include management fees, legal, bookkeeping and audit fees, Board compensation, custodian expenses, share issuance costs, interest, taxes, brokerage commissions, and non-recurring expenses, such as litigation costs. Then the expenses allocated to a share class are allotted equally to each outstanding share within a given class.

Other expenses that are directly attributable to a particular class are allocated equally to each outstanding share within that class. Examples of such expenses include distribution and service plan (12b-1) fees, transfer and shareholder servicing agent fees and expenses, and shareholder meeting expenses to the extent that such expenses pertain only to a specific class.

The Oppenheimer Funds. The "Oppenheimer funds" are those mutual funds for which the Distributor acts as distributor and currently include the following:

Classes of Shares. Each class of shares of the Fund represents an interest in the same portfolio of investments of the Fund. However, each class has different shareholder privileges and features. The net income attributable to each class of shares and the dividends payable on each class of shares will be reduced by incremental expenses borne solely by that class. Those expenses include the asset-based sales charges to which some share classes are subject.

The availability of different classes of shares permits an investor to choose the method of purchasing shares that is more appropriate for the investor. That may depend on the amount of the purchase, the length of time the investor expects to hold shares, and other relevant circumstances. Class A shares normally are sold subject to an initial sales charge. The purpose of the deferred sales charge and asset-based sales charge that are applicable to some other share classes is the same as that of the initial sales charge on Class A shares - to compensate the Distributor and brokers, dealers and financial institutions that sell shares of the Fund. A salesperson who is entitled to receive compensation from his or her firm for selling Fund shares may receive different levels of compensation for selling one class of shares rather than another.

Class B shares will no longer be offered for sale after June 29, 2012. See Prospectus under "More About Your Account" for details.

Class A Sales Charges Reductions and Waivers. There is an initial sales charge on the purchase of Class A shares of each of the Oppenheimer funds except for the money market funds (under certain circumstances described in this SAI, redemption proceeds of certain money market fund shares may be subject to a CDSC). As discussed in the Prospectus, a reduced initial sales charge rate may be obtained for certain share purchases because of the reduced sales efforts and reduction in expenses realized by the Distributor, dealers or brokers in making such sales. Sales charge waivers may apply in certain other circumstances because the Distributor or dealer or broker incurs little or no selling expenses. Appendix A to this SAI includes additional information regarding certain of these sales charge reductions and waivers.

A reduced sales charge rate may be obtained for Class A shares under a Right of Accumulation or Letter of Intent because of the reduction in sales effort and expenses to the Distributor, dealers or brokers for those sales.

Letter of Intent. Under a Letter of Intent (a "Letter"), you may be able to reduce the initial sales charge rate that applies to your Class A share purchases of the Fund if you purchase Class A, Class B or Class C shares of most Oppenheimer funds (including the Fund) or Class A, Class B, Class C, Class G and Class H units of advisor sold Section 529 plans, for which the Manager or the Distributor serves as the Program Manager or Program Distributor.

A Letter is an investor's statement in writing to the Distributor of his or her intention to purchase a specified value of those shares or units during a 13 month period (the "Letter period"), which begins on the date of the investor's first share purchase following the establishment of the Letter. The sales charge on each purchase of Class A shares during the Letter period will be at the rate that would apply to a single lump-sum purchase of shares in the amount intended to be purchased. In submitting a Letter, the investor makes no commitment to purchase shares. However, if the investor does not fulfill the terms of the Letter within the Letter period, he or she agrees to pay the additional sales charges that would have been applicable to any purchases that are made. The investor agrees that shares equal in value to 2% of the intended purchase amount will be held in escrow by the Transfer Agent for that purpose, as described in "Terms of Escrow" below. It is the responsibility of the dealer of record and/or the investor to advise the Distributor about the Letter when placing purchase orders during the Letter period. The investor must also notify the Distributor or his or her financial intermediary of any qualifying 529 plan holdings.

To determine whether an investor has fulfilled the terms of a Letter, the Transfer Agent will count purchases of "qualified" Class A, Class B and Class C shares and Class A, Class B, Class C, Class G and Class H units during the Letter period. Purchases of Class N, Class Y or Class I shares, purchases made by reinvestment of dividends or capital gains distributions from the Fund or other Oppenheimer funds, purchases of Class A shares with redemption proceeds under the Reinvestment Privilege, and purchases of Class A shares of Oppenheimer Money Market Fund, Inc. or Oppenheimer Cash Reserves on which a sales charge has not been paid do not count as "qualified" shares for satisfying the terms of a Letter. An investor will also be considered to have fulfilled the Letter if the value of the investor's total holdings of qualified shares on the last day of the Letter period equals or exceeds the intended purchase amount.

If the terms of the Letter are not fulfilled within the Letter period, the concessions previously paid to the dealer of record for the account and the amount of sales charge retained by the Distributor will be adjusted on the first business day following the expiration of the Letter period to reflect the sales charge rates that are applicable to the actual total purchases.

If subsequent eligible purchases during the Letter period cause the amount of total eligible purchases to exceed the intended purchase amount and also exceed the amount needed to qualify for the next sales charge rate reduction (stated in the Prospectus), the sales charges paid on those subsequent purchases will be charged at the lower rate as permitted under the Fund's Right of Accumulation policy.

By establishing a Letter, the investor agrees to be bound by the terms of the Prospectus, this SAI and the application used for a Letter, and if those terms are amended to be bound by the amended terms and that any amendments by the Fund will apply automatically to existing Letters. Group retirement plans qualified under section 401(a) of the Internal Revenue Code may not establish a Letter, however defined benefit plans and Single K sole proprietor plans may do so.

1. Out of the initial purchase, or out of subsequent purchases if necessary, the Transfer Agent will hold in escrow Fund shares equal to 2% of the intended purchase amount specified in the Letter. For example, if the intended purchase amount is $50,000, the escrow amount would be shares valued at $1,000 (computed at the offering price for a $50,000 share purchase). Any dividends and capital gains distributions on the escrowed shares will be credited to the investor's account.

2. If the Letter applies to more than one fund account, the investor can designate the fund from which shares will be escrowed. If no fund is selected, the Transfer Agent will escrow shares in the fund account that has the highest dollar balance on the date of the first purchase under the Letter. If there are not sufficient shares to cover the escrow amount, the Transfer Agent will escrow shares in the fund account(s) with the next highest balance(s). If there are not sufficient shares in the accounts to which the Letter applies, the Transfer Agent may escrow shares in other accounts that are linked for Right of Accumulation purposes. Additionally, if there are not sufficient shares available for escrow at the time of the first purchase under the Letter, the Transfer Agent will escrow future purchases until the escrow amount is met.

3. If, during the Letter period, an investor exchanges shares of the Fund for shares of another fund (as described in the Prospectus section titled "The OppenheimerFunds Exchange Privilege"), the Fund shares held in escrow will automatically be exchanged for shares of the other fund and the escrow obligations will also be transferred to that fund.

4. If the total purchases under the Letter are less than the intended purchases specified, on the first business day after the end of the Letter period, the Distributor will redeem escrowed shares equal in value to the difference between the dollar amount of the sales charges actually paid and the amount of the sales charges that would have been paid if the total purchases had been made at a single time. Any shares remaining after such redemption will be released from escrow.

5. If the terms of the Letter are fulfilled, the escrowed shares will be promptly released to the investor at the end of the Letter period.

6. By signing the Letter, the investor irrevocably constitutes and appoints the Transfer Agent as attorney-in-fact to surrender for redemption any or all escrowed shares.

Class B Conversion. Under current interpretations of applicable federal income tax law by the Internal Revenue Service (the "IRS"), the conversion of Class B shares to Class A shares is not treated as a taxable event for the shareholder. If those laws or the IRS' interpretation of those laws should change, the automatic conversion feature may be suspended. In that event, no further conversions of Class B shares would occur while that suspension remained in effect. Although Class B shares could then be exchanged for Class A shares on the basis of relative net asset value of the two classes, without the imposition of a sales charge or fee, such exchange could constitute a taxable event for the shareholder, and absent such exchange, Class B shares might continue to be subject to the asset-based sales charge for longer than six years. A fund account that has a balance below $500 due to the automatic conversion of Class B shares to Class A shares will not be subject to the Minimum Balance Fee (described below). However, once all Class B shares held in the account have been converted to Class A shares the new Class A share account balance may become subject to that fee.

Share Certificates. When you purchase shares of the Fund, your ownership interest in the shares of the Fund will be recorded as a book entry on the records of the Fund. The Fund will not issue or re-register physical share certificates.

Cancellation of Purchase Orders. Cancellation of purchase orders for the Fund's shares (for example, when a purchase check is returned to the Fund unpaid) causes a loss to be incurred when the net asset values of the Fund's shares on the cancellation date is less than on the purchase date. That loss is equal to the amount of the decline in the net asset value per share multiplied by the number of shares in the purchase order. The investor is responsible for that loss. If the investor fails to compensate the Fund for the loss, the Distributor will do so. The Fund may reimburse the Distributor for that amount by redeeming shares from any account registered in that investor's name, or the Fund or the Distributor may seek other redress.

AccountLink. Shares purchased through AccountLink will be purchased at the net asset value calculated on the same regular business day if the Distributor is instructed to initiate the Automated Clearing House ("ACH") transfer to buy the shares before the close of the NYSE. The NYSE normally closes at 4:00 p.m., but may close earlier on certain days. If the Distributor is instructed to initiate the ACH transfer after the close of the NYSE, the shares will be purchased on the next regular business day.

Dividends will begin to accrue on the shares purchased through the ACH system on the business day the Fund receives Federal Funds before the close of the NYSE. The proceeds of ACH transfers are normally received by the Fund three days after a transfer is initiated. If Federal Funds are received on a business day after the close of the NYSE, dividends will begin to accrue on the next regular business day. If the proceeds of an ACH transfer are not received on a timely basis, the Distributor reserves the right to cancel the purchase order. The Distributor and the Fund are not responsible for any delays in purchasing shares resulting from delays in ACH transmissions.

The minimum purchase through AccountLink is generally $50, however for accounts established prior to November 1, 2002 the minimum purchase is $25.

Asset Builder Plans. As indicated in the Prospectus, you normally must establish your Fund account with $1,000 or more. However, you can open a Fund account for as little as $500 if you establish an Asset Builder Plan at the time of your initial share purchase to automatically purchase additional shares directly from a bank account.

An Asset Builder Plan is available only if your bank is an ACH member and you establish AccountLink. Under an Asset Builder Plan, payments to purchase shares of the Fund will be debited from your bank account automatically. Normally the debit will be made two business days prior to the investment dates you select on your application. Neither the Distributor, the Transfer Agent nor the Fund will be responsible for any delays in purchasing shares that result from delays in ACH transmissions.

To establish an Asset Builder Plan at the time you initially purchase Fund shares, complete the "Asset Builder Plan" information on the Account Application. To establish an Asset Builder Plan for an existing account, use the Asset Builder Enrollment Form. The Account Application and the Asset Builder Enrollment Form are available by contacting the Distributor or may be downloaded from our website at www.oppenheimerfunds.com. Before you establish a new Fund account under the Asset Builder Plan, you should obtain a prospectus of the selected Fund and read it carefully.

You may change the amount of your Asset Builder payment or you can terminate your automatic investments at any time by writing to the Transfer Agent. The Transfer Agent requires a reasonable period (approximately 10 days) after receipt of your instructions to implement them. The minimum additional purchase under an Asset Builder Plan is $50, except that for Asset Builder Plans established prior to November 1, 2002, the minimum additional purchase is $25. Shares purchased by Asset Builder Plan payments are subject to the redemption restrictions for recent purchases described in the Prospectus. An Asset Builder Plan may not be used to buy shares for OppenheimerFunds employer-sponsored qualified retirement accounts. The Fund reserves the right to amend, suspend or discontinue offering Asset Builder Plans at any time without prior notice.

Electronic Document Delivery. To access your account documents electronically via eDocs Direct, please visit our website at www.oppenheimerfunds.com and click the hyperlink "Sign Up for Electronic Document Delivery" under the heading "I want to..." in the left hand column, or call 1.888.470.0862 for instructions.

Receiving Redemption Proceeds by Federal Funds Wire. The Fund would normally authorize a Federal Funds wire of redemption proceeds to be made on its next regular business day following the redemption. A Federal Funds wire may be delayed if the Fund's custodian bank is not open for business on that day. In that case, the wire will not be transmitted until the next business day on which the bank and the Fund are both open for business. No dividends will be paid on the proceeds of redeemed shares awaiting transfer by Federal Funds wire.

Redeeming Shares Through Brokers or Dealers. The Distributor is the Fund's agent to repurchase its shares from authorized brokers or dealers on behalf of their customers. Shareholders should contact their broker or dealer to arrange this type of redemption. The repurchase price per share will be the next net asset value computed after the Distributor or the broker or dealer receives the order. A repurchase will be processed at that day's net asset value if the order was received by the broker or dealer from its customer prior to the time the close of the NYSE. Normally, the NYSE closes at 4:00 p.m., but may do so earlier on some days.

For accounts redeemed through a broker-dealer, payment will ordinarily be made within three business days after the shares are redeemed. However, the Distributor must receive the required redemption documents in proper form, with the signature(s) of the registered shareholder(s) guaranteed as described in the Prospectus.

Payments "In Kind." As stated in the Prospectus, payment for redeemed shares is ordinarily made in cash. Under certain circumstances, however, the Board may determine that it would be detrimental to the best interests of the remaining shareholders for the Fund to pay for the redeemed shares in cash. In that case, the Fund may pay the redemption proceeds, in whole or in part, by a distribution "in kind" of liquid securities from the Fund's portfolio. The Fund will value securities used to pay a redemption in kind using the same method described above under "Determination of Net Asset Value Per Share." That valuation will be made as of the time the redemption price is determined. If shares are redeemed in kind, the redeeming shareholder might incur brokerage or other costs in selling the securities for cash.

The Fund has elected to be governed by Rule 18f-1 under the Investment Company Act. Under that rule, redemptions by a shareholder, of up to the lesser of $250,000 or 1% of the net assets of the Fund during any 90-day period, must be redeemed solely in cash.

Automatic Withdrawal Plans. Under an Automatic Withdrawal Plan, investors who own Fund shares can authorize the Transfer Agent to redeem shares automatically on a monthly, quarterly, semi-annual or annual basis. The minimum periodic redemption amount under an Automatic Withdrawal Plan is $50. Shareholders having AccountLink privileges may have Automatic Withdrawal Plan payments deposited to their designated bank account. Payments may also be made by check, payable to all shareholders of record and sent to the address of record for the account. Automatic withdrawals may be requested by telephone for amounts up to $1,500 per month if the payments are to be made by checks sent to the address of record for the account. Telephone requests are not available if the address on the account has been changed within the prior 15 days.

Fund shares will be redeemed as necessary to meet the requested withdrawal payments. Shares will be redeemed at the net asset value per share determined on the redemption date, which is normally three business days prior to the payment receipt date requested by the shareholder. The Fund cannot guarantee receipt of a payment on the date requested, however. Shares acquired without a sales charge will be redeemed first. Shares acquired with reinvested dividends and capital gains distributions will be redeemed next, followed by shares acquired with a sales charge, to the extent necessary to make withdrawal payments. Depending on the amount withdrawn, the investor's principal may be depleted. Payments made under these plans should not be considered as a yield or income on your investment.

Because of the sales charge assessed on Class A share purchases, shareholders should usually not make additional Class A share purchases while participating in an Automatic Withdrawal Plan. A shareholder whose account is subject to a CDSC should usually not establish an automatic withdrawal plan because of the imposition of the CDSC on the withdrawals. If a CDSC does apply to a redemption, the amount of the check or payment will be reduced accordingly. Distributions of capital gains from accounts subject to an Automatic Withdrawal Plan must be reinvested in Fund shares. Dividends on shares held in the account may be paid in cash or reinvested. Required minimum distributions from OppenheimerFunds-sponsored retirement plans may not be arranged on this basis.

The shareholder may change the amount, the payment interval, the address to which checks are to be mailed, the designated bank account for AccountLink payments or may terminate a plan at any time by writing to the Transfer Agent. A signature guarantee may be required for certain changes. The requested change will usually be put into effect approximately two weeks after such notification is received. The shareholder may redeem all or any part of the shares in the account by written notice to the Transfer Agent. That notice must be in proper form in accordance with the requirements in the then-current Fund Prospectus.

The Transfer Agent will administer the Automatic Withdrawal Plan as agent for the shareholder(s) who executed the plan authorization and application submitted to the Transfer Agent. Neither the Fund nor the Transfer Agent shall incur any liability for any action taken or not taken by the Transfer Agent in good faith to administer the plan. Any share certificates must be surrendered unendorsed to the Transfer Agent with the plan application to be eligible for automatic withdrawal payments. If the Transfer Agent ceases to act as transfer agent for the Fund, the shareholder will be deemed to have appointed any successor transfer agent to act as agent in administering the plan.

The Transfer Agent will terminate a plan upon its receipt of evidence, satisfactory to it, that the shareholder has died or is legally incapacitated. The Fund may also give directions to the Transfer Agent to terminate a plan. Shares that have not been redeemed at the time a plan is terminated will be held in an account in the name of the shareholder. Share certificates will not be issued for any such shares and all dividends will be reinvested in the account unless and until different instructions are received, in proper form, from the shareholder, his or her executor or guardian, or another authorized person.

The Fund reserves the right to amend, suspend or discontinue offering these plans at any time without prior notice. By requesting an Automatic Withdrawal Plan, the shareholder agrees to the terms and conditions that apply to such plans. These provisions may be amended from time to time by the Fund and/or the Distributor. When adopted, any amendments will automatically apply to existing Plans.

Transfers of Shares. A shareholder will not be required to pay a CDSC when Fund shares are transferred to registration in the name of another person or entity. The transfer may occur by absolute assignment, gift or bequest, as long as it does not involve, directly or indirectly, a public sale of the shares. When shares subject to a CDSC are transferred, the CDSC will continue to apply to the transferred shares and will be calculated as if the transferee had acquired the shares in the same manner and at the same time as the transferring shareholder.

If less than all of the shares held in an account are transferred, and some but not all shares in the account would be subject to a CDSC if redeemed at that time, the priorities for the imposition of the CDSC described in the Prospectus will be followed in determining the order in which the shares are transferred.

Minimum Balance Fee. A $12 annual "Minimum Balance Fee" is assessed on each Fund account with a share balance of less than $500. The Minimum Balance Fee is automatically deducted from each such Fund account in September.

Listed below are certain cases in which the Fund has elected, in its discretion, not to assess the Minimum Balance Fee. These exceptions are subject to change:

Involuntary Redemptions. The Fund's Board has the right to involuntarily redeem shares held in any account with an aggregate net asset value of less than $200. The Board may change the amount of the aggregate net asset value to which this involuntary redemption policy may apply. The Board will not cause the involuntary redemption of shares in an account if the aggregate net asset value of such shares has fallen below the stated minimum solely as a result of market fluctuations within the last 12-month period. If the Board exercises this right, it may also determine the requirements for any notice to be given to the shareholders (but not less than 30 days). Alternatively, the Board may set requirements for the shareholder to increase the investment, or set other terms and conditions so that the shares would not be involuntarily redeemed.

Unclaimed accounts may be subject to state escheatment laws, and the Fund and the Transfer Agent will not be liable to shareholders or their representatives for good faith compliance with those laws.

The Fund reserves the authority to modify the minimum balance policies in its discretion.

Reinvestment Privilege. Within six months after redeeming Class A or Class B shares, a shareholder may reinvest all or part of the redemption proceeds without a sales charge if:

The reinvestment may only be made in Class A shares of the Fund or other Oppenheimer funds into which shares of the Fund are exchangeable, as described in "How to Exchange Shares" below. This privilege does not apply to any other share class or to purchases made through automatic investment options. The Fund may amend, suspend or cease offering this reinvestment privilege at any time for shares redeemed after the date of the amendment, suspension or cessation. The shareholder must request the reinvestment privilege from the Transfer Agent or his or her financial intermediary at the time of purchase.

Reinvestment will be at the next net asset value computed after the Transfer Agent receives the reinvestment order. Any capital gain that was realized when the shares were redeemed is taxable, and reinvestment will not alter any capital gains tax payable on that gain. If there was a capital loss on the redemption, some or all of the loss may not be tax deductible, depending on the timing and amount of the reinvestment. Under the Internal Revenue Code, if the redemption proceeds of Fund shares on which a sales charge was paid are reinvested in shares of the Fund or another of the Oppenheimer funds within 90 days after the payment of the sales charge, in certain circumstances, the shareholder's basis in the shares of the Fund that were redeemed may not include the amount of the sales charge paid. That would reduce the loss or increase the gain recognized from the redemption, however, the sales charge would be added to the basis of the shares acquired with the redemption proceeds.

Shares of the Fund (including shares acquired by reinvestment of dividends or distributions from other Oppenheimer funds) may be exchanged for shares of certain other Oppenheimer funds at net asset value without the imposition of a sales charge, however a CDSC may apply to the acquired shares as described below. Shares of certain money market funds purchased without a sales charge may be exchanged for shares of other Oppenheimer funds offered with a sales charge upon payment of the sales charge. Exchanges into another Oppenheimer fund must meet any applicable minimum investment requirements of that fund.

As stated in the Prospectus, shares of a particular class of Oppenheimer funds having more than one class of shares may be exchanged only for shares of the same class of other Oppenheimer funds. The prospectus of each of the Oppenheimer funds indicates which share class or classes that fund offers and provides information about limitations on the purchase of particular share classes, as applicable for the particular fund. Shareholders that own more than one class of shares of the Fund must specify which class of shares they wish to exchange.

You can obtain a current list of the share classes offered by the funds by calling the toll-free phone number on the first page of this SAI.

The different Oppenheimer funds that are available for exchange have different investment objectives, policies and risks. A shareholder should determine whether the fund selected is appropriate for his or her investment goals and should be aware of the tax consequences of an exchange. For federal income tax purposes, an exchange transaction is treated as a redemption of shares of one fund and a purchase of shares of another. Some of the tax consequences of reinvesting redemption proceeds are discussed in "Reinvestment Privilege," above. The Fund, the Distributor, and the Transfer Agent are unable to provide investment, tax or legal advice to a shareholder in connection with an exchange request or any other investment transaction.

The Fund may amend, suspend or terminate the exchange privilege at any time. Although the Fund may impose these changes at any time, it will provide notice of those changes whenever it is required to do so by applicable law. It may be required to provide 60 days' notice prior to materially amending or terminating the exchange privilege, however that notice is not required in extraordinary circumstances.

How Exchanges Affect Contingent Deferred Sales Charges. A CDSC will be imposed on Class A shares acquired by exchange if they are redeemed within the CDSC holding period that was applicable to the exchanged shares. For other share classes, a CDSC will be imposed if the shares are redeemed within the CDSC holding period that is applicable to the acquired shares. This includes the redemption of shares of Oppenheimer Cash Reserves and Oppenheimer Money Market Fund, Inc. that were acquired by exchange.

When shares that are subject to a CDSC are exchanged, the priorities for the imposition of the CDSC described in "About Your Account" in the Prospectus will be followed in determining the order in which the shares are exchanged. Before exchanging shares, shareholders should consider how the exchange may affect any CDSC that might be imposed on the subsequent redemption of any remaining shares

For circumstances in which a CDSC on shares acquired by exchange may be waived, see Appendix A "Special Sales Charge Arrangements and Waivers."

Telephone Exchange Requests. When exchanging shares by telephone, a shareholder must have an existing account in the fund to which the exchange is to be made. Otherwise, the investors must obtain a prospectus of that fund before the exchange request may be submitted. If all telephone lines are busy (which might occur, for example, during periods of substantial market fluctuations), shareholders might not be able to request exchanges by telephone and would have to submit written exchange requests.

Automatic Exchange Plans. Under an Automatic Exchange Plan, shareholders can authorize the Transfer Agent to exchange shares of the Fund for shares of other Oppenheimer funds automatically on a monthly, quarterly, semi-annual or annual basis. The minimum amount that may be exchanged to each other fund account is $50. Instructions regarding the exchange amount, the selected fund(s) and the exchange interval should be provided on the OppenheimerFunds account application or by signature-guaranteed instructions. Any requested changes will usually be put into effect approximately two weeks after notification of a change is received. Exchanges made under these plans are subject to the restrictions that apply to exchanges as set forth in this SAI and in "The OppenheimerFunds Exchange Privilege" section in the Prospectus.

The Transfer Agent will administer the Automatic Exchange Plan as agent for the shareholder(s). Neither the Fund nor the Transfer Agent shall incur any liability for any action taken or not taken by the Transfer Agent in good faith to administer the plan. Any share certificates must be surrendered unendorsed to the Transfer Agent with the plan application to be eligible for automatic exchanges. If the Transfer Agent ceases to act as transfer agent for the Fund, the shareholder will be deemed to have appointed any successor transfer agent to act as agent in administering the plan.

The Fund reserves the right to amend, suspend or discontinue offering automatic exchanges at any time without prior notice. By requesting an Automatic Exchange Plan, the shareholder agrees to the terms and conditions that apply to such plans. These provisions may be amended from time to time and any amendments will automatically apply to existing Plans.

Processing Exchange Requests. Shares to be exchanged are redeemed at the net asset value calculated on the regular business day the Transfer Agent receives an exchange request in proper form before the close of the NYSE (the "Redemption Date"). Normally, shares of the fund to be acquired are purchased on the Redemption Date, but such purchases may be delayed by up to five business days if it is determined that either fund would be disadvantaged by an immediate transfer of the redemption proceeds. The Fund reserves the right, in its discretion, to refuse any exchange request that may disadvantage it. For example, if the receipt of multiple exchange requests from a dealer might require the disposition of portfolio securities at a time or at a price that might be disadvantageous to the Fund, the Fund may refuse the request.

When you exchange some or all of your shares, any special features of your account that are available in the new fund (such as an Asset Builder Plan or Automatic Withdrawal Plan) will be applied to the new fund account unless you tell the Transfer Agent not to do so.

Shares that are subject to a restriction cited in the Prospectus or this SAI and shares covered by a share certificate that is not tendered will not be exchanged. If an exchange request includes such shares, only the shares available without restrictions will be exchanged.

Dividends and Other Distributions. Dividends will be payable on shares held of record at the time of the previous determination of net asset value, or as otherwise described in "How to Buy Shares." Daily dividends will not be declared or paid on newly purchased shares until such time as Federal Funds (funds credited to a member bank's account at the Federal Reserve Bank) are available from the purchase payment for such shares. Normally, purchase checks received from investors are converted to Federal Funds on the next business day. Shares purchased through dealers or brokers normally are paid for by the third business day following the placement of the purchase order.

Shares redeemed through the regular redemption procedure will be paid dividends through and including the day on which the redemption request is received by the Transfer Agent in proper form. Dividends will be declared on shares repurchased by a dealer or broker for three business days following the trade date (that is, up to and including the day prior to settlement of the repurchase). If all shares in an account are redeemed, all dividends accrued on shares of the same class in the account will be paid together with the redemption proceeds.

The Fund's practice of attempting to pay dividends on Class A shares at a constant level requires the Manager to monitor the Fund's portfolio and, if necessary, to select higher-yielding securities when it is deemed appropriate to seek income at the level needed to meet the target. Those securities must be within the Fund's investment parameters, however. The Fund expects to pay dividends at a targeted level from its net investment income and other distributable income without any impact on the net asset values per share.

Distributions are calculated in the same manner, at the same time, and on the same day for each class of shares but will normally differ in amount. Distributions on Class B and Class C shares are expected to be lower than distributions on Class A and Class Y shares because of the effect of the asset-based sales charge on Class B and Class C shares. Distributions are taxable to shareholders, as discussed below, regardless of whether the distributions are paid in cash or reinvested in additional shares of the Fund (or of another fund). Shareholders receiving a distribution in the form of additional shares will be treated as receiving a distribution in an amount equal to the fair market value of the shares received, determined as of the reinvestment date.

Returned checks for the proceeds of redemptions are invested in shares of Oppenheimer Money Market Fund, Inc. If a dividend check or a check representing an automatic withdrawal payment is returned to the Transfer Agent by the Postal Service as undeliverable, it will be reinvested in shares of the Fund. Reinvestments will be made as promptly as possible after the return of such checks to the Transfer Agent. Unclaimed accounts may be subject to state escheatment laws, and the Fund and the Transfer Agent will not be liable to shareholders or their representatives for compliance with those laws in good faith.

Taxes. The federal tax treatment of the Fund and distributions to shareholders is briefly highlighted in the Prospectus. The following is only a summary of certain additional tax considerations generally affecting the Fund and its shareholders. The tax discussion in the Prospectus and this SAI is based on tax laws in effect on the date of the Prospectus and SAI. Those laws and regulations may be changed by legislative, judicial, or administrative action, sometimes with retroactive effect. State and local tax treatment may differ from the treatment under the Internal Revenue Code as described below.

Before purchasing Fund shares, investors are urged to consult their tax advisers with reference to their own particular tax circumstances as well as the consequences of federal, state, local and any other jurisdiction's tax rules affecting an investment in the Fund.

Qualification and Taxation as a Regulated Investment Company. The Fund has elected to be taxed as a regulated investment company ("RIC") under Subchapter M of the Internal Revenue Code. As long as the Fund qualifies as a RIC, the Fund is not subject to federal income tax on the portion of its net investment income (that is, taxable interest, dividends, and other taxable ordinary income, net of expenses) and capital gain net income (that is, the excess of capital gains over capital losses) that it distributed to shareholders.

If the Fund qualifies as a "regulated investment company" under the Internal Revenue Code, it will not be liable for federal income tax on amounts it pays as dividends and other distributions. That qualification enables the Fund to "pass through" its income and realized capital gains to shareholders without having to pay tax on them. The Fund qualified as a regulated investment company in its last fiscal year and intends to qualify in future years, but reserves the right not to qualify. The Internal Revenue Code contains a number of complex tests to determine whether the Fund qualifies. One or more Funds might not meet those tests in a particular year. If the Fund does not qualify, the Fund would (unless certain cure provisions apply) be treated for tax purposes as an ordinary corporation and would receive no tax deduction for payments of dividends and other distributions made to shareholders. In such an instance, all of the Fund's dividends would be taxable to shareholders.

Qualifying as a RIC . To qualify as a RIC, the Fund must be a domestic corporation that is either registered under the Investment Company Act as a management company or unit investment trust or is otherwise described in the Internal Revenue Code as having a specific status under the Investment Company Act. The Fund must also satisfy certain tests with respect to (i) the composition of its gross income, (ii) the composition of its assets and (iii) the amount of its dividend distributions.

Gross Income Test. To qualify as a RIC, the Fund must derive at least 90% of its gross income from dividends, interest, certain payments with respect to loans of securities, gains from the sale or other disposition of securities or foreign currencies, and certain other income derived with respect to its business of investing in such securities or currencies (including, but not limited to, gains from options, futures or forward contracts), and net income derived from interests in certain "qualified publicly traded partnerships."

Asset Test. In addition, at the close of each quarter of its taxable year, the Fund must satisfy two asset tests. First, at least 50% of the value of the Fund's assets must consist of U.S. Government securities, securities of other RIC's, securities of other issuers ("Other Issuers") and cash or cash items (including receivables). The securities of an Other Issuer are not counted towards satisfying the 50% test if the Fund either invests more than 5% of the value of the Fund's assets in the securities of that Other Issuer or holds more than 10% of the outstanding voting securities of that Other Issuer. Second, no more than 25% of the value of the Fund's total assets may be invested in (1) the securities of any one issuer (other than U.S. Government securities and the securities of other RIC's), (2) the securities of two or more issuers (other than the securities of other RIC's) that the Fund controls and that are engaged in the same or similar trades or businesses, or (3) the securities of one or more qualified publicly traded partnerships. For purposes of these tests, obligations issued or guaranteed by certain agencies or instrumentalities of the U.S. Government are treated as U.S. Government securities.

Dividend Distributions Test. During the taxable year or, under specified circumstances, within 12 months after the close of the taxable year, the Fund must distribute at least 90% of its investment company taxable income and at least 90% of its net tax-exempt income for the taxable year, which is generally its net investment income and the excess of its net short-term capital gain minus its net long-term capital loss.

Failure to Qualify. If the Fund failed to qualify as a RIC, it would (unless certain cure provisions apply) then be unable to deduct from its taxable income the dividend distributions made to its shareholders and therefore those amounts would be subject to a Fund-level corporate income tax. In addition, the Fund would not be able to characterize the distributions made to its shareholders as anything other than ordinary corporate distributions. To the extent the Fund had "earnings and profits" (as determined for tax purposes), distributions to its shareholders would be taxable as ordinary dividend income. In the case of individuals, those distributions may qualify for the maximum 15% tax rate on dividend income (for taxable years beginning before 2013) and, in the case of corporations, they may qualify for the dividends-received deduction.

Portfolio Investments Subject to Special Tax Rules. The Fund may engage in transactions and investments that are subject to special tax rules under the Internal Revenue Code. These special tax rules may, among other things, affect the Fund's holding period in its investments, change the character of, or accelerate, the Fund's income, defer or disallow the Fund's deductions and losses, and compel the Fund to report as taxable income mere increases in the value of its assets. For example, the Fund may invest in foreign currencies or securities denominated in foreign currencies. Under certain circumstances losses from foreign securities could be capital losses but gains from foreign currencies are ordinary income. Because capital losses cannot be deducted against ordinary income, this mismatch in character may negatively affect the character and amount of the Fund's distributions. Or part of an "interest" payment from a high yield debt obligation may be characterized for tax purposes as a dividend and, therefore, eligible for the dividends-received deduction available to corporations.

Certain positions in the Fund's portfolio may have to be "marked-to-market," (that is, treated as if they were sold and repurchased on the last day of the Fund's taxable year). Such "deemed sales" under the mark-to-market rules may alter the character, amount and timing of distributions to shareholders by requiring the Fund to make distributions in order to satisfy the RIC dividend distributions test even though the deemed sales generate no cash. The Fund will monitor its transactions, and seek to make appropriate tax elections and appropriate entries in its books and records in order to reduce the effect of the mark-to-market rules while remaining qualified for treatment as a RIC.

Passive Foreign Investment Companies. If the Fund invests in a "passive foreign investment company" ("PFIC"), then the Fund may be subject to special rules meant to discourage U.S. taxpayers from investing in foreign companies as a way of deferring taxable income. Under those rules, any income from certain PFIC distributions or the sale of PFIC shares is allocated to the current taxable year and to prior taxable years. Income allocated to the current year is treated as part of the year's ordinary income. Income allocated to a prior taxable year is taxed at the highest corporate rate for that year (regardless of the Fund's actual income or tax rate for that prior year). For each prior taxable year, the Fund must pay both the amount of tax so computed and a penalty that is calculated as if the amount of tax was due but unpaid for the prior taxable year. Liability for such taxes and penalties would reduce the investment return of the Fund.

If a PFIC is willing to provide the Fund with certain necessary reporting information annually (which PFICs frequently do not provide), the Fund may elect to treat a PFIC as a "qualified electing fund" ("QEF") and, in lieu of the tax consequences described above, the Fund would be required to include in each year's income its share of the ordinary earnings and net capital gains of the PFIC, even if they are not distributed to the Fund. Those amounts would be treated as taxable income for purposes of the 90% dividends distributions test mentioned above and the excise tax discussed below.

Alternatively, if the Fund invests in a PFIC, it may make a mark-to-market election that will result in the Fund being treated as if it had sold and repurchased its PFIC stock at the end of each year. In that case, the Fund would report any gains as ordinary income and would deduct any losses as ordinary losses to the extent of previously recognized gains. The election must be made separately for each PFIC owned by the Fund and, once made, would be effective for all subsequent taxable years, unless revoked with the consent of the U.S. Internal Revenue Service (the "IRS"). By making the election, the Fund might be able to mitigate the adverse tax consequences with respect to its ownership of shares in a PFIC, but in any particular year it could be required to recognize income in excess of the distributions it received from the PFIC and the proceeds from dispositions of the PFIC's stock. The amounts so included would be treated as taxable income for purposes of the 90% dividends distributions test and for excise tax purposes (discussed below).

Excise Tax on Regulated Investment Companies. Under the Internal Revenue Code, the Fund must pay an annual, non-deductible excise tax unless, by December 31st each year, it distributes (1) 98% of its taxable investment income earned from January 1 through December 31, (2) 98.2% of its capital gain net income realized in the period from November 1 of the prior year through October 31 of the current year and (3) undistributed amounts from prior years. It is presently anticipated that the Fund will meet these distribution requirements, although to do so the Fund might be required to liquidate portfolio investments in certain circumstances. In some years, the Board and the Manager may determine that it would be in the shareholders' best interests for the Fund to pay the excise tax on undistributed amounts rather than making the required level of distributions. In that event, the tax may reduce shareholder total returns from the Fund.

Taxation of Fund Distributions. Distributions by the Fund will be treated in the manner described below regardless of whether the distributions are paid in cash or reinvested in additional shares of the Fund (or of another fund). The Fund's distributions will be treated as dividends to the extent paid from the Fund's earnings and profits (as determined under the Internal Revenue Code). Distributions in excess of the Fund's earnings and profits will first reduce the adjusted tax basis of a shareholder's shares and, after such tax basis is reduced to zero, will constitute capital gain to the shareholder (assuming the shares are held as a capital asset). The Fund's dividends will not be eligible for the dividends-received deduction for corporations. Shareholders reinvesting a distribution in shares of the distributing Fund, or one of the other Oppenheimer funds, will be treated as receiving a distribution in an amount equal to the fair market value of the shares received, determined as of the reinvestment date.

Special Characteristics of Certain Distributions. Different types of Fund earnings may have different federal income tax characteristics, including different types of capital gains and different types of ordinary income. For example, if the Fund invests in stock, a portion of the Fund's ordinary income may be composed of dividends eligible for the dividends-received deduction or that qualify for the special maximum tax rate on "qualified dividend income" as described below. The Fund may also generate foreign tax credits. The Fund will allocate the tax characteristics of its earnings among its distributions as prescribed by the IRS. The percentage of each distribution that corresponds to a particular type of income will generally be based on how much of that income the Fund earns for the taxable year in accordance with the IRS rules, rather than how much of that income the Fund has earned at time of the distribution. Those percentages normally will be determined after the close of the Fund's taxable year. The Fund will provide a statement to shareholders shortly after the end of each year indicating the amount and character of distributions made during the preceding calendar year.

Distributions Derived from Dividends. If the Fund earns dividend income from U.S. corporations, for the Fund's corporate shareholders to claim the dividends-received deduction against the Fund's distributions, both the Fund and its corporate shareholders must satisfy special provisions of the Internal Revenue Code. If a dividend the Fund receives on a stock held in its portfolio otherwise qualifies for the dividends-received deduction, the Fund still (1) must hold the stock for a minimum number of days during a specified period that includes the stock's ex-dividend date, (2) cannot enter into certain positions that reduce the risk of holding the stock and (3) cannot debt finance the stock. Similarly, distributions of otherwise qualifying dividends will not be eligible for the dividends-received deduction in the hands of a corporate shareholder of the Fund unless the corporate shareholder (1) holds the Fund's shares for at least 46 days during a specified period that includes the portfolio stock's ex-dividend date and (2) does not debt finance its investment in the Fund's shares. To the extent the Fund's distributions are derived from items such as option premiums, interest income, gains from the sale of securities, or dividends from foreign corporations, those distributions will not qualify for the dividends-received deduction.

If the Fund earns qualified dividend income, as discussed below, special rules may also apply to regular dividends paid to a non-corporate shareholder of the Fund during the shareholder's taxable years beginning before 2013. Provided that the shareholder receiving the dividend satisfies certain holding period and other requirements, those dividends may be subject to tax at the reduced rates generally applicable to long-term capital gains for individuals. Dividends subject to these special rules are not actually treated as capital gains, however. They are not included in the computation of the shareholder's net capital gain and generally cannot be offset by capital losses. For a taxable year of the Fund, (i) if 95% or more of the Fund's gross income is attributable to qualified dividend income (defined below), then the special maximum rate will apply to 100% of the regular dividends paid to the shareholder during such year and (ii) if less than 95% of the Fund's gross income is attributable to qualified dividend income, then the special maximum rate will only apply to the portion of the regular dividends reported by the Fund as qualified dividend income, which generally cannot exceed the ratio that the Fund's qualified dividend income bears to its gross income. Gross income, for these purposes, does not include gains attributable to the sale or other disposition of stocks and securities, except to the extent the net short-term capital gain from such sales and dispositions exceeds the net long-term capital loss from such sales and dispositions.

"Qualified dividend income" generally means dividends received by the Fund with respect to the stock of a U.S. corporation or qualified foreign corporation. It also includes dividends received with respect to the stock of a foreign corporation provided the stock is readily tradable on an established U.S. securities market. In each case, however, the Fund must hold the stock for a minimum number of days during a specified period that includes the stock's ex-dividend date and cannot enter into certain positions that reduce the risk of holding the stock. Qualified dividend income does not include "payments in lieu of dividends" received in securities lending transactions or dividends received from a real estate investment trust ("REIT") or another RIC, except to the extent such dividends were paid from qualified dividend income received and reported by such REIT or RIC. If a shareholder elects to treat Fund dividends as investment income for purposes of the limitation on the deductibility of investment interest, such dividends will not be treated as qualified dividend income.

Exempt-Interest Dividends. The Fund intends to satisfy the requirements under the Internal Revenue Code during each fiscal year to pay "exempt-interest dividends" to its shareholders. To qualify, at the end of each quarter of its taxable year, at least 50% of the value of the Fund's total assets must consist of obligations described in Section 103(a) of the Internal Revenue Code, as amended. Dividends that are derived from net interest income earned by the Fund on tax-exempt municipal securities and reported as "exempt-interest dividends" in a written notice sent by the Fund to its shareholders after the close of the Fund's taxable year will be excludable from gross income of shareholders for federal income tax purposes. To the extent any Fund fails to qualify to pay exempt-interest dividends in any given taxable year, such dividends would be included in the gross income of shareholders for federal income tax purposes.

The Fund will allocate interest from tax-exempt municipal securities (as well as ordinary income, capital gains, and tax preference items discussed below) among its shares according to a method that is based on the gross income allocable to each class of shareholders during the taxable year (or under another method, if prescribed by the IRS and SEC). The percentage of each distribution with respect to a taxable year of the Fund that is an exempt-interest dividend will be the same, even though that percentage may differ substantially from the percentage of the Fund's income that was tax-exempt during a particular portion of the year. This percentage normally will be determined after the close of the taxable year.

Exempt-interest dividends are excludable from a shareholder's gross income for federal income tax purposes. Interest on indebtedness incurred or continued to purchase or carry shares of a regulated investment company paying exempt-interest dividends, such as the Fund, will not be deductible by the investor for federal income tax purposes to the extent attributable to exempt-interest dividends. Shareholders receiving Social Security or railroad retirement benefits should be aware that exempt-interest dividends are a factor in determining whether, and to what extent, such benefits are subject to federal income tax.

A portion of the exempt-interest dividends paid by the Fund may give rise to liability under the federal alternative minimum tax for individual or corporate shareholders. Income on certain private activity bonds issued after August 7, 1986, while excludable from gross income for purposes of the federal income tax, is an item of "tax preference" that must be included in income for purposes of the federal alternative minimum tax for individuals and corporations. "Private activity bonds" are bonds that are used for purposes not generally performed by governmental entities and that benefit non-governmental entities. The amount of any exempt-interest dividends that is attributable to tax preference items for purposes of the alternative minimum tax will be identified when tax information is distributed by the Fund.

In addition, corporate taxpayers are subject to the federal alternative minimum tax based in part on certain differences between taxable income as adjusted for other tax preferences and the corporation's "adjusted current earnings," which more closely reflect a corporation's economic income. Because an exempt-interest dividend paid by the Fund will be included in adjusted current earnings, a corporate shareholder may be required to pay alternative minimum tax on exempt-interest dividends paid by the Fund.

Shareholders are advised to consult their tax advisers with respect to their liability for federal alternative minimum tax, and for advice concerning the loss of exclusion from gross income for exempt-interest dividends paid to a shareholder who would be treated as a "substantial user" or "related person" under Section 147(a) of the Internal Revenue Code with respect to property financed with the proceeds of an issue of private activity bonds held by the Fund.

Ordinary Income Dividends. Distributions from income earned by the Fund from one or more of the following sources will be treated as ordinary income to the shareholder:

Capital Gain Distributions. The Fund may either retain or distribute to shareholders its net capital gain (the excess of net long-term capital gain over net short-term capital loss). Currently, the Fund intends to distribute these gains. Distributed net capital gain that is properly reported will be taxable to the Fund's shareholders as long-term capital gain. The amount of distributions reported as net capital gain will be reported to shareholders shortly after the end of each year. Such treatment will apply no matter how long the shareholder has held Fund shares and even if the gain was recognized by the Fund before the shareholder acquired Fund shares.

If the Fund elects to retain all or a portion of its net capital gain for a taxable year, the Fund will be subject to tax on such gain at the highest corporate tax rate. If the Fund so elects, each shareholder of record on the last day of such taxable year will be informed of his or her portion of both the gain and the tax paid, will be required to report the gain as long-term capital gain, will be able to claim the tax paid as a refundable credit, and will increase the basis of his or her shares by the amount of the capital gain reported minus the tax credit.

For taxable years beginning after December 31, 2012, an additional 3.8% Medicare tax will be imposed on certain net investment income (including ordinary dividends and capital gain distributions received from the Fund and net gains from redemptions or other taxable dispositions of Fund shares) of U.S. individuals, estates and trusts to the extent that such person's "modified adjusted gross income" (in the case of an individual) or "adjusted gross income" (in the case of an estate or trust) exceeds a threshold amount.

Backup Withholding. The Fund will be required in certain cases to withhold 28% (currently scheduled to increase to 31% after 2012) of ordinary income dividends, capital gain distributions and the proceeds of the redemption of shares, paid to any shareholder (1) who has failed to provide a correct taxpayer identification number or to properly certify that number when required, (2) who is subject to backup withholding for failure to report properly the receipt of interest or dividend income, or (3) who has failed to certify to the Fund that the shareholder is not subject to backup withholding or is an "exempt recipient" (such as a corporation). Any tax withheld by the Fund is remitted by the Fund to the U.S. Treasury and is identified in reports mailed to shareholders in January of each year with a copy sent to the IRS. Backup withholding is not an additional tax. Any amount withheld generally may be allowed as a refund or a credit against a shareholder's federal income tax liability, provided the required information is timely provided to the IRS.

Tax Consequences of Share Redemptions. If all or a portion of a shareholder's investment in the Fund is redeemed, the shareholder will generally recognize a gain or loss on the redeemed shares equal to the difference between the proceeds of the redeemed shares and the shareholder's adjusted tax basis in the shares. In general, any gain or loss from the redemption of shares of the Fund will be considered capital gain or loss if the shares were held as a capital asset and will be long-term capital gain or loss if the shares were held for more than one year. Any capital loss arising from the redemption of shares held for six months or less, however, will be treated as a long-term capital loss to the extent of the amount of capital gain dividends received on those shares. Special holding period rules under the Internal Revenue Code apply in this case to determine the holding period of shares. There are limits on the deductibility of capital losses in any year.

All or a portion of any loss on redeemed shares may be disallowed if the shareholder purchases other shares of the Fund within 30 days before or after the redemption (including purchases through the reinvestment of dividends). In that case, the basis of the acquired shares will be adjusted to reflect the disallowed loss. For shares acquired on or before December 22, 2010, losses realized by a shareholder on the redemption of Fund shares within six months of purchase will be disallowed for federal income tax purposes to the extent of exempt-interest dividends received on such shares. For shares acquired after December 22, 2010, this disallowance rule will not apply to any exempt-interest regular dividend paid by the Fund, provided that the Fund declares exempt-interest dividends daily in an amount equal to at least 90% of its net tax-exempt interest and pays such dividends at least monthly. If a shareholder exercises the exchange privilege within 90 days after acquiring Fund shares, and no later than January 31 of the following calendar year, in certain circumstances, any loss that the shareholder recognizes on the exchange will be reduced, or any gain will be increased, to the extent that any sales charge paid on the exchanged shares reduces any charges the shareholder would have incurred on the purchase of the new shares in the absence of the exchange privilege. Such sales charge will be treated as an amount paid for the new shares.

Taxation of Foreign Shareholders. Under the Internal Revenue Code, taxation of a foreign shareholder depends primarily on whether the foreign shareholder's income from the Fund is effectively connected with the conduct of a U.S. trade or business. "Foreign shareholders" include, but are not limited to, a nonresident alien individual, a foreign trust, a foreign estate, a foreign corporation, or a foreign partnership.

If a foreign shareholder fails to provide a properly completed and signed Certificate of Foreign Status, the Fund will be required to withhold U.S. tax on ordinary income dividends, capital gains distributions and the proceeds of the redemption of shares. Provided the Fund obtains a proper certification of foreign status, ordinary income dividends that are paid by the Fund to foreign shareholders and that are not "effectively connected income," will be subject to a U.S. withholding tax. The tax rate may be reduced if the foreign person's country of residence has an income tax treaty with the United States allowing for a reduced tax rate on ordinary income dividends paid by the Fund. If the ordinary income dividends from the Fund are effectively connected with the conduct of a U.S. trade or business, then the foreign shareholder may claim an exemption from the U.S. withholding tax described above provided the Fund obtains a properly completed and signed Certificate of Foreign Status. Any tax withheld by the Fund is remitted to the U.S. Treasury and all income and any tax withheld is identified in reports mailed to shareholders in the early part of each year with a copy sent to the IRS. Capital gain dividends are not subject to U.S. withholding tax unless the recipient is a nonresident alien who is present in the United States for 183 days or more during the taxable year in which the dividends are received. A foreign individual who is present in the United States for 183 days or more generally loses his or her status as a nonresident alien.

For taxable years of the Fund beginning before January 1, 2012, properly reported dividends are generally exempt from U.S. federal withholding tax on foreign persons provided such dividends (i) are derived from the Fund's "qualified net interest income" (generally, the Fund's U.S. source interest income, other than certain contingent interest and interest from obligations of a corporation or partnership in which the Fund is a 10% or greater shareholder, reduced by expenses that are allocable to such income) or (ii) are derived from the Fund's "qualified short-term capital gains" (generally, the excess of the Fund's net short-term capital gain over the Fund's net long-term capital loss for such taxable year). In order to qualify for this exemption from withholding, a shareholder that is a foreign person must comply with applicable certification requirements relating to its non-U.S. status. However, depending on its circumstances, the Fund may report some, all, or none of its potentially eligible dividends as interest-related dividends or as short-term capital gain dividends, and/or treat such dividends, in whole or in part, as ineligible for this exemption from withholding on foreign persons. In the case of shares held through an intermediary, the intermediary may withhold even if the Fund reports the payment as qualified net interest income or qualified short-term capital gain. Shareholders that are foreign persons should contact their intermediaries with respect to the application of these rules to their accounts.

The tax consequences to foreign persons entitled to claim the benefits of an applicable income tax treaty may be different from those described in this SAI. Foreign shareholders are urged to consult their tax advisers with respect to the particular tax consequences of an investment in the Fund, including the applicability of the U.S. withholding taxes described above and the possible applicability of U.S. estate tax.

Under recently-enacted legislation, payments after 2012 of dividends on, and gross proceeds from the redemption of, shares of the Fund made to "foreign financial institutions" and certain other foreign entities will be subject to U.S. withholding tax at a rate of 30% unless various certification, information reporting, due diligence and other applicable requirements (different from, and in addition to, those described above) are satisfied. Payments that are taken into account as effectively connected income are not subject to these withholding rules. Foreign shareholders should consult their own tax advisors as to the applicability and consequences of this new legislation to them.

Recently-enacted legislation imposes information reporting requirements on individuals that hold any interest in a "specified foreign financial asset" if the aggregate value of all such assets held by such individual exceeds $50,000. Significant penalties can apply upon a failure to make the required disclosure and in respect to understatements of tax attributable to undisclosed foreign financial assets. This information reporting requirement is generally applicable for taxable years beginning after March 18, 2010. The scope of this reporting requirement is not entirely clear and all shareholders should consult their own tax advisors as to whether reporting may be required in respect of their indirect interests in the Fund's investments.

Tax Shelter and Other Reporting Requirements. If a shareholder realizes a loss on the disposition of Fund shares of at least $2 million in any single taxable year or $4 million in any combination of taxable years (for an individual shareholder); or at least $10 million in any single taxable year or $20 million in any combination of taxable years (for a corporate shareholder), the shareholder must file with the Internal Revenue Service a disclosure statement on Form 8886. Shareholders should consult their tax advisers to determine the applicability of this requirement in light of their individual circumstances.

California Tax Considerations. To the extent that dividends are derived from interest on California tax-exempt securities and on certain U.S. government securities, such dividends will also be exempt from California personal income taxes. Under California law, a fund which qualifies as a regulated investment company must have at least 50% of its total assets invested in California state and local government obligations or in U.S. government obligations which pay interest excludable from income or in a combination of such obligations at the end of each quarter of its taxable year in order to be eligible to pay dividends which will be exempt from California personal income taxes.

The portion of dividends constituting exempt-interest dividends is that portion (i) derived from interest on obligations that would be exempt from California tax if held by an individual and (ii) reported by the Fund as exempt-interest dividends in written statements furnished to shareholders. However, the total amount of dividends paid by the Fund to all of its shareholders with respect to any taxable year that can be treated as exempt-interest dividends for California tax purposes cannot exceed the difference between (i) the amount of interest received by the Fund during such year on obligations which pay interest excludable from California personal income under California law and (ii) the expenses of the Fund that would be disallowed under California personal income tax law as allocable to tax exempt interest if the Fund were an individual. If the aggregate dividends designated by the Fund as exempt-interest dividends for a taxable year exceed the amount that may be treated as exempt-interest dividends for California tax purposes, only that percentage of each dividend distribution equal to the ratio of aggregate exempt-interest dividends to aggregate dividends so designated will be treated as an exempt-interest dividend for California tax purposes.

Unlike federal law, California law provides that no portion of the exempt-interest dividends will constitute an item of tax preference for California personal alternative minimum tax purposes. Because, unlike federal law, California law does not impose personal income tax on an individual's Social Security benefits, the receipt of California exempt-interest dividends will have no effect on an individual's California personal income tax.

Individual shareholders will normally be subject to federal and California personal income tax on dividends paid from interest income derived from taxable securities and distributions of net capital gains. In addition, distributions other than exempt-interest dividends to such shareholders are includable in income subject to the California alternative minimum tax. For federal income tax and California personal income tax purposes, distributions of long-term capital gains, if any, are taxable to shareholders as long-term capital gains, regardless of how long a shareholder has held shares of the fund and regardless of whether the distribution is received in additional shares or in cash. In addition, unlike under federal law, the shareholders of the Fund will not be subject to California personal income tax, or receive a credit for tax paid by the Fund, on undistributed capital gains, if any.

Interest on indebtedness incurred by shareholders or related parties to purchase or carry shares of an investment company paying exempt-interest dividends, such as the Fund, generally will not be deductible by the investor for federal or state personal income tax purposes. In addition, as a result of California's incorporation of certain provisions of the Code, a loss realized by a shareholder upon the sale of shares held for six months or less may, depending on the frequency of a Fund's distributions, be disallowed to the extent of any exempt-interest dividends received with respect to such shares. Moreover, any loss realized upon the redemption of shares within six months from the date of purchase of such shares and following receipt of a long-term capital gains distribution will be treated as long-term capital loss to the extent of such long-term capital gains distribution. Finally, any loss realized upon the redemption of shares within 30 days before or after the acquisition of other shares of the Fund may be disallowed under the "wash sale" rules.

The foregoing relates to federal income taxation and to California personal income taxation as in effect as of the date of the Prospectus. Distributions from investment income and capital gains, including exempt-interest dividends, may be subject to California franchise tax for corporate shareholders. In addition, distributions from investment income and capital gains may be subject to state taxes in states other than California, and to local taxes.

The Distributor. The Fund's shares are sold through dealers, brokers and other financial institutions that have a sales agreement with OppenheimerFunds Distributor, Inc., a subsidiary of the Manager that acts as the Fund's Distributor. The Distributor also distributes shares of the other Oppenheimer funds.

The Transfer Agent. OppenheimerFunds Services, the Fund's Transfer Agent, is a division of the Manager. It is responsible for maintaining the Fund's shareholder registry and shareholder accounting records, and for paying dividends and distributions to shareholders. It also handles shareholder servicing and administrative functions. It serves as the Transfer Agent for an annual per account fee. It also acts as shareholder servicing agent for the other Oppenheimer funds. Shareholders should direct inquiries about their accounts to the Transfer Agent at the address and toll-free numbers shown on the back cover.

The Custodian. Citibank, N.A. is the custodian of the Fund's assets. The custodian's responsibilities include safeguarding and controlling the Fund's portfolio securities and handling the delivery of such securities to and from the Fund. It is the practice of the Fund to deal with the custodian in a manner uninfluenced by any banking relationship the custodian may have with the Manager and its affiliates. The Fund's cash balances with the custodian in excess of $250,000 are not protected by the federal deposit insurance corporation ("FDIC").

Independent Registered Public Accounting Firm. KPMG LLP serves as the independent registered public accounting firm for the Fund. KPMG LLP audits the Fund's financial statements and performs other related audit and tax services. KPMG LLP also acts as the independent registered public accounting firm for the Manager and certain other funds advised by the Manager and its affiliates. Audit and non-audit services provided by KPMG LLP to the Fund must be pre-approved by the Audit Committee.

In certain cases, the initial sales charge that applies to purchases of Class A shares of the Oppenheimer funds or the contingent deferred sales charge ("CDSC") that may apply to Class A, Class B, Class C or Class N shares may be waived. That is because of the economies of sales efforts realized by OppenheimerFunds Distributor, Inc., (referred to in this document as the "Distributor"), or by dealers or other financial institutions that offer those shares to certain classes of investors. Not all waivers apply to all funds.

For the purposes of some of the waivers described below and in the Prospectus and Statement of Additional Information of the applicable Oppenheimer funds, the term "Retirement Plan" refers to the following types of plans:

The interpretation of these provisions as to the applicability of a special arrangement or waiver in a particular case is in the sole discretion of the Distributor or the transfer agent (referred to in this document as the "Transfer Agent") of the particular Oppenheimer fund. These waivers and special arrangements may be amended or terminated at any time by a particular fund, the Distributor, and/or OppenheimerFunds, Inc. (referred to in this document as the "Manager").

Waivers that apply at the time shares are redeemed must be requested by the shareholder and/or dealer in the redemption request.

I. Applicability of Class A Contingent Deferred Sales Charges in Certain Cases

Purchases of Class A Shares of Oppenheimer Funds That Are Not Subject to Initial Sales Charge but May Be Subject to the Class A Contingent Deferred Sales Charge (unless a waiver applies).

There is no initial sales charge on purchases of Class A shares of any of the Oppenheimer funds in the cases listed below. However, these purchases may be subject to the Class A CDSC if redeemed within 18 months (24 months in the case of shares of Oppenheimer Rochester National Municipals and Rochester Fund Municipals shares purchased prior to 10/22/07) of the beginning of the calendar month of their purchase, as described in the Prospectus (unless a waiver described elsewhere in this Appendix applies to the redemption). Additionally, on shares purchased under these waivers that are subject to the Class A CDSC, the Distributor will pay the applicable concession described in the Prospectus under "Class A Contingent Deferred Sales Charge."² This waiver provision applies to:

A. Waivers of Initial and Contingent Deferred Sales Charges for Certain Purchasers.

Class A shares purchased by the following investors are not subject to any Class A sales charges (and no concessions are paid by the Distributor on such purchases):

B. Waivers of the Class A Initial and Contingent Deferred Sales Charges in Certain Transactions.

1. Class A shares issued or purchased in the following transactions are not subject to sales charges (and no concessions are paid by the Distributor on such purchases):

2. Class A shares issued and purchased in the following transactions are not subject to sales charges (a dealer concession at the annual rate of 0.25% is paid by the Distributor on purchases made within the first 6 months of plan establishment):

C. Waivers of the Class A Contingent Deferred Sales Charge for Certain Redemptions.

The Class A CDSC is also waived if shares that would otherwise be subject to the CDSC are redeemed in the following cases:

III. Waivers of Class B, Class C and Class N Sales Charges of Oppenheimer Funds

The Class B, Class C and Class N CDSCs will not be applied to shares purchased in certain types of transactions or redeemed in certain circumstances described below. Class C or Class N shares acquired by conversion from another share class are not considered a "purchase" for any purpose.

The Class B, Class C and Class N CDSCs will be waived for redemptions of shares in the following cases:

The CDSC is also waived on Class B, Class C and Class N shares sold or issued in the following cases:

IV. Special Sales Charge Arrangements for Former Shareholders of Quest for Value Funds

For shareholders of the Quest for Value Funds who acquired shares prior to November 24, 1995 and still hold those shares (or shares of an Oppenheimer fund into which any Quest for Value Fund was reorganized), any initial and contingent deferred sales charges will be waived if requested by the shareholder.

V. Special Sales Charge Arrangements for Former Shareholders of Connecticut Mutual Investment Accounts, Inc.

For shareholders of the Connecticut Mutual Investment Accounts who acquired shares prior to March 1, 1996 and still hold those shares (or shares of an Oppenheimer fund into which any Connecticut Mutual Investment Account was reorganized), any initial and contingent deferred sales charges will be waived if requested by the shareholder.

VI. Special Sales Charge Arrangements for Former Shareholders of Advance America Funds, Inc.

For shareholders of the Advanced America Funds who acquired shares prior to October 18, 1991 and still hold those shares (or shares of an Oppenheimer fund into which any Advanced American Fund was reorganized), any initial and contingent deferred sales charges will be waived if requested by the shareholder.

1. The term "Group Retirement Plan" means any qualified or non-qualified retirement plan for employees of a corporation or sole proprietorship, members and employees of a partnership or association or other organized group of persons (the members of which may include other groups), if the group has made special arrangements with the Distributor and all members of the group participating in (or who are eligible to participate in) the plan purchase shares of an Oppenheimer fund or funds through a single investment dealer, broker or other financial institution designated by the group. Such plans include 457 plans, SEP-IRAs, SARSEPs, SIMPLE plans and 403(b) plans other than plans for public school employees. The term "Group Retirement Plan" also includes qualified retirement plans and non-qualified deferred compensation plans and IRAs that purchase shares of an Oppenheimer fund or funds through a single investment dealer, broker or other financial institution that has made special arrangements with the Distributor.

2. However, that concession will not be paid on purchases of shares in amounts of $1 million or more (including any right of accumulation) by a Retirement Plan that pays for the purchase with the redemption proceeds of Class C shares of one or more Oppenheimer funds held by the Plan for more than one year.

4. This provision only applies to qualified retirement plans and 403(b)(7) custodial plans after your separation from service in or after the year you reached age 55.

5. The distribution must be requested prior to Plan termination or the elimination of the Oppenheimer funds as an investment option under the Plan.

6. This provision does not apply to loans from 403(b)(7) custodial plans or from OppenheimerFunds Single K plans.

7. This provision does not apply to 403(b)(7) custodial plans if the participant is less than age 55, nor to IRAs.

Because the Fund invests in securities issued by California or entities within California, an investment in the Fund may involve greater risk than investments in certain other types of municipal bond funds. You should consider carefully the special risks inherent in the Fund's investments in California municipal securities.

The Fund also invests in municipal securities issued by certain territories, commonwealths and possessions of the United States that pay interest that is exempt (in the opinion of the issuer's legal counsel when the security is issued) from federal income tax and the Fund's state personal income tax. Therefore, the Fund's investments could be affected by the fiscal stability of, for example, Puerto Rico, the Virgin Islands, Guam or the Northern Mariana Islands. Additionally, the Fund's investments could be affected by economic, legislative, regulatory or political developments affecting issuers in those territories, commonwealths or possessions.

Following is a discussion of the special considerations relating to the Fund's investments in municipal securities issued by California, Puerto Rico, the Virgin Islands, Guam and the Northern Mariana Islands (collectively, the "Applicable Jurisdictions"). It constitutes only a brief summary of the complex factors which may impact issuers of municipal securities of the Applicable Jurisdictions and does not purport to be a complete or exhaustive description of all adverse conditions, including both economic and political conditions, affecting the financial situation in the Applicable Jurisdictions. The information is based on information drawn from official statements relating to securities offerings from the Applicable Jurisdictions and/or data from other public sources available as of the date of this Statement of Additional Information. While neither the Manager nor the Fund has independently verified this information, neither has reason to believe that such information was not correct in all material respects at time of its publication. The information provided below is subject to change rapidly, substantially, and without notice, and the inclusion of such information shall not, under any circumstances, create any implication that there has been no change in the affairs of the Applicable Jurisdictions or their issuers since the date of its preparation. Any such change(s) may adversely affect the applicable state, territory or commonwealth and the applicable issuer's cash flows, expenditures, or revenues, or otherwise negatively impact the current or projected financial situation of the applicable state, territory or commonwealth, which could negatively impact the performance of the Fund.

The information below is not intended as a discussion of any specific factor that may affect any particular obligation or issuer. Many factors, including national, economic, social and environmental policies and conditions, which are not within the control of issuers of municipal securities of the Applicable Jurisdictions, could have an adverse impact on the financial condition of such issuers. The Fund cannot predict whether or to what extent such factors or other factors may affect the issuers of such municipal securities, the market value or marketability of such securities or the ability of the respective issuers of such securities acquired by the Fund to pay interest on, or principal of, such securities.

The marketability, valuation or liquidity of such municipal securities may be negatively affected in the event that applicable localities or authorities default on their debt obligations or other market events arise, which in turn may negatively impact the performance of the Fund, sometimes substantially. Economic and other conditions within the state, territory or commonwealth may affect the credit risk of its localities or authorities to the extent that such localities and authorities are reliant upon its appropriations.

Municipal bonds may be more susceptible to being downgraded, and issuers of municipal bonds may be more susceptible to default, insolvency and bankruptcy, during recessions or similar periods of economic stress. Factors contributing to the economic stress on municipalities may include lower property tax collections as a result of lower home values, lower sales tax revenue as a result of consumers cutting back from spending, and lower income tax revenue as a result of a high unemployment rate. In addition, as certain municipal obligations may be secured or guaranteed by banks and other institutions, the risk to a fund could increase if the banking or financial sector suffers an economic downturn and/or if the credit ratings of the institutions issuing the guarantee are downgraded or at risk of being downgraded by a national rating organization. Such a downward revision or risk of being downgraded may have an adverse effect on the market prices of the bonds and thus the value of a fund's investments.

Recent downgrades of certain municipal securities insurers have negatively impacted the price of certain insured municipal securities. Given the large number of potential claims against municipal securities insurers, there is a risk that they will be unable to meet all future claims. Certain municipal issuers either have been unable to issue bonds or access the market to sell their issues or, if able to access the market, have issued bonds at much higher rates, which may reduce revenues available for municipal issuers to pay existing obligations. Should any of California, Puerto Rico, the Virgin Islands, Guam, the Northern Mariana Islands, or its applicable municipalities fail to sell bonds when and at the rates projected, it could experience a weakened overall cash position in the current fiscal year.

An insolvent municipality may take steps to reorganize its debt, which might include extending debt maturities, reducing the amount of principal or interest, refinancing the debt or taking other measures which may significantly affect the rights of creditors and the value of the securities issued by the municipality and the value of a fund's investments. For example, pursuant to Chapter 9 of the United States ("U.S.") Bankruptcy Code, a California municipality that meets certain conditions is provided protection from its creditors while it develops and negotiates a plan for reorganizing its debts.

California's economy, the largest among the 50 states and one of the largest in the world, has major components in high technology, trade, entertainment, agriculture, manufacturing, tourism, construction and services. As a result, economic problems or factors that negatively impact these sectors may have a negative impact on the value of California municipal securities and entities issuing these securities.

During the recent recession, California experienced one of the most significant economic downturns since the Great Depression of the 1930s, evidenced by a high unemployment rate, declining consumer confidence and spending, reduced credit availability, falling home prices and reduced tax revenue.
Certain signs indicate, however, that economic growth in California could have begun improving during the second half of 2009, and economic recovery appeared to continue through early 2011. For example, after falling for six consecutive quarters, taxable sales turned around in the second half of 2009 and continued to improve through the first quarter of 2011. Also, the California labor markets, which had deteriorated dramatically during the latter half of 2008 and the first six months of 2009, suffering their worst losses on record, experienced modest gains 2010 and early 2011. Further, after dropping in the second half of 2008 and bottoming out in the first quarter of 2009, made-in-California exports grew by 19% in 2010 and 13% in the first half of 2011.

Despite these and other signs that California's economy might be improving, because of the current economic environment and the magnitude of the economic recession, the state continues to face significant fiscal challenges. For example, estimated California general fund revenues (as used in this section, "General Fund") for fiscal years 2010-11 and 2011-12 remain approximately 7.6% and 13.7%, respectively below their fiscal year 2007-08 peak. Also, although the state's unemployment rate has fallen, with the August 2011 unemployment rate at 12.1%, unemployment still remains high. Further, recent California budgets have pushed costs into future years. Some of these actions have been formal borrowing in the public debt market, or from local governments or special funds. In other cases, costs have simply been deferred from one fiscal year into the next. As a result of these and other factors, on January 10, 2011, the Governor of California, (as used in this section, "Governor") projected a combined fiscal years 2010-11 and 2011-12 budget gap of approximately $25.4 billion.

There can be no assurances that California will not continue to face fiscal stress and cash pressures and that such circumstances will not become more difficult, or that other impacts of the current economic situation will not further materially adversely affect California's financial condition.

Over the years, a number of laws and constitutional amendments have been enacted, often through voter initiatives, which have increased the difficulty of raising state taxes, restricted the use of the General Fund or special fund revenues, or otherwise limited the California Legislature (as used in this section, "Legislature") and the Governor's discretion in enacting budgets. These include Proposition 13, passed in 1978, which requires that any change in state taxes enacted for the purpose of increasing revenues collected pursuant thereto, whether by increased rates or changes in computation, be approved by a two-thirds majority of each house of the Legislature; Proposition 98, passed in 1988, which mandates that a minimum amount of General Fund revenues be spent on local education; and Proposition 10, passed in 1998, which raised taxes on tobacco products and mandated how the additional revenues would be expended.

Constitutional amendments approved by the voters have also affected the budget process. These include Proposition 58, approved in 2004, which requires the adoption of a balanced budget and restricts future borrowing to cover budget deficits; Proposition 49, approved in 2002, which requires the expansion of funding for before and after school programs; Proposition 63, approved in 2004, which imposes a surcharge on taxable income of more than $1 million and earmarks this funding for expanded mental health service; Proposition 1A of 2004, approved in 2004, which limits the Legislature's power over local revenue sources, Proposition 1A of 2006, approved in 2006, which limits the Legislature's ability to use sales taxes on motor vehicle fuels for any purpose other than transportation; Proposition 22, approved in 2010, which supersedes some parts of Proposition 1A of 2004, prohibits any future action by the Legislature to take, reallocate or borrow money raised by local governments for local purposes, and prohibits changes in the allocation of property taxes among local governments designed to aid state finances; and Proposition 26, approved in 2010, which amended the State Constitution to provide that a two-thirds vote (instead of a majority vote) of both houses of the Legislature is required for any increase in any tax on any taxpayer.

In addition, as part of the enactment of the 2010 Budget Act, the Legislature adopted Senate Constitutional Amendment 10, which will be placed before the voters at the next statewide primary, general or special election. If approved by the voters, this measure would place a limit on state spending if revenues in any fiscal year exceed a specified cap, by requiring such unanticipated revenues (after required payments to schools) to be spent only on designated purposes such as deposit to the budget reserve fund, repayment of existing debts or capital investment in infrastructure. The measure would also strengthen existing law providing for annual deposits to the budget reserve fund, would increase the maximum size of the reserve fund from $8 billion to an amount equal to 10% of General Fund revenues, and would tighten the rules by which moneys can be transferred from the budget reserve fund.

Balanced Budget Amendment (Proposition 58). Proposition 58, approved by the voters in 2004, requires the state to enact a balanced budget, and establish a special reserve and restricts certain future borrowing to cover fiscal year end deficits. As a result of the provisions requiring the enactment of a balanced budget and restricting borrowing, the state would in some cases have to take more immediate actions to correct budgetary shortfalls. Beginning with the budget for fiscal year 2004-05, Proposition 58 requires the Legislature to pass a balanced budget and provides for mid-year adjustments in the event that the budget falls out of balance and the Governor calls a special legislative session to address the shortfall. The balanced budget determination is made by subtracting estimated expenditures from all resources expected to be available, including prior-year balances.

Proposition 58 also requires that a special reserve BSA be established. The BSA is funded by annual transfers of specified amounts from the General Fund, unless suspended or reduced by the Governor or until a specified maximum amount has been deposited Proposition 58 also prohibits the use of general obligation bonds, revenue bonds, and certain other forms of borrowing to cover fiscal year end budget deficits. The restriction does not apply to certain other types of borrowing, such as (i) short-term borrowing to cover cash shortfalls in the General Fund (including revenue anticipation notes or revenue anticipation warrants currently used by the state), or (ii) inter-fund borrowings.

Local Government Finance (Proposition 1A of 2004). Amendment No. 4 (also known as "Proposition 1A of 2004"), approved by the voters in the November 2004 election, amended the State Constitution to, among other things, reduce the Legislature's authority over local government revenue sources by placing restrictions on the state's access to local governments' property, sales, and vehicle license fee revenues as of November 3, 2004. Beginning with fiscal year 2008-09, the state is able to borrow up to 8% of local property tax revenues, but only if the Governor proclaims such action is necessary due to a severe state fiscal hardship and two-thirds of both houses of the Legislature approve the borrowing. The amount borrowed is required to be paid back within three years. The state also will not be able to borrow from local property tax revenues for more than two fiscal years within a period of 10 fiscal years. In addition, the state cannot reduce the local sales tax rate or restrict the authority of local governments to impose or change the distribution of the statewide local sales tax.

The provisions of Proposition 1A allowing the state to borrow money from local governments from time to time have been suspended by Proposition 22 of 2010, which permanently prohibits any future such borrowing.

Proposition 1A further requires the state to reimburse cities, counties, and special districts for mandated costs incurred prior to fiscal year 2004-05 over a term of years. The 2010 Budget Act defers payment of these claims and refinances the balance owed over the remaining payment period. The remaining estimated cost of claims for mandated costs incurred prior to fiscal year 2004-05 is approximately $900. Pursuant to Proposition 1A of 2004, the state is also required to repay the local government borrowing no later than June 15, 2013. The 2011 Budget Act includes $90.8 million for the interest payments that will be incurred in fiscal year 2011-12 to be paid from the General Fund.

After School Education Funding (Proposition 49). An initiative statute, Proposition 49, called the "After School Education and Safety Program Act of 2002," was approved by the voters on November 5, 2002, and required the state to expand funding for before and after school programs in the state's public elementary, middle and junior high schools. The increase was first triggered in fiscal year 2006-07, which increased funding for these programs to $550 million. These funds are part of the Proposition 98 minimum funding guarantee for K-14 education and, in accordance with the initiative, expenditures can only be reduced in certain low revenue years.

Mental Health Services (Proposition 63). On November 2, 2004, the voters approved proposition 63, the Mental Health Services Act, which imposes a 1% tax surcharge on taxpayers with annual taxable income of more than $1 million for purposes of funding and expanding mental health services. Proposition 63 prohibits the Legislature or the Governor from redirecting funds not used for mental services to other purposes or from reducing General Fund support for mental health services below the levels provided in fiscal year 2003-04. However, the on-time use of Proposition 63 funds in fiscal year 2011-12 was allowed by Chapter 5, Statutes of 2011 (AB 100) for the Early and Periodic Screening Diagnosis and Treatment program, mental health managed care, mental health services for students for special education. Commencing in fiscal year 2012-13, the Proposition 63 funds would be replaced with dedicated revenues which would be used to fund the cost of these programs as the programs are realigned to counties.

Transportation Financing (Proposition 1A of 2006). On November 7, 2006, voters approved Proposition 1A of 2006, which had been placed on the ballot by the Legislature as Senate Constitutional Amendment No. 7, to protect Proposition 42 transportation funds from any further suspensions. Provisions of the State Constitution enacted as Proposition 42 in 2002, permitted the suspension of the annual transfer of motor vehicle fuel sales tax revenues from the General Fund to the Transportation Investment Fund if the Governor declared that the transfer would result in a "significant negative fiscal impact" on the General Fund and the Legislature agreed with a two-thirds vote of each house. The new measure modified the constitutional provisions of Proposition 42 in a manner similar to Proposition 1A of 2004, so that if such a suspension were to have occurred, the amount owed by the General Fund would have had to be repaid to the Transportation Investment Fund within three years, and only two such suspensions could have been made within any 10-year period. In fiscal year 2003-04, $868 million of the scheduled Proposition 42 transfer was suspended, and in fiscal year 2004-05 the full transfer of $1.258 billion was suspended. Budget Acts for fiscal years 2006-07 through 2010-11 all fully funded the Proposition 42 transfer and partially repaid the earlier suspensions. Chapter 11, Statutes of 2010, in the Eighth Extraordinary Session eliminated the General Fund sales tax on gasoline that funded the Proposition 42 Transfer, and replaced it with increased fuel excise tax revenues that go directly to local governments for road maintenance and to the State Highway Account for highway maintenance and rehabilitation projects. However, the 2011 Budget Act still includes $83 million to repay a portion of past suspensions.

Proposition 22 - Local Government Funds. This measure, called the "Local Taxpayer, Public Safety and Transportation Protection Act of 2010," supersedes some parts of Proposition 1A of 2004, prohibits any future action by the Legislature to take, reallocate or borrow money raised by local governments for local purposes, and prohibits changes in the allocation of property taxes among local governments designed to aid state finances. The Proposition 1A borrowing done in 2009 is grandfathered. In addition, superseding Proposition 1A of 2006, the state is prohibited from borrowing sales taxes or excise taxes on motor vehicle fuels or changing the allocations of those taxes among local governments except pursuant to specified procedures involving public notices and hearings. Any law enacted after October 29, 2009 inconsistent with Proposition 22 is repealed. Passage of this measure eliminates an estimated $850 million in General Fund relief in fiscal year 2010-11, an amount which would have grown to over $1 billion by fiscal year 2013-14. The 2011 Budget Act replaces the use of gasoline excise tax for these purposes under Article XIX of the California Constitution. This preserves the 2011 Budget Act allocations for state and local programs The inability of the state to borrow or redirect property tax or redevelopment funds will reduce the state's flexibility in reaching budget solutions in the future. The state has used these actions for several billion dollars of solutions in some recent years.

Proposition 26 - Increases in Taxes or Fees. On November 2, 2010, voters approved this ballot measure which revises provisions in Articles XIII A and XIII C of the Constitution dealing with tax increases. The measure specifies that a two-thirds vote of both houses of the Legislature is required for any increase in any tax on any taxpayer, eliminating the current practice where a tax increase coupled with a tax reduction is treated as being able to be adopted by majority vote. Furthermore, any increase in a fee beyond the amount needed to provide the specific service or benefit is deemed a tax requiring two-thirds vote. Finally, any tax or fee adopted after January 1, 2010 with a majority vote which would have required a two-thirds vote if Proposition 26 were in place would be repealed after one year from the election date unless readopted by the necessary two-thirds vote.

The state's fiscal year begins on July 1 and ends on June 30 of the following year. The state's General Fund budget operates on a legal basis, generally using a modified accrual system of accounting for its General Fund, with revenues credited in the period in which they are measurable and available and expenditures debited in the period in which the corresponding liabilities are incurred.

The annual budget is proposed by the Governor by January 10 of each year for the next fiscal year (the "Governor's Budget"). Under state law and constitution, the annual proposed Governor's Budget cannot provide for projected expenditures in excess of projected revenues for the ensuing fiscal year. Following the submission of the Governor's Budget, the Legislature takes up the proposal. As required by the Proposition 58, as discussed above, beginning with fiscal year 2004-05, the Legislature may not pass a budget bill in which General Fund expenditures exceed estimated General Fund revenues and beginning fund balances at the time of the passage and as set forth in the budget bill.

On January 10, 2011, the Governor released the 2011-12 Governor's Budget. The 2011-12 Governor's Budget projected that the 2010-11 fiscal year would end with an $8.2 billion deficit, compared to the assumption of a $1.5 billion budget reserve balance in the 2010 Budget Act. Among the reasons for this change was a failure to obtain as much federal assistance as had been anticipated. Looking toward the combined 2-year period of fiscal years 2010-11 and 2011-12, the 2011-12 Governor's Budget projected a budget gap of approximately $25.4 billion.

The 2011-12 Governor's Budget contained several proposals to close the budget gap, including: (i) expenditure reductions totaling approximately $12.5 billion, including the elimination of redevelopment agencies; (ii) a five-year extension of temporary increases in personal income taxes, sales and use taxes and vehicle license fees and a reduction in dependent exclusions from personal income taxes, totaling $14 billion (but which would provide only about $12 billion in total budget savings because of the impact of greater revenues on the Proposition 98 school funding, which, as described above, requires a minimum percentage of General Fund revenues be spent on local education); (iii) a restructuring of the state-local relationship in the delivery of certain services; and (iv) other internal loans, transfers and delays of previous loan repayments totaling approximately $2 billion.

The 2011 Budget Act was the first budget to be enacted under Proposition 25, approved by the voters in November 2010, which lowered the required vote for budget actions to a majority from two-thirds. However, Proposition 25 did not lower the vote required to raise taxes, which remains at two-thirds in each House of the Legislature. The 2011-12 Governor's Budget proposed that the Legislature accelerate the budget process to reach a conclusion in March 2011, so that a ballot measure to approve the tax extensions (discussed above) and the proposed shift of some state programs to local entities, as well as certain other related budget matters could be placed on a June 2011 ballot (a special election which would be called by the Governor).
Negotiations between Legislative leaders and the Governor in the period immediately following the release of the 2011-12 Governor's Budget resulted in partial adoption of the Governor's proposals. By mid-March, the Legislature had enacted, largely by majority vote, a series of bills adopting substantial and permanent expenditure reductions and other solutions totaling approximately $13 billion. Most of these bills were signed by the Governor at the time. However, there was no agreement to place the tax extensions proposed by the Governor on the June ballot. Since the entire budget gap was not closed, no final budget package was adopted in March.

On May 16, 2011, the Governor released the May Revision to the 2011-12 Budget (the "2011 May Revision"). At that time, the Governor estimated that the remaining budget gap to be closed had been reduced from $25.4 billion to $9.6 billion, plus a target for a $1.2 billion reserve at the end of the 2011-12 fiscal year, so that $10.8 billion in solutions still had to be enacted. The main reasons for the reduced budget gap were the enactment of approximately $13 billion of solutions in March and more favorable revenue estimates, totaling approximately $6.6 billion. The Governor made certain modifications to his budget proposals from January, but continued to seek an early ballot measure to extend the expiring tax surcharges.

On May 19, 2011, the California Legislative Analyst's Office ("LAO") released its analysis of the 2011 May Revision ("May LAO Report"). The May LAO Report cautioned that the 2011 May Revision creates substantial uncertainty for many parties, because the Governor's major tax proposals were dependent upon voter approval in June 2011. For example, school districts, which need to make budget-year staffing and other decisions, would not know whether to budget based on the higher Proposition 98 funding level in the May Revision, the minimum guarantee should no tax proposals be adopted, or some level below that (should rejection of the tax measures require even more significant reductions).

Following the release of the 2011 May Revision, the Legislature and Governor continued to be unable to reach agreements on any actions leading to an extension of the tax surcharges. On June 15, 2011, the Legislature, by majority vote, adopted a budget bill. The Governor vetoed this bill the next day, indicating that in his view the budget was not a balanced solution and that the state could not carry out its normal cash flow borrowing based on this budget.

By the end of June, preliminary cash results for the General Fund's main tax sources for May and part of June were ahead of the 2011 May Revision projections. The additional revenues for May and June were estimated at $1.2 billion. The Legislature and Department of Finance agreed that if the trend of better-than-projected revenues continued, approximately $4 billion of additional revenue could be received for the full 2011-12 fiscal year. The combined $5.2 billion of additional revenues above the 2011 May Revision projection was enough to close the remaining budget gap. However, a "trigger mechanism" (described below) was included in the 2011 Budget Act to reduce spending automatically if an updated forecast of full-year revenues in mid-December 2011 showed that there would be at least a $1 billion shortfall compared to the 2011 Budget Act estimate.

The 2011 Budget Act, enacted on June 30, 2011, projected that the state would end fiscal year 2011-12 with a $543 million General Fund reserve. General Fund revenues and transfers for fiscal year 2011-12 were projected at $88.5 billion, a reduction of $6.3 billion compared with fiscal year 2010-11. General Fund expenditures for fiscal year 2011-12 were projected at $85.6 billion, and an ending reserve of $955 million. The Budget Act also includes special fund expenditures of $34.2 billion and bond fund expenditures of $9.4 billion. The 2011 Budget Act takes into account the end of federal stimulus funds under the American Recovery and Reinvestment Act in February 2009 ("ARRA"), which provided substantial assistance to the state in prior years to offset to offset General Fund costs. For example, The 2011 Budget Act includes only $31.5 million in ARRA funds to offset General Fund expenditures, compared to $4.2 billion fiscal year 2010-11.

The estimated General Fund revenue reflects a combination of factors, including expiration of temporary taxed and surcharges (which totaled approximately $7.1 billion in fiscal year 2010-11) and transfer of about 1% of the state sales tax rate to local governments to fund the restructuring of the state-local relationship in the delivery of certain services. Offsetting these reductions was improved revenue estimates for the remaining State tax sources. Expenditures reflected increases need to offset the termination of certain federal stimulus funding which supported about $4.2 billion of General Fund programs in fiscal year 2010-11.

Trigger Mechanism for Revenue Shortfall. The 2011 Budget Act recognized the potential risk to the State's fiscal condition if forecasted higher revenues did not materialize by including a "trigger mechanism" to provide certain automatic expenditure reductions if projections of the fiscal year 2011-12 revenues are more than $1 billion lower than projected under the 2011 Budget Act. If revenue projections released in mid-November 2011 by the LAO were projected to fall short of expectations by an amount between $1 billion and $2 billion (first "tier"), $601 million in cuts to higher education, health and human services, and public safety would be implemented by the Director of Finance beginning in January 2012. If revenues are projected to fall short by more than $2 billion (second "tier"), additional cuts would occur. A fixed amount totaling $320 million in cuts would come from eliminating the home-to-school transportation program and reducing community college apportionments. Up to an additional $1.5 billion in cuts would come from shortening the school year by up to seven days.

Budget Risks. Many complex political, social, and economic factors influence California's economy and finances. Such factors may impact California's budget unpredictably from year to year. Such factors include, but are not limited to: (i) developments with respect to the national economy as a whole; (ii) developments in the world economy, (iii) U.S. fiscal and economic policies, including fiscal stimulus efforts in general and the amount of federal aid to the State; (iv) whether actual budgeted revenues are less than projected revenues and actual expenditures are more than projected expenditures; (v) whether savings that are contingent upon receiving federal administrative approval receive such approval; (vi) the impact of lawsuits challenging any of the solutions designed to close a budget gap; (vii) whether the state is able to achieve the full amount of projected savings in various programs; and (viii) whether a referendum impacts any of a budget act's measures. Under the referendum provision of the Constitution of California, if enough valid signatures are collection within a 90-day period after the adoption of the law in question, the law being challenged does not go into effect, but instead is placed on the next statewide ballot. At that time, voters will either disapprove the measure, or allow it to go into effect.

These factors are continually changing, and no assurances can be given with respect to how these factors or other factors will materialize in the future or what impact they will have on California's fiscal and economic condition. Such factors could have an adverse impact on the state's budget in the current year and could result in declines, possibly severe, in the value of the state's and municipal issuers' outstanding obligations, increases in their future borrowing costs, and impairment of their ability to pay debt service on their obligations.

Cash Management Tools. The majority of the General Fund revenues are received in the latter part of the fiscal year. Expenditures from the General Fund occur more evenly throughout the fiscal year. The state's cash flow management program customarily addresses this timing difference by making use of internal borrowing and by issuing short-term notes in the capital markets. External borrowing is typically done with revenue anticipation notes ("RANs") that are payable not later than the last day of the fiscal year in which they are issued. RANs have been issued in all but one fiscal year since the mid-1980's and have always been paid at maturity. The state also is authorized under certain circumstances to issue and revenue anticipation warrants ("RAWs") that are payable in the succeeding fiscal year. The state issued RAWs to bridge short-term cash flow shortages in 1992, 1993, 1994, 2002 and 2003.

The state has employed additional cash management measures during some fiscal years, including: delaying certain types of disbursements from the General Fund, increasing the state's internal borrowing capability; and issuing registered warrants (commonly referred to as "IOUs").

Cash Management in Fiscal Year 2011-12. Timely enactment of the 2011 Budget Act allowed the state to carry out its normal cash flow borrowings (2011 RANs) early in the fiscal year. The state issued interim RANs of $5.4 billion in late July to provide sufficient cash for the early part of the fiscal year, in case developments in the U.S. Congress, including those relating to the federal debt limit situation, disrupted the market for 2011 RANs. In addition to the 2011 RANs, intra-year payment deferrals will be used, providing up to $5.7 billion of cash flow relief in certain months. The State will also benefit from $1.7 billion of additional internal borrowable resources from the state Agency Investment Fund. There can be no assurance that deterioration in revenue and/or increases in expenditures in the current fiscal year or early in fiscal year 2012-13 will not require state officers to implement additional cash management measures before the end of the fiscal year to supplement its cash management program for fiscal years 2011-12 or 2012-13.

The State Treasurer is responsible for the sale of debt obligations of the state and its various authorities and agencies. The state has always paid when due the principal of and interest on its general obligation bonds, general obligation commercial paper notes, lease-purchase debt and short-term obligations, including RANs and RAW. Certain state agencies and authorities also can issue revenue obligations for which the General Fund has no liability.

General Obligation Bonds. The State Constitution prohibits the creation of general obligation indebtedness of the state unless a bond measure is approved by a majority of the electorate voting at a general election or a direct primary. General obligation bond acts provide a continuing appropriation from the General Fund of all debt service payments on general obligation bonds, subject only to the prior application of moneys in the General Fund to the support of the public school system and public institutions of higher education. Under the State Constitution, the appropriation to pay debt service on the general obligation bonds cannot be repealed until the principal and interest on the bonds have been paid. Certain general obligation bond programs, called "self-liquidating bonds," receive revenues from specified sources so that moneys from the General Fund are not expected to be needed to pay debt service, but the General Fund is liable as a back-up if the specified revenue source is not sufficient. The principal self-liquidating bond programs are the economic recovery bonds ("ERBs"), supported by a special sales tax, and veterans general obligation bonds, supported by mortgage repayments from housing loans made to military veterans.

General obligation bonds are typically authorized for infrastructure and other capital improvements at the state and local level. Pursuant to the State Constitution, general obligation bonds cannot be used to finance state budget deficits (except as already authorized by ERBs, as described below).

As of August 1, 2011, the state had outstanding $79,130,455,000 aggregate principal amount of long-term general obligation bonds, of which $71,134,420,000 were payable primarily from the state's General Fund, and $7,996,035,000 were "self-liquidating" bonds payable first from other special revenue funds. As of August 1, 2011, there were unused voter authorizations for the future issuance of $38,359,259,000 of long-term general obligation bonds, some of which may first be issued as commercial paper notes. Of this unissued amount, $1,306,210,000 is for general obligation bonds payable first from other revenue sources.

A ballot measure will be submitted to voters at the statewide election on November 6, 2012 to approve the issuance of $11.14 billion in general obligation bonds for a wide variety of purposes relating to the improvement of California's water supply systems, drought relief, and groundwater protection. Additional bond measure may be included on future election ballots.

The general obligation bond law permits the state to issue as variable rate indebtedness up to 20% of the aggregate amount of long-term general obligation bonds outstanding. As of August 1, 2011, the state had outstanding $4,844,275,000 principal amount of variable rate general obligation bonds (which includes a portion of the ERBs described below), representing about 6.1% of the state's total outstanding general obligation bonds as of that date. As of August 1, 2011, a total of $7.42 billion of ERBs has been retired, leaving a principal balance of $6.79 billion.

Ratings. The ratings of the state's general obligation bonds as of November 11, 2011 are "Al" from Moody's, and "A-" from S&P and Fitch.
Each such rating reflects only the views of the respective rating agency and an explanation of the significance of such rating may be obtained from such rating agency. There is no assurance that such ratings will continue for any given period of time or that they will not be revised or withdrawn entirely by such rating agency if in the judgment of such rating agency circumstances so warrant. A downward revision or withdrawal of any such rating may have an adverse effect on the market prices of the bonds.

Commercial Paper Program. Pursuant to legislation enacted in 1995, voter-approved general obligation indebtedness may be issued either as long-term bonds or, for some but not all bond issues, as commercial paper notes. Commercial paper notes may be renewed or may be refunded by the issuance of long-term bonds. It is currently the state's policy to use commercial paper notes to provide flexibility for bond programs, such as to provide interim funding of voter-approved projects and to facilitate refunding of variable rate bonds into fixed rate bonds. Pursuant to the terms of the bank credit agreement presently in effect, the general obligation commercial paper program may have up to $1.57 billion in aggregate principal amount at any time. The sale of general obligation bonds on September 20, 2011 retired all of the $1,292,170,000 aggregate principal amount of general obligation commercial paper notes that were outstanding.

Lease-Purchase Debt. In addition to general obligation bonds, the state has acquired and constructed capital facilities through the use of lease-revenue borrowing (also referred to as lease-purchase borrowing). Under these arrangements, the California Public Works Board, another state or local agency or a joint powers authority issued bonds to pay for the construction of facilities such as office buildings, university buildings, courthouses or correctional institutions. These facilities are leased to a state agency, the California State University, the University of California or the Judicial Council under a long-term lease that provides the source of payment of the debt service on the lease-revenue bonds. In some cases, there was not a separate bond issue, but a trustee directly created certificates of participation in the state's lease obligation, which were then marketed to investors. Under applicable court decisions, such lease arrangements do not constitute the creation of "indebtedness" within the meaning of the State Constitutional provisions that require voter approval. The state had $9,426,325,000 in lease-revenue obligations outstanding as of August 1, 2011. The State Public Works Board, which is authorized to sell lease-revenue bonds, had $12,081,534,477 authorized and unissued as of August 1, 2011. In addition, SB 1407 (Chapter 311, statutes of 2008) included intent language authorizing up to $5 billion in lease revenue financing for court construction. The debt service for all court projects financed under SB 1407 will be paid from a special fund with revenues dedicated for debt service payments.

Non-Recourse Debt. Certain state agencies and authorities issue revenue obligations for which the General Fund has no liability. Revenue bonds represent obligations payable from state revenue-producing enterprises and projects, which are not payable from the General Fund, and conduit obligations payable only from revenues paid by private users of facilities financed by the revenue bonds. The enterprises and projects include transportation projects, various public works projects, public and private educational facilities (including the California State University and University of California systems), housing health facilities and pollution control facilities. State agencies and authorities had approximately $59 billion aggregate principal amount of revenue bonds and notes which are non-recourse to the General Fund outstanding as of June 30, 2011.

Build America Bonds. In February 2009, the U.S. Congress enacted certain new municipal bond provisions as part of the ARRA (stimulus bill). One provision allows municipal issuers such as the state to issue "Build America Bonds" ("BABs") for new infrastructure investments. BABs are bonds whose interest is subject to federal income tax, but the U.S. Treasury will repay to the state an amount equal to 35% of the interest cost on any BABs issued during 2009 and 2010. This results in a net interest expense lower than what the state would have had to pay for tax-exempt bonds of similar maturity. The subsidy payments from general obligation bonds are General Fund revenues to the state, while subsidy payments for lease-revenue bonds are deposited into a fund which is made available to the State Public Works Board for any lawful purpose. In neither instance are the subsidy payments specifically pledged to repayment of the BABs to which they relate. The cash subsidy payment with respect to the BABs, to which the state is entitled, is treated by the Internal Revenue Service as a refund of a tax credit and such refund may be offset by the Department of the Treasury by any liability of the state payable to the federal government, including in respect of any internal revenue tax (including any interest and penalties), past due child support, past due and legally enforceable debt due federal agencies, unemployment compensation debts, and past due legally enforceable state income tax debts. As of August 1, 2011, the state has received all BABs cash subsidy payments to which it has been entitled, without offset.

Between April 2009 and December 2010, the state issued $13.54 billion of BAB general obligation bonds and $551 million BAB lease-revenue bonds. The aggregate amount of the subsidy payments to be received from fiscal year 2011-12 through the maturity of these bonds (mostly 20 to 30 years) is approximately $9.0 billion for the general obligation BABs and $309 million for the lease-revenue BABs. Federal legislative proposals have been made from time to time which would provide for future issuance of BABs (although at lower subsidy rates), but none have been enacted into law.

Economic Recovery Bonds. The California Economic Recovery Bond Act ("Proposition 57") was approved by the voters on March 2, 2004. Proposition 57 authorized the issuance of up to $15 billion in ERBs to finance the negative General Fund reserve balance as of June 30, 2004, and other General Fund obligations undertaken prior to June 30, 2004. Repayment of the ERBs is secured by a pledge of revenues from a one-quarter cent increase in the state's sales and use tax that became effective July 1, 2004. In addition, as voter-approved general obligation bonds, the ERBs are secured by the state's full faith and credit and payable from the General Fund in the event the dedicated sales and use tax revenue is insufficient to repay the bonds.

The entire authorized amount of ERBs was issued in three sales, in May and June 2004, and in February 2008. No further ERBs can be issued under Proposition 57, except for refunding bonds. Because of the sharp reduction in taxable sales as a result of the recent economic recession, the Special Sales Tax Revenues ("SSTRs") collected from the one-quarter cent tax dedicated to repayment of the ERB debt decreased to a level which did not provide adequate coverage above the required debt service amounts for the 2004 and 2008 ERBs. In order to restore adequate coverage, the state restructured the ERB debt through the issuance of approximately $3.435 billion ERB refunding bonds on November 5, 2009. The restructuring reduced annual debt service costs to come into alignment with reduced tax revenues, with a coverage target of at least 1.3 times. The ratings for all ERBs have since been raised to levels above the state's general obligation bond ratings.

Three different sources of funds are required to be applied to the early retirement (generally by purchase or redemption) of ERBs (i) all proceeds from the dedicated quarter cent sales tax in excess of the amounts needed, on a semi-annual basis, to pay debt service and other required costs of the bonds, (ii) all proceeds from the sale of specified surplus state property, and (iii) 50% of each annual deposit, up to $5 billion in the aggregate, of deposits in the BSA. As of August 2011, funds from these sources have been used for early retirement of approximately $4.12 billion of bonds during fiscal years 2005-06 through 2010-11, including $472 million which was transferred from the BSA in fiscal year 2006-07 and $1.023 billion transferred from the BSA in fiscal year 2007-08. As of August 1, 2011 a total of $7.42 billion of ERBs has been retired, leaving a principal balance of $6.79 billion. The Governor suspended each of the fiscal years 2008-09 through 2011-12 BSA transfers due to the condition of the General Fund.

Tobacco Settlement Revenue Bonds. In 1998 the state signed a settlement agreement (the "Master Settlement Agreement" or "MSA") with the four major cigarette manufacturers (the "participating manufacturers' or "PMs"). Under the MSA, the PMs agreed to make payments to the state in perpetuity, which payments, at the time were predicted to total approximately $25 billion (subject to adjustments) over the first 25 years. Under a separate Memorandum of Understanding, half of the payments made by the cigarette manufacturers are paid to the state and half to local governments. The specific amount to be received by the state and local governments is subject to adjustment. Details in the MSA require reduction of the PMs' payments for decreases in cigarette shipment volumes by the PMs, payments owed to certain "Previously Settled States" and certain other types of offsets. However, settlement payments are adjusted upward each year by at least 3% for inflation, compounded annually.

State law enacted in 2002 (the â€˜Tobacco Securitization Law") authorized the establishment of a special purpose trust to purchase the tobacco assets and to issue revenue bonds secured by the tobacco settlement revenues received beginning in the 2003-04 fiscal year. Legislation in 2003 amended the Tobacco Securitization Law to authorize a "back-up state guaranty" that requires the Governor to request an appropriation from the General Fund in the annual Budget Act to pay debt service and other related costs of the tobacco settlement revenue bonds secured by the second 2003 sale of tobacco settlement revenues when such tobacco settlement revenues are insufficient. The Legislature is not obligated to make any General Fund appropriation.
In 2003, two separate sales of these assets financed with revenue bonds (the "2003 Bonds') produced about $4.75 billion in proceeds which were transferred to the General Fund. In 2005 and 2007, the state refunded all of the original 2003 Bonds, generating additional proceeds of approximately $1.783 billion, which were also transferred to the General Fund. The back-up state guarantee was applied to only the second 2003 sale of bonds and was continued when those bonds were refunded in 2005. The back-up state guaranty now applies to the $3.14 billion of 2005 Refunding Bonds.

The MSA provides for a potential reduction to the PMs' payments under specified conditions relating to the loss of market share to non-participating manufacturers ("NPMs"). This potential reduction is called an "NPM adjustment." The state disputes the PMs right to an NPM adjustment for any year. The MSA also allows the PMs to withhold any portion of their annual payments that is disputed, until such time as the dispute is resolved. Since 2006, the annual amount of revenues received by the state has incurred some level of withholding based on the PMs' assertion of their right to receive an NPM adjustment. For the first time since the Bonds were issued, the reserve funds of each bond are anticipated to be used to make the required debt service interest payment due in December 2011. The State Attorney General is pursuing in a multi-state arbitration proceeding a determination compelling the PMs to pay the full amount scheduled, given that the state asserts that it has been diligently enforcing the statute governing the NPMs, as required in the MSA.

Tobacco settlement revenue bonds are neither general nor legal obligations of the state or any of its political subdivisions and neither the faith and credit nor the taxing power nor any other assets or revenues of the state or of any political subdivision is or shall be pledged to the payment of any such bonds provided that, in connection with the issuance of the 2005 Refunding Bonds, the state covenanted to request the legislature for a General Fund appropriation in the event tobacco settlement revenues fall short. Tobacco settlement revenues have been sufficient to pay debt service with respect to the tobacco settlement revenue bonds, and therefore the state's covenant to request an appropriation has never been invoked.

Obligations In Connection with Proposition 1A of 2004. The Amended 2009 Budget Act provided for state borrowing pursuant to Proposition 1A of 2004, of approximately $1.998 billion of local property tax revenues. In accordance with Proposition 1A of 2004, the state is required to repay such revenues no later than June 2013. Legislation implementing the borrowing in the Amended 2009 Budget Act provided authority to local governments to sell their right to receive the state repayment to a joint powers authority ("JPA") and for the JPA to issue bonds backed by the state's repayment obligation. The repayment obligation includes interest and issuance costs for the JPA bonds.

On November 19, 2009, the California Statewide Communities Development Authority, a JPA, issued $1,895,000,000 of bonds which are secured by the state's obligation to make these payments to about 1,300 local governments, representing about 95% of the state's total borrowing from local governments. The 2011 Budget Act includes $90.8 million General Fund for the interest payments that will be incurred in that fiscal year. In accordance with the authorizing legislation, these bonds will be repaid by June 15, 2013. In addition, for the obligations to entities not participating in the JPA bond program (which are $103 million in principal amount); the Director of Finance has set an interest rate of 2% per annum.

Future Issuance Plans and General Fund Debt Ratio. Since 2006, approximately $53.6 billion of new general obligation bonds, $12.1 billion of lease-revenue bonds and $1.895 billion of Propositions 1A bonds have been authorized by voters and/or the Legislature. The authorizations led to a substantial increase in the amount of General Fund-supported debt outstanding from $44.85 billion as of July 1, 2006 to $82.46 billion as of August 1, 2011, while still leaving current authorized and unissued bonds of about $49 billion. Further amounts of general obligation debt issuance will depend on departmental spending needs, overall budget constraints, market conditions, refunding opportunities and other factors.

As a result of the drop of General Fund revenues resulting from general current market conditions and the impact of the recession, and the continues issuance of authorized by unissued bond sales to occur in the future, the ratio of debt service on general obligation, lease-revenue, and the Proposition 1A bonds supported by the General Fund, to annual General Fund revenues and transfers (the "General Fund Debt Ratio"), can be expected to increase in future years. As assumptions for future debt issuance and revenue projections are updated from time to time, any changes to these amounts may impact the projected General Fund Debt Ratio. Based on the revenue estimates used for the 2011 Budget Act, in fiscal year 2011-12, the General Fund Debt Ratio is estimated to equal approximately 7.77%. The ac General Fund Debt Ration in future years will depend on a variety of factors, including actual debt issuance, actual interest rates, debt service structure, and actual General Fund revenues and transfers.

The General Fund. The moneys of the state are segregated into the General Fund and over 1,000 other funds, including special, bond and trust funds. The General Fund consists of revenues received by the State Treasury and not required by law to be credited to any other fund, as well as earnings from the investment of state moneys not allocable to another fund. The General Fund is the principal operating fund for the majority of governmental activities and is the depository of most of the major revenue sources of the state. The General Fund may be expended as a consequence of appropriation measures enacted by the Legislature and approved by the Governor (including the annual Budget Act), as well as appropriations pursuant to various constitutional authorizations and initiative statutes.

The Special Fund for Economic Uncertainties. The Special Fund for Economic Uncertainties ("SFEU") is funded with General Fund revenues and was established to protect the state from unforeseen revenue reductions and/or unanticipated expenditure increases. The State Controller may transfer amounts in the SFEU to the General Fund as necessary to meet cash needs of the General Fund and such transfers are characterized as "loans." The State Controller is required to return moneys so transferred without payment of interest as soon as there are sufficient moneys in the General Fund. At the end of each fiscal year, the State Controller is required to transfer from the SFEU to the General Fund any amount necessary to eliminate any deficit in the General Fund. The legislation creating the SFEU (Government Code Section 16418) also contains a continuous appropriation authorizing the State Controller to transfer the unencumbered balance in the General Fund to the SFEU, as of the end of each fiscal year. However, if, at the end of any fiscal year in which it has been determined that there are revenues in excess of the amount that may be appropriated, as defined in subdivision (a) of Section 2 of Article XIII B of the California Constitution, this transfer shall be reduced by the amount of the excess revenues. The estimates of the transfer shall be made jointly by the LAO and the Department of Finance. For budgeting and accounting purposes, any appropriation made from the SFEU, other than appropriations contained in Government Code Section 16418, is deemed an appropriation from the General Fund. For year-end reporting purposes, the State Controller is required to add the balance in the SFEU to the balance in the General Fund so as to show the total moneys then available for General Fund purposes.

The Budget Stabilization Account. Proposition 58, approved in March 2004, created the BSA as a second budgetary reserve. Beginning with fiscal year 2006-07, a specified portion of estimated annual General Fund revenues (reaching a ceiling of 3% by fiscal year 2008-09) will be transferred by the State Controller into the BSA no later than September 30 of each fiscal year unless the transfer is suspended or reduced as described below. These transfers will continue until the balance in the BSA reaches $8 billion or 5% of the estimated General Fund revenues for that fiscal year, whichever is greater. The annual transfer requirement will go back into effect whenever the balance falls below the $8 billion or the 5% target. The annual transfers can be suspended or reduced for a fiscal year by an executive order issued by the Governor no later than June 1 of the preceding fiscal year. Proposition 58 also provides that one-half of the annual transfers shall be used to retire ERBs, until a total of $5 billion has been used for that purpose. A total of $1.495 billion of the $5 billion amount has been applied to the retirement of ERBs.

Since 2007, the Budget Act has provided the Director of Finance the authority to transfer moneys from the BSA back into the General Fund in an amount determined by the Director of Finance to be sufficient to ensure there is a prudent General Fund balance. Using this authority, the Director of Finance ordered the transfer of the entire balance of $1.495 billion from the BSA to the General Fund to address a fiscal emergency proclaimed by the Governor on January 10, 2008. Once moneys are transferred out of the BSA, pursuant to the authority, they will not be replenished by a future fiscal year's annual transfer unless the Legislature, by statute, directs additional funds to be transferred from the General Fund into the BSA. In light of the condition of the General Fund, the Governor issued an Executive Order on May 31, 2011, to suspend the September 30, 2011 transfer from the General Fund to the BSA estimated at $2.7 billion based on the 2011 Budget Act. The Governor had also suspended the General Fund transfer to the BSA for fiscal years 2010-11 (approximately $2.8 billion), 2009-10 (approximately $2.8 billion) and fiscal year 2008-09 (approximately $3.0 billion). There are currently no moneys in the BSA.

Inter-Fund Borrowings. Inter-fund borrowing is used to meet temporary imbalances of receipts and disbursements in the General Fund. In the event the General Fund is or will be exhausted, the State Controller is required to notify the Governor and the PMIB (comprised of the State Director of Finance, the State Treasurer and the State Controller). The Governor may then order the State Controller to direct the transfer of all or any part of the moneys not needed in Special Funds to the General Fund, as determined by the PMIB. All money so transferred must be returned to the special fund from which it was transferred as soon as there is sufficient money in the General Fund to do so. Transfers cannot be made which will interfere with the objective for which such special fund was created, or from certain specific funds. Enactment of Proposition 22 on November 2, 2010 prohibits interfund borrowing from certain transportation funds.

State Appropriations Limit. The state is subject to an annual appropriations limit imposed by Article XIII B of the State Constitution (the "Appropriations Limit"). The Appropriations Limit does not restrict appropriations to pay debt service on voter-authorized bonds. There are various types of appropriations excluded from the Appropriations Limit. For example, debt service costs of bonds existing or authorized by January 1, 1979, or subsequently authorized by the voters, appropriations required to comply with mandates of courts or the federal government, appropriations for qualified capital outlay projects, appropriations for tax refunds, appropriations of revenues derived from any increase in gasoline taxes and motor vehicle weight fees above January 1, 1990 levels, and appropriation of certain special taxes imposed by initiative (e.g., cigarette and tobacco taxes) are all excluded The Appropriations Limit may also be exceeded in cases of emergency.

The Appropriations Limit in each year is based on the Appropriations Limit for the prior year, adjusted annually for changes in state per capita personal income and changes in population, and adjusted, when applicable, for any transfer of financial responsibility of providing services to or from another unit of government or any transfer of the financial source for the provisions of services from tax proceeds to non-tax proceeds. The measurement of change in population is a blended average of statewide overall population growth, and change in attendance at local school and community college ("K-14") districts. The Appropriations Limit is tested over consecutive two-year periods. Any excess of the aggregate "proceeds of taxes" received over such two-year period above the combined Appropriations Limits for those two years, is divided equally between transfers to K-14 districts and refunds to taxpayers.

Pension Trusts and Unfunded Liability. The two main state pension funds have sustained substantial investment losses in recent years and face large unfunded future liabilities. The most recent actuarial valuation of California Public Employees' Retirement System ("CalPERS"), based on data through June 30, 2010, showed an accrued unfunded liability allocable to state employees of $24.1 billion on an actuarial value of assets basis ("AVA") and $45.2 billion on a market value of assets basis ("MVA"). The California State Teachers' Retirement System ("CalSTRS") reported the unfunded accrued liability of its Defined Benefit Plan at June 30, 2010 at $56.02 billion on an AVA basis, and $79.19 billion on an MVA basis. The state also has an unfunded liability relating to retirees' post-employment healthcare benefits which was estimated at $59.9 billion, based on data through June 30, 2010.

The state General Fund contributions to CalPERS are anticipated to be approximately $2.1in fiscal year 2011-12, and its contributions to CalSTRS will be approximately $1.3 billion during that period. The combined contributions represent about 4% of all General Fund expenditures in fiscal year 2010-11. The state may be obligated to make increasingly larger payments in the future to bring CalPERS closer to a fully funded condition; the state's contributions to CalSTRS are set by a statutory formula.

As part of the enactment of the 2010 Budget Act, legislation was adopted which will reduce pension benefits primarily for newly-hired state employees. Ingeneral, this law sets benefit levels for future employees at levels which were in effect in 1999, prior to a law which at that time increased the percentage of salary which could be received by state employees, and reduced the number of years of service required to achieve maximum benefits. In addition, future employees will have their benefits based on the highest three-year average annual pay, rather than being based on the highest single year, as is provided under current law (except for those employees already using the three-year formula under a contract). SB6X 22 does not change the pension benefits for current state employees and retirees, so the financial benefits will accrue over a number of years. However, pursuant to labor agreements signed with several bargaining units, both current and future employees will be required to contribute a larger portion of their salary toward future pension benefits.

Welfare System. The Personal Responsibility and Work Opportunity Reconciliation Act of 1996 fundamentally reformed the nation's welfare system. The Law included provisions to: (i) convert Aid to Families with Dependent Children ("AFDC"), an entitlement program, to Temporary Assistance for Needy Families ("TANF"), a block grant program with lifetime time limits on TANF recipients, work requirements and other changes (ii) deny certain federal welfare and public benefits to legal noncitizens (subsequent federal law has amended this provision), allow states to elect to deny additional benefits (including TANF) to legal noncitizens, and generally deny almost all benefits to illegal immigrants; and (iii) make changes in the Food Stamp program, including reducing maximum benefits and imposing work requirements. The TANF block grant formula under the Law is operative through December 3, 2010.

Effective January 1, 1998, CalWORKs replaced the former AFDC program and California's previous welfare program, Greater Avenues to Independence programs. Consistent with the federal law, CalWORKs contains time limits on the receipt of welfare aid, both lifetime as well as current period. The centerpiece of CalWORKs is the linkage of eligibility to work participation requirements. Caseload under CalWORKs is projected to increase in fiscal year 2010-11. CalWORKs caseload projections are 587,000 cases in fiscal year 2010-11 and 590,000 cases in fiscal year 2011-12.

Current policies are not expected to increase work participation rates enough to meet the federal requirement for at least 50% work participation among all families. The federal government recently notified California that it has not met the 2008 work participation rate requirements and assessed a penalty of $47.7 million. Under current state law, 50% of the penalty amount is the state's responsibility and the remaining 50% would be shared among those counties not meeting work participation rate requirements. The state intends to seek relief from the penalty based on current economic conditions and/or a corrective action plan. To the extent full or partial relief is not obtained, any penalty would not be assessed in fiscal year 2011-12. Considerable improvement in work participation rates must be achieved to avoid additional federal penalties.

Health Care. Medi-Cal, California's Medicaid program, is a health care entitlement program for low-income individuals and families who receive public assistance or otherwise lack health care coverage. Medi-Cal serves over one in six Californians. Federal law requires Medi-Cal to provide basic services such as doctor visits, laboratory tests, x-rays, hospital inpatient and outpatient care, hospice, skilled nursing care, and early periodic screening, diagnosis and treatment. Also, federal matching funds are available if states choose to provide any of numerous optional benefits. The federal government pays for half of the cost of providing most Medi-Cal services in California, including optional benefits. A wide range of public and private providers and facilities delivers these services. Providers are reimbursed by the traditional fee-for-service method or by capitated payments from managed care plans. Approximately 4.0 million Medi-Cal beneficiaries (more than half of the people receiving Medi-Cal benefits and services) are currently enrolled in managed care plans.

For the 2011 Budget Act, Medi-Cal expenditures are estimated to be $54.6 billion ($12.4 billion General Fund) in fiscal year 2010-11 and $45.5 billion ($14.7 billion General Fund) in fiscal year 2010-11.

In fiscal year 2009-10, approximately 92.7% of General Fund revenues and transfers were derived from personal income taxes (51.5%), sales and use taxes (30.7%) and corporate taxes (10.5%). Similarly, in fiscal years 2010-11 and 2001-12, approximately 91.1% and 88.7%, respectively of revenues and transfers are estimated to be derived from personal income taxes (52.8% and 57.0%, respectively), sales and use taxes (28.6% and 21.5%, respectively) and corporate taxes (10.5% and 10.2%, respectively). Other major General Fund taxes and licenses include: insurance, estate, inheritance and gift taxes, cigarette taxes, alcoholic beverage taxes, horse racing license fees and trailer coach license fees. As discussed above, Proposition 26 makes it more difficult for the state to raise fees and change taxes. Lasting effects from the recession, the current economic environment, as well as future economic problems and factors could negatively impact General Fund revenues received from these and other sources.

Personal Income Tax. The California personal income tax, which accounted for an estimated 52.8% of General Fund revenues and transfers in fiscal year 2010-11, is closely modeled after the federal income tax law. It is imposed on net taxable income (gross income less exclusions and deductions), with rates ranging from 1% to 9.3%. The personal income tax is adjusted annually by the change in the consumer price index to prevent taxpayers from being pushed into higher tax brackets without a real increase in income. Personal, dependent, and other credits are allowed against the gross tax liability. In addition, taxpayers may be subject to an alternative minimum tax ("AMT), which is much like the federal AMT. The personal income tax structure is considered to be highly progressive. For example, the Franchise Tax Board ("FTB") indicates that the top 1% of taxpayers paid 36.9% of the total personal income tax in tax year 2009.

Proposition 63, approved by the voters in the November 2004 election, imposes a 1% surcharge on taxable income over $1 million in addition to the 9.3 % rate. The proceeds of the tax surcharge are required to be used to expand mental health programs.

Taxes on capital gains realizations, which are largely linked to stock market performance, can add a significant dimension of volatility to personal income tax receipts. Capital gains tax receipts accounted for an estimated 4.4% of General Fund revenues and transfers in fiscal year 2010-11.

Sales and Use Tax. The sales and use tax, which accounted for an estimated 28.6% of General Fund revenues and transfers in fiscal year 2010-11, is imposed upon retailers for the privilege of selling tangible personal property in California. Most retail sales and leases are subject to the tax. However, exemptions have been provided for certain essentials such as food for home consumption, prescription drugs, gas delivered through mains, and electricity. Other exemptions provide relief for a variety of sales ranging from custom computer software to aircraft.

Corporation Tax. Corporation tax revenues, which accounted for an estimated 10.5% of General Fund tax revenues in fiscal year 2010-11, are derived from the following taxes and/or sources: (1) the franchise tax and the corporate income tax, which are levied at an 8.84% rate on profit (2) banks and other financial corporations that are subject to the franchise tax plus an additional tax at the rate of 2% on their net income, (3) the AMT, which is imposed at a rate of 6.65%, is similar to the Federal AMT and is based on a higher level of net income computed by adding back certain tax preferences; (4) a minimum franchise tax of up to $800, which is imposed on corporations subject to the franchise tax but not on those subject to the corporate income tax (new corporations are exempted from the minimum franchise tax for the first two years of incorporation); (5) Sub-Chapter S corporations, which are taxed at 1.5% of profits; and (6) fees paid by limited liability companies, which account for 2.8% of revenues (the constitutionality of these fees has been challenged in three separate litigations).

Litigation
The state and its officers and employees are parties to numerous legal proceedings, many of which normally occur in government operations. In addition, at any given time, including the present, there are numerous civil actions pending against the state (described in the state's recent Official Statements), which could, if determined adversely to the state, affect the state's expenditures and, in some cases, its revenues and cash flow. Because of the prospective nature of these proceedings, it is not presently possible to predict the outcome of such litigation, estimate the potential impact on the ability of the state to pay debt service costs on its obligations, or determine what impact, if any, such proceedings may have on the Fund's investments.

Local Governments
California's weakened economy and reduced spending have pressured the credit quality of municipal issuers in the state, though such impacts have had wide variability. The primary units of local government in California are the 58 counties. Counties are responsible for the provision of many basic services, including indigent health care, welfare, jails and public safety in unincorporated areas. There are also 480 incorporated cities in California and thousands of special districts formed for education, utilities, and other services. These local governments derive revenues mainly from sales tax, real property tax, transfer tax and fees relating to real property transactions. A depressed economy, slowed real estate market and decreased housing values pose significant challenges to local governments seeking to raise revenues to sustain their operations.

Similar to the State, local governments face their own set of constitutional amendments that have limited their ability to raise revenues, thus giving rise to concerns over the ability of municipal issuers to satisfy their debt obligations. In particular, the fiscal condition of local governments has been constrained since Proposition 13, passed in 1978, which reduced and limited the future growth of property taxes and limited the ability of local governments to impose "special taxes" (those devoted to a specific purpose) without two-thirds voter approval. In addition, Proposition 218, passed in 1996, further limited the ability of local governments to raise taxes, fees, and other exactions without a vote. As a result of the economy and the lack of revenues, a number of local governments are facing serious fiscal problems. In response to the severe fiscal problems, and pursuant to Chapter 9 of the U.S. Bankruptcy Code, the city of Vallejo filed for bankruptcy protection in 2008. In recent years, other cities have indicated that they are considering bankruptcy as an option in the face of fiscal challenges.

In the past, California has provided monetary assistance to local governments. Whether and to what extent the California legislature will continue to apportion amounts from the General Fund to counties, cities and their various entities, which depend upon state government appropriations, is not entirely certain. This uncertainty poses risks to a fund investing in debt obligations of issuers that rely in whole or in substantial part on state government revenues for the continuance of their operations and payment of their obligations. Any reductions in state aid could compound the serious fiscal constraints already experienced by many local governments. To the extent local entities do not receive money from the state to pay for their operations and services, their ability to pay debt service on obligations held by the Fund may be impaired.

The Commonwealth of Puerto Rico's (as used in this section, "Puerto Rico" or the "Commonwealth") constitutional status is that of a territory of the U.S., and, pursuant to the territorial clause of the U.S. Constitution, the ultimate source of power over Puerto Rico is the U.S. Congress.

Although Puerto Rico's economy is diversified across the manufacturing, service, government, agriculture and construction sectors, the dominant sectors of its economy in terms of production and income are manufacturing and services. As a result, economic problems or factors that negatively impact any of these sectors, but especially the manufacturing and services sectors, may have a negative impact on the value of Puerto Rico municipal securities and entities issuing these securities.

The Commonwealth's economy entered into a recession that began in the fourth quarter of fiscal year 2006, a fiscal year in which the real gross national product grew by only 0.5% and the government of Puerto Rico (as used in this section, "Government") was shut down the first two weeks of May. The recession has been evidenced by, among other things, a contraction in the economy, decreased Commonwealth general fund (as used in this section, "General Fund") revenues and high unemployment.

Certain signs indicate, however, that economic growth in the Commonwealth might be improving. For example, preliminary General Fund net revenues for fiscal year 2011 were higher than in the same period in fiscal year 2010. Also, preliminary General Fund net revenues for the first three months of fiscal year 2012 were higher than in the same period in fiscal year 2011.

Despite these and other signs that the Commonwealth's economy could be improving, because of the current economic environment and the magnitude of the economic recession, the Commonwealth continues to face significant fiscal challenges, including a significant structural imbalance (General Fund total expenditures exceeding revenues).

There can be no assurances that the Commonwealth will not continue to face fiscal stress and that such circumstances will not become more difficult, or that other impacts of the current economic situation will not further materially adversely affect the financial condition of the Commonwealth.

Since 2000, the Commonwealth has experienced an imbalance between recurring Government revenues and total expenditures. The imbalance reached its highest level in fiscal year 2009. In an attempt to address the imbalance, the Government has taken multiple steps, including reforming its taxes and implementing a fiscal stabilization plan, an economic reconstruction plan and an economic development plan.

Tax Reform. In 2010, the Governor of Puerto Rico (as used in this section, "Governor") submitted, and Puerto Rico's Legislature (as used in this section, "Legislature") passed, legislation to implement tax reform. Although elements of the tax reform are designed to provide individual and corporate taxpayers with savings, the Government anticipates that the reduction in income tax revenues resulting from the implementation of the tax reform should be fully offset by the additional revenues produced by (i) enhanced tax compliance measures, (ii) the elimination of certain incentives and tax credits, (iii) a new temporary excise tax imposed on a controlled group member's acquisition from another group member of certain personal property manufactured or produced in Puerto Rico and certain services performed in Puerto Rico (at a declining rate from 4% for 2011 to 1% for 2016) and (iv) an expansion of taxation rules that characterize certain income of non-resident corporations, partnerships and individuals as effectively connected with the conduct of a trade or business in Puerto Rico and therefore subject to Puerto Rico income tax.

There can be no assurance that the revenues resulting from the implementation of the tax reform, together with the other revenue enhancement measures included in the tax reform, will be sufficient to make the reform revenue positive.

Fiscal Stabilization Plan. In January 2009, the Commonwealth's administration, which controls the Executive and Legislative branches of government, began to implement a multi-year plan designed to achieve fiscal balance, restore sustainable economic growth and safeguard the investment-grade ratings of the Puerto Rico. The fiscal stabilization plan, which was generally contained in Act No. 7, sought to achieve budgetary balance on or before fiscal year 2013, while addressing expected fiscal deficits in the intervening years through the implementation of a number of initiatives, including: (i) a gradual operating expense-reduction plan through reduction of operating expenses, including payroll, which is the main component of government expenditures, and the reorganization of the Executive Branch;( ii) a combination of temporary and permanent revenue raising measures, coupled with additional tax enforcement measures; and (iii) a bond issuance program through the Puerto Rico Sales Tax Financing Corporation ("COFINA" by its Spanish-language acronym). The proceeds from the COFINA bond issuance program, which are held by the Government Development Bank for Puerto Rico ("GDB") in an account ("Stabilization Fund"), have been used to repay existing government debt (including debts with GDB), finance operating expenses for fiscal years 2008 through 2011 (and may be used for fiscal year 2012, to the extent included in the government's annual budget for such fiscal year), including costs related to the implementation of a workforce reduction plan, and fund an economic stimulus plan.

Economic Reconstruction Plan. In fiscal year 2009, the Commonwealth's administration began to implement a short-term economic reconstruction plan. The cornerstone of this plan was the implementation of U.S. federal and local economic stimulus programs. The Commonwealth was awarded approximately $6.8 billion in stimulus funds under the ARRA program. Approximately $3.3 billion of the ARRA funds is allocated for consumer and taxpayer relief and the remainder will be used to expand unemployment and other social welfare benefits, and spending in education, healthcare, and infrastructure, among others. As of March 31, 2011, the Commonwealth had disbursed $4.3 billion in ARRA funds, or 63% of awarded funds.

The Commonwealth's administration has complemented the U.S. federal stimulus package with additional short and medium-term supplemental stimulus measures that seek to address local economic challenges and provide investment in strategic areas. These measures included a local $500 million economic stimulus plan.

Economic Development Plan. The Commonwealth's administration has also developed the "Strategic Model for a New Economy," which is a comprehensive long-term economic development plan aimed at improving Puerto Rico's overall competitiveness and business environment and increasing private-sector participation in Puerto Rico's economy. As part of this plan, the Commonwealth's administration enacted Act No. 161 on December 1, 2009, which overhauled the permitting and licensing process in Puerto Rico in order to provide for a leaner and more efficient process that fosters economic development. The Commonwealth's administration enacted Acts No. 82 and 83 of July 19, 2010, which provide for a new energy policy that seeks to lower energy costs and reduce energy-price volatility by reducing Puerto Rico's dependence on fuel oil and the promotion of diverse, renewable-energy technologies. Moreover, the Commonwealth's administration proposed the adoption of a comprehensive tax reform that takes into account the Commonwealth's current financial situation.

In addition, to further stimulate economic development and cope with the fiscal crisis, the Commonwealth's Legislative Assembly approved Act No. 29 on June 8, 2009, establishing a public policy and legal framework for the establishment of public-private partnerships to finance and develop infrastructure projects and operate and manage certain public assets. During fiscal year 2010, the administration engaged various financial advisors to assist it in the evaluation and procurement of various projects in the energy, transportation, water and public school infrastructure sectors. During the fourth quarter of fiscal year 2010, the administration published desirability studies for four public-private partnership priority projects and commenced procurement for such projects.

The Commonwealth's administration has also identified strategic initiatives to promote economic growth in various sectors of the economy where Puerto Rico is believed to have competitive advantages and several strategic/regional projects aimed at fostering balanced economic development throughout the Commonwealth. These projects, some of which are ongoing, include tourism and urban redevelopment projects.

On July 1, 2011, the Governor signed the Commonwealth's central-government budget for fiscal year 2012. The adopted budget provides for total General Fund revenues of approximately $9.3 billion, $610 million of which consists of proceeds from COFINA bond issues.

The principal changes in General Fund revenues under the fiscal year 2012 budget compared to the fiscal year 2011 budget are accounted for mainly by the projected collections from the temporary excise tax under Act No. 154 (up $969 million), sales and use taxes (up $125 million), retained non-resident income taxes (up $29 million), alcoholic beverage taxes (up $9 million), and projected decreases in excise taxes on motor vehicles and accessories (down $8 million), corporate income tax (down $51 million), federal excise taxes on offshore shipments (down $66 million), property taxes (down $162 million) and personal income taxes (down $239 million).

The fiscal year 2012 budget provides for total expenditures of approximately $9.3 billion, $610 million of which are expected to be covered by proceeds from COFINA bond issues. The fiscal year 2012 budgeted expenditures exclude certain debt service payments on the Commonwealth's general obligation bonds and Commonwealth guaranteed Puerto Rico Public Buildings Authority ("PBA") bonds which are expected to be refinanced during fiscal year 2012. The budgeted total expenditures for fiscal year 2012 are $126 million, or 1.4%, higher than budgeted total expenditures of approximately $9.1 billion for fiscal year 2011, and approximately $1.1 billion, or 10.7%, lower than total expenditures of approximately $10.4 billion for fiscal year 2010.

Budgeted expenditures and capital improvements for the central government of all budgetary funds total approximately $15.9 billion, a decrease of $142.9 million from fiscal year 2011 budgeted appropriations. The principal changes in General Fund expenditures by program in the fiscal year 2012 budget compared to the fiscal year 2011 budget are mainly due to increases in public safety and protection (up $80.1 million), education (up $131.4 million), economic development (up $106.4 million), transportation (up $10.2 million), special pension contributions (up $85.8 million), contribution to municipalities (up $28.5 million), and decreases in general obligation bonds debt service (down $21.5 million), welfare (down $22.0 million), health care (down $209.2 million) and governmental management (down $51.2 million).

Budget Risks. Many complex political, social, and economic factors influence the Commonwealth's economy and finances. Such factors may affect the Commonwealth's budget unpredictably from year to year. Such factors include, but are not limited to: (i) developments with respect to the national economy as a whole; (ii) developments with respect to the manufacturing and service sectors of the economy; (iii) developments in the world economy, and in particular commodity prices such as oil; (iv) U.S. fiscal and economic policies, including fiscal stimulus efforts in general and the amount of federal aid to the Commonwealth; (v) the impact of the tax reform, and the Commonwealth's fiscal stabilization plan, economic reconstruction plan and economic development plan; (vi) the impact of the funds received or expected to be received pursuant to the ARRA, which was enacted by the U.S. government to stimulate the U.S. economy in the wake of the global economic downturn; and (vii) whether actual budgeted revenues are less than projected revenues and actual expenditures are more than projected expenditures.

These factors are continually changing, and no assurances can be given with respect to how these factors or other factors will materialize in the future or what impact they will have on the Commonwealth's fiscal and economic condition. Such factors could have an adverse impact on the Commonwealth budget in the current year and could result in declines, possibly severe, in the value of the Commonwealth's and municipal issuers' outstanding obligations, increases in their future borrowing costs, and impairment of their ability to pay debt service on their obligations.

The ratings of the Commonwealth's general obligation bonds as of November11, 2011 are "Baa1" from Moody's, "BBB" from S&P and "BBB+" from Fitch.

Each such rating reflects only the views of the respective rating agency and an explanation of the significance of such rating may be obtained from such rating agency. There is no assurance that such ratings will continue for any given period of time or that they will not be revised or withdrawn entirely by such rating agency if in the judgment of such rating agency circumstances so warrant. A downward revision or withdrawal of any such rating may have an adverse effect on the market prices of the bonds.

Major sources of General Fund expenditures include, among other items: (i) grants and subsidies (including contributions to municipalities), (ii) personal and other services (including compensation paid for personal services rendered to the Commonwealth and its public instrumentalities as well as other services such as building and equipment rental and insurance premiums), (iii) capital outlays (including outlays made for land acquisition or interest in land, construction of buildings, road bridges and other structures) and (iv) funding benefits (including pension benefits and non-pension, post-employment benefits for certain individuals). Effects from the recession, the current economic environment, as well as future economic problems and factors could increase General Fund expenditures to these and other sources.

Pension and Non-Pension Unfunded Liability. One of the challenges that the Government faces is how to address the growing unfunded pension benefit obligations and funding shortfalls of the three government retirement systems (the Employees Retirement System, the Teachers Retirement System, and the Judiciary Retirement System) that are funded principally with Government appropriations. The three systems are funded principally by contributions made by employers (the Commonwealth, public corporations, and municipalities) and employees, as well as investment income. The Government is responsible for approximately 64% of total employer contributions to the Employees Retirement System, and the other 36% is the responsibility of public corporations and municipalities. The Government is also responsible for 100% and 99% of total employer contributions to the Judiciary and Teachers Retirement Systems, respectively. As of June 30, 2010, the date of the latest actuarial valuations of the retirement systems, the unfunded actuarial accrued liability (including basic and system administered benefits) for the Employees Retirement System, the Teachers Retirement System, and the Judiciary Retirement System was approximately $17.8 billion, $7.1 billion and $283 million, respectively, and the funded ratios were 8.5%, 23.97% and 16.4%, respectively.

Since the Commonwealth and other participating employers (such as municipalities and participating public corporations) are ultimately responsible for any funding deficiency in the three retirement systems, the depletion of the assets available to cover retirement benefits will require the Commonwealth and other participating employers to cover annual funding deficiencies. It is estimated that the Commonwealth would be responsible for approximately 74% of the combined annual funding deficiency of the three retirement systems, with the balance being the responsibility of the municipalities and participating public corporations.

The Commonwealth also provides non-pension, post-employment benefits in the form of a medical insurance plan contribution. The cost of these benefits, which amounted to $114.2 million for fiscal year 2010, are funded on a pay-as-you-go basis from the General Fund and are valued using actuarial principles similar to those used for calculating pension benefits. Based on the latest actuarial valuations, as of June 30, 2010, the aggregate unfunded actuarial accrued liability for these benefits was $2.3 billion.
Ultimately, since the Commonwealth's General Fund is required to cover a significant amount of the funding deficiencies, the Commonwealth would have difficulty funding the annual required contributions unless it implements significant reforms, obtains additional revenues, or takes other budgetary measures.

In order to address, at least in part, the growing unfunded pension benefit obligations and funding shortfalls of the three Government retirement systems, the Government enacted two bills in 2011. The first bill was enacted as Act No. 96 of June 16, 2011. In accordance with Act No. 96, on June 23, 2011, $162.5 million of funds on deposit in the Corpus Account of the Puerto Rico Infrastructure Fund were contributed to the Employees Retirement System and invested in capital appreciation bonds issued by COFINA. The second bill, enacted as Act No. 116 of July 6, 2011, provides an increase in employer contributions to the Employee Retirement System and the Teachers Retirement System of 1% of covered payroll in each of the next five fiscal years and by 1.25% of covered payroll in each of the following five fiscal years. There is no guarantee that these measures will be sufficient to fix the unfunded liability to the Government's retirement systems.

The major sources of General Fund revenues are derived from personal income taxes and taxes on corporations and partnerships. Other major taxes that provide revenues to the General Fund include an excise tax, a property tax and a license tax. Effects from the tax reform, discussed above, the recession and the current economic environment, as well as future economic problems and factors could negatively impact General Fund revenues received from these and other sources.

The Commonwealth and its officers and employees may be parties to numerous legal proceedings, many of which normally occur in government operations. In addition, the Commonwealth is involved in certain other legal proceedings (described in the Commonwealth's recent Official Statements) that, if decided against the Commonwealth, might require the Commonwealth to make significant future expenditures or substantially impair future revenue sources. Because of the prospective nature of these proceedings, it is not presently possible to predict the outcome of such litigation, estimate the potential impact on the ability of the Commonwealth to pay debt service costs on its obligations, or determine what impact, if any, such proceedings may have on a fund's investments.

The constitutional status of the island of Guam (as used in this section, "Guam" or the "Territory") is that of an unincorporated territory of the U.S., and, pursuant to the territorial clause of the U.S. Constitution, the ultimate source of power over the Territory is the U.S. Congress. The organization and powers of the government of the Territory (as used in this section, "Government") are determined by the terms of the Organic Act.

Although Guam's economy is diversified, tourism has represented the primary source of income for the Territory's economy for over twenty-five years. U.S. federal and military spending also contribute significantly to its economy. Therefore, economic problems or factors that negatively impact tourism in Guam, as well as factors that reduce U.S. federal and military spending in Guam, may have a negative impact on the value of Guam municipal securities and entities issuing these securities.

In regard to tourism, in fiscal year 2010, Guam's top four visitor markets, as measured by visitors to Guam by air, were Japan (75.8%), Korea (10.3%), the U.S. (5.2%) and Taiwan (2.5%). Therefore, Guam's economy is very sensitive to fluctuations in each of these economies, but especially to that of Japan. The March 11, 2011 earthquake that occurred near northeastern Japan and the subsequent tsunami that affected Japan's northern and central east coast are anticipated to have a negative effect on Guam's tourism, although it is too early to predict the ultimate effect of these natural disasters on Guam's economy.

Despite significant revenues from the federal government in recent years through stimulus packages (including approximately $386 million of ARRA funding for programs and infrastructure projects) and military contracts (including over $964 million in fiscal year 2010), there is no guarantee that such stimulus and military spending will not decrease, potentially significantly, in future years.

Because of the current economic environment, the magnitude of the global recession, and a slew of misfortunes that negatively impacted tourism in Guam (including earthquakes, tsunamis, super typhoons, the September 1, 2001 terrorist attacks and the outbreak of diseases, such as severe acute respiratory syndrome in 2003 and the H1N1 virus in 2009), Guam faces significant economic problems. These problems are reflected in Guam's rising unemployment rate (which increased from 6.9% in March 2006 to 13.3% in March) and growing deficit (which, according to the 2010 Guam General Fund (as used in this section, "General Fund") unaudited financial statements for the period ending September 30, 2010, indicate that Guam's deficit rose by $83,583,828, from a level of $265,377,371 in fiscal year 2009 to $348,961,199 in fiscal year 2010, and is projected to increase further to $348,972,664 in fiscal year 2011).

There can be no assurances that Guam will not continue to face fiscal stress and that such circumstances will not become more difficult, or that other impacts of the current economic situation will not further materially adversely affect Guam's financial condition.

On April 8, 2011, the Governor of Guam (as used in this section, "Governor") submitted his proposed fiscal year 2012 budget to the Territory's Legislature (as used in this section, "Legislature"). The proposed plan included revenue available for appropriations of $561.1 million, tax refunds in the amount of $105.0 million and a General Fund reserve of 2% in the amount of $11.2 set aside for deficit reduction.

On September 20, 2011, the Governor signed the budget for fiscal year 2012 that was previously passed by the Legislature. The adopted fiscal year 2012 budget leaves total General Fund revenue available for appropriation of approximately $562.3 million, a slight increase over the appropriations in the proposed budget. Revenue from taxes accounts for over 90% of total General Fund revenue available for appropriation.

Major expenditures in the 2012 budget include, but are not limited to: (i) appropriations for debt service; (ii) appropriations for health, including for the Department of Public Health and Social Services, the Medically Indigent Program and for Guam's medicaid program; (iii) appropriations for public education, including for the operations of the University of Guam and Guam Community College; and (iv) appropriations for the protection of life and property, including for the base operations of the Fire Department, the Police Department and the Department of Corrections.

Budget Risks. Many complex political, social, and economic factors influence Guam's economy and finances. Such factors may affect Guam's budget unpredictably from year to year. Such factors include, but are not limited to: (i) developments with respect to the national economy as a whole; (ii) developments with respect to the economies of Japan, Korea, the U.S. and Taiwan that impact tourism; (iii) developments in the world economy, and in particular commodity prices such as oil; (iv) U.S. fiscal and economic policies, including fiscal stimulus efforts in general and the amount of federal aid to Guam; (v) developments with respect to the U.S. military spending in Guam; and (vi) whether actual budgeted revenues are less than projected revenues and actual expenditures are more than projected expenditures.

These factors are continually changing, and no assurances can be given with respect to how these factors or other factors will materialize in the future or what impact they will have on Guam's fiscal and economic condition. Such factors could have an adverse impact on Guam's budget in the current year and could result in declines, possibly severe, in the value of Guam's municipal issuers' outstanding obligations, increases in their future borrowing costs, and impairment of their ability to pay debt service on their obligations.

The rating of Guam's general obligation debt as of November 11, 2011 is "B+" from S&P.

The rating reflects only the view of the rating agency and an explanation of the significance of such rating may be obtained from such rating agency. There is no assurance that such ratings will continue for any given period of time or that they will not be revised or withdrawn entirely by such rating agency if in the judgment of such rating agency circumstances so warrant. A downward revision or withdrawal of the rating may have an adverse effect on the market prices of the bonds.

Major Sources of General Fund Expenditures
Expenditures of General Fund revenues are made pursuant to appropriation laws. The two largest expenditure categories, public education and protection of life and property, accounted for approximately 41% and 16% of total General Fund expenditures in fiscal year 2010, respectively. The Government also has significant unfunded liabilities relating to the Guam Retirement Fund (as used in this section, the "Retirement Fund"). Effects from the global recession, the current economic environment, as well as future economic problems and factors could increase General Fund expenditures to these and other sources.

Retirement Fund Unfunded Liability. One of the challenges that the Government faces is how to address the growing unfunded pension benefit obligations and funding shortfalls of the Retirement Fund. The Retirement Fund provides retirement annuities and other payments to retired Government employees and their dependents. Although the retirement plan has historically been a defined benefit plan, all new Government employees hired after September 30, 1995 are instead participants in a defined contribution retirement plan. Based on the September 30, 2010 valuation, the Retirement Fund had an unfunded accrued liability of $1.545 billion. Based on the actuarial valuation, the actuarially determined contribution rate for fiscal year 2010 was 30.09% of covered payroll. However, the Government has funded a lower contribution rate of 28.3% for fiscal year 2010 based in part on a law that provides that the Government's employer contribution rate to the Retirement Fund will increase over a five-year period, beginning with fiscal year 2007, until it reaches the actuarial recommended contribution rate. Increased expenditures to the Retirement Fund in upcoming years may exert pressure on the budget.

The two largest General Fund revenue categories are taxes and U.S. federal government contributions, which accounted for approximately 57% and 35% of total General Fund revenues in fiscal year 2010, respectively. Effects from the global recession, the current economic environment, as well as future economic problems and factors could negatively impact General Fund revenues received from these and other sources.

Guam and its officers and employees may be parties to legal proceedings, many of which normally occur in government operations. In addition, at any given time, including the present, there are civil actions pending against Guam (described in Guam's recent Official Statement), which could, if determined adversely to Guam, affect Guam's expenditures and, in some cases, its revenues and cash flow. Because of the prospective nature of these proceedings, it is not presently possible to predict the outcome of such litigation, estimate the potential impact on the ability of Guam to pay debt service costs on its obligations, or determine what impact, if any, such proceedings may have on the Fund's investments.

The constitutional status of the U.S. Virgin Islands (as used in this section, "USVI" or the "Territory") is that of an unincorporated territory of the U.S., and, pursuant to the territorial clause of the U.S. Constitution, the ultimate source of power over the Territory is the U.S. Congress. The organization and powers of the government of the Territory (as used in this section, "Government") are determined by the terms of the Revised Organic Act.

Although the Territory's economy is diversified, tourism remains the economy's primary source of income. Therefore, economic problems or factors that negatively impact tourism in USVI may have a negative impact on the value of USVI municipal securities and entities issuing these securities.

During the recent recession, the Territory experienced a significant economic downturn, evidenced by rising unemployment and declining tax revenues and tourism.

Certain signs indicate, however, that economic growth in the Territory might recently have been improving. For example, total visitor arrivals increased in the first half of fiscal year 2011 compared to the same period for fiscal year 2010. Also, during the first half of fiscal year 2011, tax revenues collections increased compared to the same period for fiscal year 2010.

Despite these and other signs that USVI's economy could be improving, because of the current economic environment and the magnitude of the economic recession, the Territory continues to face significant fiscal problems, including a projected $75.1 million budget deficit in fiscal year 2011 and a $131.5 deficit in fiscal year 2012.

There can be no assurances that USVI will not continue to face fiscal stress and that such circumstances will not become more difficult, or that other impacts of the current economic situation will not further materially adversely affect the Territory's financial condition.

On June 10, 2011, the Governor of USVI (as used in this section, "Governor") submitted his proposed $1.2 billion fiscal year 2012 budget to the Territory's Legislature (as used in this section, "Legislature") for its review and approval. Of the total budget, $731.3 million would come from the USVI general fund (as used in this section, "General Fund"). The remaining revenues would derive from other sources, including federal funds. The Governor attempted to balance the budget through a combination of measures, including, among others, increasing gross receipts taxes by 1% and implementing nine unpaid holidays for government workers.

After numerous hearings, the USVI Legislature (as used in this section, "Legislature") passed the fiscal year 2012 budget and sent it to the Governor on September 26, 2011. As passed, the Legislature rejected some of the Governor's proposals for balancing the budget, including the 1% increase in the gross receipts tax (which was cut in half) and the nine unpaid holidays. Because he disagreed with some of the changes to his proposed budget, the Governor refused to sign the budget. Under the Revised Organic Act, if the Governor does not take action on a piece of legislation passed by the Legislature within 10 days, it automatically becomes law. As such, the 2012 budget became law on October 7, 2011.

Major expenditures in the 2012 budget include, but are not limited to: (i) appropriations for health and human services, including appropriations for the Department of Health, the Schneider Regional Medical Center, the Governor Juan F. Luis Hospital and Medical Center and the Department of Human Services; (ii) appropriations for public education, including for the Department of Education; and (iii) appropriations for the protection of life and property, including for the Police Department, the VI Fire Department and the Department of Corrections.

Budget Risks. Many complex political, social, and economic factors influence the economy and finances of the USVI. Such factors may affect the Territory's budget unpredictably from year to year. Such factors include, but are not limited to: (i) developments with respect to the national economy as a whole; (ii) developments that impact tourism; (iii) developments in the world economy, and in particular commodity prices such as oil; (iv) U.S. fiscal and economic policies, including fiscal stimulus efforts in general and the amount of federal aid to the Territory; and (v) whether actual budgeted revenues are less than projected revenues and actual expenditures are more than projected expenditures.

These factors are continually changing, and no assurances can be given with respect to how these factors or other factors will materialize in the future or what impact they will have on the USVI's fiscal and economic condition. Such factors could have an adverse impact on the USVI's budget in the current year and could result in declines, possibly severe, in the value of USVI municipal issuers' outstanding obligations, increases in their future borrowing costs, and impairment of their ability to pay debt service on their obligations.

The rating of USVI's general obligation debt as of November 11, 2011 is "BAA1" from Moody's.

Historically, a significant portion of the Government expenditures consist of appropriations for the administration and operation of the Government's institutions and facilities (such as educational facilities and health and hospital facilities) and for the operation of the Government's departments and agencies (such as the Police Department and Fire Department). Expenditures also are required under legally binding contractual agreements that the Government has previously made or existing statutes which have continuing applicability. Contractually required expenditures include amounts for debt service payments. In addition, the Government has significant unfunded liabilities relating to the Government Employees' Retirement System ("GERS") of the USVI. Effects from the global recession, the current economic environment, as well as future economic problems and factors could increase General Fund expenditures to these and other sources.

GERS Unfunded Liability. GERS was statutorily created to administer a defined benefit-pension plan sponsored by the Virgin Islands Government. According to the most recent financial report for GERS, as of September 30, 2009, the plan was 52% funded, with an unfunded actuarial accrued liability of $1.4 billion. Increased expenditures to GERS in upcoming years may exert pressure on the budget.

The principal sources of revenues for the General Fund are personal income taxes and gross receipt taxes. Other tax sources of revenues for the General Fund include real property taxes; federal excise taxes imposed on products of the USVI entering the U.S. and other fees and taxes collected by the U.S. federal government (including stamp taxes, foreign sales corporation franchise taxes, inheritance taxes and corporate franchise taxes). Non-tax sources of revenues for the General Fund include, among other things, licenses, fees, permits, fines, franchise fees, and custom dues, as well as inter-fund transfers. Effects from the global recession, the current economic environment, as well as future economic problems and factors could negatively impact General Fund revenues received from these and other sources.

Litigation
The Territory and its officers and employees may be parties to legal proceedings, many of which normally occur in government operations. In addition, at any given time there may be civil actions pending against the USVI, which could, if determined adversely to the USVI, affect the USVI's expenditures and, in some cases, its revenues and cash flow. Because of the prospective nature of any such proceeding, it is not presently possible to predict the outcome of such litigation, estimate the potential impact on the ability of the Territory to pay debt service costs on its obligations, or determine what impact, if any, such proceedings may have on the Fund's investments.

The Commonwealth of the Northern Mariana Islands (as used in this section, "CNMI" or the "Commonwealth") emerged from the Trust Territory of the Pacific Islands ("TTPI"), which the U.S. administered on behalf of the United Nations. The U.S. law (the Covenant) making the CNMI a U.S. territory passed in 1975.

The main drivers of the economy of the CNMI are its garment and tourism industries. Therefore, economic problems or factors that negatively impact these industries may have a negative impact on the value of CNMI municipal securities and entities issuing these securities.

When the CNMI became a U.S. territory in 1975, the U.S. government agreed to exempt the Commonwealth from federal minimum wage and immigration laws in an effort to help stimulate industry and the economy. As a result, the Commonwealth was able to build a large garment industry which at one time encompassed 40% of the economy, and its rapid growth from 1980-1995 helped put the Commonweal at the top of the list of economic growth worldwide. Critical to this growth was duty-free access to U.S. markets and local authority over immigration and the minimum wage. However, in 2005 when the World Trade Organization ("WTO") eliminated quotas on apparel imports from other textile producing countries, the CNMI a competitive advantage. In addition, the CNMI came under U.S. minimum wage regulations in 2007 and U.S. immigration law in 2008. As such, the Commonwealth must now follow all U.S. immigration and minimum wage laws. The minimum wage will be increased by $0.50 each year until 2015 when it reaches the current U.S. minimum wage. The actions have potentially raised the production costs to a level that renders the garment industry uncompetitive for the Commonwealth. Also, under new immigration laws, all non-U.S. born residents must leave the CNMI by 2012 unless they qualify for a working visa. As a result of these changes, as well as other factors, the garment industry has declined significantly which has affected jobs, population, income and CNMI government (as used in this section, "Government") revenues.

Tourism is also a significant industry for the Commonwealth's economy. The CNMI continues its heavy dependence on Asian markets for tourism. In 2008, 51% of visitors were from Japan, 26% from Korea and 12% from Russia and China. Therefore, the Commonwealth's economy is very sensitive to fluctuations in each of these economies, but especially to that of Japan. The March 11, 2011 earthquake that occurred near northeastern Japan and the subsequent tsunami that affected Japan's northern and central east coast will likely have a negative effect on the Commonwealth's tourism, although it is too early to predict the ultimate effect of these natural disasters on the Commonwealth's economy.

Because of the current economic environment, including the downturn of the garment industry, the magnitude of the global recession and a slew of misfortunes that negatively impacted tourism in the CNMI (including earthquakes, tsunamis, the Asian economic crisis in the 1990's, the September 1, 2001 terrorist attacks and the outbreak of diseases, such as severe acute respiratory syndrome in 2003 and the H1N1 virus in 2009), the Commonwealth faces significant economic problems.

The Commonwealth's general fund (as used in this section, "General Fund") has been in a deficit position since 1994. At the end of fiscal year 2009, the General Fund had an accumulated deficit of $300.8 million, reflecting an increase of 17.4% from the General Fund's deficit of $256.6 million at the start of the fiscal year. The deficit was created from years of deficit operations resulting from both incorrect revenue and expenditure assumptions and the consequences from not adopting a budget. In a year in which the CNMI did not adopt a budget, it could spend at the prior budget's levels, which, in some cases, was four years old. As a result, its expenditures could be significantly more than its revenues. The deficit has historically been funded, at least in part, by eliminating payments to the Northern Mariana Islands Retirement Fund (as used in this section, the "Retirement Fund"). The elimination of retirement funding has also left the Retirement Fund grossly underfunded.

According to the latest audit report available, which was conducted for the fiscal years ended September 30, 2009 and 2008, the Retirement Fund had unfunded liability of $545,965,188, and, as of September 30, 2009, Retirement Fund assets available for benefits were not sufficient to pay for its accrued benefits. Increased expenditures to the Retirement Fund in upcoming years may exert pressure on the budget.

There can be no assurances that CNMI will not continue to face fiscal stress and that such circumstances will not become more difficult, or that other impacts of the current economic situation will not further materially adversely affect the Commonwealth's financial condition.

On September 26, 2011, the Governor of the CNMI (as used in this section, "Governor") signed the 2012 Budget into law. As passed, the adopted budget projects that net budgetary resources available for appropriation will be $102 million, approximately $20 million less than the previous fiscal year. The adopted budget includes $8,429,000 for debt service for certain previously issued bonds.

Budget Risks. Many complex political, social, and economic factors influence the economy and finances of the CNMI. Such factors may affect the Commonwealth's budget unpredictably from year to year. Such factors include, but are not limited to: (i) developments with respect to the national economy as a whole; (ii) developments with respect to the economies of Japan, Korea, China and Russia that impact tourism; (iii) developments that impact the garment industry; (iv) developments in the world economy, and in particular commodity prices such as oil; (v) U.S. fiscal and economic policies, including fiscal stimulus efforts in general and the amount of federal aid to the Commonwealth; and (vi) whether actual budgeted revenues are less than projected revenues and actual expenditures are more than projected expenditures.

These factors are continually changing, and no assurances can be given with respect to how these factors or other factors will materialize in the future or what impact they will have on the CNMI's fiscal and economic condition. Such factors could have an adverse impact on the CNMI's budget in the current year and could result in declines, possibly severe, in the value of CNMI municipal issuers' outstanding obligations, increases in their future borrowing costs, and impairment of their ability to pay debt service on their obligations.

The rating of the Commonwealth's general obligation debt as of November 11, 2011, is "B2" by Moody's and "AA+" by S&P.

The Commonwealth and its officers and employees may be parties to legal proceedings, many of which normally occur in government operations. In addition, at any given time there may be civil actions pending against the CNMI, which could, if determined adversely to the Commonwealth, affect the CNMI's expenditures and, in some cases, its revenues and cash flow. Because of the prospective nature of any such proceeding, it is not presently possible to predict the outcome of such litigation, estimate the potential impact on the ability of the Commonwealth to pay debt service costs on its obligations, or determine what impact, if any, such proceedings may have on the Fund's investments.

Below are summaries of the rating definitions used by the nationally recognized rating agencies listed below for municipal securities. Those ratings represent the opinion of the agency as to the credit quality of issues that they rate. The summaries below are based upon publicly available information provided by the rating organizations.

Moody's long-term obligation ratings are opinions of the relative credit risk of fixed-income obligations with an original maturity of one year or more. They address the possibility that a financial obligation will not be honored as promised. Such ratings reflect both the likelihood of default and any financial loss suffered in the event of default.

Aaa: Obligations rated Aaa are judged to be of the highest quality, with minimal credit risk.

Aa: Obligations rated Aa are judged to be of high quality and are subject to very low credit risk.

A: Obligations rated A are considered upper-medium grade and are subject to low credit risk.

Baa: Obligations rated Baa are subject to moderate credit risk. They are considered medium-grade and as such may possess certain speculative characteristics.

Ba: Obligations rated Ba are judged to have speculative elements and are subject to substantial credit risk.

B: Obligations rated B are considered speculative and are subject to high credit risk.

Caa: Obligations rated Caa are judged to be of poor standing and are subject to very high credit risk.

Ca: Obligations rated Ca are highly speculative and are likely in, or very near, default, with some prospect of recovery of principal and interest.

C: Obligations rated C are the lowest rated class of bonds and are typically in default, with little prospect for recovery of principal or interest.

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

US MUNICIPAL SHORT-TERM DEBT AND DEMAND OBLIGATION RATINGS

SHORT-TERM OBLIGATION RATINGS

There are three rating categories for short-term municipal obligations that are considered investment grade. These ratings are designated as Municipal Investment Grade (MIG) and are divided into three levels - MIG 1 through MIG 3. In addition, those short-term obligations that are of speculative quality are designated SG, or speculative grade. MIG ratings expire at the maturity of the obligation.

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

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

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

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

In the case of variable rate demand obligations ("VRDOs"), a two-component rating is assigned; a long or short-term debt rating and a demand obligation rating. The first element represents Moody's evaluation of the degree of risk associated with scheduled principal and interest payments. The second element represents Moody's evaluation of the degree of risk associated with the ability to receive purchase price upon demand ("demand feature"), using a variation of the MIG rating scale, the Variable Municipal Investment Grade or VMIG rating.
When either the long- or short-term aspect of a VRDO is not rated, that piece is designated NR, e.g., Aaa/NR or NR/VMIG 1. VMIG rating expirations are a function of each issue's specific structural or credit features.

VMIG 1: This designation denotes superior credit quality. Excellent protection is afforded by the superior short-term credit strength of the liquidity provider and structural and legal protections that ensure the timely payment of purchase price upon demand.

VMIG 2: This designation denotes strong credit quality. Good protection is afforded by the strong short-term credit strength of the liquidity provider and structural and legal protections that ensure the timely payment of purchase price upon demand.

VMIG 3: This designation denotes acceptable credit quality. Adequate protection is afforded by the satisfactory short-term credit strength of the liquidity provider and structural and legal protections that ensure the timely payment of purchase price upon demand.

SG: This designation denotes speculative-grade credit quality. Demand features rated in this category may be supported by a liquidity provider that does not have an investment grade short-term rating or may lack the structural and/or legal protections necessary to ensure the timely payment of purchase price upon demand.

Standard & Poor's Ratings Services ("Standard & Poor's"), a division of The McGraw-Hill Companies, Inc.

LONG-TERM ISSUE CREDIT RATINGS
Issue credit ratings are based in varying degrees, on the following considerations:

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

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.

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

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 are 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.

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

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.

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

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

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

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

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

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.

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

SHORT-TERM ISSUE CREDIT RATINGS
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.

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.

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.

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

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

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

Fitch, Inc.
International credit ratings assess the capacity to meet foreign currency or local currency commitments. Both "foreign currency" and "local currency" ratings are internationally comparable assessments. The local currency rating measures the probability of payment within the relevant sovereign state's currency and jurisdiction and therefore, unlike the foreign currency rating, does not take account of the possibility of foreign exchange controls limiting transfer into foreign currency.

INTERNATIONAL LONG-TERM CREDIT RATINGS
The following ratings scale applies to foreign currency and local currency ratings.
Investment Grade:

AAA: Highest Credit Quality. "AAA" ratings denote the lowest expectation of credit risk. They are assigned only in the 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 a 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.

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, and 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, and 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.
Plus (+) and minus (-) signs may be appended to a rating symbol to denote relative status within the major rating categories. Plus and minus signs are not added to the "AAA" category or to categories below "CCC," nor to short-term ratings other than "F1" (see below).

INTERNATIONAL SHORT-TERM CREDIT RATINGS
The following ratings scale applies to foreign currency and local currency 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. 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 higher ratings.

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

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

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

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements and financial highlights are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. Our procedures included confirmation of securities owned as of July 29, 2011, by correspondence with the custodian and brokers, or by other appropriate auditing procedures where replies from brokers were not received. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

STATEMENT OF INVESTMENTS July 29, 2011*


								Effective
Principal								Maturity
Amount			Coupon			Maturity		(Unaudited)**			Value

Municipal Bonds and Notes—102.9%
California—97.5%
$	100,000	Adelanto, CA Elementary School District Community Facilities District No. 1¹		4.700	%		09/01/2012		09/01/2012		$	96,541
	660,000	Adelanto, CA Improvement Agency, Series B¹		5.500			12/01/2023		10/09/2018	^A		604,514
	210,000	Adelanto, CA Public Financing Authority, Series B¹		6.300			09/01/2028		07/12/2023	^A		206,113
	350,000	Alameda, CA Transportation Authority¹		5.250			10/01/2021		10/01/2011	^B		350,186
	25,000	Alvord, CA Unified School District Community Facilities District¹		6.200			09/01/2025		04/03/2024	^A		24,179
	10,000	Antelope Valley, CA Healthcare District¹		5.200			01/01/2017		08/29/2011	^B		10,016
	1,000,000	Antelope Valley, CA Healthcare District¹		5.200			01/01/2020		08/29/2011	^B		1,000,760
	1,500,000	Antelope Valley, CA Healthcare District¹		5.250			09/01/2017		09/01/2017			1,451,385
	550,000	Antioch, CA Public Financing Authority¹		5.625			01/01/2022		08/29/2011	^B		550,424
	3,005,000	Antioch, CA Public Financing Authority¹		5.625			01/01/2027		08/29/2011	^B		3,005,361
	30,000	Apple Valley, CA Improvement Bond Act 1915¹		6.900			09/02/2015		09/02/2011	^B		30,968
	15,000	Aromas, CA Water District¹		5.600			09/01/2018		09/01/2011	^B		14,998
	15,000	Atwater, CA Redevel. Agency (Downtown Redevel.)¹		5.500			06/01/2019		06/01/2019			14,472
	25,000	Azusa, CA COP¹		5.750			08/01/2020		02/01/2012	^B		25,544
	35,000	Bakersfield, CA Improvement Bond Act 1915¹		5.600			09/02/2020		03/02/2016	^A		34,552
	45,000	Bakersfield, CA Improvement Bond Act 1915¹		6.100			09/02/2024		10/16/2022	^A		43,812
	15,000	Bakersfield, CA Improvement Bond Act 1915¹		7.100			09/02/2015		09/02/2011	^B		15,028
	70,000	Baldwin Park, CA Redevel. Agency¹		5.750			09/01/2030		09/01/2012	^B		70,226
	25,000	Beaumont, CA Financing Authority, Series A¹		5.700			09/01/2035		10/11/2033	^A		22,967
	170,000	Beaumont, CA Financing Authority, Series A¹		7.000			09/01/2023		08/29/2011	^B		170,109
	55,000	Beaumont, CA Financing Authority, Series B¹		6.000			09/01/2034		04/02/2030	^A		53,263
	30,000	Belmont, CA Redevel. Agency (Los Costanos Community Devel.)¹		5.500			08/01/2016		08/29/2011	^B		30,048
	50,000	Belmont, CA Redevel. Agency (Los Costanos Community Devel.)¹		5.600			08/01/2018		08/29/2011	^B		50,051
	50,000	Blythe, CA Redevel. Agency (Redevel. Project No. 1 Tax Allocation)¹		5.750			05/01/2034		06/30/2032	^A		42,036
	795,000	Bonita Canyon, CA Public Facilities Financing Authority¹		5.375			09/01/2028		11/22/2022	^A		761,117
	70,000	Brentwood, CA Improvement Bond Act 1915¹		6.800			09/02/2017		08/29/2011	^B		70,107
	30,000	Brisbane, CA Improvement Bond Act 1915 (Northeast Ridge)¹		5.875			09/02/2020		03/31/2019	^A		30,176
	205,000	Brisbane, CA Public Financing Authority¹		6.000			05/01/2026		07/26/2023	^A		201,050
	35,000	Buena Park, CA Special Tax (Park Mall)¹		6.125			09/01/2033		10/16/2031	^A		30,867
	250,000	Burbank, CA Community Facilities District Special Tax¹		5.200			12/01/2023		06/25/2022	^A		239,013
	50,000	CA ABAG Finance Authority for NonProfit Corporations (Odd Fellows Home of California)¹		6.000			08/15/2024		08/29/2011	^B		51,135


								Effective
Principal								Maturity
Amount			Coupon			Maturity		(Unaudited)**			Value

California Continued
$	5,000	CA ABAG Finance Authority for NonProfit Corporations COP¹		5.600	%		11/01/2023		08/29/2011	^B	$	5,003
	20,000	CA ABAG Finance Authority for NonProfit Corporations COP¹		5.800			03/01/2023		08/29/2011	^B		20,026
	15,000	CA ABAG Finance Authority for NonProfit Corporations COP (Episcopal Homes Foundation)		5.125			07/01/2013		08/29/2011	^B		15,024
	155,000	CA ABAG Finance Authority for NonProfit Corporations COP (O’Connor Woods)¹		6.200			11/01/2029		08/05/2023	^A		144,116
	20,000	CA ABAG Finance Authority for NonProfit Corporations (OW/OWHC/SJRHC Obligated Group)¹		5.700			11/01/2013		11/01/2011	^B		20,092
	65,000	CA ABAG Tax Allocation, Series A¹		6.000			12/15/2014		12/15/2011	^B		66,244
	100,000	CA Affordable Hsg. Agency (Merced County Hsg. Authority)¹		6.500			01/01/2033		01/02/2029	^A		85,823
	8,445,000	CA County Tobacco Securitization Agency		5.830	²		06/01/2033		06/01/2033			788,172
	410,000	CA County Tobacco Securitization Agency (TASC)¹		5.000			06/01/2026		11/29/2017	^A		372,305
	150,000	CA County Tobacco Securitization Agency (TASC)¹		5.100			06/01/2028		02/11/2019	^A		126,644
	2,000,000	CA County Tobacco Securitization Agency (TASC)¹		5.125			06/01/2038		06/25/2028	^A		1,386,740
	6,620,000	CA County Tobacco Securitization Agency (TASC)¹		5.250			06/01/2021		01/12/2014	^A		6,133,761
	2,240,000	CA County Tobacco Securitization Agency (TASC)¹		5.450			06/01/2028		01/06/2020	^A		1,949,427
	295,000	CA County Tobacco Securitization Agency (TASC)¹		5.500			06/01/2033		05/29/2015	^A		251,399
	7,955,000	CA County Tobacco Securitization Agency (TASC)¹		5.750			06/01/2029		09/10/2015	^A		7,530,123
	150,000	CA County Tobacco Securitization Agency (TASC)¹		5.875			06/01/2027		04/14/2019	^A		145,995
	340,000	CA County Tobacco Securitization Agency (TASC)¹		5.875			06/01/2035		01/13/2020	^A		269,895
	305,000	CA County Tobacco Securitization Agency (TASC)¹		5.875			06/01/2043		08/29/2024	^A		235,125
	1,295,000	CA County Tobacco Securitization Agency (TASC)¹		6.000			06/01/2029		11/14/2015	^A		1,272,765
	4,965,000	CA County Tobacco Securitization Agency (TASC)¹		6.000			06/01/2035		10/18/2024	^A		4,035,403
	435,000	CA County Tobacco Securitization Agency (TASC)¹		6.000			06/01/2042		08/18/2024	^A		342,384
	10,700,000	CA County Tobacco Securitization Agency (TASC)		6.068	²		06/01/2046		06/05/2033	^A		541,527


								Effective
Principal								Maturity
Amount			Coupon			Maturity		(Unaudited)**			Value

California Continued
$	50,000	CA County Tobacco Securitization Agency (TASC)¹		6.250	%		06/01/2037		03/12/2024	^A	$	41,481
	2,935,000	CA Dept. of Transportation COP¹		5.250			03/01/2016		08/29/2011	^B		2,946,182
	85,000	CA Dept. of Veterans Affairs Home Purchase¹		5.200			12/01/2027		08/29/2011	^B		85,047
	60,000	CA Dept. of Veterans Affairs Home Purchase¹		5.200			12/01/2028		08/29/2011	^B		60,241
	685,000	CA Dept. of Water Resources (Center Valley)¹		5.250			07/01/2022		08/29/2011	^B		687,247
	10,000	CA Dept. of Water Resources (Center Valley)		5.400			07/01/2012		08/29/2011	^A		10,045
	1,130,000	CA Educational Facilities Authority¹		5.125			04/01/2017		08/29/2011	^B		1,130,124
	250,000	CA Educational Facilities Authority (California College of Arts & Crafts)¹		5.750			06/01/2025		11/29/2022	^A		241,878
	25,000	CA Educational Facilities Authority (California College of Arts & Crafts)¹		5.875			06/01/2030		07/12/2028	^A		23,704
	115,000	CA Educational Facilities Authority (Golden Gate University)¹		5.500			10/01/2018		08/29/2011	^B		115,015
	10,000	CA Educational Facilities Authority (Los Angeles College of Chiropractic)¹		5.600			11/01/2017		01/20/2015	^A		8,570
	325,000	CA Educational Facilities Authority (Mills College)¹		5.125			09/01/2022		08/29/2011	^B		325,114
	725,000	CA Educational Facilities Authority (Pooled University)¹		5.250			04/01/2024		06/16/2021	^A		675,330
	50,000	CA Educational Facilities Authority (Stanford University)¹		5.125			01/01/2031		08/29/2011	^B		50,139
	310,000	CA Educational Facilities Authority (University Pacific)¹		5.750			11/01/2030		08/29/2011	^B		310,229
	335,000	CA Financing Authority (Wastewater Improvement)¹		6.100			11/01/2033		12/17/2031	^A		294,378
	60,000	CA GO		4.800			08/01/2014		08/29/2011	^B		60,191
	25,000	CA GO¹		5.000			06/01/2017		08/29/2011	^B		25,083
	25,000	CA GO¹		5.000			06/01/2019		08/29/2011	^B		25,076
	5,000	CA GO¹		5.000			06/01/2019		08/29/2011	^B		5,015
	5,000	CA GO		5.000			02/01/2021		08/29/2011	^B		5,014
	100,000	CA GO¹		5.000			11/01/2022		11/01/2011	^B		100,736
	75,000	CA GO¹		5.000			10/01/2023		08/29/2011	^B		75,128
	10,000	CA GO¹		5.000			10/01/2023		08/29/2011	^B		10,017
	45,000	CA GO¹		5.000			02/01/2025		08/29/2011	^B		45,068
	10,000	CA GO¹		5.000			02/01/2025		08/29/2011	^B		10,015
	25,000	CA GO¹		5.125			10/01/2027		08/29/2011	^B		25,015
	25,000	CA GO¹		5.250			10/01/2013		10/01/2011	^B		25,194
	25,000	CA GO¹		5.250			10/01/2013		10/01/2011	^B		25,194
	20,000	CA GO¹		5.250			06/01/2016		12/01/2011	^B		20,300
	25,000	CA GO¹		5.250			04/01/2018		08/29/2011	^B		25,086
	10,000	CA GO¹		5.250			04/01/2019		08/29/2011	^B		10,033
	10,000	CA GO		5.250			04/01/2021		08/29/2011	^B		10,029


								Effective
Principal								Maturity
Amount			Coupon			Maturity		(Unaudited)**			Value

California Continued
$	160,000	CA GO¹		5.250	%		06/01/2021		12/01/2011	^B	$	161,846
	10,000	CA GO¹		5.250			02/01/2029		02/01/2013	^B		10,090
	10,000	CA GO¹		5.250			02/01/2030		02/01/2012	^B		10,026
	15,000	CA GO¹		5.300			09/01/2011		09/01/2011			15,066
	15,000	CA GO¹		5.375			06/01/2026		12/01/2011	^B		15,102
	125,000	CA GO¹		5.500			03/01/2013		08/29/2011	^B		125,526
	75,000	CA GO¹		5.500			06/01/2013		08/29/2011	^B		75,310
	10,000	CA GO¹		5.500			03/01/2014		08/29/2011	^B		10,042
	125,000	CA GO¹		5.500			03/01/2014		08/29/2011	^B		125,516
	15,000	CA GO¹		5.500			04/01/2014		08/29/2011	^B		15,062
	65,000	CA GO¹		5.500			06/01/2014		08/29/2011	^B		65,268
	550,000	CA GO¹		5.500			03/01/2015		08/29/2011	^B		552,272
	55,000	CA GO¹		5.500			04/01/2015		10/01/2011	^B		55,455
	40,000	CA GO¹		5.500			06/01/2015		08/29/2011	^B		40,165
	55,000	CA GO¹		5.500			04/01/2019		10/01/2011	^B		55,397
	15,000	CA GO¹		5.500			03/01/2020		09/01/2011	^B		15,054
	25,000	CA GO¹		5.500			03/01/2020		09/01/2011	^B		25,087
	25,000	CA GO¹		5.500			10/01/2022		10/01/2011	^B		25,154
	40,000	CA GO¹		5.500			06/01/2025		08/29/2011	^B		40,121
	65,000	CA GO¹		5.600			09/01/2021		09/01/2011	^B		65,219
	5,000	CA GO¹		5.600			09/01/2021		09/01/2011	^B		5,017
	70,000	CA GO¹		5.625			10/01/2021		10/01/2011	^B		70,461
	140,000	CA GO¹		5.625			10/01/2023		10/01/2011	^B		140,893
	10,000	CA GO¹		5.625			09/01/2024		09/01/2011	^B		10,033
	45,000	CA GO¹		5.625			05/01/2026		08/29/2011	^B		45,116
	15,000	CA GO¹		5.625			10/01/2026		10/01/2011	^B		15,078
	5,000	CA GO¹		5.750			03/01/2012		09/01/2011	^B		5,023
	35,000	CA GO¹		5.750			03/01/2015		09/01/2011	^B		35,157
	4,890,000	CA GO¹		5.750			11/01/2017		11/01/2011	^B		4,948,289
	35,000	CA GO¹		5.750			11/01/2017		11/01/2011	^B		35,417
	40,000	CA GO¹		5.800			06/01/2013		08/29/2011	^B		40,176
	1,410,000	CA GO¹		5.900			04/01/2023		10/01/2011	^B		1,419,673
	230,000	CA GO¹		5.900			04/01/2023		10/01/2011	^B		231,578
	75,000	CA GO¹		5.900			03/01/2025		09/01/2011	^B		75,261
	25,000	CA GO¹		6.000			05/01/2012		11/01/2011	^B		25,349
	15,000	CA GO¹		6.000			10/01/2014		10/01/2011	^B		15,137
	20,000	CA GO¹		6.000			08/01/2015		02/01/2012	^B		20,530
	20,000	CA GO¹		6.000			05/01/2018		11/01/2011	^B		20,244
	5,000	CA GO¹		6.000			08/01/2019		02/01/2012	^B		5,115
	55,000	CA GO¹		6.000			10/01/2021		10/01/2011	^B		55,397
	85,000	CA GO¹		6.000			08/01/2024		02/01/2012	^B		86,757


								Effective
Principal								Maturity
Amount			Coupon			Maturity		(Unaudited)**			Value

California Continued
$	605,000	CA GO¹		6.250	%		10/01/2019		10/01/2011	^B	$	610,022
	905,000	CA GO¹		6.250			10/01/2019		10/01/2011	^B		912,512
	25,000	CA Golden State Tobacco Securitization Corp.¹		5.000			06/01/2020		08/29/2011	^B		25,003
	2,580,000	CA Golden State Tobacco Securitization Corp. (TASC)¹		4.500			06/01/2027		11/01/2016	^A		2,162,040
	500,000	CA Golden State Tobacco Securitization Corp. (TASC)		5.000			06/01/2018		08/29/2011	^B		500,155
	135,000	CA Health Facilities Financing Authority (Catholic Healthcare West)¹		5.125			07/01/2024		08/29/2011	^B		135,069
	30,000	CA Health Facilities Financing Authority (Catholic Healthcare West)¹		5.250			07/01/2023		08/29/2011	^B		30,026
	160,000	CA Health Facilities Financing Authority (Catholic Healthcare West)¹		5.250			07/01/2023		08/29/2011	^B		160,136
	60,000	CA Health Facilities Financing Authority (Cedars-Sinai Medical Center)¹		5.250			08/01/2027		08/29/2011	^B		60,008
	60,000	CA Health Facilities Financing Authority (CHCW/BMH Obligated Group)¹		5.000			07/01/2018		08/29/2011	^B		60,097
	420,000	CA Health Facilities Financing Authority (CHCW/CHCWSC/CHWCC Obligated Group)¹		5.000			07/01/2017		08/29/2011	^B		420,819
	35,000	CA Health Facilities Financing Authority (Downey Community Hospital)		5.750			05/15/2015		12/09/2013	^A		28,543
	65,000	CA Health Facilities Financing Authority (Exception Childrens Foundation)¹		6.500			05/01/2020		08/29/2011	^B		65,116
	50,000	CA Health Facilities Financing Authority (Fellowship Homes)¹		6.000			09/01/2019		08/29/2011	^B		50,103
	10,000	CA Health Facilities Financing Authority (FF/OCTC/SCADP Obligated Group)¹		6.500			12/01/2022		08/29/2011	^B		10,015
	2,000,000	CA Health Facilities Financing Authority (Kaiser Permanente)¹		5.400			05/01/2028		08/29/2011	^B		2,008,060
	20,000	CA Health Facilities Financing Authority (Marshall Hospital)		5.125			11/01/2012		08/29/2011	^B		20,066
	85,000	CA Health Facilities Financing Authority (Mercy Senior Hsg.)¹		5.800			12/01/2018		08/29/2011	^B		85,143
	450,000	CA Health Facilities Financing Authority (Northern California Presbyterian Homes & Services)¹		5.125			07/01/2018		08/29/2011	^B		450,324
	1,065,000	CA Health Facilities Financing Authority (Pomona Valley Hospital Medical Center)¹		5.625			07/01/2019		08/29/2011	^B		1,066,193
	20,000	CA Health Facilities Financing Authority (Pomona Valley Hospital Medical Center)¹		5.750			07/01/2015		08/29/2011	^B		20,049
	30,000	CA Health Facilities Financing Authority (Providence Health System-Southern California)¹		5.500			10/01/2013		08/29/2011	^B		30,117


								Effective
Principal								Maturity
Amount			Coupon			Maturity		(Unaudited)**			Value

California Continued
$	30,000	CA Health Facilities Financing Authority (San Fernando Valley Community Mental Health Center)¹		5.250	%		06/01/2023		08/29/2011	^B	$	30,010
	50,000	CA Health Facilities Financing Authority (Sunny View Lutheran Home)¹		5.100			01/01/2024		08/29/2011	^B		50,006
	335,000	CA Health Facilities Financing Authority (Sutter Health)¹		5.125			08/15/2022		08/29/2011	^B		335,429
	520,000	CA Health Facilities Financing Authority (Sutter Health)¹		5.350			08/15/2028		08/29/2011	^B		520,177
	30,000	CA Health Facilities Financing Authority (Sutter Health)¹		5.375			08/15/2030		08/29/2011	^B		30,010
	3,975,000	CA HFA (Home Mtg.)¹		5.000			08/01/2037		01/21/2013	^B		4,041,780
	6,985,000	CA HFA (Home Mtg.)¹		5.500			02/01/2042		05/26/2013	^B		7,101,510
	10,770,000	CA HFA (Home Mtg.)¹		5.500			08/01/2042		09/01/2013	^B		10,773,446
	55,000	CA HFA (Multifamily Hsg.)¹		5.375			08/01/2028		01/06/2026	^A		51,423
	2,195,000	CA HFA (Multifamily Hsg.)¹		5.400			08/01/2018		03/15/2015	^A		2,183,630
	40,000	CA HFA (Multifamily Hsg.)¹		5.400			08/01/2018		03/02/2015	^A		39,793
	670,000	CA HFA (Multifamily Hsg.)¹		5.450			08/01/2028		02/22/2024	^A		655,334
	630,000	CA HFA (Multifamily Hsg.)¹		5.950			08/01/2028		05/17/2024	^A		605,915
	350,000	CA HFA (Multifamily Hsg.)¹		6.050			08/01/2016		08/29/2011	^B		350,343
	2,625,000	CA HFA (Multifamily Hsg.)¹		6.050			08/01/2027		08/29/2011	^B		2,645,580
	25,000	CA HFA (Multifamily Hsg.)¹		6.050			08/01/2038		02/01/2029	^A		24,352
	2,350,000	CA HFA (Multifamily Hsg.)¹		6.150			08/01/2022		08/29/2011	^B		2,353,126
	100,000	CA Infrastructure and Economic Devel. (Scripps Research Institute)¹		5.625			07/01/2020		08/29/2011	^B		100,320
	3,550,000	CA Infrastructure and Economic Devel. (Scripps Research Institute)¹		5.750			07/01/2030		08/29/2011	^B		3,552,627
	15,000	CA Infrastructure and Economic Devel. (Stockton Port District)¹		5.375			07/01/2022		02/24/2020	^A		12,816
	1,130,000	CA Inland Empire Tobacco Securitization Authority¹		5.000			06/01/2021		06/01/2021			928,193
	345,000	CA Intercommunity Hospital Financing Authority COP¹		5.250			11/01/2019		03/04/2016	^A		342,920
	35,000	CA M-S-R Public Power Agency (San Juan)¹		6.000			07/01/2022		08/29/2011	^B		37,306
	10,000	CA Maritime Infrastructure Authority (Santa Cruz Port District)¹		5.750			05/01/2024		04/17/2020	^A		9,438
	50,000	CA Pollution Control Financing Authority (Pacific Gas & Electric Company)¹		5.350			12/01/2016		08/29/2011	^B		51,069
	30,000	CA Pollution Control Financing Authority (Sacramento Biosolids Facility)¹		5.300			12/01/2017		06/25/2016	^A		27,067
	340,000	CA Pollution Control Financing Authority (Sacramento Biosolids Facility)¹		5.500			12/01/2024		07/27/2022	^A		264,119
	860,000	CA Pollution Control Financing Authority (San Diego Gas & Electric Company)¹		5.850			06/01/2021		08/29/2011	^B		862,804


								Effective
Principal								Maturity
Amount			Coupon			Maturity		(Unaudited)**			Value

California Continued
$	195,000	CA Pollution Control Financing Authority (San Diego Gas & Electric Company)¹		5.850	%		06/01/2021		08/29/2011	^B	$	195,636
	460,000	CA Pollution Control Financing Authority (San Diego Gas & Electric Company)¹		5.850			06/01/2021		08/29/2011	^B		461,500
	20,000	CA Pollution Control Financing Authority (Southern California Edison Company)¹		5.550			09/01/2031		09/01/2011	^B		20,004
	565,000	CA Pollution Control Financing Authority (Southern California Water Company)¹		5.500			12/01/2026		08/29/2011	^B		565,164
	65,000	CA Pollution Control Financing Authority (West Coast Resource Recovery)		5.125			01/01/2014		08/29/2011	^B		65,158
	80,000	CA Public Works		5.250			12/01/2013		08/29/2011	^B		80,268
	725,000	CA Public Works¹		6.625			11/01/2034		04/17/2019	^B		786,212
	75,000	CA Public Works (CA Community Colleges)¹		5.250			12/01/2016		08/29/2011	^B		75,173
	55,000	CA Public Works (California Community Colleges)		5.100			09/01/2014		08/29/2011	^B		55,158
	1,000,000	CA Public Works (California Community Colleges)		5.250			12/01/2013		08/29/2011	^B		1,003,350
	200,000	CA Public Works (California Community Colleges)¹		5.250			12/01/2014		08/29/2011	^B		200,590
	305,000	CA Public Works (California Community Colleges)¹		5.250			12/01/2015		08/29/2011	^B		305,802
	65,000	CA Public Works (California Community Colleges)¹		5.250			12/01/2015		08/29/2011	^B		65,171
	70,000	CA Public Works (California Community Colleges)¹		5.250			12/01/2016		08/29/2011	^B		70,161
	180,000	CA Public Works (California Community Colleges)		5.250			09/01/2019		08/29/2011	^B		180,416
	60,000	CA Public Works (California Highway Patrol)¹		5.250			11/01/2014		11/01/2011	^B		60,529
	330,000	CA Public Works (California Science Center)		5.250			10/01/2017		08/29/2011	^B		330,762
	600,000	CA Public Works (California State University)¹		5.250			10/01/2015		08/29/2011	^B		601,608
	50,000	CA Public Works (California State University)¹		5.375			10/01/2016		08/29/2011	^B		50,121
	50,000	CA Public Works (California State University)		5.375			10/01/2017		08/29/2011	^B		50,121
	1,340,000	CA Public Works (California State University)¹		5.400			12/01/2016		08/29/2011	^B		1,343,256
	40,000	CA Public Works (California State University)¹		5.450			09/01/2014		08/29/2011	^B		40,124
	400,000	CA Public Works (California State University)¹		5.500			09/01/2015		08/29/2011	^B		401,164
	75,000	CA Public Works (Dept. of Corrections)		5.000			10/01/2012		08/29/2011	^B		75,248
	25,000	CA Public Works (Dept. of Corrections)¹		5.000			09/01/2018		08/29/2011	^B		25,036
	50,000	CA Public Works (Dept. of Corrections)¹		5.250			09/01/2014		08/29/2011	^B		50,150
	100,000	CA Public Works (Dept. of Corrections)¹		5.250			09/01/2015		08/29/2011	^B		100,270
	75,000	CA Public Works (Dept. of Corrections)¹		5.250			09/01/2015		08/29/2011	^B		75,203
	50,000	CA Public Works (Dept. of Corrections)¹		5.250			09/01/2016		08/29/2011	^B		50,117
	125,000	CA Public Works (Dept. of Corrections)¹		5.375			10/01/2016		08/29/2011	^B		125,303
	40,000	CA Public Works (Dept. of Corrections)		5.500			10/01/2017		08/29/2011	^B		40,102


								Effective
Principal								Maturity
Amount			Coupon			Maturity		(Unaudited)**			Value

California Continued
$	350,000	CA Public Works (Dept. of Corrections)		5.500	%		10/01/2018		08/29/2011	^B	$	350,896
	350,000	CA Public Works (Dept. of Corrections)		5.500			10/01/2019		08/29/2011	^B		350,896
	40,000	CA Public Works (Dept. of Corrections)¹		5.625			10/01/2020		08/29/2011	^B		40,107
	75,000	CA Public Works (Dept. of Food & Agriculture)		5.400			06/01/2013		08/29/2011	^B		75,259
	1,000,000	CA Public Works (Dept. of Health Services)		5.500			11/01/2015		08/29/2011	^B		1,008,350
	150,000	CA Public Works (Dept. of Youth Authority)¹		5.375			10/01/2015		08/29/2011	^B		150,419
	25,000	CA Public Works (Dept. of Youth Authority)		5.500			10/01/2018		08/29/2011	^B		25,064
	25,000	CA Public Works (Library & Courts Annex)¹		5.000			05/01/2015		08/29/2011	^B		25,064
	25,000	CA Public Works (Regents University)		5.250			11/01/2013		08/29/2011	^B		25,086
	25,000	CA Public Works (Regents University)		5.250			11/01/2013		08/29/2011	^B		25,086
	1,500,000	CA Public Works (State Archives Building Complex)		5.375			12/01/2012		08/29/2011	^B		1,505,400
	155,000	CA Public Works (State Universities)		5.250			12/01/2013		08/29/2011	^B		155,494
	160,000	CA Public Works (State Universities)		5.400			10/01/2022		08/29/2011	^B		160,390
	1,400,000	CA Public Works (State Universities)		5.500			12/01/2018		08/29/2011	^B		1,403,584
	100,000	CA Public Works (Trustees of California)¹		5.250			10/01/2012		08/29/2011	^B		100,361
	25,000	CA Public Works (Trustees of California)¹		5.250			10/01/2014		08/29/2011	^B		25,073
	20,000	CA Public Works (Various California State Universities)¹		5.550			09/01/2016		08/29/2011	^B		20,052
	30,000	CA Public Works (Various Community Colleges)¹		5.200			09/01/2017		08/29/2011	^B		30,057
	275,000	CA Public Works (Various Community Colleges)		5.375			03/01/2013		08/29/2011	^B		275,954
	555,000	CA Public Works (Various Community Colleges)		5.375			03/01/2014		08/29/2011	^B		556,915
	20,000	CA Public Works (Various Community Colleges)		5.500			09/01/2011		08/29/2011	^B		20,080
	50,000	CA Public Works (Various Community Colleges)		5.500			09/01/2011		08/29/2011	^B		50,201
	110,000	CA Public Works (Various Community Colleges)¹		5.500			04/01/2013		08/29/2011	^B		110,393
	50,000	CA Public Works (Various Community Colleges)		5.600			04/01/2014		08/29/2011	^B		50,169
	2,690,000	CA Public Works (Various Community Colleges)¹		5.625			03/01/2016		08/29/2011	^B		2,697,236
	4,825,000	CA Public Works (Various Community Colleges)¹		5.625			03/01/2016		08/29/2011	^B		4,837,979
	1,870,000	CA Public Works (Various Community Colleges)¹		5.625			03/01/2019		08/29/2011	^B		1,874,993
	175,000	CA Public Works (Various State Universities)		5.200			12/01/2012		08/29/2011	^B		175,646
	25,000	CA Public Works (Various State Universities)		5.250			12/01/2013		08/29/2011	^B		25,086


								Effective
Principal								Maturity
Amount			Coupon			Maturity		(Unaudited)**			Value

California Continued
$	300,000	CA Public Works (Various State Universities)		5.300	%		12/01/2014		08/29/2011	^B	$	301,017
	210,000	CA Public Works (Various State Universities)		5.350			12/01/2015		08/29/2011	^B		210,685
	445,000	CA Public Works (Various State Universities)		5.375			12/01/2019		08/29/2011	^B		446,072
	115,000	CA Public Works (Various State Universities)		5.400			10/01/2022		08/29/2011	^B		115,281
	745,000	CA Public Works (Various State Universities)¹		5.400			10/01/2022		08/29/2011	^B		747,384
	10,000	CA Public Works (Various State Universities)¹		5.500			09/01/2015		08/29/2011	^B		10,029
	75,000	CA River Highlands Community Services District³		7.750			09/02/2020		09/19/2016	^A		25,500
	15,000	CA River Highlands Community Services District³		8.125			09/02/2020		10/28/2016	^A		5,100
	65,000	CA Rural Home Mtg. Finance Authority (Single Family Mtg.), Series A¹		6.350			12/01/2029		09/15/2014	^A		67,341
	50,000	CA Special Districts Finance Program COP¹		5.250			12/01/2026		07/28/2024	^A		48,814
	25,000	CA Statewide CDA¹		6.625			09/01/2027		09/01/2011	^B		24,999
	5,000	CA Statewide CDA¹		7.000			07/01/2022		08/29/2011	^B		5,003
	30,000	CA Statewide CDA (Ararat Home of Los Angeles)¹		5.550			06/01/2021		12/01/2011	^B		30,109
	75,000	CA Statewide CDA (Bouquet Canyon)¹		5.300			07/01/2018		09/01/2011	^B		75,078
	95,000	CA Statewide CDA (California Odd Fellow Hsg.)		5.375			10/01/2013		08/29/2011	^B		95,295
	740,000	CA Statewide CDA (Childrens Hospital Los Angeles)¹		5.250			08/15/2029		03/05/2026	^A		691,678
	2,025,000	CA Statewide CDA (CVHP/CVMC/FH Obligated Group) COP		5.500			04/01/2013		08/29/2011	^B		2,028,281
	930,000	CA Statewide CDA (Daughters of Charity Health System/St. Francis Medical Center Obligated Group)¹		5.250			07/01/2025		08/24/2019	^A		845,119
	500,000	CA Statewide CDA (East Tabor Apartments)¹		6.850			08/20/2036		02/20/2012	^B		525,585
	435,000	CA Statewide CDA (Eastfield Ming Quong)¹		5.625			06/01/2020		08/29/2011	^B		435,470
	45,000	CA Statewide CDA (Escrow Term)¹		6.750			09/01/2037		07/27/2036	^A		44,506
	250,000	CA Statewide CDA (Fairfield Apartments)¹		6.500			01/01/2016		02/07/2014	^A		252,270
	35,000	CA Statewide CDA (GP Steinbeck)¹		5.700			09/20/2019		09/20/2011	^B		36,439
	85,000	CA Statewide CDA (GP Steinbeck)		5.897	²		09/20/2027		09/20/2014	^B		32,850
	15,000	CA Statewide CDA (John Muir Health)¹		5.125			08/15/2017		08/29/2011	^B		15,024
	100,000	CA Statewide CDA (LA Orthopedic Hospital Foundation)¹		5.250			06/01/2015		08/29/2011	^B		100,202
	1,190,000	CA Statewide CDA (LA Orthopedic Hospital Foundation)¹		5.500			06/01/2019		08/29/2011	^B		1,191,154
	70,000	CA Statewide CDA (LA Orthopedic Hospital Foundation/Orthopedic Hospital Obligated Group)¹		5.500			06/01/2018		08/29/2011	^B		70,085
	250,000	CA Statewide CDA (Live Oak School)¹		6.750			10/01/2030		12/19/2023	^A		242,785
	100,000	CA Statewide CDA (Multifamily)		5.696	²		09/20/2021		09/20/2011	^B		56,486


								Effective
Principal								Maturity
Amount			Coupon			Maturity		(Unaudited)**			Value

California Continued
$	100,000	CA Statewide CDA (Multifamily)		5.744	²%		09/20/2023		09/20/2011	^B	$	49,890
	150,000	CA Statewide CDA (Quail Ridge Apartments)¹		5.375			07/01/2032		11/27/2029	^A		116,336
	430,000	CA Statewide CDA (Rio Bravo)¹		6.500			12/01/2018		09/15/2015	^A		388,724
	100,000	CA Statewide CDA (Sherman Oaks)¹		5.000			08/01/2018		08/29/2011	^B		100,086
	100,000	CA Statewide CDA (Sutter Health/Alta Bates Medical Center/East Bay Perinatal Center Obligated Group)¹		5.750			08/15/2027		08/29/2011	^B		100,074
	560,000	CA Statewide CDA (Sycamore)¹		6.000			03/20/2038		03/20/2018	^B		584,847
	25,000	CA Statewide CDA Community Facilities District¹		6.350			09/01/2021		09/01/2014	^B		25,425
	30,000	CA Statewide CDA COP (Ararat Home of Los Angeles)¹		5.400			06/01/2016		12/01/2011	^B		30,254
	5,000	CA Statewide CDA COP (CVHP/CVMC/FH Obligated Group)¹		5.000			04/01/2018		05/07/2016	^A		4,933
	45,000	CA Statewide CDA COP (CVHP/CVMC/FH Obligated Group)¹		5.125			04/01/2023		05/07/2021	^A		40,915
	100,000	CA Statewide CDA COP (Sutter Health)		5.500			08/15/2018		08/29/2011	^B		100,368
	205,000	CA Statewide CDA COP (Sutter Health)¹		5.500			08/15/2031		08/29/2011	^B		205,041
	20,000	CA Statewide CDA Special Tax Community Facilities District No. 2007-1 (Orinda)¹		5.300			09/01/2017		09/01/2017			19,798
	85,000	CA Statewide CDA Water & Wastewater¹		5.700			10/01/2024		08/29/2011	^B		85,153
	1,634,000	CA Statewide Financing Authority Tobacco Settlement (TASC)¹		5.625			05/01/2029		04/08/2015	^A		1,545,290
	1,150,000	CA Statewide Financing Authority Tobacco Settlement (TASC)¹		5.625			05/01/2029		04/07/2015	^A		1,087,567
	250,000	CA Statewide Financing Authority Tobacco Settlement (TASC)¹		6.000			05/01/2037		11/26/2023	^A		200,545
	50,000	CA Water Resource Devel. GO, Series P¹		5.800			06/01/2014		08/29/2011	^B		50,220
	50,000	CA Water Resource Devel. GO, Series Q¹		5.000			03/01/2016		08/29/2011	^B		50,180
	35,000	CA Western Hills Water District Special Tax¹		5.000			09/01/2014		03/25/2013	^A		29,831
	65,000	CA Western Hills Water District Special Tax (Diablo Grande Community Facilities)¹		4.000			09/01/2011		09/01/2011			64,632
	25,000	CA Western Hills Water District Special Tax (Diablo Grande Community Facilities)¹		4.650			09/01/2014		09/01/2014			21,083
	120,000	CA Western Hills Water District Special Tax (Diablo Grande Community Facilities)¹		6.000			09/01/2024		06/22/2021	^A		75,956
	50,000	CA Western Hills Water District Special Tax (Diablo Grande Community Facilities)¹		6.125			09/01/2031		03/23/2029	^A		28,655
	115,000	CA Western Hills Water District Special Tax (Diablo Grande Community Facilities)¹		6.750			09/01/2022		09/14/2018	^A		81,591
	45,000	CA Western Hills Water District Special Tax (Diablo Grande Community Facilities)¹		6.875			09/01/2031		04/30/2027	^A		28,386
	310,000	CA William S. Hart Union School District¹		6.000			09/01/2027		09/01/2013	^B		310,040
	10,000	Calabasas, CA Special Tax Community Facilities District 98-1¹		5.750			09/01/2028		06/18/2025	^A		9,127


								Effective
Principal								Maturity
Amount			Coupon			Maturity		(Unaudited)**			Value

California Continued
$	45,000	California City, CA Redevel. Agency Tax Allocation¹		7.000	%		09/01/2015		08/29/2011	^B	$	45,094
	2,795,000	California County, CA Tobacco Securitization Authority (TASC)¹		5.625			06/01/2023		06/01/2012	^B		2,797,208
	60,000	Campbell, CA (Civic Center) COP¹		5.250			10/01/2028		08/29/2011	^B		60,154
	25,000	Campbell, CA Improvement Bond Act 1915 (Dillon-Gilman Local Improvement District)¹		7.150			09/02/2012		09/02/2011	^B		25,841
	15,000	Canyon Lake, CA COP (Railroad Canyon Road)¹		7.375			06/01/2014		12/01/2011	^B		15,233
	40,000	Capistrano, CA Unified School District (Education & Support Facilities) COP¹		5.250			12/01/2026		12/01/2011	^B		40,392
	75,000	Capistrano, CA Unified School District (Las Flores)¹		5.000			09/01/2023		10/06/2021	^A		74,193
	50,000	Capistrano, CA Unified School District School Facilities Improvement District No. 1¹		6.000			08/01/2024		08/29/2011	^B		50,174
	80,000	Carlsbad, CA Improvement Bond Act 1915¹		5.550			09/02/2028		08/30/2022	^A		77,458
	120,000	Carlsbad, CA Improvement Bond Act 1915¹		5.950			09/02/2025		09/02/2012	^B		120,444
	30,000	Carlsbad, CA Improvement Bond Act 1915¹		6.000			09/02/2022		09/02/2011	^B		30,018
	90,000	Carson, CA Improvement Bond Act 1915¹		7.375			09/02/2022		09/02/2011	^B		90,050
	40,000	Castaic, CA Union School District Community Facilities District No. 92-1¹		8.500			10/01/2013		10/01/2011	^B		40,335
	2,750,000	Castaic, CA Union School District Community Facilities District No. 92-1¹		9.000			10/01/2019		10/01/2011	^B		2,764,823
	70,000	Cathedral City, CA Improvement Bond Act 1915¹		5.950			09/02/2034		05/03/2032	^A		67,364
	50,000	Cathedral City, CA Special Tax Community Facilities District No. 1		6.625			09/01/2023		09/25/2022	^A		46,520
	50,000	Cathedral City, CA Special Tax Community Facilities District No. 1		6.700			09/01/2030		01/10/2028	^A		43,909
	10,000	Central CA Unified School District¹		5.625			03/01/2018		09/01/2011	^B		10,044
	35,000	Chico, CA Improvement Bond Act 1915 (Mission Ranch)¹		6.625			09/02/2011		09/02/2011			35,099
	95,000	Chico, CA Improvement Bond Act 1915 (Mission Ranch)¹		6.625			09/02/2012		09/02/2012			97,798
	100,000	Chico, CA Improvement Bond Act 1915 (Mission Ranch)¹		6.625			09/02/2013		09/02/2011	^B		103,192
	55,000	Chino, CA Community Facilities District Special Tax¹		5.750			09/01/2034		10/11/2032	^A		49,917
	20,000	Chowchilla, CA Improvement Bond Act 1915¹		6.700			09/02/2027		09/02/2014	^B		20,048
	55,000	Chula Vista, CA Community Facilities District (Eastlake Woods)¹		5.700			09/01/2016		09/01/2011	^B		56,180
	15,000	Chula Vista, CA Community Facilities District (Eastlake Woods)¹		6.100			09/01/2021		09/01/2013	^B		15,242


								Effective
Principal								Maturity
Amount			Coupon			Maturity		(Unaudited)**			Value

California Continued
$	10,000	Chula Vista, CA Improvement Bond Act 1915 Assessment District No. 94-1 (Eastlake)¹		7.000	%		09/02/2015		09/02/2012	^A	$	10,324
	25,000	Colton, CA Community Facilities District Special Tax¹		5.800			09/01/2018		09/01/2011	^B		25,003
	175,000	Colton, CA Joint Unified School District¹		5.700			09/01/2034		10/18/2030	^A		144,902
	50,000	Colton, CA Joint Unified School District COP¹		5.100			06/01/2020		06/01/2020			49,891
	50,000	Colton, CA Public Financing Authority, Series B¹		5.875			08/01/2027		05/05/2018	^A		44,857
	20,000	Colton, CA Redevel. Agency (West Valley)¹		6.375			09/01/2035		01/24/2032	^A		17,977
	100,000	Compton, CA Sewer¹		5.375			09/01/2023		08/29/2011	^B		100,061
	110,000	Contra Costa County, CA Public Financing Authority¹		5.250			06/01/2015		08/29/2011	^B		110,294
	1,170,000	Contra Costa County, CA Public Financing Authority (Pleasant Hill Bart)¹		5.125			08/01/2019		09/05/2017	^A		1,133,800
	25,000	Contra Costa, CA Community College District COP (Diablo Valley College)¹		6.000			06/01/2021		08/29/2011	^B		25,056
	100,000	Corona, CA Redevel. Agency Tax Allocation		5.400			09/01/2011		08/29/2011	^B		100,269
	25,000	Corona, CA Redevel. Agency Tax Allocation¹		5.500			09/01/2016		08/29/2011	^B		25,034
	15,000	Corona-Norco, CA Unified School District¹		5.625			09/01/2033		01/10/2030	^A		13,415
	55,000	Corona-Norco, CA Unified School District¹		5.750			09/01/2014		08/29/2011	^B		55,124
	100,000	Corona-Norco, CA Unified School District Community Facilities District No. 06-1¹		6.000			09/01/2027		05/05/2025	^A		98,375
	55,000	Crescent City, CA Public Financing Authority		7.750			09/15/2012		08/29/2011	^B		55,218
	25,000	Culver City, CA Redevel. Finance Authority¹		5.500			11/01/2014		05/27/2013	^A		25,673
	20,000	Cypress, CA Improvement Bond Act 1915 (Business and Professional Center)¹		5.700			09/02/2022		08/17/2018	^A		19,606
	20,000	Davis, CA Joint Unified School District Special Tax¹		5.300			08/15/2024		05/11/2021	^A		19,413
	10,000	Del Mar, CA Unified School District¹		5.875			09/01/2029		10/14/2027	^A		9,452
	40,000	Dixon, CA Public Financing Authority¹		5.150			09/02/2020		09/02/2011	^B		40,004
	35,000	Dixon, CA Public Financing Authority¹		5.700			09/02/2020		03/02/2017	^A		34,622
	480,000	Downey, CA Community Devel. Commission Tax Allocation (Downey Redevel.)¹		5.125			08/01/2020		05/05/2017	^A		461,976
	1,000,000	Duarte, CA COP (Hope National Medical Center)		5.250			04/01/2019		08/29/2011	^B		1,002,530
	190,000	Duarte, CA Hsg. (Heritage Park Apartments)¹		5.850			05/01/2030		09/01/2011	^B		190,015
	40,000	Eastern CA Municipal Water District Community Facilities Special Tax¹		6.375			09/01/2027		10/15/2025	^A		38,312
	250,000	Eastern CA Municipal Water District Community Facilities Special Tax¹		6.375			09/01/2037		01/15/2034	^A		241,818
	90,000	Eastern CA Municipal Water District Community Facilities Special Tax (Crown Valley Village)¹		5.500			09/01/2028		09/14/2027	^A		77,220


								Effective
Principal								Maturity
Amount			Coupon			Maturity		(Unaudited)**			Value

California Continued
$	65,000	Eastern CA Municipal Water District Community Facilities Special Tax (Crown Valley Village)¹		5.625	%		09/01/2034		04/30/2032	^A	$	53,775
	50,000	Eastern CA Municipal Water District Community Facilities Special Tax (Promontory Park)¹		5.500			09/01/2024		03/25/2023	^A		48,147
	10,000	Eastern CA Municipal Water District Improvement Bond Act 1915¹		5.750			09/02/2020		09/02/2012	^B		10,011
	50,000	El Dorado County, CA Special Tax¹		6.250			09/01/2029		09/04/2023	^A		49,252
	1,170,000	Emery, CA Unified School District¹		6.250			08/01/2026		08/01/2021	^B		1,358,791
	25,000	Emeryville, CA Public Financing Authority¹		6.100			09/01/2012		08/29/2011	^B		25,078
	145,000	Emeryville, CA Public Financing Authority¹		6.200			09/01/2025		08/29/2011	^B		145,029
	20,000	Encinitas, CA Improvement Bond Act 1915¹		6.900			09/02/2017		11/20/2014	^A		19,391
	15,000	Fairfield, CA Improvement Bond Act 1915 (Green Valley Road/Mangels Blvd.)¹		7.375			09/02/2018		09/02/2011	^B		15,475
	15,000	Florin, CA Resource Conservation District COP		6.000			02/01/2029		04/04/2027	^A		13,514
	250,000	Folsom Cordova, CA Unified School District School Facilities Improvement District No. 2¹		5.375			10/01/2017		10/01/2011	^B		254,525
	10,000	Folsom, CA Improvement Bond Act 1915¹		6.500			09/02/2013		09/02/2011	^B		10,027
	25,000	Folsom, CA Public Financing Authority¹		5.400			09/02/2020		08/14/2017	^A		23,694
	25,000	Folsom, CA Public Financing Authority¹		5.625			09/02/2020		06/16/2017	^A		24,650
	30,000	Folsom, CA Special Tax Community Facilities District No. 7¹		6.000			09/01/2024		09/01/2011	^B		30,013
	555,000	Fontana, CA Redevel. Agency (Downtown Redevel.)¹		5.000			09/01/2014		08/29/2011	^B		555,722
	250,000	Fontana, CA Redevel. Agency (Southwest Industrial Park)¹		5.000			09/01/2022		12/29/2018	^A		245,300
	265,000	Fontana, CA Special Tax (Citrus)¹		5.000			09/01/2020		09/01/2020			246,100
	2,300,000	Fontana, CA Special Tax Community Facilities District No. 2-A¹		5.250			09/01/2017		09/01/2011	^B		2,302,300
	10,000	Fontana, CA Special Tax Community Facilities District No. 4¹		7.125			10/01/2015		10/01/2011	^B		10,058
	1,500,000	Foothill, CA Eastern Transportation Corridor Agency Toll Road¹		5.875			01/15/2026		01/15/2026			1,489,425
	50,000	Foothill, CA Eastern Transportation Corridor Agency Toll Road)¹		5.375			01/15/2014		01/15/2014			49,718
	1,175,000	Fresno, CA Airport¹		5.800			07/01/2030		08/29/2011	^B		1,178,126
	25,000	Fresno, CA Joint Powers Financing Authority¹		5.750			06/01/2026		08/29/2011	^B		25,113
	25,000	Fullerton, CA Community Facilities District No. 1 Special Tax (Amerige Heights)¹		6.200			09/01/2032		09/01/2012	^B		25,371
	80,000	Fullerton, CA School District Special Tax¹		6.300			09/01/2023		09/01/2011	^B		81,671
	10,000	Galt, CA Improvement Bond Act 1915¹		5.900			09/02/2022		09/02/2022			9,816
	25,000	Galt, CA Improvement Bond Act 1915		8.450			09/02/2011		09/02/2011			24,994


								Effective
Principal								Maturity
Amount			Coupon			Maturity		(Unaudited)**			Value

California Continued
$	20,000	Granada, CA Sanitation District Improvement Bond Act 1915¹		6.125	%		09/02/2022		09/02/2011	^B	$	19,998
	15,000	Greenfield, CA Redevel. Agency¹		6.000			02/01/2029		02/19/2028	^A		13,037
	200,000	Hamilton, CA Union High School District¹		5.250			08/01/2023		08/29/2011	^B		200,244
	3,220,000	Hawthorne, CA Community Redevel. Agency Special Tax¹		6.125			10/01/2025		10/01/2011	^B		3,322,042
	150,000	Hawthorne, CA Parking Authority¹		8.000			09/01/2015		09/01/2011	^B		150,462
	155,000	Hawthorne, CA Parking Authority¹		8.125			09/01/2019		09/01/2011	^B		155,259
	45,000	Hayward, CA Improvement Bond Act 1915¹		7.100			09/02/2018		09/02/2011	^B		45,071
	50,000	Hayward, CA Public Finance Authority (Hayward Water System)		5.100			06/01/2013		08/29/2011	^B		50,154
	2,000,000	Hesperia, CA Public Financing Authority, Tranche A¹		6.250			09/01/2035		09/29/2028	^A		1,790,240
	10,000	Hollister, CA Improvement Bond Act 1915¹		7.125			09/02/2022		09/02/2011	^B		10,302
	15,000	Huntington Beach, CA Community Facilities District¹		5.400			10/01/2020		10/01/2011	^B		15,024
	20,000	Huntington Beach, CA Community Facilities District Special Tax¹		6.250			09/01/2027		09/01/2012	^B		20,053
	35,000	Imperial County, CA Special Tax¹		6.500			09/01/2031		03/05/2026	^A		31,729
	50,000	Indio, CA Community Facilities District Special Tax (Talavera)¹		5.000			09/01/2017		09/01/2012	^B		50,198
	135,000	Indio, CA Hsg. (Olive Court Apartments)¹		6.375			12/01/2026		12/01/2011	^B		135,154
	20,000	Indio, CA Improvement Bond Act 1915¹		6.350			09/02/2027		09/02/2014	^B		20,048
	20,000	Indio, CA Improvement Bond Act 1915¹		6.375			09/02/2027		09/02/2014	^B		20,062
	35,000	Indio, CA Improvement Bond Act 1915 Assessment District No. 99.1¹		7.125			09/02/2020		09/02/2011	^B		35,050
	25,000	Inglewood, CA Public Financing Authority¹		5.625			08/01/2017		02/01/2012	^B		25,130
	750,000	Inland Valley, CA Devel. Agency Tax Allocation¹		5.500			04/01/2014		04/01/2014			846,413
	2,545,000	Inland, CA Empire Tobacco Securitization Authority (TASC)¹		4.625			06/01/2021		06/01/2021			2,023,886
	150,000	Irvine, CA Improvement Bond Act 1915¹		5.550			09/02/2026		09/02/2013	^B		150,326
	20,000	Irvine, CA Improvement Bond Act 1915¹		5.600			09/02/2022		09/02/2014	^B		20,366
	30,000	Irvine, CA Improvement Bond Act 1915¹		5.625			09/02/2024		09/02/2013	^B		30,239
	25,000	Irvine, CA Mobile Home Park (Meadows Mobile Home Park)¹		6.050			03/01/2028		02/23/2024	^A		23,867
	15,000	Kingsburg, CA Public Financing Authority¹		8.000			09/15/2021		08/29/2011	^B		15,023
	30,000	La Habra, CA Redevel. Agency Community Facilities District¹		6.000			09/01/2014		08/29/2011	^B		30,055
	10,000	La Habra, CA Redevel. Agency Community Facilities District¹		6.000			09/01/2019		08/29/2011	^B		10,003
	55,000	La Mesa, CA Improvement Bond Act 1915¹		5.750			09/02/2023		08/18/2019	^A		53,458
	1,730,000	Lake Elsinore, CA Improvement Bond Act 1915¹		7.000			09/02/2030		08/24/2012	^B		1,739,013
	15,000	Lake Elsinore, CA Public Financing Authority¹		6.375			10/01/2033		02/06/2031	^A		14,694


								Effective
Principal								Maturity
Amount			Coupon			Maturity		(Unaudited)**			Value

California Continued
$	15,000	Lake Elsinore, CA School Financing Authority¹		6.000	%		09/01/2011		09/01/2011		$	15,059
	500,000	Lake Elsinore, CA Special Tax¹		5.100			09/01/2022		04/18/2021	^A		477,145
	1,135,000	Lake Elsinore, CA Unified School District¹		5.300			09/01/2026		11/07/2024	^A		1,055,085
	125,000	Lammersville, CA School District Community Facilities District (Mountain House)¹		5.500			09/01/2013		09/01/2012	^B		129,680
	50,000	Lammersville, CA School District Community Facilities District (Mountain House)¹		6.300			09/01/2024		09/01/2013	^B		50,502
	50,000	Lammersville, CA Unified School District Special¹		6.375			09/01/2032		09/01/2013	^B		50,079
	45,000	Lancaster, CA Community Facilities District Special Tax¹		6.000			10/01/2016		10/01/2011	^B		45,102
	15,000	Lancaster, CA Redevel. Agency (Desert Sands Mobile Home Park)¹		6.375			11/01/2027		10/29/2011	^B		14,999
	100,000	Lathrop, CA COP¹		5.875			06/01/2030		08/29/2011	^B		100,015
	115,000	Lathrop, CA Financing Authority (Water Supply)¹		5.700			06/01/2019		06/01/2013	^B		116,562
	15,000	Lathrop, CA Financing Authority (Water Supply)¹		5.750			06/01/2020		06/01/2013	^B		15,163
	50,000	Lathrop, CA Financing Authority (Water Supply)¹		5.900			06/01/2023		06/01/2013	^B		50,246
	10,000	Lathrop, CA Improvement Bond Act 1915¹		6.000			09/02/2021		03/02/2014	^B		10,049
	10,000	Lathrop, CA Improvement Bond Act 1915 (Louise Avenue)¹		6.875			09/02/2017		09/02/2011	^B		10,317
	10,000	Lathrop, CA Improvement Bond Act 1915 (Mossdale Village)¹		6.000			09/02/2023		09/02/2023			9,889
	60,000	Lathrop, CA Improvement Bond Act 1915 (Mossdale Village)¹		6.125			09/02/2028		10/06/2026	^A		57,337
	100,000	Lee Lake, CA Water District Community Facilities District No. 2 Special Tax (Montecito Ranch)¹		6.125			09/01/2027		10/14/2025	^A		98,140
	65,000	Lincoln, CA Public Financing Authority (Twelve Bridges)¹		6.125			09/02/2027		01/24/2024	^A		61,901
	25,000	Livermore, CA Capital Projects Financing Authority¹		5.650			09/02/2016		09/02/2011	^B		25,520
	10,000	Livermore, CA Community Facilities District Special Tax (Tri Valley Tech Park)¹		5.750			09/01/2012		09/01/2011	^B		10,021
	45,000	Livermore, CA Community Facilities District Special Tax (Tri Valley Tech Park)¹		6.400			09/01/2026		09/16/2025	^A		43,110
	15,000	Livermore, CA Community Facilities District Special Tax (Tri Valley Tech Park)¹		6.400			09/01/2030		03/30/2029	^A		13,999
	100,000	Livermore-Amadore Valley, CA Water Management Agency¹		5.000			08/01/2023		08/29/2011	^B		100,271


								Effective
Principal								Maturity
Amount			Coupon			Maturity		(Unaudited)**			Value

California Continued
$	65,000	Livermore-Amadore Valley, CA Water Management Agency¹		5.000	%		08/01/2031		08/29/2011	^B	$	65,006
	100,000	Long Beach, CA Bond Finance Authority Natural Gas¹		5.000			11/15/2011		11/15/2011			101,180
	50,000	Long Beach, CA Special Tax (Pike)¹		6.250			10/01/2026		02/25/2023	^A		48,800
	30,000	Long Beach, CA Special Tax (Pine Avenue)¹		6.375			09/01/2023		09/01/2011	^B		30,001
	1,000,000	Los Angeles County, CA Community Facilities District No. 4 Special Tax¹		5.500			09/01/2014		09/01/2011	^B		1,004,060
	5,000	Los Angeles County, CA Community Facilities District No. 4 Special Tax¹		7.750			09/01/2017		09/01/2011	^B		5,015
	95,000	Los Angeles County, CA COP (Insured Health Clinic)¹		5.800			12/01/2023		08/29/2011	^B		95,074
	100,000	Los Angeles, CA Community Facilities District Special Tax (Cascade Business Park)¹		6.400			09/01/2022		09/01/2011	^B		100,084
	50,000	Los Angeles, CA Community Redevel. Agency (Freeway Recovery)¹		6.000			09/01/2031		09/01/2012	^B		50,172
	40,000	Los Angeles, CA Community Redevel. Agency (Grand Central Square)¹		5.100			12/01/2015		08/29/2011	^B		40,094
	50,000	Los Angeles, CA Community Redevel. Agency (Grand Central Square)¹		5.200			12/01/2017		08/29/2011	^B		50,088
	50,000	Los Angeles, CA Community Redevel. Agency (Grand Central Square)¹		5.200			12/01/2018		08/29/2011	^B		50,069
	120,000	Los Angeles, CA Community Redevel. Agency (Grand Central Square)¹		5.200			12/01/2019		08/29/2011	^B		120,125
	125,000	Los Angeles, CA Community Redevel. Agency (Grand Central Square)¹		5.250			12/01/2020		08/29/2011	^B		125,108
	80,000	Los Angeles, CA Community Redevel. Agency (Grand Central Square)¹		5.250			12/01/2021		08/29/2011	^B		80,058
	25,000	Los Angeles, CA Community Redevel. Agency (Hoover Redevel.)¹		5.500			09/01/2014		08/29/2011	^B		25,043
	40,000	Los Angeles, CA COP (Dept. of Public Social Services)¹		5.500			08/01/2019		08/29/2011	^B		40,071
	10,000,000	Los Angeles, CA Dept. of Airports ROLs⁴		5.375			05/15/2025		05/15/2018	^B		10,544,872
	15,000	Los Angeles, CA Dept. of Water & Power		4.750			08/15/2017		08/29/2011	^B		15,051
	10,000	Los Angeles, CA Dept. of Water & Power¹		4.750			10/15/2020		08/29/2011	^B		10,033
	60,000	Los Angeles, CA Mtg. (Section 8)¹		5.350			07/01/2022		08/29/2011	^B		60,050
	15,000	Los Angeles, CA Mtg. (Section 8)¹		6.500			07/01/2022		08/29/2011	^B		15,026
	50,000	Los Angeles, CA Multifamily Hsg. (Arminta North & South)		7.700			06/20/2028		12/20/2011	^B		49,998
	45,000	Los Angeles, CA Multifamily Hsg. (Earthquake Rehabilitation)¹		5.900			01/01/2030		08/29/2011	^B		45,029
	130,000	Los Angeles, CA Regional Airports Improvement Corp. (Laxfuel Corp.)¹		5.250			01/01/2023		01/01/2012	^B		130,046


								Effective
Principal								Maturity
Amount			Coupon			Maturity		(Unaudited)**			Value

California Continued
$	5,000	Los Angeles, CA Regional Airports Improvement Corp. (Los Angeles West Terminal Fuel Corp.)¹		10.250	%		01/01/2013		07/28/2012	^A	$	5,134
	200,000	Los Angeles, CA State Building Authority¹		5.500			10/01/2017		10/01/2011	^B		201,028
	20,000	Los Angeles, CA State Building Authority¹		5.500			10/01/2018		10/01/2011	^B		20,103
	55,000	Los Angeles, CA State Building Authority¹		5.500			10/01/2019		10/01/2011	^B		55,283
	75,000	Los Banos, CA Sewer System COP¹		5.000			12/01/2019		08/29/2011	^B		75,115
	25,000	Los Banos, CA Unified School District COP¹		5.625			08/01/2016		08/25/2011	^B		25,037
	175,000	Madera County, CA COP (Valley Children’s Hospital)¹		5.000			03/15/2023		08/29/2011	^B		175,011
	360,000	Madera County, CA COP (Valley Children’s Hospital)¹		5.750			03/15/2028		08/29/2011	^B		360,058
	50,000	Mammoth Lakes, CA Community Facilities District (North Village Area)¹		5.750			10/01/2033		09/03/2029	^A		42,023
	20,000	Manhattan Beach, CA Water & Wastewater Authority COP¹		5.750			09/01/2020		08/29/2011	^B		20,004
	10,000	Martinez, CA Mtg. (Ridgecrest Apartments)¹		5.625			07/01/2025		08/29/2011	^B		10,009
	65,000	Maywood, CA Public Financing Authority¹		6.500			09/01/2018		05/24/2013	^B		65,663
	1,045,000	Mendocino Coast, CA Healthcare District¹		5.875			02/01/2020		08/29/2011	^B		1,046,369
	25,000	Menifee, CA Union School District Special Tax¹		6.050			09/01/2026		10/15/2024	^A		24,634
	175,000	Mill Valley, CA COP (The Redwoods)		5.750			12/01/2020		08/29/2011	^B		175,611
	10,000	Milpitas, CA Improvement Bond Act 1915¹		5.700			09/02/2018		10/12/2016	^A		10,249
	2,040,000	Modesto, CA Irrigation District COP¹		5.300			07/01/2022		08/29/2011	^B		2,046,304
	75,000	Modesto, CA Irrigation District COP¹		5.300			07/01/2022		08/29/2011	^B		75,232
	10,000	Monrovia, CA Redevel. Agency Public Parking Facilities		5.200			04/01/2013		08/29/2011	^B		10,029
	10,000	Montclair, CA Redevel. Agency Mobile Home Park (Augusta Homes Villa Del Arroyo)¹		6.100			11/15/2037		09/06/2034	^A		9,583
	25,000	Montclair, CA Redevel. Agency Mobile Home Park (Hacienda Mobile Home Park)¹		6.000			11/15/2029		02/08/2027	^A		24,697
	20,000	Montclair, CA Redevel. Agency Mobile Home Park (Villa Mobile Home Park)¹		6.100			06/15/2029		07/16/2023	^A		19,448
	415,000	Montebello, CA Community Redevel. Agency (Montebello Hills Redevel.)¹		5.500			03/01/2014		09/01/2011	^B		415,718
	10,000	Montebello, CA Community Redevel. Agency (South Montebello)¹		5.500			09/01/2022		03/28/2021	^A		9,292
	65,000	Monterey, CA Joint Powers Financing Authority (Materials Recovery Facilities)		5.600			03/01/2012		08/29/2011	^B		65,443
	50,000	Monterey, CA Joint Powers Financing Authority (Materials Recovery Facilities)		5.600			03/01/2013		08/29/2011	^B		50,450
	65,000	Monterey, CA Joint Powers Financing Authority (Materials Recovery Facilities)¹		5.700			03/01/2015		08/29/2011	^B		65,885
	20,000	Monterey, CA Joint Powers Financing Authority (Materials Recovery Facilities)¹		5.700			03/01/2016		08/29/2011	^B		20,319


								Effective
Principal								Maturity
Amount			Coupon			Maturity		(Unaudited)**			Value

California Continued
$	10,000	Moorpark, CA Special Tax Community Facilities District No. 97-1¹		6.400	%		09/01/2017		09/01/2011	^B	$	10,010
	140,000	Moorpark, CA Special Tax Community Facilities District No. 97-1¹		6.700			09/01/2027		09/13/2023	^A		137,826
	430,000	Moreno Valley, CA Unified School District Community Facilities District Special Tax No. 2003-2¹		5.950			09/01/2034		09/01/2011	^B		430,095
	400,000	Moreno Valley, CA Unified School District Community Facilities District Special Tax No. 2004-6¹		5.000			09/01/2022		09/25/2021	^A		383,540
	15,000	Morgan Hill, CA Improvement Bond Act 1915¹		5.600			09/02/2011		09/02/2011			15,041
	10,000	Murrieta County, CA Water District¹		6.500			10/01/2015		10/01/2011	^B		10,142
	30,000	Murrieta County, CA Water District Special Tax Community Facilities District No. 88-1¹		6.700			12/01/2030		12/01/2011	^B		30,014
	10,000	Murrieta, CA Community Facilities District Special Tax (Blackmore Ranch)¹		6.100			09/01/2034		09/24/2027	^A		9,266
	835,000	Murrieta, CA Community Facilities District Special Tax (Bluestone)¹		6.250			09/01/2025		10/16/2023	^A		834,165
	20,000	Murrieta, CA Community Facilities District Special Tax (Bluestone)¹		6.300			09/01/2031		05/07/2029	^A		19,336
	105,000	Murrieta, CA Community Facilities District Special Tax (Murrieta Springs)¹		5.500			09/01/2034		10/10/2032	^A		90,845
	50,000	Murrieta, CA Improvement Bond Act 1915¹		6.375			09/01/2031		04/02/2025	^A		49,301
	85,000	Murrieta, CA Water Public Financing Authority¹		5.700			10/01/2021		10/01/2011	^B		85,655
	10,000	Needles, CA Public Utility Authority¹		6.350			02/01/2012		08/29/2011	^B		10,013
	230,000	Needles, CA Public Utility Authority¹		6.650			02/01/2032		02/12/2028	^A		219,933
	2,550,000	Northern CA Tobacco Securitization Authority (TASC)¹		4.750			06/01/2023		02/01/2016	^A		2,252,670
	1,820,000	Northern, CA Inyo County Local Hospital District¹		5.000			12/01/2015		01/05/2014	^A		1,863,316
	35,000	Novato, CA GO		5.000			08/01/2012		08/29/2011	^B		35,135
	100,000	Novato, CA GO¹		5.250			08/01/2017		02/01/2012	^B		102,054
	30,000	Oakdale, CA Public Financing Authority Tax Allocation (Central City Redevel.)¹		5.900			06/01/2014		12/01/2011	^B		30,185
	10,000	Oakdale, CA Public Financing Authority Tax Allocation (Central City Redevel.)¹		6.000			06/01/2019		12/01/2011	^B		10,006
	50,000	Oakdale, CA Public Financing Authority Tax Allocation (Central City Redevel.)¹		6.100			06/01/2027		03/29/2024	^A		46,359
	375,000	Oakland, CA Joint Powers Financing Authority¹		5.500			09/02/2024		03/02/2012	^B		378,941
	3,000,000	Oakland, CA Unified School District¹		5.250			08/01/2024		08/01/2012	^B		3,008,430
	1,000,000	Oakland, CA Unified School District¹		6.125			08/01/2029		08/01/2019	^B		1,060,950
	25,000	Ontario, CA Improvement Bond Act 1915¹		6.800			09/02/2013		09/02/2011	^B		25,071
	15,000	Orange County, CA Improvement Bond Act 1915¹		5.500			09/02/2016		09/02/2011	^B		15,028


								Effective
Principal								Maturity
Amount			Coupon			Maturity		(Unaudited)**			Value

California Continued
$	10,000	Orange County, CA Improvement Bond Act 1915 (Irvine Coast Assessment)¹		5.375	%		09/02/2012		09/02/2011	^B	$	10,032
	20,000	Orange County, CA Improvement Bond Act 1915 (Irvine Coast Assessment)¹		5.850			09/02/2013		09/02/2011	^B		20,065
	55,000	Oroville, CA Hospital¹		5.400			12/01/2022		08/29/2011	^B		55,031
	1,415,000	Oxnard, CA Harbor District¹		5.550			08/01/2013		02/01/2012	^B		1,446,781
	25,000	Oxnard, CA Improvement Bond Act 1915¹		5.625			09/02/2027		10/11/2025	^A		22,275
	10,000	Oxnard, CA Special Tax Community Facilities District No. 1¹		6.000			09/01/2027		09/01/2011	^B		9,999
	45,000	Pajaro Valley, CA Water Management Agency COP¹		5.500			03/01/2018		03/01/2018			43,692
	500,000	Palm Springs, CA Airport Passenger Facilities (Palm Springs International Airport)¹		6.000			07/01/2018		08/10/2016	^A		483,485
	100,000	Palmdale, CA Civic Authority (Civic Center)¹		5.600			07/01/2015		08/29/2011	^B		100,157
	125,000	Palmdale, CA Community Facilities District Special Tax¹		5.400			09/01/2035		10/10/2033	^A		101,891
	700,000	Palmdale, CA Elementary School District Special Tax Community Facilities District No. 90-1¹		5.700			08/01/2018		08/29/2011	^B		701,645
	100,000	Palo Alto, CA Improvement Bond Act 1915 (University Ave. Area)¹		5.100			09/02/2024		09/02/2024			90,563
	100,000	Palo Alto, CA Improvement Bond Act 1915 (University Ave. Area)¹		5.125			09/02/2025		09/02/2025			89,642
	45,000	Palo Alto, CA Improvement Bond Act 1915 (University Ave. Area)¹		5.700			09/02/2018		09/02/2011	^B		45,945
	100,000	Palomar Pomerado, CA Health System¹		5.375			11/01/2013		08/29/2011	^B		100,175
	25,000	Pasadena, CA Public Financing Authority (Orange Grove & Villa Parke)¹		5.450			06/01/2012		12/01/2011	^B		25,181
	275,000	Perris, CA Community Facilities District Special Tax¹		6.375			09/01/2032		09/01/2014	^B		276,009
	60,000	Perris, CA Public Financing Authority¹		5.750			09/01/2024		09/01/2016	^B		60,049
	155,000	Perris, CA Public Financing Authority		7.875			09/01/2025		08/29/2011	^B		155,239
	20,000	Perris, CA Public Financing Authority, Series A¹		6.125			09/01/2034		10/01/2030	^A		19,552
	10,000	Petaluma, CA Improvement Bond Act 1915¹		6.000			09/02/2020		09/02/2011	^B		10,001
	60,000	Pittsburg, CA Improvement Bond Act 1915¹		6.300			09/02/2025		10/18/2023	^A		58,845
	10,000	Pittsburg, CA Improvement Bond Act 1915¹		6.350			09/02/2031		05/11/2029	^A		9,304
	20,000	Pittsburg, CA Improvement Bond Act 1915 (San Marco Phase I)¹		6.350			09/02/2031		01/28/2028	^A		18,607
	50,000	Pittsburg, CA Infrastructure Financing Authority¹		5.850			09/02/2015		08/29/2011	^B		50,068
	25,000	Pittsburg, CA Infrastructure Financing Authority, Series B¹		5.800			09/02/2014		08/29/2011	^B		25,045
	130,000	Pittsburg, CA Infrastructure Financing Authority, Series B¹		6.000			09/02/2024		02/04/2020	^A		125,428


								Effective
Principal								Maturity
Amount			Coupon			Maturity		(Unaudited)**			Value

California Continued
$	500,000	Pittsburg, CA Redevel. Agency (Los Medanos Community Devel.)¹		5.850	%		08/01/2018		02/01/2012	^B	$	503,775
	4,550,000	Placentia, CA Redevel. Agency Tax Allocation¹		7.750			02/01/2014		02/01/2012	^B		4,617,704
	10,000	Placer County, CA Community Facilities District¹		6.500			09/01/2026		10/17/2024	^A		9,637
	5,000	Placer County, CA Community Facilities District Special Tax No. 2001-1 (Dry Creek)¹		5.700			09/01/2013		09/01/2011	^B		5,110
	5,000	Placer County, CA Community Facilities District Special Tax No. 2001-1 (Dry Creek)¹		6.300			09/01/2019		09/01/2012	^B		5,038
	10,000	Pleasant Hill, CA Special Tax Downtown Community Facilities District No. 1¹		5.875			09/01/2025		03/30/2024	^A		9,552
	30,000	Port of Oakland, CA¹		5.250			11/01/2027		11/01/2012	^B		30,021
	500,000	Port of Oakland, CA¹		5.700			11/01/2019		08/29/2011	^B		500,735
	1,485,000	Port of Oakland, CA¹		5.750			11/01/2014		08/29/2011	^B		1,489,618
	775,000	Port of Oakland, CA¹		5.750			11/01/2016		08/29/2011	^B		776,938
	2,500,000	Port of Oakland, CA¹		5.750			11/01/2020		08/29/2011	^B		2,503,225
	1,665,000	Port of Oakland, CA¹		5.750			11/01/2021		08/29/2011	^B		1,666,915
	225,000	Port of Oakland, CA¹		5.750			11/01/2022		08/29/2011	^B		225,218
	2,475,000	Port of Oakland, CA¹		5.750			11/01/2029		08/29/2011	^B		2,475,569
	2,975,000	Port of Oakland, CA¹		5.875			11/01/2017		08/29/2011	^B		2,981,605
	940,000	Port of Oakland, CA¹		5.875			11/01/2030		08/29/2011	^B		940,244
	110,000	Port Redwood City, CA GO¹		5.400			06/01/2019		01/24/2017	^A		109,714
	50,000	Poway, CA Public Financing Authority (Water Services)¹		5.500			11/01/2015		08/29/2011	^B		50,079
	100,000	Poway, CA Unified School District¹		7.125			09/15/2026		09/15/2011	^B		104,851
	100,000	Poway, CA Unified School District¹		7.125			09/15/2027		09/15/2011	^B		104,464
	200,000	Poway, CA Unified School District¹		7.250			09/15/2028		09/15/2011	^B		209,848
	100,000	Poway, CA Unified School District¹		7.375			09/15/2029		09/15/2011	^B		105,511
	270,000	Poway, CA Unified School District¹		7.500			09/15/2032		09/15/2011	^B		284,893
	1,115,000	Poway, CA Unified School District Special Tax¹		6.125			09/01/2033		08/11/2030	^A		1,114,253
	30,000	Poway, CA Unified School District Special Tax Community Facilities District No. 10¹		5.750			09/01/2032		03/01/2028	^A		28,455
	25,000	Poway, CA Unified School District Special Tax Community Facilities District No. 10¹		5.950			09/01/2018		09/01/2011	^B		25,029
	35,000	Poway, CA Unified School District Special Tax Community Facilities District No. 10¹		6.100			09/01/2031		03/25/2029	^A		34,877
	10,000	Rancho Cucamonga, CA Public Finance Authority¹		6.000			09/02/2020		09/02/2011	^B		10,000
	20,000	Rancho Mirage, CA Improvement Bond Act 1915¹		5.500			09/02/2024		05/03/2022	^A		17,832
	30,000	Rancho Mirage, CA Improvement Bond Act 1915¹		5.750			09/02/2022		03/28/2021	^A		29,090


								Effective
Principal								Maturity
Amount			Coupon			Maturity		(Unaudited)**			Value

California Continued
$	35,000	Rancho Santa Fe, CA Community Services District Special Tax¹		6.600	%		09/01/2020		09/01/2011	^B	$	35,030
	550,000	Rancho Santa Fe, CA Community Services District Special Tax¹		6.700			09/01/2030		09/01/2011	^B		550,017
	55,000	Redding, CA Improvement Bond Act 1915 (Tierra Oaks Assessment District 1993-1)¹		7.000			09/02/2013		09/02/2011	^B		56,774
	10,000	Redlands, CA Community Facilities District¹		5.850			09/01/2033		05/27/2031	^A		8,517
	50,000	Rialto, CA Special Tax Community Facilities District No. 2006-1¹		5.000			09/01/2016		03/16/2016	^A		51,170
	25,000	Rialto, CA Special Tax Community Facilities District No. 2006-1¹		5.050			09/01/2017		09/01/2016	^B		25,200
	65,000	Rialto, CA Special Tax Community Facilities District No. 2006-1¹		5.125			09/01/2018		09/01/2018			64,711
	100,000	Rialto, CA Special Tax Community Facilities District No. 2006-1¹		5.200			09/01/2019		09/01/2019			97,993
	100,000	Rialto, CA Special Tax Community Facilities District No. 2006-1¹		5.250			09/01/2020		09/01/2020			96,630
	50,000	Rialto, CA Special Tax Community Facilities District No. 2006-1¹		5.250			09/01/2021		09/01/2021			47,626
	100,000	Richmond, CA Redevel. Agency (Harbour Redevel.)		5.500			07/01/2018		08/29/2011	^B		100,336
	80,000	River Islands, CA Public Financing Authority¹		6.000			09/01/2027		06/22/2024	^A		65,405
	100,000	River Islands, CA Public Financing Authority¹		6.150			09/01/2035		06/24/2032	^A		76,895
	250,000	Riverside County, CA Community Facilities District Special Tax¹		5.000			09/01/2012		09/01/2011	^B		256,585
	15,000	Riverside County, CA Community Facilities District Special Tax¹		6.000			09/01/2030		05/01/2028	^A		12,952
	150,000	Riverside County, CA Community Facilities District Special Tax No. 87-1¹		5.100			09/01/2013		09/01/2011	^B		154,761
	215,000	Riverside County, CA Community Facilities District Special Tax No. 87-1¹		5.150			09/01/2014		09/01/2011	^B		221,760
	385,000	Riverside County, CA Community Facilities District Special Tax No. 87-1¹		5.200			09/01/2015		09/01/2011	^B		396,974
	225,000	Riverside County, CA Community Facilities District Special Tax No. 87-1¹		5.250			09/01/2016		09/01/2011	^B		231,944
	200,000	Riverside County, CA Community Facilities District Special Tax No. 88-8¹		5.300			09/01/2011		09/01/2011			200,490
	210,000	Riverside County, CA Community Facilities District Special Tax No. 88-8¹		5.350			09/01/2012		09/01/2012			215,416
	430,000	Riverside County, CA Community Facilities District Special Tax No. 88-8¹		5.400			09/01/2013		09/01/2013			447,398
	450,000	Riverside County, CA Community Facilities District Special Tax No. 88-8¹		5.450			09/01/2014		09/01/2014			472,181
	475,000	Riverside County, CA Community Facilities District Special Tax No. 88-8¹		5.500			09/01/2015		09/01/2015			498,869


								Effective
Principal								Maturity
Amount			Coupon			Maturity		(Unaudited)**			Value

California Continued
$	220,000	Riverside County, CA Public Financing Authority¹		5.250	%		10/01/2017		08/29/2011	^B	$	220,376
	35,000	Riverside County, CA Public Financing Authority (Menifee Village)¹		7.150			09/01/2011		09/01/2011			35,140
	425,000	Riverside County, CA Public Financing Authority COP¹		5.750			05/15/2019		03/03/2016	^A		382,687
	305,000	Riverside County, CA Redevel. Agency (Jurupa Valley Redevel.)¹		5.750			10/01/2020		10/01/2020			311,731
	60,000	Riverside, CA Improvement Bond Act 1915¹		8.250			09/02/2016		09/02/2011	^B		60,227
	200,000	Riverside, CA Improvement Bond Act 1915 (Riverwalk Business)¹		6.250			09/02/2029		10/09/2027	^A		198,064
	5,000	Riverside, CA Improvement Bond Act 1915 (Sycamore Canyon Assessment District)¹		8.500			09/02/2012		09/02/2011	^B		5,027
	50,000	Riverside, CA Special Tax Community Facilities District No. 90-1, Series A¹		5.500			09/01/2015		09/01/2011	^B		50,092
	10,000	Riverside, CA Unified School District¹		5.000			02/01/2027		02/01/2012	^B		10,186
	100,000	Riverside, CA Unified School District¹		5.350			09/01/2024		03/04/2024	^A		95,801
	90,000	Riverside, CA Unified School District¹		5.450			09/01/2025		10/11/2023	^A		87,294
	100,000	Riverside, CA Unified School District¹		5.500			09/01/2034		10/11/2032	^A		89,436
	80,000	Riverside, CA Unified School District¹		5.700			09/01/2034		01/13/2031	^A		73,976
	10,000	Riverside, CA Unified School District¹		6.000			09/01/2029		05/25/2023	^A		9,923
	25,000	Romoland, CA School District Special Tax¹		6.000			09/01/2033		11/10/2029	^A		23,853
	50,000	Romoland, CA School District Special Tax¹		6.375			09/01/2033		11/24/2026	^A		49,908
	50,000	Romoland, CA School District Special Tax¹		6.375			09/01/2033		06/05/2031	^A		49,908
	10,000	Roseville, CA Special Tax Community Facilities District No. 1 (Westpark)¹		4.300			09/01/2012		09/01/2012			10,178
	25,000	Sacramento County, CA COP¹		5.375			02/01/2019		08/29/2011	^B		25,010
	990,000	Sacramento County, CA Hsg. Authority (Cottage Estates Apartments)¹		6.000			02/01/2033		12/21/2024	^A		977,873
	1,500,000	Sacramento County, CA Hsg. Authority (Verandas Apartments Senior Community)¹		5.700			03/01/2034		09/01/2012	^B		1,509,495
	295,000	Sacramento, CA City Financing Authority		5.250			05/01/2015		08/29/2011	^B		295,443
	500,000	Sacramento, CA City Financing Authority (California EPA Building)¹		5.250			05/01/2019		08/29/2011	^B		500,640
	10,000	Sacramento, CA Improvement Bond Act 1915 (Citywide Landscaping & Lighting)¹		5.500			09/02/2016		08/29/2011	^B		10,026
	1,470,000	Sacramento, CA Special Tax (North Natomas Community Facilities)¹		5.700			09/01/2023		09/01/2011	^B		1,469,927
	30,000	Sacramento, CA Special Tax (North Natomas Community Facilities)¹		6.300			09/01/2026		09/01/2011	^B		30,006
	510,000	Saddleback Valley, CA Unified School District¹		5.650			09/01/2017		08/29/2011	^B		511,816
	95,000	Salida, CA Public Facilities Financing Agency¹		5.250			09/01/2028		08/29/2011	^B		95,235
	300,000	Salida, CA Public Facilities Financing Agency Community Facilities District Special Tax		5.250			09/01/2018		08/29/2011	^B		300,906


								Effective
Principal								Maturity
Amount			Coupon			Maturity		(Unaudited)**			Value

California Continued
$	180,000	Salinas Valley, CA Solid Waste Authority¹		5.625	%		08/01/2015		08/01/2012	^B	$	183,856
	1,000,000	Salinas Valley, CA Solid Waste Authority¹		5.625			08/01/2018		08/01/2012	^B		1,010,530
	100,000	Salinas, CA Improvement Bond Act 1915¹		5.450			09/02/2013		09/02/2011	^B		103,132
	50,000	Salinas, CA Improvement Bond Act 1915 (Bella Vista)¹		5.500			09/02/2013		09/02/2011	^B		51,585
	120,000	Salinas, CA Redevel. Agency Tax Allocation (Central City Revitalization)¹		5.500			11/01/2023		08/29/2011	^B		120,404
	135,000	San Bernardino County, CA (Single Family Mtg.)		5.376	²		05/01/2031		09/26/2014	^A		44,940
	65,000	San Bernardino County, CA COP (Medical Center Financing)¹		5.250			08/01/2016		08/25/2011	^B		65,123
	90,000	San Bernardino County, CA Hsg. Authority (Friendly Village Mobile Home Park Corp.)¹		6.700			03/20/2043		03/05/2016	^B		95,405
	60,000	San Bernardino County, CA Hsg. Authority (Glen Aire Mobile Home Park)¹		6.700			12/20/2041		11/20/2011	^B		63,217
	135,000	San Bernardino, CA Joint Powers Financing Authority (California Dept. of Transportation Lease)¹		5.500			12/01/2020		08/29/2011	^B		135,144
	270,000	San Bernardino, CA Joint Powers Financing Authority (California Dept. of Transportation Lease)¹		5.500			12/01/2020		08/29/2011	^B		270,410
	55,000	San Bernardino, CA Joint Powers Financing Authority (City Hall)¹		5.600			01/01/2015		08/29/2011	^B		55,171
	135,000	San Bernardino, CA Joint Powers Financing Authority (Police Station)¹		5.500			09/01/2024		03/27/2023	^A		131,313
	150,000	San Bernardino, CA Joint Powers Financing Authority (Tax Allocation)¹		6.625			04/01/2026		07/07/2023	^A		145,809
	685,000	San Bernardino, CA Mountains Community Hospital District COP		5.000			02/01/2017		03/08/2015	^A		604,102
	30,000	San Bernardino, CA Redevel. Agency (Ramona Senior Complex)¹		7.875			07/01/2025		03/09/2020	^A		28,766
	2,250,000	San Diego County, CA (Developmental Services Foundation) COP¹		5.500			09/01/2017		09/01/2012	^B		2,292,503
	30,000	San Diego, CA Convention Center¹		5.250			04/01/2015		08/29/2011	^B		30,073
	50,000	San Diego, CA Convention Center Expansion Financing Authority		5.250			04/01/2013		08/29/2011	^B		50,143
	100,000	San Diego, CA Foundation Auxiliary Organization (San Diego State University Foundation)¹		5.000			03/01/2022		03/01/2012	^B		101,691
	150,000	San Diego, CA Mtg. (Mariners Cove)¹		5.800			09/01/2015		08/29/2011	^B		150,425
	10,000	San Diego, CA Redevel. Agency		6.000			11/01/2015		08/29/2011	^B		10,038
	150,000	San Diego, CA Redevel. Agency (Centre City)¹		5.250			09/01/2021		09/01/2011	^B		151,814
	25,000	San Diego, CA Redevel. Agency (Centre City)¹		5.350			09/01/2024		03/26/2023	^A		24,442
	105,000	San Diego, CA Redevel. Agency (Mt. Hope Redevel.)		5.875			10/01/2019		08/29/2011	^B		105,378


								Effective
Principal								Maturity
Amount			Coupon			Maturity		(Unaudited)**			Value

California Continued
$	50,000	San Diego, CA Redevel. Agency (North Bay Redevel.)¹		5.800	%		09/01/2022		08/29/2011	^B	$	50,014
	300,000	San Diego, CA Redevel. Agency (North Bay Redevel.)¹		5.875			09/01/2030		08/29/2011	^B		300,006
	710,000	San Diego, CA Redevel. Agency (North Park Redevel.)¹		5.900			09/01/2025		08/29/2011	^B		710,149
	25,000	San Diego, CA Redevel. Agency Tax Allocation (North Park Redevel.)¹		5.900			09/01/2030		08/29/2011	^B		25,011
	53,000	San Francisco, CA City & County Airports Commission¹		5.000			05/01/2025		08/29/2011	^B		53,010
	185,000	San Francisco, CA City & County Airports Commission¹		5.250			01/01/2026		01/01/2026			184,528
	25,000	San Francisco, CA City & County Airports Commission¹		5.500			05/01/2016		05/01/2012	^B		25,858
	10,000	San Francisco, CA City & County Airports Commission (SFO Fuel Company)		5.000			01/01/2014		08/29/2011	^B		10,022
	285,000	San Francisco, CA City & County Airports Commission (SFO Fuel Company)¹		5.125			01/01/2017		08/29/2011	^B		285,439
	55,000	San Francisco, CA City & County Airports Commission (SFO Fuel Company)¹		5.250			01/01/2020		08/29/2011	^B		55,044
	40,000	San Francisco, CA City & County Airports Commission (SFO Fuel Company)¹		5.250			01/01/2021		08/29/2011	^B		40,026
	50,000	San Francisco, CA City & County Airports Commission (SFO Fuel Company)¹		5.250			01/01/2027		01/01/2027			49,452
	490,000	San Francisco, CA City & County Airports Commission (SFO Fuel Company)¹		6.125			01/01/2027		08/29/2011	^B		490,544
	1,500,000	San Francisco, CA City & County Airports Commission (SFO Fuel Company)¹		5.250			01/01/2019		08/29/2011	^B		1,501,485
	45,000	San Francisco, CA City & County Improvement Bond Act 1915¹		6.850			09/02/2026		09/02/2011	^B		46,362
	25,000	San Francisco, CA City & County Parking Authority (Parking Meter)		5.000			06/01/2018		08/29/2011	^B		25,074
	25,000	San Joaquin County, CA Community Facilities District Special Tax (Delta Farms)¹		6.125			09/01/2024		06/24/2021	^A		23,489
	500,000	San Joaquin County, CA COP General Hospital¹		5.250			09/01/2013		09/01/2011	^B		501,410
	20,000	San Jose, CA Improvement Bond Act 1915¹		5.600			09/02/2016		09/02/2011	^B		20,617
	25,000	San Jose, CA Improvement Bond Act 1915¹		5.700			09/02/2018		09/02/2011	^B		25,757
	95,000	San Jose, CA Improvement Bond Act 1915¹		5.750			09/02/2019		09/02/2019			97,026
	60,000	San Jose, CA Improvement Bond Act 1915¹		5.750			09/02/2020		09/02/2020			60,461
	255,000	San Jose, CA Multifamily Hsg. (Almaden Senior Hsg. Partners)¹		5.350			07/15/2034		05/15/2016	^B		264,598
	30,000	San Jose, CA Multifamily Hsg. (El Parador Apartments)¹		6.100			01/01/2031		05/04/2023	^A		27,874


								Effective
Principal								Maturity
Amount			Coupon			Maturity		(Unaudited)**			Value

California Continued
$	325,000	San Jose, CA Multifamily Hsg. (Sixth & Martha Family Apartments)¹		5.875	%		03/01/2033		03/01/2012	^B	$	326,602
	20,000	San Jose, CA Redevel. Agency¹		5.500			08/01/2014		08/29/2011	^B		20,037
	10,000	San Jose, CA Redevel. Agency¹		5.500			08/01/2016		08/29/2011	^B		10,016
	95,000	San Jose, CA Redevel. Agency¹		5.750			08/01/2017		02/01/2012	^B		95,834
	5,000	San Jose, CA Redevel. Agency Tax Allocation¹		5.600			08/01/2019		08/29/2011	^B		5,004
	200,000	San Marcos, CA Public Facilities Authority¹		5.800			09/01/2018		09/01/2011	^B		200,242
	35,000	San Marcos, CA Redevel. Agency Tax Allocation (Affordable Hsg.)¹		5.650			10/01/2028		08/29/2011	^B		35,011
	1,715,000	Santa Clara County, CA Hsg. Authority (John Burns Gardens Apartments)¹		5.850			08/01/2031		04/24/2027	^A		1,686,634
	80,000	Santa Clara County, CA Hsg. Authority (Rivertown Apartments)¹		5.700			08/01/2021		02/01/2013	^B		80,342
	75,000	Santa Clara, CA Redevel. Agency Tax Allocation (Bayshore North)¹		5.000			06/01/2015		12/01/2011	^B		75,565
	50,000	Santa Clara, CA Redevel. Agency Tax Allocation (Bayshore North)¹		5.250			06/01/2018		12/01/2011	^B		50,224
	995,000	Santa Clara, CA Redevel. Agency Tax Allocation (Bayshore North)¹		5.250			06/01/2019		12/01/2011	^B		998,413
	35,000	Santa Cruz County, CA Hsg. Authority (Northgate Apartments)¹		5.350			07/20/2022		08/29/2011	^B		35,025
	85,000	Santa Fe Springs, CA Community Devel. Commission Tax Allocation¹		5.375			09/01/2018		09/01/2011	^B		85,072
	800,000	Santa Fe Springs, CA Community Devel. Commission Tax Allocation¹		5.375			09/01/2021		09/01/2011	^B		800,184
	20,000	Santa Margarita, CA Water District Special Tax Facilities District No. 99-1¹		6.200			09/01/2020		09/01/2011	^B		20,027
	1,100,000	Santa Margarita, CA Water District Special Tax Facilities District No. 99-1¹		6.250			09/01/2029		09/01/2011	^B		1,100,572
	25,000	Santa Maria, CA COP¹		5.500			08/01/2021		05/14/2018	^A		25,000
	25,000	Santa Nella County, CA Water District¹		6.250			09/02/2028		10/10/2021	^A		19,348
	20,000	Santa Rosa, CA Improvement Bond Act 1915 (Nielson Ranch)¹		6.700			09/02/2022		09/02/2011	^B		20,208
	45,000	Santaluz, CA Special Tax Community Facilities District No. 2¹		5.500			09/01/2030		04/27/2028	^A		43,251
	845,000	Santaluz, CA Special Tax Community Facilities District No. 2¹		6.375			09/01/2030		09/01/2011	^B		845,338
	70,000	Saugus, CA Union School District Special Tax¹		6.250			09/01/2028		09/01/2028			69,922
	90,000	Saugus, CA Union School District Special Tax¹		6.375			09/01/2029		09/01/2020	^B		90,209
	50,000	Saugus/Hart, CA School Facilities Financing Authority¹		6.100			09/01/2032		09/01/2011	^B		50,021
	2,040,000	Saugus/Hart, CA School Facilities Financing Authority¹		6.125			09/01/2033		09/01/2011	^B		2,040,816
	115,000	Scotts Valley, CA Special Tax¹		5.200			09/01/2028		09/01/2011	^B		115,509


								Effective
Principal								Maturity
Amount			Coupon			Maturity		(Unaudited)**			Value

California Continued
$	1,390,000	Selma, CA Redevel. Agency¹		5.750	%		09/01/2024		09/01/2024		$	1,287,404
	15,000	Sequoia, CA Hospital District¹		5.375			08/15/2023		08/29/2011	^A		16,445
	110,000	Shafter, CA Community Devel. Agency Tax Allocation¹		5.000			11/01/2013		11/01/2013			112,941
	100,000	Shafter, CA Community Devel. Agency Tax Allocation¹		5.250			11/01/2017		11/01/2016	^B		100,128
	100,000	Shafter, CA Community Devel. Agency Tax Allocation¹		5.300			11/01/2018		11/01/2018			98,012
	100,000	Shafter, CA Community Devel. Agency Tax Allocation¹		5.350			11/01/2019		11/01/2019			96,740
	100,000	Shafter, CA Community Devel. Agency Tax Allocation¹		5.375			11/01/2020		11/01/2020			95,123
	65,000	South Orange County, CA Public Financing Authority		5.375			08/15/2013		08/29/2011	^B		65,246
	25,000	Southern CA Public Power Authority		5.500			07/01/2020		08/29/2011	^B		25,092
	10,000	Southern CA Public Power Authority¹		5.750			07/01/2021		08/29/2011	^B		10,038
	7,245,000	Southern CA Tobacco Securitization Authority¹		4.750			06/01/2025		12/23/2014	^A		6,290,037
	4,235,000	Southern CA Tobacco Securitization Authority (TASC)¹		5.000			06/01/2037		06/22/2026	^A		3,048,480
	125,000	Spreckels, CA Union School District		6.125			08/01/2017		08/29/2011	^B		125,626
	200,000	Stockton, CA COP (Wastewater System)¹		5.125			09/01/2016		08/29/2011	^B		200,298
	30,000	Stockton, CA Improvement Bond Act 1915¹		5.800			09/02/2020		09/02/2011	^B		30,005
	5,000	Susanville, CA Public Financing Authority¹		7.750			09/01/2017		08/29/2011	^B		5,020
	100,000	Taft, CA Public Financing Authority (Community Correctional Facility)¹		6.050			01/01/2017		08/29/2011	^B		100,265
	15,000	Tejon Ranch, CA Public Facilities Finance Authority¹		7.200			09/01/2030		03/01/2013	^B		15,090
	725,000	Tejon Ranch, CA Public Facilities Finance Authority Special Tax (Community Facilities District No. 1)¹		7.200			09/01/2030		02/18/2013	^B		729,343
	30,000	Temecula Valley, CA Unified School District Community Facilities District No. 02-1¹		6.125			09/01/2033		10/15/2031	^A		28,520
	905,000	Temecula, CA Public Financing Authority Community Facilities District (Roripaugh)¹		4.650			09/01/2011		09/01/2011			900,837
	1,485,000	Torrance, CA Hospital (Torrance Memorial Medical Center)		6.000			06/01/2022		08/29/2011	^B		1,504,260
	20,000	Torrance, CA Redevel. Agency (Downtown Redevel.)¹		5.550			09/01/2018		08/29/2011	^B		20,013
	260,000	Tracy, CA Area Public Facilities Financing Agency¹		5.875			10/01/2013		10/01/2011	^B		261,409
	1,430,000	Tracy, CA Area Public Facilities Financing Agency¹		5.875			10/01/2019		10/01/2011	^B		1,432,846
	50,000	Tracy, CA Community Facilities District¹		5.400			09/01/2015		09/02/2011	^B		50,107


								Effective
Principal								Maturity
Amount			Coupon			Maturity		(Unaudited)**			Value

California Continued
$	50,000	Tracy, CA Community Facilities District¹		6.100	%		09/01/2015		09/01/2011	^B	$	50,101
	50,000	Tracy, CA Community Facilities District¹		6.300			09/01/2026		08/29/2011	^B		50,002
	10,000	Tracy, CA Community Facilities District¹		6.500			09/01/2020		09/01/2011	^B		10,010
	25,000	Tracy, CA Community Facilities District (205 Parcel Glen)¹		6.250			09/01/2032		05/08/2030	^A		24,539
	1,095,000	Tracy, CA Community Facilities District (South Mac Arthur Area)¹		6.000			09/01/2027		09/02/2011	^B		1,095,526
	30,000	Tracy, CA Community Facilities District (South Mac Arthur Area)¹		6.300			09/01/2017		09/01/2011	^B		30,047
	35,000	Tracy, CA Improvement Bond Act 1915¹		5.700			09/02/2023		08/17/2019	^A		34,715
	75,000	Tracy, CA Operating Partnership Joint Powers Authority¹		6.100			09/02/2021		03/02/2013	^B		75,740
	30,000	Truckee-Donner, CA Public Utility District Special Tax¹		5.800			09/01/2035		05/26/2033	^A		23,740
	75,000	Truckee-Donner, CA Public Utility District Special Tax¹		6.000			09/01/2028		06/07/2026	^A		72,206
	20,000	Truckee-Donner, CA Public Utility District Special Tax¹		6.100			09/01/2033		11/01/2031	^A		18,844
	750,000	Turlock, CA Health Facility (Emanuel Medical Center) COP¹		5.000			10/15/2017		10/27/2016	^A		763,965
	2,210,000	Upland, CA Community Facilities District Special Tax (Colonies at San Antonio)¹		5.900			09/01/2024		09/01/2013	^B		2,227,967
	20,000	Vacaville, CA Improvement Bond Act 1915 (East Monte Vista Avenue)¹		5.850			09/02/2016		03/02/2013	^B		20,308
	10,000	Vacaville, CA Improvement Bond Act 1915 (Green Tree Reassessment District)¹		6.300			09/02/2013		09/02/2011	^B		10,225
	195,000	Vacaville, CA Public Financing Authority¹		5.400			09/01/2022		08/29/2011	^B		195,113
	200,000	Vacaville, CA Redevel. Agency (Vacaville Community Hsg.)¹		6.000			11/01/2024		11/01/2011	^B		200,484
	275,000	Val Verde, CA Unified School District¹		6.125			09/01/2034		06/25/2031	^A		255,621
	25,000	Vallejo, CA Public Financing Authority, Series A¹		7.500			09/01/2020		09/01/2011	^B		25,025
	40,000	Vallejo, CA Quadrant Improvement District No. 001¹		6.000			09/01/2017		09/01/2015	^B		41,000
	30,000	Vallejo, CA Quadrant Improvement District No. 001¹		6.000			09/01/2026		05/03/2024	^A		27,282
	40,000	Vallejo, CA Quadrant Improvement District No. 001¹		6.125			09/01/2034		06/24/2031	^A		34,550
	25,000	Valley Center-Pauma, CA Unified School District (Woods Valley Ranch)¹		5.500			09/01/2019		09/01/2019			24,774
	10,000	Valley Center-Pauma, CA Unified School District (Woods Valley Ranch)¹		6.000			09/01/2025		09/01/2025			9,578
	20,000	Valley Center-Pauma, CA Unified School District (Woods Valley Ranch)¹		6.000			09/01/2028		09/16/2027	^A		18,097


								Effective
Principal								Maturity
Amount			Coupon			Maturity		(Unaudited)**			Value

California Continued
$	1,825,000	Ventura County, CA Area Hsg. Authority (Mira Vista Senior Apartments)¹		5.000	%		12/01/2022		06/15/2019	^A	$	1,583,735
	20,000	Ventura County, CA Area Hsg. Authority (Mira Vista Senior Apartments)¹		5.050			12/01/2026		03/28/2025	^A		16,567
	145,000	Victor, CA Elementary School District¹		5.600			09/01/2034		04/06/2033	^A		123,791
	60,000	Vista, CA Joint Powers Financing Authority¹		6.100			10/01/2021		10/01/2011	^B		60,121
	5,000	Vista, CA Joint Powers Financing Authority¹		6.250			12/01/2019		12/01/2011	^B		5,036
	260,000	Walnut, CA Unified School District¹		7.200			02/01/2016		01/08/2012	^B		276,227
	15,000	Wasco, CA Improvement Bond Act 1915¹		8.750			09/02/2013		09/02/2011	^B		15,519
	100,000	Wasco, CA Public Financing Authority¹		5.375			09/01/2021		09/01/2012	^B		100,383
	15,000	Wasco, CA Public Financing Authority		7.350			09/15/2015		08/29/2011	^B		15,038
	10,000	Wasco, CA Public Financing Authority¹		7.500			09/15/2023		08/29/2011	^B		10,008
	100,000	West Covina, CA Redevel. Agency Tax Allocation (Executive Lodge Apartments)¹		5.100			09/01/2014		08/29/2011	^B		100,138
	20,000	West Patterson, CA Financing Authority Special Tax¹		5.850			09/01/2028		10/30/2026	^A		17,262
	10,000	West Patterson, CA Financing Authority Special Tax¹		6.000			09/01/2019		09/01/2019			9,924
	15,000	West Patterson, CA Financing Authority Special Tax¹		6.000			09/01/2039		05/18/2035	^A		12,215
	165,000	West Patterson, CA Financing Authority Special Tax¹		6.600			09/01/2033		12/17/2030	^A		149,079
	25,000	West Patterson, CA Financing Authority Special Tax¹		6.700			09/01/2032		04/27/2028	^A		22,994
	5,000	West Patterson, CA Financing Authority Special Tax¹		6.750			09/01/2035		09/01/2017	^A		4,548
	100,000	West Patterson, CA Financing Authority Special Tax¹		6.750			09/01/2036		09/09/2027	^A		90,734
	10,000	West Patterson, CA Financing Authority Special Tax Community Facilities District¹		5.600			09/01/2019		09/01/2019			9,646
	60,000	West Sacramento, CA Financing Authority Special Tax¹		6.100			09/01/2029		02/15/2026	^A		58,459
	5,000	West Sacramento, CA Improvement Bond Act 1915¹		8.500			09/02/2017		09/02/2011	^B		5,155
	250,000	West Sacramento, CA Special Tax Community Facilities District No. 12¹		5.750			09/01/2029		08/17/2025	^A		229,460
	50,000	West Sacramento, CA Special Tax Community Facilities District No. 14¹		6.125			09/01/2021		09/01/2011	^B		50,004
	10,000	West Sacramento, CA Special Tax Community Facilities District No. 17¹		5.875			09/01/2033		08/17/2029	^A		9,327
	50,000	West Sacramento, CA Special Tax Community Facilities District No. 8 (Southport)¹		6.500			09/01/2031		09/01/2011	^B		49,996
	25,000	Western CA Municipal Water Districts¹		7.125			09/02/2014		09/02/2011	^B		25,821


								Effective
Principal								Maturity
Amount			Coupon			Maturity		(Unaudited)**			Value

California Continued
$	70,000	Yolo County, CA Hsg. Authority (Russell Park Apartments)¹		7.000	%		11/01/2014		08/29/2011	^B	$	70,278
	20,000	Yorba Linda, CA Redevel. Agency Tax Allocation¹		5.250			09/01/2013		09/01/2011	^B		20,038
	70,000	Yorba Linda, CA Redevel. Agency Tax Allocation¹		5.250			09/01/2023		03/26/2022	^A		66,508
	30,000	Yuba City, CA Unified School District COP¹		5.250			02/01/2022		08/29/2011	^B		30,086
	30,000	Yucaipa, CA Special Tax Community Facilities District No. 98-1¹		6.000			09/01/2028		09/16/2021	^A		29,034

												280,340,716
U.S. Possessions—5.4%
	50,000	Puerto Rico Children’s Trust Fund (TASC)¹		5.375			05/15/2033		01/14/2016	^A		47,623
	485,000	Puerto Rico Commonwealth GO¹		5.625			07/01/2019		08/11/2011	^B		485,883
	560,000	Puerto Rico Commonwealth GO¹		5.625			07/01/2031		07/01/2014	^B		564,990
	2,000,000	Puerto Rico Commonwealth GO¹		6.000			07/01/2029		07/01/2016	^B		2,083,560
	110,000	Puerto Rico IMEPCF (American Home Products)		5.100			12/01/2018		08/29/2011	^B		110,420
	4,400,000	Puerto Rico ITEMECF (Cogeneration Facilities)		6.625			06/01/2026		08/29/2011	^B		4,437,400
	520,000	Puerto Rico ITEMECF (University Plaza)¹		5.625			07/01/2013		01/01/2012	^B		527,342
	500,000	Puerto Rico ITEMECF (University Plaza)¹		5.625			07/01/2019		01/01/2012	^B		506,865
	135,000	Puerto Rico Municipal Finance Agency, Series A		5.500			07/01/2017		08/29/2011	^B		135,370
	25,000	Puerto Rico Municipal Finance Agency, Series A¹		5.750			08/01/2012		08/29/2011	^B		25,101
	925,000	Puerto Rico Public Buildings Authority¹		7.000			07/01/2021		07/01/2014	^B		1,023,920
	2,600,000	Puerto Rico Public Buildings Authority¹		7.000			07/01/2025		06/01/2014	^B		2,821,308
	2,500,000	Puerto Rico Sales Tax Financing Corp., Series A¹		6.125			08/01/2029		02/01/2014	^B		2,593,450
	35,000	University of Puerto Rico		5.500			06/01/2012		08/29/2011	^B		35,101
	250,000	V.I. Public Finance Authority, Series A¹		5.250			10/01/2024		10/01/2014	^B		252,708

												15,651,041

Total Investments, at Value (Cost $300,525,476)—102.9%												295,991,757
Liabilities in Excess of Other Assets—(2.9)												(8,336,872	)

Net Assets—100.0%											$	287,654,885

To simplify the listings of securities, abbreviations are used per the table below:



ABAG		Association of Bay Area Governments
BMH		Bakersfield Memorial Hospital
CDA		Communities Devel. Authority
CHCW		Catholic Healthcare West
CHCWSC		Catholic Healthcare West Southern California
CHWCC		CHW Central Coast
COP		Certificates of Participation
CVHP		Citrus Valley Health Partners
CVMC		Citrus Valley Medical Center
FF		Feedback Foundation
FH		Foothill Hospital
GO		General Obligation
HFA		Housing Finance Agency
IMEPCF		Industrial, Medical and Environmental Pollution Control Facilities
ITEMECF		Industrial, Tourist, Educational, Medical and Environmental Community Facilities
M.S.R		Modesto Irrigation District of the City of Santa Clara and the City of Redding
OCTC		Olive Crest Treatment Centers
OW		O’Connor Woods
OWHC		O’Connor Woods Housing Corporation
ROLs		Residual Option Longs
SCADP		Southern California Alcohol & Drug Programs
SJRHC		St. Joseph’s Regional Housing Corporation
TASC		Tobacco Settlement Asset-Backed Bonds
V.I.		United States Virgin Islands

See accompanying Notes to Financial Statements.

STATEMENT OF ASSETS AND LIABILITIES July 29, 2011¹



Assets
Investments, at value (cost $300,525,476)—see accompanying statement of investments	$	295,991,757
Cash		551,664
Receivables and other assets:
Interest		5,213,335
Investments sold		4,743,994
Shares of beneficial interest sold		535,270
Other		87,954

Total assets		307,123,974

Liabilities
Payables and other liabilities:
Payable on borrowings (See Note 5)		10,800,000
Payable for short-term floating rate notes issued (See Note 1)		6,665,000
Shares of beneficial interest redeemed		1,067,881
Investments purchased		658,134
Dividends		122,816
Distribution and service plan fees		48,411
Trustees’ compensation		30,160
Shareholder communications		20,136
Transfer and shareholder servicing agent fees		8,015
Interest expense on borrowings		834
Other		47,702

Total liabilities		19,469,089

Net Assets	$	287,654,885


Composition of Net Assets
Par value of shares of beneficial interest	$	86,556
Additional paid-in capital		312,198,024
Accumulated net investment income		2,183,899
Accumulated net realized loss on investments		(22,279,875	)
Net unrealized depreciation on investments		(4,533,719	)

Net Assets	$	287,654,885

1. July 29, 2011 represents the last business day of the Fund’s 2011 fiscal year. See Note 1 of the accompanying Notes.



Net Asset Value Per Share

Class A Shares:
Net asset value and redemption price per share (based on net assets of $198,431,159 and 59,671,085 shares of beneficial interest outstanding)	$	3.33
Maximum offering price per share (net asset value plus sales charge of 3.50% of offering price)	$	3.45

Class B Shares:
Net asset value, redemption price (excludes applicable contingent deferred sales charge) and offering price per share (based on net assets of $1,539,366 and 451,605 shares of beneficial interest outstanding)	$	3.41

Class C Shares:
Net asset value, redemption price (excludes applicable contingent deferred sales charge) and offering price per share (based on net assets of $74,653,840 and 22,523,823 shares of beneficial interest outstanding)	$	3.31

Class Y Shares:
Net asset value, redemption price and offering price per share (based on net assets of $13,030,520 and 3,909,940 shares of beneficial interest outstanding)	$	3.33

See accompanying Notes to Financial Statements.

STATEMENT OF OPERATIONS For the Year Ended July 29, 2011¹



Investment Income
Interest	$	16,259,570
Other income		60

Total investment income		16,259,630

Expenses
Management fees		1,275,068
Distribution and service plan fees:
Class A		470,490
Class B		17,128
Class C		738,057
Transfer and shareholder servicing agent fees:
Class A		58,386
Class B		2,892
Class C		37,777
Class Y		2,743
Shareholder communications:
Class A		23,417
Class B		1,103
Class C		16,272
Class Y		945
Borrowing fees		322,406
Interest expense and fees on short-term floating rate notes issued (See Note 1)		130,904
Interest expense on borrowings		21,836
Trustees’ compensation		5,394
Custodian fees and expenses		1,614
Administration service fees		1,500
Other		56,204

Total expenses		3,184,136
Less waivers and reimbursements of expenses		(5	)

Net expenses		3,184,131

Net Investment Income		13,075,499

Realized and Unrealized Gain (Loss)
Net realized loss on investments		(5,910,066	)
Net change in unrealized appreciation/depreciation on investments		2,027,703

Net Increase in Net Assets Resulting from Operations	$	9,193,136

1. July 29, 2011 represents the last business day of the Fund’s 2011 fiscal year. See Note 1 of the accompanying Notes.

See accompanying Notes to Financial Statements.

STATEMENTS OF CHANGES IN NET ASSETS


	Year Ended July			Year Ended July
	29, 2011¹			30, 2010¹

Operations
Net investment income	$	13,075,499		$	11,243,191
Net realized loss		(5,910,066	)		(2,422,539	)
Net change in unrealized appreciation/depreciation		2,027,703			12,757,738

Net increase in net assets resulting from operations		9,193,136			21,578,390

Dividends and/or Distributions to Shareholders
Dividends from net investment income:
Class A		(9,586,279	)		(7,972,240	)
Class B		(65,399	)		(71,825	)
Class C		(3,039,436	)		(2,560,883	)
Class Y		(182,069	)		—

		(12,873,183	)		(10,604,948	)

Beneficial Interest Transactions
Net increase (decrease) in net assets resulting from beneficial interest transactions:
Class A		12,637,380			26,517,767
Class B		(305,993	)		(208,248	)
Class C		5,117,953			7,137,748
Class Y		12,789,992			—

		30,239,332			33,447,267

Net Assets
Total increase		26,559,285			44,420,709
Beginning of period		261,095,600			216,674,891

End of period (including accumulated net investment income of $2,183,899 and $2,014,040, respectively)	$	287,654,885		$	261,095,600

1. July 29, 2011 and July 30, 2010 represent the last business days of the Fund’s respective 2011 and 2010 fiscal years.

See Note 1 of the accompanying Notes.

See accompanying Notes to Financial Statements.

STATEMENT OF CASH FLOWS For the Year Ended July 29, 2011¹



Cash Flows from Operating Activities
Net increase in net assets from operations	$	9,193,136
Adjustments to reconcile net increase in net assets from operations to net cash used in operating activities:
Purchase of investment securities		(46,985,672	)
Proceeds from disposition of investment securities		48,883,080
Short-term investment securities, net		(27,374,602	)
Premium amortization		1,008,143
Discount accretion		(620,083	)
Net realized loss on investments		5,910,066
Net change in unrealized appreciation/depreciation on investments		(2,027,703	)
Change in assets:
Increase in other assets		(49,005	)
Increase in interest receivable		(473,891	)
Increase in receivable for securities sold		(1,180,465	)
Change in liabilities:
Decrease in other liabilities		(51,707	)
Decrease in payable for securities purchased		(759,911	)

Net cash used in operating activities		(14,528,614	)

Cash Flows from Financing Activities
Proceeds from bank borrowings		117,100,000
Payments on bank borrowings		(116,100,000	)
Payments on short-term floating rate notes issued		(4,722,000	)
Proceeds from shares sold		149,147,045
Payments on shares redeemed		(125,531,902	)
Cash distributions paid		(5,024,583	)

Net cash provided by financing activities		14,868,560
Net increase in cash		339,946
Cash, beginning balance		211,718

Cash, ending balance	$	551,664

Supplemental disclosure of cash flow information:

Noncash financing activities not included herein consist of reinvestment of dividends and distributions of $7,868,627.

Cash paid for interest on bank borrowings-$24,018.

Cash paid for interest on short-term floating rate notes issued-$130,904.

1. July 29, 2011 represents the last business day of the Fund’s 2011 fiscal year. See Note 1 of the accompanying Notes.

See accompanying Notes to Financial Statements.

FINANCIAL HIGHLIGHTS


	July 29,			July 30,			July 31,			July 31,			July 31,
Class A Year Ended	2011¹			2010¹			2009			2008			2007

Per Share Operating Data
Net asset value, beginning of period	$	3.36		$	3.20		$	3.34		$	3.55		$	3.52

Income (loss) from investment operations:
Net investment income²		.16			.17			.16			.15			.15
Net realized and unrealized gain (loss)		(.03	)		.15			(.15	)		(.22	)		.02

Total from investment operations		.13			.32			.01			(.07	)		.17

Dividends and/or distributions to shareholders:
Dividends from net investment income		(.16	)		(.16	)		(.15	)		(.14	)		(.14	)

Net asset value, end of period	$	3.33		$	3.36		$	3.20		$	3.34		$	3.55


Total Return, at Net Asset Value³		4.07	%		10.02	%		0.51	%		(1.85	)%		4.99	%

Ratios/Supplemental Data
Net assets, end of period (in thousands)	$	198,431		$	188,647		$	154,287		$	228,159		$	208,041

Average net assets (in thousands)	$	197,240		$	170,296		$	180,705		$	229,325		$	186,689

Ratios to average net assets:⁴
Net investment income		4.94	%		4.96	%		5.10	%		4.36	%		4.10	%
Expenses excluding interest and fees on short-term floating rate notes issued and interest and fees from borrowings		0.77	%		0.81	%		0.80	%		0.79	%		0.78	%
Interest and fees from borrowings		0.12	%		0.27	%		0.63	%		0.10	%		0.26	%
Interest and fees on short-term floating rate notes issued⁵		0.05	%		0.05	%		0.03	%		0.15	%		0.24	%

Total expenses		0.94	%		1.13	%		1.46	%		1.04	%		1.28	%
Expenses after payments, waivers and/or reimbursements and reduction to custodian expenses		0.94	%		1.13	%		1.46	%		1.03	%		1.08	%

Portfolio turnover rate		32	%		42	%		31	%		41	%		17	%

1. July 29, 2011 and July 30, 2010 represent the last business days of the Fund’s respective 2011 and 2010 fiscal years. See Note 1 of the accompanying Notes.

2. Per share amounts calculated based on the average shares outstanding during the period.

3. Assumes an initial investment at net asset value on the business day before the first day of the fiscal period, with all dividends and distributions reinvested in additional shares on the reinvestment date, and redemption at the net asset value calculated on the last business day of the fiscal period. Sales charges are not reflected in the total return. Total returns are not annualized for periods less than one full year. Returns do not reflect the deduction of taxes that a shareholder would pay on fund distributions or the redemption of fund shares.

4. Annualized for periods less than one full year.

5. Interest and fee expense relates to the Fund’s liability for short-term floating rate notes issued in conjunction with inverse floating rate security transactions.

See accompanying Notes to Financial Statements.


	July 29,			July 30,			July 31,			July 31,			July 31,
Class B Year Ended	2011¹			2010¹			2009			2008			2007

Per Share Operating Data
Net asset value, beginning of period	$	3.44		$	3.27		$	3.41		$	3.62		$	3.59

Income (loss) from investment operations:
Net investment income²		.14			.14			.13			.12			.12
Net realized and unrealized gain (loss)		(.04	)		.15			(.15	)		(.22	)		.02

Total from investment operations		.10			.29			(.02	)		(.10	)		.14

Dividends and/or distributions to shareholders:
Dividends from net investment income		(.13	)		(.12	)		(.12	)		(.11	)		(.11	)

Net asset value, end of period	$	3.41		$	3.44		$	3.27		$	3.41		$	3.62


Total Return, at Net Asset Value³		2.98	%		9.07	%		(0.50	)%		(2.69	)%		4.05	%

Ratios/Supplemental Data
Net assets, end of period (in thousands)	$	1,539		$	1,870		$	1,977		$	2,028		$	2,136

Average net assets (in thousands)	$	1,720		$	1,973		$	1,951		$	2,068		$	2,276

Ratios to average net assets:⁴
Net investment income		3.99	%		4.03	%		4.14	%		3.46	%		3.34	%
Expenses excluding interest and fees on short-term floating rate notes issued and interest and fees from borrowings		1.72	%		1.76	%		1.82	%		1.67	%		1.68	%
Interest and fees from borrowings		0.12	%		0.27	%		0.63	%		0.10	%		0.26	%
Interest and fees on short-term floating rate notes issued⁵		0.05	%		0.05	%		0.03	%		0.15	%		0.24	%

Total expenses		1.89	%		2.08	%		2.48	%		1.92	%		2.18	%
Expenses after payments, waivers and/or reimbursements and reduction to custodian expenses		1.89	%		2.08	%		2.48	%		1.91	%		1.89	%

Portfolio turnover rate		32	%		42	%		31	%		41	%		17	%

1. July 29, 2011 and July 30, 2010 represent the last business days of the Fund’s respective 2011 and 2010 fiscal years. See Note 1 of the accompanying Notes.

2. Per share amounts calculated based on the average shares outstanding during the period.

4. Annualized for periods less than one full year.

5. Interest and fee expense relates to the Fund’s liability for short-term floating rate notes issued in conjunction with inverse floating rate security transactions.

See accompanying Notes to Financial Statements.


	July 29,			July 30,			July 31,			July 31,			July 31,
Class C Year Ended	2011¹			2010¹			2009			2008			2007

Per Share Operating Data
Net asset value, beginning of period	$	3.35		$	3.19		$	3.33		$	3.54		$	3.51

Income (loss) from investment operations:
Net investment income²		.14			.14			.13			.12			.12
Net realized and unrealized gain (loss)		(.04	)		.15			(.15	)		(.21	)		.03

Total from investment operations		.10			.29			(.02	)		(.09	)		.15

Dividends and/or distributions to shareholders:
Dividends from net investment income		(.14	)		(.13	)		(.12	)		(.12	)		(.12	)

Net asset value, end of period	$	3.31		$	3.35		$	3.19		$	3.33		$	3.54


Total Return, at Net Asset Value³		2.96	%		9.19	%		(0.29	)%		(2.59	)%		4.25	%

Ratios/Supplemental Data
Net assets, end of period (in thousands)	$	74,654		$	70,579		$	60,411		$	77,530		$	59,029

Average net assets (in thousands)	$	74,225		$	65,423		$	66,544		$	71,291		$	55,357

Ratios to average net assets:⁴
Net investment income		4.15	%		4.17	%		4.31	%		3.58	%		3.34	%
Expenses excluding interest and fees on short-term floating rate notes issued and interest and fees from borrowings		1.56	%		1.60	%		1.60	%		1.57	%		1.58	%
Interest and fees from borrowings		0.12	%		0.27	%		0.63	%		0.10	%		0.26	%
Interest and fees on short-term floating rate notes issued⁵		0.05	%		0.05	%		0.03	%		0.15	%		0.24	%

Total expenses		1.73	%		1.92	%		2.26	%		1.82	%		2.08	%
Expenses after payments, waivers and/or reimbursements and reduction to custodian expenses		1.73	%		1.92	%		2.26	%		1.81	%		1.86	%

Portfolio turnover rate		32	%		42	%		31	%		41	%		17	%

1. July 29, 2011 and July 30, 2010 represent the last business days of the Fund’s respective 2011 and 2010 fiscal years.

See Note 1 of the accompanying Notes.

2. Per share amounts calculated based on the average shares outstanding during the period.

4. Annualized for periods less than one full year.

5. Interest and fee expense relates to the Fund’s liability for short-term floating rate notes issued in conjunction with inverse floating rate security transactions.

See accompanying Notes to Financial Statements.


	Period Ended
Class Y	July 29, 2011¹

Per Share Operating Data
Net asset value, beginning of period	$	3.34

Income (loss) from investment operations:
Net investment income²		.11
Net realized and unrealized loss		(.01	)

Total from investment operations		.10

Dividends and/or distributions to shareholders:
Dividends from net investment income		(.11	)

Net asset value, end of period	$	3.33


Total Return, at Net Asset Value³		3.20	%

Ratios/Supplemental Data
Net assets, end of period (in thousands)	$	13,031

Average net assets (in thousands)	$	5,548

Ratios to average net assets:⁴
Net investment income		5.05	%
Expenses excluding interest and fees on short-term floating rate notes issued and interest and fees from borrowings		0.58	%
Interest and fees from borrowings		0.10	%
Interest and fees on short-term floating rate notes issued⁵		0.05	%

Total expenses		0.73	%
Expenses after payments, waivers and/or reimbursements and reduction to custodian expenses		0.73	%

Portfolio turnover rate		32	%

1. For the period from November 29, 2010 (inception of offering) to July 29, 2011, which represents the last business day of the Fund’s 2011 fiscal year. See Note 1 of the accompanying Notes.

2. Per share amounts calculated based on the average shares outstanding during the period.

4. Annualized for periods less than one full year.

5. Interest and fee expense relates to the Fund’s liability for short-term floating rate notes issued in conjunction with inverse floating rate security transactions.

See accompanying Notes to Financial Statements.

The Fund offers Class A, Class B, Class C and Class Y shares. Class A shares are sold at their offering price, which is normally net asset value plus a front-end sales charge. Class B and Class C shares are sold without a front-end sales charge but may be subject to a contingent deferred sales charge (“CDSC”). Class Y shares are sold to certain institutional investors or intermediaries without either a front-end sales charge or a CDSC, however, the intermediaries may impose charges on their accountholders who beneficially own Class Y shares. All classes of shares have identical rights and voting privileges with respect to the Fund in general and exclusive voting rights on matters that affect that class alone. Earnings, net assets and net asset value per share may differ due to each class having its own expenses, such as transfer and shareholder servicing agent fees and shareholder communications, directly attributable to that class. Class A, B and C shares have separate distribution and/or service plans under which they pay fees. Class Y shares do not pay such fees. Class B shares will automatically convert to Class A shares 72 months after the date of purchase. Class Y shares were first publicly offered on November 29, 2010.

Securities traded on a registered U.S. securities exchange are valued based on the last sale price of the security reported on the principal exchange on which it is traded, prior to the time when the Fund’s assets are valued. Securities whose principal exchange is NASDAQ^® are valued based on the official closing prices reported by NASDAQ prior to the time when the Fund’s assets are valued. In the absence of a sale, the security is valued at the last sale price on the prior trading day, if it is within the spread of the current day’s closing “bid” and “asked” prices, and if not, at the current day’s closing bid price. A foreign security traded on a foreign exchange is valued based on the last sale price on the principal exchange on which the security is traded, as identified by the portfolio pricing service used by the Manager, prior to the time when the Fund’s assets are valued. In the absence of a sale, the security is valued at the most recent official closing price on the principal exchange on which it is traded.

In the absence of a current price quotation obtained from an independent pricing service or broker-dealer, including for securities whose values have been materially affected by what the Manager identifies as a significant event occurring before the Fund’s assets are valued but after the close of the securities’ respective exchanges, the Manager, acting through its internal valuation committee, in good faith determines the fair valuation of that asset using consistently applied procedures under the supervision of the Board of Trustees (which reviews those fair valuations by the Manager). Those procedures include certain standardized methodologies to fair value securities. Such methodologies include, but are not limited to, pricing securities initially at cost and subsequently adjusting the value based on: changes in company specific fundamentals, changes in an appropriate securities index, or changes in the value of similar securities which may be adjusted for any discounts related to resale restrictions. When possible, such methodologies use observable market inputs such as unadjusted quoted prices of similar securities, observable interest rates, currency rates and yield curves. The methodologies used for valuing securities are not necessarily an indication of the risks associated with investing in those securities.

There have been no significant changes to the fair valuation methodologies of the Fund during the period.

Inverse Floating Rate Securities. The Fund invests in inverse floating rate securities that pay interest at a rate that varies inversely with short-term interest rates. Certain of these securities may be leveraged, whereby the interest rate varies inversely at a multiple of the change in short-term rates. As interest rates rise, inverse floaters produce less current income. The price of such securities is more volatile than comparable fixed rate securities. The Fund may expose up to 20% of its total assets to the effects of leverage from its investments in inverse floaters. The Fund’s exposure to the effects of leverage from its investments in inverse floaters amount to $6,665,000 as of July 29, 2011, which represents 2.17% of the Fund’s total assets.

Certain inverse floating rate securities are created when the Fund purchases and subsequently transfers a municipal bond security (the “municipal bond”) to a broker dealer. The municipal bond is typically a fixed rate security. The broker dealer (the “sponsor”) creates a trust (the “Trust”) and deposits the municipal bond. The Trust issues short-term floating rate notes available to third parties and a residual interest in the municipal bond (referred to as an “inverse floating rate security”) to the Fund. The terms of these inverse floating rate securities grant the Fund the right to require that the Trust issuing the inverse floating rate security compel a tender of the short-term floating rate notes to facilitate the Fund’s repurchase of the underlying municipal bond. Following such a request, the Fund pays the sponsor the principal amount due to the holders of the short-term floating rate notes issued by the Trust and exchanges the inverse floating rate security for the underlying municipal bond. These transactions are considered secured borrowings for financial reporting purposes. As a result of such accounting treatments, the Fund includes the municipal bond position on its Statement of Investments (but does not separately include the inverse floating rate securities received). The Fund also includes the value of the municipal bond and a payable amount equal to the short-term floating rate notes issued by the Trust on its Statement of Assets and Liabilities. The interest rates on these short-term floating rate notes reset periodically, usually weekly. The holders of these short-term floating rate notes have the option to tender their investment, to the sponsor or the Trust’s liquidity provider, for redemption at par at each reset date. Income from the municipal bond position and the interest expense on the payable for the short-term floating rate notes issued by the Trust are recorded on the Fund’s Statement of Operations. At July 29, 2011, municipal bond holdings with a value of $10,544,872 shown on the Fund’s Statement of Investments are held by such Trusts and serve as collateral for the $6,665,000 in short-term floating rate notes issued and outstanding at that date.

The Fund’s investments in inverse floaters involve certain risks. The market value of an inverse floating rate security can be more volatile than that of a conventional fixed-rate bond having similar credit quality, maturity and redemption provisions. Typically, an inverse floating rate security tends to underperform fixed rate bonds when long-term interest rates are rising but tends to outperform fixed rate bonds when long-term interest rates are stable or falling. An inverse floating rate security entails a degree of leverage because the trust issues short-term securities in a ratio to the inverse floating rate security with the underlying long-term bond providing collateral for the obligation to pay the principal value of the short-term securities if and when they are tendered. If the Fund has created the inverse floater by depositing a long-term bond into a trust, it may be required to provide additional collateral for the short-term securities if the value of the underlying bond deposited in the trust falls.

At July 29, 2011, the Fund’s residual exposure to these types of inverse floating rate securities were as follows:

Principal

Coupon

Maturity

Amount

Inverse Floater¹

Rate²

Date

Value

3,335,000

Los Angeles, CA Dept. of Airports ROLs³

12.637

5/15/25

3,879,872

1. For a list of abbreviations used in the Inverse Floater table see the Portfolio Abbreviations table at the end of the Statement of Investments.

2. Represents the current interest rate for a variable rate bond known as an “inverse floater.”

3. Security is subject to a shortfall and forbearance agreement.

The Fund enters into shortfall and forbearance agreements with the sponsors of certain inverse floaters held by the Fund. These agreements commit the Fund to reimburse the sponsor of the inverse floater, in certain circumstances, for the amount of the difference between the liquidation value of the underlying security (which is the basis of the inverse floater) and the principal amount due to the holders of the short-term floating rate notes issued by the Trust in conjunction with the inverse floating rate security. Under the standard terms of an inverse floating rate security, absent such a shortfall and forbearance agreement, the Fund would not be required to make such a reimbursement. The Manager monitors the Fund’s potential exposure with respect to these agreements on a daily basis and intends to take action to terminate the Fund’s investment in such inverse floating rate securities, if it deems it appropriate to do so. As of July 29, 2011, in addition to the exposure detailed in the preceding table, the Fund’s maximum exposure under such agreements is estimated at $6,665,000.

Credit Risk. The Fund invests in high-yield, non-investment-grade bonds, which may be subject to a greater degree of credit risk. Credit risk relates to the ability of the issuer to meet interest or principal payments or both as they become due. The Fund may acquire securities that have missed an interest payment, and is not obligated to dispose of securities whose issuers or underlying obligors subsequently miss an interest payment. Information concerning securities not accruing interest as of July 29, 2011 is as follows:



Cost	$	90,000
Market Value	$	30,600
Market Value as a % of Net Assets		0.01	%

Concentration Risk. There are certain risks arising from geographic concentration in any state, commonwealth or territory. Certain economic, regulatory or political developments occurring in the state, commonwealth or territory may impair the ability of certain issuers of municipal securities to pay principal and interest on their obligations.

Specific information regarding the impact of the Act on the Fund will be contained within the “Federal Taxes” section of the financial statement notes for the fiscal year ending 2012.

Trustees’ Compensation. The Fund has adopted an unfunded retirement plan (the “Plan”) for the Fund’s independent trustees. Benefits are based on years of service and fees paid to each trustee during their period of service. The Plan was frozen with respect to adding new participants effective December 31, 2006 (the “Freeze Date”) and existing Plan Participants as of the Freeze Date will continue to receive accrued benefits under the Plan. Active independent trustees as of the Freeze Date have each elected a distribution method with respect to their benefits under the Plan. During the year ended July 29, 2011, the Fund’s projected benefit obligations, payments to retired trustees and accumulated liability were as follows:



Projected Benefit Obligations Increased	$	1,028
Payments Made to Retired Trustees		2,077
Accumulated Liability as of July 29, 2011		16,600

The Board of Trustees has adopted a compensation deferral plan for independent trustees that enables trustees to elect to defer receipt of all or a portion of the annual compensation they are entitled to receive from the Fund. For purposes of determining the amount owed to the Trustee under the plan, deferred amounts are treated as though equal dollar amounts had been invested in shares of the Fund or in other Oppenheimer funds selected by the Trustee. The Fund purchases shares of the funds selected for deferral by the Trustee in amounts equal to his or her deemed investment, resulting in a Fund asset equal to the deferred compensation liability. Such assets are included as a component of “Other” within the asset section of the Statement of Assets and Liabilities. Deferral of trustees’ fees under the plan will not affect the net assets of the Fund, and will not materially affect the Fund’s assets, liabilities or net investment income per share. Amounts will be deferred until distributed in accordance with the compensation deferral plan.

Dividends and Distributions to Shareholders. Dividends and distributions to shareholders, which are determined in accordance with income tax regulations and may differ from U.S. generally accepted accounting principles, are recorded on the ex-dividend date. Income distributions, if any, are declared daily and paid monthly. Capital gain distributions, if any, are declared and paid annually.

Investment Income. Interest income is recognized on an accrual basis. Discount and premium, which are included in interest income on the Statement of Operations, are amortized or accreted daily.

Custodian Fees. “Custodian fees and expenses” in the Statement of Operations may include interest expense incurred by the Fund on any cash overdrafts of its custodian account during the period. Such cash overdrafts may result from the effects of failed trades in portfolio securities and from cash outflows resulting from unanticipated shareholder redemption activity. The Fund pays interest to its custodian on such cash overdraft at a rate equal to the 1 Month LIBOR Rate plus 2.00%. The “Reduction to custodian expenses” line item, if applicable, represents earnings on cash balances maintained by the Fund during the period. Such interest expense and other custodian fees may be paid with these earnings.

Security Transactions. Security transactions are recorded on the trade date. Realized gains and losses on securities sold are determined on the basis of identified cost.

Indemnifications. The Fund’s organizational documents provide current and former trustees and officers with a limited indemnification against liabilities arising in connection with the performance of their duties to the Fund. In the normal course of business, the Fund may also enter into contracts that provide general indemnifications. The Fund’s maximum exposure under these arrangements is unknown as this would be dependent on future claims that may be made against the Fund. The risk of material loss from such claims is considered remote.

Other. The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of increases and decreases in net assets from operations during the reporting period. Actual results could differ from those estimates.

2. Shares of Beneficial Interest

The Fund has authorized an unlimited number of $0.001 par value shares of beneficial interest of each class. Transactions in shares of beneficial interest were as follows:


	Year Ended July 29, 2011¹						Year Ended July 30, 2010
	Shares			Amount			Shares			Amount

Class A
Sold		31,348,494		$	104,398,735			19,741,040		$	65,936,252
Dividends and/or distributions reinvested		1,776,426			5,881,006			1,581,874			5,282,815
Redeemed		(29,573,623	)		(97,642,361	)		(13,403,714	)		(44,701,300	)

Net increase		3,551,297		$	12,637,380			7,919,200		$	26,517,767


Class B
Sold		127,177		$	437,364			121,343		$	413,547
Dividends and/or distributions reinvested		14,649			49,702			14,579			49,828
Redeemed		(233,615	)		(793,059	)		(196,559	)		(671,623	)

Net decrease		(91,789	)	$	(305,993	)		(60,637	)	$	(208,248	)


Class C
Sold		8,485,831		$	28,232,052			7,140,540		$	23,791,887
Dividends and/or distributions reinvested		542,493			1,790,365			480,977			1,601,412
Redeemed		(7,567,071	)		(24,904,464	)		(5,487,683	)		(18,255,551	)

Net increase		1,461,253		$	5,117,953			2,133,834		$	7,137,748

Service Plan for Class A Shares. The Fund has adopted a Service Plan (the “Plan”) for Class A shares under Rule 12b-1 of the Investment Company Act of 1940. Under the Plan, the Fund reimburses the Distributor for a portion of its costs incurred for services provided to accounts that hold Class A shares. Reimbursement is made periodically at an annual rate of up to 0.25% of the daily net assets of Class A shares of the Fund. The Distributor currently uses all of those fees to pay dealers, brokers, banks and other financial institutions periodically for providing personal service and maintenance of accounts of their customers that hold Class A shares. Any unreimbursed expenses the Distributor incurs with respect to Class A shares in any fiscal year cannot be recovered in subsequent periods. Fees incurred by the Fund under the Plan are detailed in the Statement of Operations.

Distribution and Service Plans for Class B and Class C Shares. The Fund has adopted Distribution and Service Plans (the “Plans”) for Class B and Class C shares under Rule 12b-1 of the Investment Company Act of 1940 to compensate the Distributor for its services in connection with the distribution of those shares and servicing accounts. Under the Plans, the Fund pays the Distributor an annual asset-based sales charge of 0.75% on Class B and Class C shares daily net assets. The Distributor also receives a service fee of 0.25% per year under each plan. If either the Class B or Class C plan is terminated by the Fund or by the shareholders of a class, the Board of Trustees and its independent trustees must determine whether the Distributor shall be entitled to payment from the Fund of all or a portion of the service fee and/or asset-based sales charge in respect to shares sold prior to the effective date of such termination. Fees incurred by the Fund under the Plans are detailed in the Statement of Operations. The Distributor determines its uncompensated expenses under the Plans at calendar quarter ends. The Distributor’s aggregate uncompensated expenses under the Plans at June 30, 2011 were as follows:

The Fund entered into a Revolving Credit and Security Agreement (the “Agreement”) with conduit lenders and Citibank N.A. which enables it to participate with certain other Oppenheimer funds in a committed, secured borrowing facility that permits borrowings of up to $2.0 billion, collectively, by the Oppenheimer Rochester Funds. To secure the loan, the Fund pledges investment securities in accordance with the terms of the Agreement. Securities held in collateralized accounts to cover these borrowings are noted in the Statement of Investments. Interest is charged to the Fund, based on its borrowings, at current commercial paper issuance rates (0.175% as of July 29, 2011). The Fund pays additional fees annually to its lender on its outstanding borrowings to manage and administer the facility and is allocated its pro-rata share of an annual structuring fee and ongoing commitment fees both of which are based on the total facility size. Total fees and interest that are included in expenses on the Fund’s Statement of Operations related to its participation in the borrowing facility during the year ended July 29, 2011 equal 0.11% of the Fund’s average net assets on an annualized basis. The Fund has the right to prepay such loans and terminate its participation in the conduit loan facility at any time upon prior notice.

The Fund entered into a Committed Repurchase Transaction Facility (the “Facility”) with J.P. Morgan Securities LLC (the “counterparty’) which enables it to participate with certain other Oppenheimer funds in a committed reverse repurchase agreement facility that permits aggregate outstanding reverse repurchase agreements of up to $750 million, collectively. Interest is charged to the Fund on the purchase price of outstanding reverse repurchase agreements at current LIBOR rates plus an applicable spread. The Fund is also allocated its pro-rata share of an annual structuring fee based on the total Facility size and ongoing commitment fees based on the total unused amount of the Facility. The Fund retains the economic exposure to fluctuations in the value of securities subject to reverse repurchase agreements under the Facility and therefore these transactions are considered secured borrowings for financial reporting purposes. The Fund also continues to receive the economic benefit of interest payments received on securities subject to reverse repurchase agreements, in the form of a direct payment from the counterparty. These payments are included in interest income on the Statement of Operations. Total fees and interest related to the Fund’s participation in the Facility during the year ended July 29, 2011 are included in expenses on the Fund’s Statement of Operations and equal 0.01% of the Fund’s average net assets on an annualized basis.

The securities subject to reverse repurchase agreements under the Facility are valued on a daily basis. To the extent this value, after adjusting for certain margin requirements of the Facility, exceeds the cash proceeds received, the Fund may request the counterparty to return securities equal in margin value to this excess. To the extent that the cash proceeds received exceed the margin value of the securities subject to the transaction, the counterparty may request additional securities from the Fund. The Fund has the right to declare the first or fifteenth day of any calendar month as the repurchase date for any outstanding reverse repurchase agreement upon delivery of advanced notification and may also recall any security subject to such a transaction by substituting eligible securities of equal or greater margin value according to the Facility’s terms.

The Fund executed no transactions under the Facility during the year ended July 29, 2011.

7. Pending Litigation

Since 2009, a number of lawsuits have been filed in federal and state courts against the Manager, the Distributor and certain Oppenheimer mutual funds (but not including the Fund) advised by the Manager and distributed by the Distributor (the “Defendant Funds”). Several of these lawsuits also name as defendants certain officers and current and former trustees of the respective Defendant Funds. The lawsuits raise claims under federal and state securities laws and state common law and allege, among other things, that the disclosure documents of the respective Defendant Fund contained misrepresentations and omissions and that the respective Defendant Fund’s investment policies were not followed. The plaintiffs in these actions seek unspecified damages, equitable relief and an award of attorneys’ fees and litigation expenses. On June 1, 2011, the U.S. District Court for the District of Colorado gave preliminary approval to stipulations and agreements of settlement in certain purported class action lawsuits involving two Defendant Funds, Oppenheimer Champion Income Fund and Oppenheimer Core Bond Fund. Those settlements are subject to the final approval of the court. Final approval of the settlements also requires that a sufficient number of class members approve the settlement to induce the settling defendants to proceed with it. These settlements do not resolve any of the other outstanding lawsuits relating to Oppenheimer Champion Income Fund, Oppenheimer Core Bond Fund or other Defendant Funds.

Other lawsuits have been filed since 2008 in various state and federal courts against the Manager and certain of its affiliates by investors seeking to recover investments they allegedly lost as a result of the “Ponzi” scheme run by Bernard L. Madoff and his firm, Bernard L. Madoff Investment Securities, LLC (“BLMIS”). Plaintiffs in these suits allege that they suffered losses as a result of their investments in several funds managed by an affiliate of the Manager and assert a variety of claims, including breach of fiduciary duty, fraud, negligent misrepresentation, unjust enrichment, and violation of federal and state securities laws and regulations, among others. They seek unspecified damages, equitable relief and awards of attorneys’ fees and litigation expenses. None of the suits have named the Distributor, any of the Oppenheimer mutual funds or any of their independent Trustees or Directors as defendants. None of the Oppenheimer mutual funds invested in any funds or accounts managed by Mr. Madoff or BLMIS. On February 28, 2011, a stipulation of partial settlement of certain purported class action lawsuits relating to these matters was filed in the U.S. District Court for the Southern District of New York. On August 8, 2011, the court issued a ruling approving the settlement as fair, reasonable and adequate. The court’s approval of the settlement is subject to potential appeal by claimants. On July 29, 2011, a stipulation of settlement between certain affiliates of the Manager and the Trustee appointed under the Securities Investor Protection Act to liquidate BLMIS was filed in the U.S. Bankruptcy Court for the Southern District of New York to resolve purported preference and fraudulent transfer claims by the Trustee. This settlement is subject to the final approval of the court. The aforementioned settlements do not resolve any of the other outstanding lawsuits relating to these matters.

On April 16, 2010, a lawsuit was filed in New York state court against the Manager, an affiliate of the Manager and AAArdvark IV Funding Limited (“AAArdvark IV”), an entity advised by the Manager’s affiliate, in connection with investments made by the plaintiffs in AAArdvark IV. Plaintiffs allege breach of contract against the defendants and seek compensatory damages, costs and disbursements, including attorney fees. On July 15, 2011, a lawsuit was filed in New York state court against the Manager, an affiliate of the Manager and AAArdvark I Funding Limited (“AAArdvark I”), an entity advised by the Manager’s affiliate, in connection with investments made by the plaintiffs in AAArdvark I. The complaint alleges breach of contract against the defendants and seeks compensatory damages, costs and disbursements, including attorney fees.

The Manager believes the lawsuits described above are without legal merit and, with the exception of actions it has agreed to settle, is defending against them vigorously. The Defendant Funds’ Boards of Trustees have also engaged counsel to represent the Funds and the present and former Independent Trustees named in those suits. While it is premature to render any opinion as to the outcome in these lawsuits, or whether any costs that the Defendant Funds may bear in defending the suits might not be reimbursed by insurance, the Manager believes that these suits should not impair the ability of the Manager or the Distributor to perform their respective duties to the Fund, and that the outcome of all of the suits together should not have any material effect on the operations of any of the Oppenheimer mutual funds.

Investment Adviser
OppenheimerFunds, Inc.
Two World Financial Center
225 Liberty Street, 11th Floor
New York, New York 10281-1008

Distributor
OppenheimerFunds Distributor, Inc.
Two World Financial Center
225 Liberty Street, 11th Floor
New York, New York 10281-1008

Transfer Agent
OppenheimerFunds Services
P.O. Box 5270
Denver, Colorado 80217
1.800.CALL OPP (225.5677)

Independent Registered Public Accounting Firm
KPMG LLP
707 Seventeenth Street
Denver, Colorado 80202

Legal Counsel
Kramer Levin Naftalis & Frankel LLP
1177 Avenue of the Americas
New York, New York 10036

(a) Declaration of Trust dated 12/11/03: Previously filed with Registrant’s Initial Registration Statement, (12/16/03), and incorporated herein by reference.

(b) By-Laws dated 02/19/04: Previously filed with Registrant’s Initial Registration Statement, (12/16/03), and incorporated herein by reference.

(i) Amendment No. 1 to the By-Laws dated 6/22/05: Previously filed with Registrant’s Post-Effective No. 4, (10/24/06), and incorporated herein by reference.

(c) (i) Specimen Class A Share Certificate: Previously filed with Registrant’s Initial Registration Statement, (12/16/03), and incorporated herein by reference.

        (ii)    Specimen Class B Share Certificate: Previously filed with Registrant’s Initial Registration Statement, (12/16/03), and incorporated herein by reference.

        (iii)    Specimen Class C Share Certificate: Previously filed with Registrant’s Initial Registration Statement, (12/16/03), and incorporated herein by reference.

       (iv)    Specimen Class Y Share Certificate: Previously filed with Registrant’s Initial Registration Statement, (12/16/03), and incorporated herein by reference.

(d)     Amended and Restated Investment Advisory Agreement dated 1/1/05: Previously filed with Registrant’s Post-Effective Amendment No. 6, (11/26/08), and incorporated herein by reference.

(e) (i) Form of General Distributor’s Agreement dated 02/19/04: Previously filed with Registrant’s Initial Registration Statement, (12/16/03), and incorporated herein by reference.

(ii) Form of Dealer Agreement of OppenheimerFunds Distributor, Inc.: Previously filed with Post-Effective Amendment No. 34 to the Registration Statement of Oppenheimer Main Street Funds, Inc. (Reg. No.33-17850), (10/23/06), and incorporated herein by reference.

(iii) Form of Broker Agreement of OppenheimerFunds Distributor, Inc.: Previously filed with Post-Effective Amendment No. 34 to the Registration Statement of Oppenheimer Main Street Funds, Inc. (Reg. No.33-17850), (10/23/06), and incorporated herein by reference.

(iv) Form of Agency Agreement of OppenheimerFunds Distributor, Inc.: Previously filed with Post-Effective Amendment No. 34 to the Registration Statement of Oppenheimer Main Street Funds, Inc. (Reg. No.33-17850), (10/23/06), and incorporated herein by reference.

(v) Form of Trust Company Fund/SERV Purchase Agreement of OppenheimerFunds Distributor, Inc.: Previously filed with Post-Effective Amendment No. 45 to the Registration Statement of Oppenheimer High Yield Fund (Reg. No. 2-62076), (10/26/01), and incorporated herein by reference.

(vi) Form of Trust Company Agency Agreement of OppenheimerFunds Distributor, Inc.: Previously filed with Post-Effective Amendment No. 34 to the Registration Statement of Oppenheimer Main Street Funds, Inc. (Reg. No.33-17850), (10/23/06), and incorporated herein by reference.

(f) (i) Amended & Restated Compensation Deferral Plan for Eligible Trustees, effective 1/1/08: Previously filed with Post-Effective Amendment No. 4 to the Registration Statement of Oppenheimer Portfolio Series (Reg. No. 333-121449), (5/29/09), and incorporated herein by reference.

(g) (i) Global Custodial Services Agreement dated 5/3/01 as amended from time to time: Previously filed with Post-Effective Amendment No. 33 to the Registration Statement of Centennial Money Market Trust (Reg. No. 2-65245), (10/25/01), and incorporated herein by reference.

(ii) Amendment dated 3/7/11 to the Global Custodial Services Agreement: Previously filed with Post-Effective Amendment No. 28 to the Registration Statement of Rochester Portfolio Series (Reg. 33-41511) (3/29/11), and incorporated herein by reference.

(iii) Amended and Restated Foreign Custody Manager Agreement dated 5/31/01, as amended July 15, 2003: Previously filed with Pre-Effective Amendment No. 1 to the Registration Statement of Oppenheimer International Large-Cap Core Trust (Reg. No. 333-106014), (8/5/03), and incorporated herein by reference.

(h)     Not applicable.

(i)     Opinion and Consent of Counsel dated 2/19/04: Previously filed with Registrant's Pre-Effective Amendment No. 2 (2/23/04), and incorporated herein by reference.

(j)     Independent Registered Public Accounting Firm’s Consent: Filed herewith.

(k)     Not applicable.

(l)     Investment Letter from OppenheimerFunds, Inc. to Registrant: Previously filed with Registrant’s Pre-Effective Amendment No. 1 (2/12/04), and incorporated herein by reference.

(m) (i) Amended and Restated Service Plan and Agreement for Class A shares dated 06/30/11: Filed herewith.

(ii) Amended and Restated Distribution and Service Plan and Agreement for Class B shares dated 06/30/11: Filed herewith.

(iii) Amended and Restated Distribution and Service Plan and Agreement for Class C shares dated 06/30/11: Filed herewith.

(n) Oppenheimer Funds Multiple Class Plan under Rule 18f-3 as updated through 4/20/11: Previously filed with Post-Effective Amendment No. 5 to the Registration Statement of Oppenheimer Transition 2010 Fund (Reg. No. 333-135516), (6/27/11), and incorporated herein by reference.

(o) Power of Attorney dated 3/3/10 for all Trustees/Directors and Officers: Previously filed with Post-Effective Amendment No. 21 to the Registration Statement of Oppenheimer International Growth Fund (Reg. No. 333-00201), (3/24/10), and incorporated herein by reference.

(p) Code of Ethics of the Oppenheimer Funds, OppenheimerFunds, Inc. (including affiliates and subsidiaries) and OppenheimerFunds Distributor, Inc., dated as of 6/1/11 under Rule 17j-1 of the Investment Company Act of 1940: Previously filed with Post-Effective Amendment No. 5 to the Registration Statement of Oppenheimer Transition 2010 Fund, (Reg. No. 333-135516), (6/27/11), and incorporated herein by reference.

Reference is made to the provisions of Article Seventh of the Registrant's Declaration of Trust filed as Exhibit 28(a) to this Registration Statement, and incorporated herein by reference.

Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to trustees, officers and controlling persons of Registrant pursuant to the foregoing provisions or otherwise, Registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act of 1933 and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by Registrant of expenses incurred or paid by a trustee, officer or controlling person of Registrant in the successful defense of any action, suit or proceeding) is asserted by such trustee, officer or controlling person, Registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act of 1933 and will be governed by the final adjudication of such issue.

(a) OppenheimerFunds, Inc. is the investment adviser of the Registrant; it and certain subsidiaries and affiliates act in the same capacity to other investment companies, including without limitation those described in Parts A and B hereof and listed in Item 31(b) below.

(b) There is set forth below information as to any other business, profession, vocation or employment of a substantial nature in which each officer and director of OppenheimerFunds, Inc. is, or at any time during the past two fiscal years has been, engaged for his/her own account or in the capacity of director, officer, employee, partner or trustee.

Oppenheimer Limited Term Municipal Fund (a series of Oppenheimer Municipal Fund)

Oppenheimer Portfolio Series Fixed Income Active Allocation Fund
Oppenheimer Principal Protected Main Street Fund III (a series of Oppenheimer Principal Protected Trust III)

Oppenheimer Rochester Arizona Municipal Fund
Oppenheimer Rochester Intermediate Term Municipal Fund

Oppenheimer Rochester Ohio Municipal Fund
Oppenheimer Rochester Short Term Municipal Fund

Rochester Fund Municipals

The address of the Oppenheimer funds listed above, Shareholder Financial Services, Inc., Shareholder Services, Inc., Centennial Asset Management Corporation, and OppenheimerFunds Legacy Program is 6803 South Tucson Way, Centennial, Colorado 80112-3924.

The address of OppenheimerFunds, Inc., OppenheimerFunds Distributor, Inc., HarbourView Asset Management Corporation, Oppenheimer Acquisition Corp., OFI Private Investments Inc., OFI Institutional Asset Management, Inc. Oppenheimer Real Asset Management, Inc. and OFI Trust Company is Two World Financial Center, 225 Liberty Street, 11^th Floor, New York, New York 10281-1008.

The address of OppenheimerFunds International Ltd. is 70 Sir John Rogerson’s Quay, Dublin 2, Ireland.

The address of Trinity Investment Management Corporation is 301 North Spring Street, Bellefonte, Pennsylvania 16823.

(a) OppenheimerFunds Distributor, Inc. is the Distributor of the Registrant's shares. It is also the Distributor of each of the other registered open-end investment companies for which OppenheimerFunds, Inc. is the investment adviser, as described in Part A and Part B of this Registration Statement and listed in Item 31(b) above (except Panorama Series Fund, Inc.) and for MassMutual Institutional Funds.

(b) The directors and officers of the Registrant's principal underwriter are:

⁽²⁾ Two World Financial Center, 225 Liberty Street, 11^th Floor, New York, NY 10281-1008

⁽⁴⁾ Independence Wharf, 470 Atlantic Avenue, 11^th Floor, Boston, MA 02210

The accounts, books and other documents required to be maintained by Registrant pursuant to Section 31(a) of the Investment Company Act of 1940 and rules promulgated thereunder are in the possession of OppenheimerFunds, Inc. at its offices at 6803 South Tucson Way, Centennial, Colorado 80112-3924.

Pursuant to the requirements of the Securities Act of 1933 and the Investment Company Act of 1940, the Registrant certifies that it meets all the requirements for effectiveness of this Registration Statement pursuant to Rule 485(b) under the Securities Act of 1933 and 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 State of New York on the 23rd day of November, 2011.

Pursuant to the requirements of the Securities Act of 1933, this Registration Statement has been signed below by the following persons in the capacities on the dates indicated:

(ii) Amended and Restated Distribution and Service Plan and Agreement for Class B shares

(iii) Amended and Restated Distribution and Service Plan and Agreement for Class C shares

NYSE Ticker Symbols
Class A	OLCAX
Class B	OLCBX
Class C	OLCCX
Class Y	OLCYX

Annual Fund Operating Expenses (expenses that you pay each year as a percentage of the value of your investment)
	Class A	Class B	Class C	Class Y
Management Fees	0.46%	0.46%	0.46%	0.46%
Distribution and/or Service (12b-1) Fees	0.24%	1.00%	0.99%	None
Other Expenses
Interest and Fees from Borrowing	0.12%	0.12%	0.12%	0.10%
Interest and Related Expenses from Inverse Floaters	0.05%	0.05%	0.05%	0.05%
Other Expenses	0.07%	0.26%	0.11%	0.12%
Total Other Expenses	0.24%	0.43%	0.28%	0.27%
Total Annual Fund Operating Expenses after Fee	0.94%	1.89%	1.73%	0.73%

	If shares are redeemed								If shares are not redeemed
	1 Year		3 Years		5 Years		10 Years			1 Year			3 Years			5 Years			10 Years
Class A	$	443	$	640	$	854	$	1,469	$		443	$		640	$		854	$		1,469
Class B	$	594	$	799	$	1,131	$	1,749	$		194	$		599	$		1,031	$		1,749
Class C	$	277	$	550	$	947	$	2,058	$		177	$		550	$		947	$		2,058
Class Y	$	75	$	234	$	407	$	910	$		75	$		234	$		407	$		910

Average Annual Total Returns for the periods ended December 31, 2010
	1 Year	5 Years	10 Years, (or life of class, if less)
Class A Shares (inception 2/25/04)
Return Before Taxes	(0.05%)	2.30%	3.74%
Return After Taxes on Distributions	(0.05%)	2.30%	3.74%
Return After Taxes on Distributions and Sale of Fund Shares	1.62%	2.60%	3.85%
Class B Shares (inception 2/25/04)	(1.16%)	1.94%	3.80%
Class C Shares (inception 2/25/04)	1.80%	2.26%	3.46%
Barclays Capital Municipal Bond Index (reflects no deduction for fees, expenses or taxes)	2.38%	4.09%	3.85%*
Consumer Price Index (reflects no deduction for fees, expenses or taxes)	1.50%	2.18%	2.42%*

Amount of Purchase	Front-End Sales Charge As a Percentage of Offering Price	Front-End Sales Charge As a Percentage of Net Amount Invested	Concession As a Percentage of Offering Price
Less than $100,000	3.50%	3.63%	3.00%
$100,000 or more but less than $250,000	3.00%	3.09%	2.50%

Table of contents
THE FUND SUMMARY
Investment Objective	3
Fees and Expenses of the Fund	3
Principal Investment Strategies	3
Principal Risks	4
The Fund's Past Performance	6
Investment Adviser	6
Portfolio Managers	6
Purchase and Sale of Fund Shares	7
Taxes	7
Payments to Broker-Dealers and Other Financial Intermediaries	7
MORE ABOUT THE FUND
About the Fund's Investments	8
How the Fund is Managed	13
MORE ABOUT YOUR ACCOUNT
About Your Account	14
Choosing a Share Class	14
The Price of Fund Shares	17
How to Buy, Sell and Exchange Shares	18
Dividends, Capital Gains and Taxes	23
Financial Highlights	25

Shareholder Fees (fees paid directly from your investment)
	Class A	Class B	Class C	Class Y
Maximum Sales Charge (Load) imposed on purchases (as % of offering price)	3.50%	None	None	None
Maximum Deferred Sales Charge (Load) (as % of the lower of the original offering price or redemption proceeds)	None	4%	1%	None

Years since Beginning of Month in Which Purchase Order was Accepted	Contingent Deferred Sales Charge on Redemptions in That Year (As % of Amount Subject to Charge)
0-1	4.0%
1-2	3.0%
2-3	2.0%
3-4	2.0%
4-5	1.0%
More than 5	None

	July 29,	July 30,	July 31,	July 31,	July 31,
Class A Year Ended	2011 ¹	2010 ¹	2009	2008	2007
Per Share Operating Data
Net asset value, beginning of period	$3.36	$3.20	$3.34	$3.55	$3.52
Income (loss) from investment operations:
Net investment income ²	.16	.17	.16	.15	.15
Net realized and unrealized gain (loss)	(.03)	.15	(.15)	(.22)	.02
Total from investment operations	.13	.32	.01	(.07)	.17
Dividends and/or distributions to shareholders:
Dividends from net investment income	(.16)	(.16)	(.15)	(.14)	(.14)
Net asset value, end of period	$3.33	$3.36	$3.20	$3.34	$3.55

Total Return, at Net Asset Value ³	4.07%	10.02%	0.51%	(1.85)%	4.99%

Ratios/Supplemental Data
Net assets, end of period (in thousands)	$198,431	$188,647	$154,287	$228,159	$208,041
Average net assets (in thousands)	$197,240	$170,296	$180,705	$229,325	$186,689
Ratios to average net assets: ⁴
Net investment income	4.94%	4.96%	5.10%	4.36%	4.10%
Expenses excluding interest and fees on short-term floating rate notes issued and interest and fees from borrowings	0.77%	0.81%	0.80%	0.79%	0.78%
Interest and fees from borrowings	0.12%	0.27%	0.63%	0.10%	0.26%
Interest and fees on short-term floating rate notes issued ⁵	0.05%	0.05%	0.03%	0.15%	0.24%
Total expenses	0.94%	1.13%	1.46%	1.04%	1.28%
Expenses after payments, waivers and/or reimbursements and reduction to custodian expenses	0.94%	1.13%	1.46%	1.03%	1.08%
Portfolio turnover rate	32%	42%	31%	41%	17%

Class Y Period Ended July 29,	2011 ¹
Per Share Operating Data
Net asset value, beginning of period	$3.34
Income (loss) from investment operations:
Net investment income ²	.11
Net realized and unrealized loss	(.01)
Total from investment operations	.10
Dividends and/or distributions to shareholders:
Dividends from net investment income	(.11)
Net asset value, end of period	$3.33

Total Return, at Net Asset Value ³	3.20%

Ratios/Supplemental Data
Net assets, end of period (in thousands)	$13,031
Average net assets (in thousands)	$ 5,548
Ratios to average net assets: ⁴
Net investment income	5.05%
Expenses excluding interest and fees on short-term floating rate notes issued and interest and fees from borrowings	0.58%
Interest and fees from borrowings	0.10%
Interest and fees on short-term floating rate notes issued ⁵	0.05%
Total expenses	0.73%
Expenses after payments, waivers and/or reimbursements and reduction to custodian expenses	0.73%
Portfolio turnover rate	32%

Telephone:	Call OppenheimerFunds Services toll-free: 1.800.CALL OPP (1.800.225.5677)
Mail:	Use the following address for regular mail: OppenheimerFunds Services P.O. Box 5270 Denver, Colorado 80217-5270
	Use the following address for courier or express mail: OppenheimerFunds Services 12100 East Iliff Avenue Suite 300 Aurora, Colorado 80014
Internet:	You may request documents, and read or download certain documents at www.oppenheimerfunds.com

Table of contents
ABOUT THE FUND
Additional Information About the Fund's Investment Policies and Risks	3
The Fund's Main Investment Policies	3
Other Investments and Investment Strategies	11
Investment Restrictions	20
Disclosure of Portfolio Holdings	21
How the Fund is Managed	24
Board of Trustees and Oversight Committees	26
Trustees and Officers of the Fund	27
The Manager	40
Brokerage Policies of the Fund	43
Distribution and Service Arrangements	44
Payments to Financial Intermediaries	47
Performance of the Fund	50
ABOUT YOUR ACCOUNT
About Your Account	55
How to Buy Shares	56
How to Sell Shares	59
How to Exchange Shares	62
Distributions and Taxes	64
Additional Information About the Fund	71
Appendix A: Special Sales Charge Arrangements and Waivers
Appendix A	72
APPENDIX B: Special Considerations Relating to State Municipal Obligations and U.S. Territories, Commonwealths and Possessions
Appendix B	77
APPENDIX C: Municipal Bond Ratings Definitions
Appendix C	100
FINANCIAL INFORMATION ABOUT THE FUND
Report of Independent Registered Public Accounting Firm	106
Financial Statements	107

13D Research	Exane, Inc.	Multi-Bank Securities
1st Discount Brokerage	Fahnestock	Murphy & Durieu
ABG Sundal Collier	Fidelity Capital Markets	Natexis Bleichroeder
ABN Amro	FMS Bonds, Inc.	National Bank Financial
Advisor Asset Management	Fox-Pitt Kelton Inc.	Ned Davis Research Group
Alfa Capital Markets	Friedman, Billings, Ramsey & Co.	Needham & Company
Altrushare	FTN Financial	Nomura Securities International
Auerbach Grayson	Gabelli & Co.	Oddo Securities Corporation
Banco de Brasil Securities LLC	George K. Baum & Co.	Oppenheimer & Co. Inc.
Bank of America Securities LLC	GMP Securities L.P.	OTA-Off the Record Research
Barclays Capital	Goldman, Sachs & Co.	Pacific Crest Securities
Barnard Jacobs Mellet	Handelsbanken Markets Securities	Petercam
Belle Haven Investments	Hapoalim Securities Bank USA	Piper Jaffray
Beltone Financial	Helvea	Prager McCarthy & Sealy
Bergen Capital	HSBC Securities Inc.	R. Seelaus & Co. Inc.
Bernstein	Hyundai Securities America, Inc.	Ramirez & Co. Inc.
BMO Capital Markets	Intermonte	Raymond James & Associates
BNP Paribas	ISI Group, Inc.	RBC Capital Markets
Bradesco Securities, Inc.	Janco Partners	Red Capital Markets
Branch Bank & Trust Capital Markets	Janney Montgomery Scott LLC	Redburn Partners
Cabrera Capital	Jefferies & Company	Rice Financial Products Co.
Canaccord Adams, Inc.	Jennings Capital Inc.	Robert W. Baird & Co.
Canaccord Capital Corp.	JNK Securities Corp.	Roosevelt & Cross
Caris & Co.	JP Morgan Securities	Royal Bank of Scotland
Carnegie	JPP Eurosecurities	Samsung Securities Inc.
Cazenove	Keefe, Bruyette & Woods, Inc.	Sandford C. Bernstein & Co.
Cheuvreux NA	Keijser Securities N.V.	Scotia Capital Markets
Citigroup	Kempen & Co. USA	Seattle Northwest Securities
Citigroup Global Markets	Kepler Capital Markets	Securevest Financial
Cleveland Research	KeyBanc Capital Markets	SG Cowen
CLSA	Kotak Mahindra Inc.	Siebert Brandford Shank & Co.
Cormark Securities	Lazard Capital Markets	Sterne Agee
Cowen and Company, LLC	Lebenthal & Co. LLC	Stifel Nicolaus & Co.
Craig-Hallum Capital Group	Leerink Swann	Stone & Youngberg
Credit Suisse First Boston	Loop Capital Markets	SWS Group, Inc.
Credit Suisse Securities LLC	M&T Securities	TD Securities
Crews & Associates	Macquarie Securities	Think Equity Partners
D.A. Davidson & Company	Madison Williams and Company LLC	Troika Dialog
Dahlman Rose & Co.	MainFirst Bank AG	UBS
Daiwa Securities	Mediobanca Securities USA LLC	UOB Kay Hian Inc.
Davy	Merrill Lynch & Company, Inc.	US Bancorp
Desjardins Securities, Inc.	Merrion Stockbrokers Ltd.	Vining & Sparks
Deutsche Bank Securities Inc.	Mesirow Financial	Vontobel Securities Ltd.
Dougherty & Co.	MF Global Securities, Ltd.	Wachovia
Duncan Williams, Inc.	Mitsubishi UFJ Securities Inc.	Wedbush Morgan Securities
Dundee Securities Inc.	Mizuho Securities USA, Inc.	Wells Fargo Securities
DZ Financial Markets	Morgan Keegan	WH Mell & Associates
Emmet & Co., Inc.	Morgan Stanley Smith Barney	William Blair & Co.
Empirical Research Partners	Motilal Oswal Securities Ltd.	Ziegler Capital Markets Group
Enam Securities PVT Ltd.	MR Beal & Co.

Limited Term New York Municipal Fund	Oppenheimer Quest International Value Fund
Oppenheimer Absolute Return Fund	Oppenheimer Real Estate Fund
Oppenheimer AMT-Free Municipals	Oppenheimer Rising Dividends Fund
Oppenheimer AMT-Free New York Municipals	Oppenheimer Rochester Arizona Municipal Fund
Oppenheimer Balanced Fund	Oppenheimer Rochester Intermediate Term Municipal Fund
Oppenheimer California Municipal Fund	Oppenheimer Rochester Maryland Municipal Fund
Oppenheimer Capital Appreciation Fund	Oppenheimer Rochester Massachusetts Municipal Fund
Oppenheimer Developing Markets Fund	Oppenheimer Rochester Michigan Municipal Fund
Oppenheimer Discovery Fund	Oppenheimer Rochester Minnesota Municipal Fund
Oppenheimer Equity Income Fund, Inc.	Oppenheimer Rochester North Carolina Municipal Fund
Oppenheimer Global Allocation Fund	Oppenheimer Rochester Ohio Municipal Fund
Oppenheimer Global Fund	Oppenheimer Rochester Short Term Municipal Fund
Oppenheimer Global Opportunities Fund	Oppenheimer Rochester Virginia Municipal Fund
Oppenheimer Global Value Fund	Oppenheimer Select Value Fund
Oppenheimer Gold & Special Minerals Fund	Oppenheimer Series Fund, Inc.
Oppenheimer Institutional Money Market Fund	Oppenheimer Small- & Mid- Cap Growth Fund
Oppenheimer International Diversified Fund	Oppenheimer Small- & Mid- Cap Value Fund
Oppenheimer International Growth Fund	Oppenheimer Transition 2010 Fund
Oppenheimer International Small Company Fund	Oppenheimer Transition 2015 Fund
Oppenheimer Limited Term California Municipal Fund	Oppenheimer Transition 2020 Fund
Oppenheimer Limited Term Municipal Fund	Oppenheimer Transition 2025 Fund
Oppenheimer Master International Value Fund, LLC	Oppenheimer Transition 2030 Fund
Oppenheimer Money Market Fund, Inc.	Oppenheimer Transition 2040 Fund
Oppenheimer Multi-State Municipal Trust	Oppenheimer Transition 2050 Fund
Oppenheimer Portfolio Series	Oppenheimer U.S. Government Trust
Oppenheimer Quest Opportunity Value Fund	Rochester Fund Municipals

Each Independent Trustee has served the Fund in the following capacities from the following dates:
	Position(s)	Length of Service
Brian F. Wruble	Board Chairman	Since 2007
	Trustee	Since 2005
David K. Downes	Trustee	Since 2007
Matthew P. Fink	Trustee	Since 2005
Phillip A. Griffiths	Trustee	Since 2005
Mary F. Miller	Trustee	Since 2005
Joel W. Motley	Trustee	Since 2005
Mary Ann Tynan	Trustee	Since 2008
Joseph M. Wikler	Trustee	Since 2004
Peter I. Wold	Trustee	Since 2004

Independent Trustees
Name, Age, Position(s)	Principal Occupation(s) During the Past 5 Years; Other Trusteeship/Directorships Held	Portfolios Overseen in Fund Complex
Brian F. Wruble (68) Chairman of the Board, Trustee	Chairman (since August 2007) and Trustee (since August 1991) of the Board of Trustees of The Jackson Laboratory (non-profit); Director of Special Value Opportunities Fund, LLC (registered investment company) (affiliate of the Manager's parent company) (since September 2004); Member of Zurich Financial Investment Management Advisory Council (insurance) (since 2004); Treasurer (since 2007) and Trustee of the Institute for Advanced Study (non-profit educational institute) (since May 1992); General Partner of Odyssey Partners, L.P. (hedge fund) (September 1995-December 2007); Special Limited Partner of Odyssey Investment Partners, LLC (private equity investment) (January 1999-September 2004). Mr. Wruble has served on the Boards of certain Oppenheimer funds since April 2001, during which time he has become familiar with the Fund's (and other Oppenheimer funds') financial, accounting, regulatory and investment matters and has contributed to the Boards' deliberations.	58
David K. Downes (71) Trustee	Director of THL Credit Inc. (since June 2009); Independent Chairman GSK Employee Benefit Trust (since April 2006); Trustee of Employee Trusts (since January 2006); Chief Executive Officer and Board Member of Community Capital Management (investment management company) (since January 2004); President of The Community Reinvestment Act Qualified Investment Fund (investment management company) (since 2004); Director of Internet Capital Group (information technology company) (since October 2003); Director of Correctnet (January 2006-2007); Independent Chairman of the Board of Trustees of Quaker Investment Trust (registered investment company) (2004-2007); Chief Operating Officer and Chief Financial Officer of Lincoln National Investment Companies, Inc. (subsidiary of Lincoln National Corporation, a publicly traded company) and Delaware Investments U.S., Inc. (investment management subsidiary of Lincoln National Corporation) (1993-2003); President, Chief Executive Officer and Trustee of Delaware Investment Family of Funds (1993-2003); President and Board Member of Lincoln National Convertible Securities Funds, Inc. and the Lincoln National Income Funds, TDC (1993-2003); Chairman and Chief Executive Officer of Retirement Financial Services, Inc. (registered transfer agent and investment adviser and subsidiary of Delaware Investments U.S., Inc.) (1993-2003); President and Chief Executive Officer of Delaware Service Company, Inc. (1995-2003); Chief Administrative Officer, Chief Financial Officer, Vice Chairman and Director of Equitable Capital Management Corporation (investment subsidiary of Equitable Life Assurance Society) (1985-1992); Corporate Controller of Merrill Lynch Company (financial services holding company) (1977-1985); held the following positions at the Colonial Penn Group, Inc. (insurance company): Corporate Budget Director (1974-1977), Assistant Treasurer (1972-1974) and Director of Corporate Taxes (1969-1972); held the following positions at Price Waterhouse Company (financial services firm): Tax Manager (1967-1969), Tax Senior (1965-1967) and Staff Accountant (1963-1965); United States Marine Corps (1957-1959). Mr. Downes has served on the Boards of certain Oppenheimer funds since December 2005, during which time he has become familiar with the Fund's (and other Oppenheimer funds') financial, accounting, regulatory and investment matters and has contributed to the Boards' deliberations.	58
Matthew P. Fink (70) Trustee	Trustee of the Committee for Economic Development (policy research foundation) (since 2005); Director of ICI Education Foundation (education foundation) (October 1991-August 2006); President of the Investment Company Institute (trade association) (October 1991-June 2004); Director of ICI Mutual Insurance Company (insurance company) (October 1991-June 2004). Mr. Fink has served on the Boards of certain Oppenheimer funds since January 2005, during which time he has become familiar with the Fund's (and other Oppenheimer funds') financial, accounting, regulatory and investment matters and has contributed to the Boards' deliberations.	58
Phillip A. Griffiths (73) Trustee	Fellow of the Carnegie Corporation (since 2007); Member of the National Academy of Sciences (since 1979); Council on Foreign Relations (since 2002); Foreign Associate of Third World Academy of Sciences (since 2002); Chair of Science Initiative Group (since 1999); Member of the American Philosophical Society (since 1996); Trustee of Woodward Academy (since 1983); Director of GSI Lumonics Inc. (precision technology products company) (2001-2010); Senior Advisor of The Andrew W. Mellon Foundation (2001-2010); Distinguished Presidential Fellow for International Affairs of the National Academy of Science (2002-2010); Director of the Institute for Advanced Study (1991-2004); Director of Bankers Trust New York Corporation (1994-1999); Provost at Duke University (1983-1991). Mr. Griffiths has served on the Boards of certain Oppenheimer funds since June 1999, during which time he has become familiar with the Fund's (and other Oppenheimer funds') financial, accounting, regulatory and investment matters and has contributed to the Boards' deliberations.	58
Mary F. Miller (69) Trustee	Trustee of International House (not-for-profit) (since June 2007); Trustee of the American Symphony Orchestra (not-for-profit) (since October 1998); and Senior Vice President and General Auditor of American Express Company (financial services company) (July 1998-February 2003). Ms. Miller has served on the Boards of certain Oppenheimer funds since August 2004, during which time she has become familiar with the Fund's (and other Oppenheimer funds') financial, accounting, regulatory and investment matters and has contributed to the Boards' deliberations.	58
Joel W. Motley (59) Trustee	Board Member of Pulitzer center for Crisis Reporting (non-profit journalism) (since December 2010); Managing Director of Public Capital Advisors, LLC (privately-held financial advisor) (since January 2006); Managing Director of Carmona Motley, Inc. (privately-held financial advisor) (since January 2002); Director of Columbia Equity Financial Corp. (privately-held financial advisor) (2002-2007); Managing Director of Carmona Motley Hoffman Inc. (privately-held financial advisor) (January 1998-December 2001); Member of the Finance and Budget Committee of the Council on Foreign Relations, Chairman of the Investment Committee of the Episcopal Church of America, Member of the Investment Committee and Board of Human Rights Watch and Member of the Investment Committee and Board of Historic Hudson Valley. Mr. Motley has served on the Boards of certain Oppenheimer funds since October 2002, during which time he has become familiar with the Fund's (and other Oppenheimer funds') financial, accounting, regulatory and investment matters and has contributed to the Boards' deliberations.	58
Mary Ann Tynan (66) Trustee	Independent Director of the ICI Board of Governors (since October 2011); Vice Chair of Board of Trustees of Brigham and Women's/Faulkner Hospitals (non-profit hospital) (since 2000); Chair of Board of Directors of Faulkner Hospital (non-profit hospital) (since 1990); Member of Audit and Compliance Committee of Partners Health Care System (non-profit) (since 2004); Board of Trustees of Middlesex School (educational institution) (since 1994); Board of Directors of Idealswork, Inc. (financial services provider) (since 2003); Partner, Senior Vice President and Director of Regulatory Affairs of Wellington Management Company, LLP (global investment manager) (1976-2002); Vice President and Corporate Secretary, John Hancock Advisers, Inc. (mutual fund investment adviser) (1970-1976). Ms. Tynan has served on the Boards of certain Oppenheimer funds since October 2008, during which time she has become familiar with the Fund's (and other Oppenheimer funds') financial, accounting, regulatory and investment matters and has contributed to the Boards' deliberations.	58
Joseph M. Wikler (70) Trustee	Director of C-TASC (bio-statistics services) (since 2007); Formerly, Director of the following medical device companies: Medintec (1992-2011) and Cathco (1996-2011); Member of the Investment Committee of the Associated Jewish Charities of Baltimore (since 1994); Director of Lakes Environmental Association (environmental protection organization) (1996-2008); Director of Fortis/Hartford mutual funds (1994-December 2001). Mr. Wikler has served on the Boards of certain Oppenheimer funds since August 2005, during which time he has become familiar with the Fund's (and other Oppenheimer funds') financial, accounting, regulatory and investment matters and has contributed to the Boards' deliberations.	58
Peter I. Wold (63) Trustee	Director of Arch Coal, Inc. (since 2010); Director and Chairman of Wyoming Enhanced Oil Recovery Institute Commission (enhanced oil recovery study) (since 2004); President of Wold Oil Properties, Inc. (oil and gas exploration and production company) (since 1994); Vice President of American Talc Company, Inc. (talc mining and milling) (since 1999); Managing Member of Hole-in-the-Wall Ranch (cattle ranching) (since 1979); Director and Chairman of the Denver Branch of the Federal Reserve Bank of Kansas City (1993-1999); and Director of PacifiCorp. (electric utility) (1995-1999). Mr. Wold has served on the Boards of certain Oppenheimer funds since August 2005, during which time he has become familiar with the Fund's (and other Oppenheimer funds') financial, accounting, regulatory and investment matters and has contributed to the Boards' deliberations.	58

Each of the officers has served the Fund in the following capacities from the following dates:
	Position(s)	Length of Service
Daniel G. Loughran	Vice President	Since 2005
Scott C. Cottier	Vice President	Since 2005
Troy E. Willis	Vice President	Since 2005
Mark R. DeMitry	Vice President	Since 2009
Michael L. Camarella	Vice President	Since 2009
Charles S. Pulire	Vice President	Since 2011
Christina M. Nasta	Vice President and Chief Business Officer	Since 2011
Richard A. Stein	Vice President	Since 2007
William F. Glavin, Jr.	President and Principal Executive Officer	Since 2009
Mark S. Vandehey	Vice President and Chief Compliance Officer	Since 2004
Robert G. Zack	Vice President	Since 2011
Brian W. Wixted	Treasurer and Principal Financial & Accounting Officer	Since 2004
Brian S. Petersen	Assistant Treasurer	Since 2004
James Kennedy	Assistant Treasurer	Since 2011
Stephanie J. Bullington	Assistant Treasurer	Since 2008
Arthur S. Gabinet	Secretary	Since 2011
Lisa I. Bloomberg	Assistant Secretary	Since 2004
Taylor V. Edwards	Assistant Secretary	Since 2008
Randy G. Legg	Assistant Secretary	Since 2008
Adrienne M. Ruffle	Assistant Secretary	Since 2008

Other Information about the Officers of the Fund
Name, Age, Position(s)	Principal Occupation(s) During the Past 5 Years	Portfolios Overseen in Fund Complex
Daniel G. Loughran (47) Vice President	Senior Vice President of the Manager (since July 2007); Vice President of the Manager (April 2001-June 2007); Team leader, a Senior Portfolio Manager, an officer and a trader for the Fund and other Oppenheimer funds.	20
Scott S. Cottier (39) Vice President	Vice President and Senior Portfolio Manager of the Manager (since September 2002); Portfolio Manager and trader at Victory Capital Management (1999-2002); Senior Portfolio Manager, an officer and trader for the Fund and other Oppenheimer funds.	20
Troy E. Willis (38) Vice President	Vice President of the Manager (since July 2009); Assistant Vice President of the Manager (July 2005-June 2009); Senior Portfolio Manager with the Manager (since January 2006); A corporate attorney for Southern Resource Group (1999-2003); He is a Senior Portfolio Manager, an officer and a trader for the Fund and other Oppenheimer funds.	20
Mark R. DeMitry (35) Vice President	Vice President and Senior Portfolio Manager of the Manager (since July 2009); Associate Portfolio Manager (September 2006-June 2009); Research Analyst of the Manager (June 2003-September 2006); Credit Analyst of the Manager (July 2001-May 2003); He is a Senior Portfolio Manager, an officer and a trader for the Fund and other Oppenheimer funds.	20
Michael L. Camarella (35) Vice President	Vice President of the Manager (since January 2011); Assistant Vice President of the Manager (July 2009-December 2010); Senior Portfolio Manager of the Manager (since January 2011); Associate Portfolio Manager of the Manager (January 2008-January 2011); Research Analyst of the Manager (April 2006 - December 2007); Credit Analyst of the Manager (June 2003 - March 2006). He is a Senior Portfolio Manager, an officer and a trader for the Fund and other Oppenheimer funds.	20
Charles S. Pulire (34) Vice President	Assistant Vice President and Portfolio Manager of the Manager (since December 2010); Research Analyst of the Manager (February 2008 - November 2010); Credit Analyst of the Manager (May 2006 - February 2008). He is a portfolio manager and trader for the Fund and other Oppenheimer funds.	20
Richard A. Stein (53) Vice President	Director of the Rochester Credit Analysis team (since March 2004); Vice President of the Manager (January 1996 - June 2011); and a Senior Vice President of the Manager (since 2011); head of Rochester's Credit Analysis team (since 1993).	20

Name, Age, Position(s)	Principal Occupation(s) During the Past 5 Years	Portfolios Overseen in Fund Complex
Mark S. Vandehey (61) Vice President and Chief Compliance Officer	Senior Vice President and Chief Compliance Officer of the Manager (since March 2004); Chief Compliance Officer of OppenheimerFunds Distributor, Inc., Centennial Asset Management and Shareholder Services, Inc. (since March 2004); Vice President of OppenheimerFunds Distributor, Inc., Centennial Asset Management Corporation and Shareholder Services, Inc. (since June 1983).	94
Christina M. Nasta (38) Vice President and Chief Business Officer	Senior Vice President of the Manager (since July 2010); Vice President of the Manager (since January 2003); Vice President of OppenheimerFunds Distributor, Inc. (since January 2003).	94
Robert G. Zack (63) Vice President	Vice President, Secretary and General Counsel of OAC (since November 2001); Executive Vice President (since January 2004) and General Counsel (March 2002-December 2010) of the Manager; Executive Vice President, General Counsel and Director of OFI Trust Company (since November 2001); General Counsel of the Distributor (December 2001-December 2010); General Counsel of Centennial Asset Management Corporation (December 2001-December 2010); Senior Vice President and General Counsel of HarbourView Asset Management Corporation (December 2001-December 2010); Assistant Secretary (September 1997-December 2010) and Director (November 2001-December 2010) of OppenheimerFunds International Ltd. and OppenheimerFunds plc; Vice President and Director of Oppenheimer Partnership Holdings, Inc. (December 2002-December 2010); Director of Oppenheimer Real Asset Management, Inc. (November 2001-December 2010); Senior Vice President, General Counsel and Director of Shareholder Financial Services, Inc. and Shareholder Services, Inc. (December 2001-December 2010); Senior Vice President, General Counsel and Director of OFI Private Investments, Inc. (November 2001-December 2010); Vice President of OppenheimerFunds Legacy Program (June 2003-December 2010); Senior Vice President and General Counsel of OFI Institutional Asset Management, Inc. (November 2001-December 2010).	94
Brian W. Wixted (52) Treasurer and Principal Financial & Accounting Officer	Senior Vice President of the Manager (since March 1999); Treasurer of the Manager and the following: HarbourView Asset Management Corporation, Shareholder Financial Services, Inc., Shareholder Services, Inc., Oppenheimer Real Asset Management, Inc. and Oppenheimer Partnership Holdings, Inc. (March 1999-June 2008), OFI Private Investments, Inc. (March 2000-June 2008), OppenheimerFunds International Ltd. and OppenheimerFunds plc (since May 2000), OFI Institutional Asset Management, Inc. (since November 2000), and OppenheimerFunds Legacy Program (charitable trust program established by the Manager) (since June 2003); Treasurer and Chief Financial Officer of OFI Trust Company (trust company subsidiary of the Manager) (since May 2000); Assistant Treasurer of the following: OAC (March 1999-June 2008).	94
Brian S. Petersen (41) Assistant Treasurer	Vice President of the Manager (since February 2007); Assistant Vice President of the Manager (August 2002-February 2007); Manager/Financial Product Accounting of the Manager (November 1998-July 2002).	94
Stephanie J. Bullington (34) Assistant Treasurer	Vice President of the Manager (since January 2010); Assistant Vice President of the Manager (October 2005-January 2010); Assistant Vice President of ButterField Fund Services (Bermuda) Limited, part of The Bank of N.T. Butterfield Son Limited (Butterfield) (February 2004-June 2005).	94
James Kennedy (53) Assistant Treasurer	Senior Vice President of the Manager (since September 2006).	94
Arthur S. Gabinet (53) Secretary	Executive Vice President (since May 2010) and General Counsel (since January 2011) of the Manager; General Counsel of the Distributor (since January 2011); General Counsel of Centennial Asset Management Corporation (since January 2011); Executive Vice President and General Counsel of HarbourView Asset Management Corporation (since January 2011); Assistant Secretary (since January 2011) and Director (since January 2011) of OppenheimerFunds International Ltd. and OppenheimerFunds plc; Vice President and Director of Oppenheimer Partnership Holdings, Inc. (since January 2011); Director of Oppenheimer Real Asset Management, Inc. (since January 2011); Executive Vice President and General Counsel of Shareholder Financial Services, Inc. and Shareholder Services, Inc. (since January 2011); Executive Vice President and General Counsel of OFI Private Investments, Inc. (since January 2011); Vice President of OppenheimerFunds Legacy Program (since January 2011); Executive Vice President and General Counsel of OFI Institutional Asset Management, Inc. (since January 2011); General Counsel, Asset Management of the Manager (May 2010-December 2010); Principal, The Vanguard Group (November 2005-April 2010); District Administrator, U.S. Securities and Exchange Commission (January 2003-October 2005).	94
Lisa I. Bloomberg (43) Assistant Secretary	Senior Vice President (since February 2010) and Deputy General Counsel (since May 2008) of the Manager; Vice President (May 2004-January 2010) and Associate Counsel of the Manager (May 2004-May 2008); First Vice President (April 2001-April 2004), Associate General Counsel (December 2000-April 2004) of UBS Financial Services, Inc.	94
Randy G. Legg (46) Assistant Secretary	Vice President (since June 2005) and Senior Counsel (since March 2011) of the Manager; Associate Counsel (January 2007-March 2011) of the Manager.	94
Taylor V. Edwards (44) Assistant Secretary	Vice President (since February 2007) and Associate Counsel (since May 2009) of the Manager; Assistant Vice President (January 2006-January 2007) and Assistant Counsel (January 2006-April 2009) of the Manager; Associate at Dechert LLP (September 2000-December 2005).	94
Adrienne M. Ruffle (34) Assistant Secretary	Vice President (since February 2007) and Associate Counsel (since May 2009) of the Manager; Assistant Vice President (February 2005-January 2007); and Assistant Counsel (February 2005-April 2009); Associate Counsel (September 2002-February 2005) at Sidley Austin LLP.	94

As of December 31, 2010
	Dollar Range of Shares Beneficially Owned in the Fund	Aggregate Dollar Range of Shares Beneficially Owned in Supervised Funds
Independent Trustees
Brian Wruble	None	Over $100,000
David K. Downes	None	Over $100,000
Matthew P. Fink	None	Over $100,000
Phillip A. Griffiths	None	Over $100,000
Mary F. Miller	None	Over $100,000
Joel W. Motley	None	Over $100,000
Mary Ann Tynan	None	Over $100,000
Joseph M. Wikler	None	Over $100,000
Peter I. Wold	None	Over $100,000

Name and Other Fund Position(s) (as applicable)	Aggregate Compensation From the Fund¹	Total Compensation From the Fund and Fund Complex
	Fiscal Year Ended July 31, 2011	Year Ended December 31, 2010
Brian F. Wruble	$798	$234,000
Chairman of the Board
David Downes	$647	$189,000
Audit Committee Chairman and Regulatory & Oversight Committee Member
Matthew P. Fink	$647	$189,000
Regulatory & Oversight Committee Chairman and Governance Committee Member
Phillip A. Griffiths	$718 ²	$210,280
Audit Committee Member and Regulatory & Oversight Committee Member
Mary F. Miller	$606 ³	$177,000
Audit Committee Member and Governance Committee Member
Joel W. Motley	$647 ⁴	$189,000
Governance Committee Chairman and Regulatory & Oversight Committee Member
Mary Ann Tynan	$606	$183,076
Regulatory & Oversight Committee Member and Governance Committee Member
Joseph M. Wikler	$606 ⁵	$177,000
Audit Committee Member and Regulatory & Oversight Committee Member
Peter I. Wold	$606 ⁶	$177,000
Audit Committee Member and Governance Committee Member

Name	Address	% Owned	Share Class
First Clearing LLC, Speical Custody Acct for the Exclusive Benefit of Customer	2801 Market Street, St. Louis MO 63103	12.58	A
Pershing LLC	1 Pershing Plaza, Jersey City NJ 07399-0001	11.27	A
Citigroup Global Mkts Inc., Attn Cindy Tempesta 7th Fl.	333 West 34th Street, New York NY 10001-2483	7.34	A
National Financial Services LLC, For Exclusive Ben of Customers, 200 Liberty Street, One World Financial Center	Attn: Mutual Funds 5th Floor, New York NY 10281-1003	7.24	A
MLPF&S For The Sole Benefit Of Its Customers, Attn Fund Admn	4800 Deer Lake Dr. E., Fl. 3, Jacksonville, FL 32246-6484	5.71	A
Pershing LLC	1 Pershing Plaza, Jersey City NJ 07399-0001	23.96	B
First Clearing LLC, Special Custody Acct for the, Exclusive Benefit of Customer	2801 Market Street, St Louis MO 63103	20.02	B
National Financial Services LLC, For Exclusive Ben of Customers, 200 Liberty Street, One World Financial Center	Attn: Mutual Funds 5th Floor, New York NY 10281-1003	9.16	B
MLPF&S Inc. For the Sole Benefit, of Its Customers	4800 Deer Lake Dr. E, Jacksonville FL 32246-6484	6.54	B
Edward D. Jones & Co, Attn Mutual Fund Shareholder Accounting	201 Progress Pkwy, Maryland HTS MO 63043-3009	5.26	B
MLPF&S For the Sole Benefit, of its Customers, Attn Fund Admin	4800 Deer Lake Dr. E. Fl 3, Jacksonville FL 32246-6484	28.36	C
First Clearing LLC, Special Custody Acct for the Exclusive Benefit of Customer	2801 Market Street, St Louis MO 63103	22.19	C
Pershing LLC	1 Pershing Plaza, Jersey City NJ 07399-0001	6.91	C
Morgan Stanley & Co, Attn Mutual Funds Operations, Harborside Financial Center	Plaza II 3rd Floor, Jersey City NJ 07311	5.55	C

Fiscal Year ended 7/31	Management Fees Paid to OppenheimerFunds, Inc.
2009	$1,164,595
2010	$1,118,621
2011	$1,275,068

Portfolio Manager	Registered Investment Companies Managed	Total Assets in Registered Investment Companies Managed¹	Other Pooled Investment Vehicles Managed	Total Assets in Other Pooled Investment Vehicles Managed¹	Other Accounts Managed	Total Assets in Other Accounts Managed²
Daniel G. Loughran	19	$27.54	None	$0	2	$163
Scott S. Cottier	19	$27.54	None	$0	2	$163
Troy E. Willis	19	$27.54	None	$0	2	$163
Mark R. DeMitry	19	$27.54	None	$0	2	$163
Michael L. Camarella	19	$27.54	None	$0	2	$163
Charles S. Pulire	19	$27.54	None	$0	2	$163

Portfolio Manager	Range of Shares Beneficially Owned in the Fund
Daniel G. Loughran	None
Scott S. Cottier	None
Troy E. Willis	None
Mark R. DeMitry	None
Michael L. Camarella	None
Charles S. Pulire	None

Fiscal Year ended 7/31	Total Brokerage Commissions Paid by the Fund
2009	$0
2010	$0
2011	$0

Fiscal Year Ended 7/31	Aggregate Front-End Sales Charges on Class A Shares¹	Class A Front-End Sales Charges Retained by Distributor²	Concessions on Class A Shares Advanced by Distributor³	Concessions on Class B Shares Advanced by Distributor²	Concessions on Class C Shares Advanced by Distributor²
2009	$204,680	$37,870	$23,841	$8,567	$86,318
2010	$374,957	$78,976	$76,858	$4,063	$143,433
2011	$368,161	$48,888	$173,423	$8,947	$160,169

Contingent Deferred Sales Charges
Fiscal Year Ended 7/31	Class A Contingent Deferred Sales Charges Retained by Distributor	Class B Contingent Deferred Sales Charges Retained by Distributor	Class C Contingent Deferred Sales Charges Retained by Distributor
2009	$58,964	$6,795	$24,863
2010	$2,486	$5,563	$18,246
2011	$26,089	$3,707	$16,919

Distribution and Service Fees Paid to the Distributor for the Fiscal Year Ended 7/31/11
Class:	Total Payments Under Plan	Amount Retained by Distributor	Amount Paid to Affiliate	Distributor's Aggregate Unreimbursed Expenses Under Plan	Distributor's Unreimbursed Expenses as % of Net Assets of Class
Class B Plan	$17,128	$13,657	$264	$0	0.00%
Class C Plan	$738,057	$212,483	$3,484	$1,265,364	1.69%

A.G. Edwards and Sons, Inc.	H.D. Vest Investment Services, Inc.	Prime Capital Services, Inc.
Aetna Life Insurance & Annuity Company	Hartford Life & Annuity Insurance Company	Primevest Financial Services, Inc.
AIG Advisor Group, Inc.	Independent Financial Group, LLC	Proequities, Inc.
Allianz Life Insurance Company	ING Financial Advisers, LLC	Protective Group Securities, Inc.
Allstate Financial Services LLC	ING Financial Partners, Inc.	Protective Life and Annuity Insurance Company
Allstate Life Insurance Company	Invest Financial Corporation	Pruco Securities, LLC
American Enterprise Life Insurance Company	Jackson National Life Insurance Company	Prudential Investment Management Services, Inc.
American General Annuity Insurance Company	Janney Montgomery Scott LLC	Raymond James & Associates, Inc.
American Portfolios Financial Services, Inc.	Jefferson Pilot Securities Corporation	Raymond James Financial Services, Inc.
American United Life Insurance Company	JJB Hillard W.L. Lyons, Inc.	RBC Capital Markets Corporation
Ameriprise Advisor Services, Inc.	JP Morgan Securities, Inc.	RBC Dain Rauscher
Ameriprise Financial Services, Inc.	Kemper Investors Life Insurance Company	Retirement Plan Consultants
Ameritas Life Insurance Company	Key Investment Services LLC	Robert W. Baird & Co.
AXA Advisors, LLC	KMS Financial Services Inc.	Royal Alliance Associates, Inc.
AXA Equitable Life Insurance Company	Legend Equities Corporation	Sagepoint Financial Advisors
Banc of America Investment Services, Inc.	Lincoln Financial Advisors Corporation	Securities America, Inc.
Cadaret Grant & Co.	Lincoln Financial Securities Corporation	Security Benefit Life Insurance Company
Cambridge Investment Research, Inc.	Lincoln Investment Planning, Inc.	Sigma Financial Corp.
CCO Investment Services Corporation	Lincoln National Life Insurance Company	Signator Investments, Inc.
Charles Schwab & Co., Inc.	LPL Financial Corporation	State Farm VP Management Corp.
Chase Investment Services Corporation	Manulife Financial	Stifel, Nicolaus & Company, Inc.
Citigroup Global Markets, Inc.	Massachusetts Mutual Life Insurance Company	Sun Life Financial Distributors, Inc.
CitiStreet Advisors LLC	MassMutual Financial Group	Sun Life Insurance Company
Citizens Bank of Rhode Island	Merrill Lynch Pierce Fenner & Smith Inc.	Sun Trust Securities, Inc.
C.M. Life Insurance Company	MetLife Investors Insurance Company	Sunamerica Securities, Inc.
Commonwealth Financial Network	MetLife Securities, Inc.	SunTrust Bank
CUNA Brokerage Services, Inc.	MML Investor Services, Inc.	Suntrust Investment Services, Inc.
CUSO Financial Services, LP	Morgan Stanley & Co., Incorporated	TD Ameritrade Clearing, Inc.
Direct Services LLC	Morgan Stanley Smith Barney LLC	The Hartford/Planco
Edward D. Jones and Company, LP	Multi-Financial Securities Corporation	The Investment Center, Inc.
Essex National Securities, Inc.	Mutual Funds Against Cancer	Thrivent Financial for Lutherans
Federal Kemper Life Assurance Company	National Planning Corporation	Thrivent Investment Management, Inc.
Financial Network Investment Corporation	National Retirement Partners, Inc.	Transamerica Life Insurance Co.
Financial Services Corporation	Nationwide Financial Services, Inc.	UBS Financial Services, Inc.
First Allied Securities, Inc.	New England Securities, Inc.	Union Central Life Insurance Company
First Clearing LLC	NFP Securities Inc.	USI Securities, Inc.
First Global Capital Corporation	North Ridge Securities Corp.	Valic Financial Advisors, Inc.
FSC Securities Corporation	Northwestern Mutual Investment Services	Vanderbilt Securities LLC
GE Life and Annuity Company	NRP Financial, Inc.	VSR Financial Services, Inc.
Geneos Wealth Management, Inc.	Oppenheimer & Co. Inc.	Wachovia Securities, LLC
Genworth Financial, Inc.	Pacific Life Insurance Co.	Walnut Street Securities, Inc.
Great West Life Insurance Company	Park Avenue Securities LLC	Wells Fargo Advisors, LLC
Guardian Insurance & Annuity Company	Pershing LLC	Wells Fargo Investments, LLC
H. Beck, Inc.	PFS Investments, Inc.	Woodbury Financial Services, Inc.
	PlanMember Securities Corp.

Acensus, Inc.	First Clearing LLC	National Financial Services LLC
ACS HR Solutions LLC	First Global Capital Corporation	New York Life Insurance and Annuity Company
ADP Broker-Dealer, Inc.	First Trust Corp.	Northwest Plan Services Inc.
Aegon USA	GE Financial Assurance	Oppenheimer & Co. Inc.
Aetna Life Insurance & Annuity Company	GE Life and Annuity Company	Pershing LLC
Alliance Benefit Group	Geller Group Ltd.	Phoenix Life Insurance Company
Allianz Life Insurance Company	Genworth Financial, Inc.	Plan Administrators Inc.
American Diversified Distribution, LLC	Great West Life Insurance Company	PlanMember Securities
American Enterprise Life Insurance	Guardian Insurance & Annuity Company	Primevest Financial Services, Inc.
American Funds	H&R Block Financial Advisors, Inc.	Principal Life Insurance
American General Annuity Insurance Company	H.D. Vest Investment Services, Inc.	Protective Life and Annuity Insurance Company
American United Life Insurance Co.	Hartford Life Insurance Company	Prudential Investment Management Services, Inc.
Ameriprise Financial Services, Inc.	Hewitt Associates LLC	PSMI Group
Ameritas Life Insurance Company	ICMA-RC Services LLC	Raymond James & Associates, Inc.
Ameritrade, Inc.	Ingham Group	Reliance Trust Co.
Annuity Investors Life Insurance Company	Interactive Retirement Systems	Robert W. Baird & Co.
AST Trust Company	Intuition Systems, Inc.	RSM McGladrey, Inc.
AXA Equitable Life Insurance Company	Investmart	Scott & Stringfellow, Inc.
Benefit Administration Co.	Janney Montgomery Scott LLC	Scottrade, Inc.
Benefit Consultants Group	JJB Hillard W. L. Lyons, Inc.	Security Benefit Life Insurance Company
Benefit Plans Administrative Services, Inc.	John Hancock Life Insurance Company	Southwest Securities, Inc.
Boston Financial Data Services, Inc.	JP Morgan Securities, Inc.	Standard Insurance Co.
Ceridian	July Business Services	Standard Retirement Services, Inc.
Charles Schwab & Co., Inc.	Kemper Investors Life Insurance Company	Stanton Group, Inc.
Citigroup Global Markets Inc.	Lincoln Benefit National Life	Sterne Agee & Leach, Inc.
CitiStreet Advisors LLC	Lincoln Financial Advisors Corporation	Stifel Nicolaus & Company, Inc.
Clark Consulting	Lincoln Investment Planning Inc.	Sun Trust Securities, Inc.
CPI Qualified Plan Consultants	LPL Financial Corporation	T. Rowe Price
CUNA Mutual Insurance Society	Marshall & Ilsley Trust Company, Inc.	The Princeton Retirement Group
DA Davidson & Co.	Massachusetts Mutual Life Insurance Company	The Retirement Plan Company, LLC
Daily Access. Com, Inc.	Matrix Settlement & Clearance Services	Transamerica Retirement Services
Davenport & Company, LLC	Mercer HR Services	UBS Financial Services, Inc.
David Lerner Associates, Inc.	Merrill Lynch Pierce Fenner & Smith Inc.	Unified Fund Services, Inc.
Digital Retirement Solutions	Mesirow Financial, Inc.	Union Bank & Trust Company
Diversified Advisors Investments Inc.	MG Trust	US Clearing Co.
DR, Inc.	Mid Atlantic Capital Co.	USAA Investment Management Co.
Dyatech, LLC	Milliman, Inc.	USI Consulting Group
E*TRADE Clearing LLC	Minnesota Life Insurance Company	Valic Financial Advisors, Inc.
Edward D. Jones and Company, LP	Mony Life Insurance Company of America	Vanguard Group
ExpertPlan.com	Morgan Stanley & Co., Incorporated	Wachovia Securities, LLC
Federal Kemper Life Assurance Company	Morgan Stanley Dean Witter	Wedbush Morgan Securities
Fidelity Brokerage Services, LLC	Mutual of Omaha Insurance Company	Wells Fargo Bank NA
Fidelity Investments Institutional Operations Co.	National City Bank	Wells Fargo Investments, LLC
Financial Administrative Services Corporation	National Deferred Compensation	Wilmington Trust Company

The Fund's Yields for the 30-Day Period Ended 7/31/11
	Standardized Yield		Dividend Yield
Class of Shares	Without Sales Charge	After Sales Charge	Without Sales Charge	After Sales Charge
Class A	4.63%	4.47%	4.86%	4.70%
Class B	3.45%	N/A	3.57%	N/A
Class C	3.79%	N/A	3.97%	N/A
Class Y	4.82%	N/A	5.02%	N/A

The Fund's Total Returns for the Periods Ended 7/31/11
	Cumulative Total Returns		Average Annual Total Returns
	10 Years or life of class, if less		1 Year		5 Years		10 Years
Class of Shares	After Sales Charge	Without Sales Charge	After Sales Charge	Without Sales Charge	After Sales Charge	Without Sales Charge	After Sales Charge	Without Sales Charge
Class A¹	34.10%	38.96%	0.43%	4.07%	2.73%	3.47%	4.03%	4.53%
Class B¹	34.60%	34.60%	(0.99%)	2.98%	2.33%	2.50%	4.08%	4.08%
Class C¹	30.64%	30.64%	1.97%	2.96%	2.62%	2.62%	3.66%	3.66%
Class Y²	3.20%	3.20%	N/A	N/A	N/A	N/A	N/A	N/A

Average Annual Total Returns for Class A Shares (After Sales Charge) for the Periods Ended 7/31/11 ¹
	1 Year	5 Years	10 Years
After Taxes on Distributions	0.43%	2.73%	4.03%
After Taxes on Distributions and Redemption of Fund Shares	1.94%	2.97%	4.09%

Oppenheimer AMT-Free Municipals	Money Market Funds:
Oppenheimer AMT-Free New York Municipals	Oppenheimer Cash Reserves
Oppenheimer Core Bond Fund	Oppenheimer Institutional Money Market Fund
Oppenheimer California Municipal Fund	Oppenheimer Money Market Fund, Inc.
Oppenheimer Capital Appreciation Fund	Oppenheimer New Jersey Municipal Fund
Oppenheimer Capital Income Fund	Oppenheimer Pennsylvania Municipal Fund
Oppenheimer Champion Income Fund	Oppenheimer Portfolio Series Funds:
Oppenheimer Commodity Strategy Total Return Fund	Active Allocation Fund
Oppenheimer Corporate Bond Fund	Conservative Investor Fund
Oppenheimer Currency Opportunities Fund	Equity Investor Fund
Oppenheimer Developing Markets Fund	Moderate Investor Fund
Oppenheimer Discovery Fund	Oppenheimer Portfolio Series Fixed Income
Oppenheimer Emerging Markets Debt Fund	Active Allocation Fund
Oppenheimer Equity Fund, Inc.	Oppenheimer Principal Protected Main Street Fund III
Oppenheimer Equity Income Fund, Inc.	Oppenheimer Quest International Value Fund
Oppenheimer Global Fund	Oppenheimer Quest Opportunity Value Fund
Oppenheimer Global Allocation Fund	Oppenheimer Real Estate Fund
Oppenheimer Global Opportunities Fund	Oppenheimer Rising Dividends Fund
Oppenheimer Global Strategic Income Fund	Oppenheimer Rochester Arizona Municipal Fund
Oppenheimer Global Value Fund	Oppenheimer Rochester Intermediate Term Municipal Fund
Oppenheimer Gold & Special Minerals Fund	Oppenheimer Rochester Maryland Municipal Fund
Oppenheimer International Bond Fund	Oppenheimer Rochester Massachusetts Municipal Fund
Oppenheimer International Diversified Fund	Oppenheimer Rochester Michigan Municipal Fund
Oppenheimer International Growth Fund	Oppenheimer Rochester Minnesota Municipal Fund
Oppenheimer International Small Company Fund	Oppenheimer Rochester National Municipals
Oppenheimer Limited Term California Municipal Fund	Oppenheimer Rochester North Carolina Municipal Fund
Oppenheimer Limited-Term Government Fund	Oppenheimer Rochester Ohio Municipal Fund
Oppenheimer Limited Term Municipal Fund	Oppenheimer Rochester Short Term Municipal Fund
Oppenheimer Main Street Fund	Oppenheimer Rochester Virginia Municipal Fund
Oppenheimer Main Street Select Fund	Oppenheimer Select Value Fund
Oppenheimer Main Street Small- & Mid-Cap Fund	Oppenheimer Senior Floating Rate Fund
	Oppenheimer Short Duration Fund
Oppenheimer LifeCycle Funds:	Oppenheimer Small- & Mid-Cap Growth Fund
Oppenheimer Transition 2010 Fund	Oppenheimer Small- & Mid- Cap Value Fund
Oppenheimer Transition 2015 Fund	Oppenheimer U.S. Government Trust
Oppenheimer Transition 2020 Fund	Oppenheimer Value Fund
Oppenheimer Transition 2025 Fund	Limited-Term New York Municipal Fund
Oppenheimer Transition 2030 Fund	Rochester Fund Municipals
Oppenheimer Transition 2040 Fund
Oppenheimer Transition 2050 Fund