--------------------------------------------------------------------------------
Prospectus                                                     February 27, 1998
--------------------------------------------------------------------------------

      Municipal High Income Fund Inc.
      388 Greenwich Street
      New York, New York  10013
      (800) 451-2010

      Municipal High Income Fund Inc. (the "Fund") is a diversified, closed-end
management investment company that seeks high tax-exempt current income by
investing primarily in a variety of obligations issued by or on behalf of
states, territories and possessions of the United States and the District of
Columbia and their political subdivisions, agencies and instrumentalities or
multi-state agencies or authorities ("Municipal Obligations"). For a discussion
of the risks associated with certain of the Fund's investments, see "Investment
Objective and Policies."

   
      This Prospectus is to be used by Smith Barney Inc. ("Smith Barney") in
connection with offers and sales of the outstanding common stock of the Fund
(the "Common Stock") in market-making activities in the over-the-counter market
at negotiated prices related to prevailing market prices at the time of the
sale.
    

      Investors are advised to read this Prospectus, which sets forth concisely
the information about the Fund that a prospective investor ought to know before
investing, and to retain it for future reference. A Statement of Additional
Information (the "SAI") dated February 27, 1998 has been filed with the
Securities and Exchange Commission (the "SEC") and is incorporated by reference
in its entirety into this Prospectus. A copy of the SAI can be obtained without
charge by calling or writing to the Fund at the telephone number or address set
forth above or by contacting any Smith Barney Financial Consultant.

                                                           (Continued on page 2)

SMITH BARNEY INC.
Distributor

THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.


                                                                               1
<PAGE>

--------------------------------------------------------------------------------
Prospectus (continued)
--------------------------------------------------------------------------------

      Smith Barney intends to make a market in the Fund's Common Stock, although
it is not obligated to conduct market-making activities and any such activities
may be discontinued at any time, without notice by Smith Barney. The shares of
Common Stock that may be offered from time to time pursuant to this Prospectus
were issued and sold by the Fund on November 28, 1988 in an initial public
offering at a price of $10.00 per share. No assurance can be given as to the
liquidity of, or the trading market for, the Common Stock as a result of any
market-making activities undertaken by Smith Barney. The Fund will not receive
any proceeds from the sale of any Common Stock offered pursuant to this
Prospectus. The Fund's Common Stock is listed on the New York Stock Exchange
("NYSE") under the symbol "MHF."

      All dealers effecting transactions in the registered securities, whether
or not participating in this distribution, may be required to deliver a
Prospectus.


2
<PAGE>

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Table of Contents
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Prospectus Summary                                                             4
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Fund Expenses                                                                  7
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Financial Highlights                                                           8
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The Fund                                                                      10
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The Offering                                                                  10
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Use of Proceeds                                                               10
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Investment Objective and Policies                                             10
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Share Price Data                                                              17
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Management of the Fund                                                        17
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Dividends and Distributions; Dividend Reinvestment Plan                       19
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Net Asset Value                                                               21
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Taxation                                                                      21
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Description of Common Stock                                                   23
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Certain Provisions of the Articles of Incorporation                           24
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Custodian, Transfer Agent, Dividend-Paying Agent,
Registrar and Plan Agent                                                      25
--------------------------------------------------------------------------------
   
Independent Auditors                                                          25
--------------------------------------------------------------------------------
Further Information                                                           25
--------------------------------------------------------------------------------
    
Appendix                                                                     A-1
--------------------------------------------------------------------------------

      No person has been authorized to give any information or to make any
representations not contained in this Prospectus and, if given or made, such
information or representations must not be relied upon as having been authorized
by the Fund or the Fund's investment adviser. This Prospectus does not
constitute an offer to sell or a solicitation of an offer to buy any security
other than the shares of Common Stock, nor does it constitute an offer to sell
or a solicitation of an offer to buy the shares of Common Stock by anyone in any
jurisdiction in which such offer or solicitation would be unlawful. Neither the
delivery of this Prospectus nor any sale made hereunder shall, under any
circumstances, create any implication that there has been no change in the
affairs of the Fund since the date hereof. If any material change occurs while
this Prospectus is required by law to be delivered, however, this Prospectus
will be supplemented or amended accordingly.


                                                                               3
<PAGE>

--------------------------------------------------------------------------------
Prospectus Summary
--------------------------------------------------------------------------------

      The following summary is qualified in its entirety by the more detailed
information included elsewhere in this Prospectus and in the SAI.

THE FUND The Fund is a diversified, closed-end management investment company
that invests substantially all of its assets in Municipal Obligations. See "The
Fund" and "Investment Objective and Policies."

INVESTMENT OBJECTIVE The Fund's objective is high tax-exempt current income.

INVESTMENT POLICIES The Fund ordinarily invests at least 80% of its net assets
in Municipal Obligations. The Fund generally invests in intermediate- and
long-term Municipal Obligations. Thus, under normal market conditions, the Fund
will invest in obligations with remaining maturities at the time of purchase
from three to in excess of 20 years. No assurance can be given that the Fund's
investment objective will be achieved. See "Investment Objective and Policies."

TAX-EXEMPT INCOME The Fund is intended to operate in such a manner that
dividends paid by the Fund may be excluded by the Fund's shareholders from their
gross incomes for Federal income tax purposes. See "Investment Objective and
Management Policies" and "Taxation." The Fund has the right to invest without
limitation in Municipal Obligations that are private activity bonds, the income
from which may be taxable as a specific preference item for purposes of the
Federal alternative minimum tax (the "AMT"). Thus, the Fund may not be a
suitable investment for investors who are subject to the AMT. See "Investment
Objective and Policies" and "Taxation."

   
THE OFFERING The Common Stock is listed for trading on the NYSE. In addition,
Smith Barney intends to make a market in the Common Stock. Smith Barney,
however, is not obligated to conduct market-making activities and any such
activities may be discontinued at any time without notice, at the sole
discretion of Smith Barney.
    

LISTING NYSE.

SYMBOL MHF.

INVESTMENT MANAGER AND ADMINISTRATOR Mutual Management Corp. ("MMC"), formerly
known as Smith Barney Mutual Funds Management Inc., serves as the Fund's
investment manager. MMC provides investment advisory and management services to
investment companies affiliated with Smith Barney. MMC is a wholly owned
subsidiary of Salomon Smith Barney Holdings Inc. ("Holdings"), the parent
company of Smith Barney. Holdings is a wholly owned subsidiary of Travelers
Group Inc. ("Travelers"). MMC also acts as administrator of the Fund and in that


4
<PAGE>

--------------------------------------------------------------------------------
Prospectus Summary (continued)
--------------------------------------------------------------------------------

   
capacity provides certain administrative services, including overseeing the
Fund's non-investment operations and its relations with other service providers
and providing executive and other officers to the Fund. The Fund pays MMC a fee
("Management Fee") for its investment advisory services at an annual rate of
0.40% of the value of the Fund's average daily net assets. The Fund pays MMC a
fee for administrative services that is computed daily and paid monthly at the
annual rate of 0.20% of the value of the Fund's average daily net assets. The
Fund will bear other expenses and costs in connection with its operation in
addition to the costs of investment management and administrative services. See
"Management of the Fund -- Investment Manager and Administrator."
    

CUSTODIAN, TRANSFER AGENT, DIVIDEND-PAYING AGENT, REGISTRAR AND PLAN AGENT PNC
Bank, N.A. ("PNC Bank") serves as the Fund's custodian. First Data Investor
Services Group, Inc. ("First Data") serves as the Fund's transfer agent,
dividend-paying agent, registrar and plan agent under the Fund's Dividend
Reinvestment Plan. See "Custodian, Transfer Agent and Dividend-Paying Agent,
Registrar and Plan Agent."

   
DIVIDENDS AND DISTRIBUTIONS; DIVIDEND REINVESTMENT PLAN The Fund generally
expects to make monthly distributions of net investment income and to distribute
net realized capital gains, if any, annually. All distributions will be
reinvested automatically in additional shares through participation in the
Fund's Dividend Reinvestment Plan unless a shareholder elects to receive cash.
See "Dividends and Distributions; Dividend Reinvestment Plan."
    

DISCOUNT FROM NET ASSET VALUE OF SHARES The Fund is a closed-end investment
company. Shares of closed-end investment companies frequently trade at a
discount from net asset value. Whether investors will realize gains or losses
upon the sale of Common Stock will not depend upon the Fund's net asset value,
but will depend entirely upon whether the market price of the Common Stock at
the time of sale is above or below the original purchase price for the shares.
Since the market price of the Fund's Common Stock will be determined by such
factors as relative demand for and supply of such shares in the market, general
market and economic conditions and other factors beyond the control of the Fund,
the Fund cannot predict whether the Common Stock will trade at, below or above
net asset value. For that reason, shares of the Fund's Common Stock are designed
primarily for long-term investors, and investors in the Fund's Common Stock
should not view the Fund as a vehicle for trading purposes. See "Investment
Objective and Policies -- Risk Factors and Special Considerations" and "Share
Price Data."

RISK FACTORS AND SPECIAL CONSIDERATIONS The Fund may invest up to 100% of its
assets in Municipal Obligations rated as low as Ba by Moody's Investors Service
Inc. ("Moody's"), BB by Standard & Poor's Ratings Group ("S&P") or BB by Fitch


                                                                               5
<PAGE>

--------------------------------------------------------------------------------
Prospectus Summary (continued)
--------------------------------------------------------------------------------

IBCA, Inc., formerly Fitch Investors Service, Inc. ("Fitch"), or in unrated
Municipal Obligations deemed to be of comparable quality. These low-rated
Municipal Obligations are regarded by Moody's as having speculative elements
and by S&P as having predominantly speculative characteristics with respect
to capacity to pay interest and repay principal and generally involve greater
volatility of price and risk of principal and income than do higher-rated
securities. In addition, low-rated and unrated securities are frequently
subordinated to the prior payment of senior indebtedness and are traded
in markets that may be less liquid than the market for higher-rated
securities. Moreover, because dealers may not maintain daily markets in
Municipal Obligations, retail secondary markets for many of these
securities may not exist. The Fund anticipates that if a secondary
market for securities it wishes to sell does not exist, the Fund could
sell the securities only to institutional investors. As a result, the Fund's
ability to sell these securities when MMC deems it appropriate may be
diminished. The Fund is not restricted in its ability to purchase illiquid
securities; however, the Fund is subject to the risk that should it desire to
sell any of these securities when a ready buyer is not available at a price the
Fund deems representative of their value, the value of the Fund's net assets
could be adversely affected. The Fund may also invest up to 30% of its assets in
securities that are not publicly traded. The Fund may be forced to sell these
securities at less than fair market value or may not be able to sell them when
MMC believes it desirable to do so.

   
      Certain of the investment techniques that the Fund may employ might expose
the Fund to special risks. These investment techniques include purchasing
municipal leases, securities on a when-issued basis, stand-by commitments and
floating- and variable-rate demand notes, entering into repurchase agreements,
lending portfolio securities and engaging in financial futures and options
transactions. See "Investment Objective and Policies--Risk Factors and Special
Considerations."
    

      The Fund's Articles of Incorporation include provisions that could have
the effect of limiting the ability of other entities or persons to acquire
control of the Fund and of depriving shareholders of an opportunity to sell
their shares at a premium over prevailing market prices. See "Certain Provisions
of the Articles of Incorporation."


6
<PAGE>

--------------------------------------------------------------------------------
Fund Expenses
--------------------------------------------------------------------------------

      The following tables are intended to assist investors in understanding the
various costs and expenses associated with investing in the Fund.

================================================================================
Shareholder Transaction Expenses
       Sales Load (as a percentage of offering price ).................     None
       Dividend Reinvestment and Cash Purchase Plan Fees...............     None
================================================================================
Annual Fund Operating Expenses
       (as a percentage of net assets)(1)
       Investment Advisory and Administration Fees.....................    0.60%
       Other Expenses..................................................    0.14%
================================================================================
TOTAL ANNUAL FUND OPERATING EXPENSES...................................    0.74%
================================================================================

(1) See "Management of the Fund" for additional information.

      EXAMPLE

      An investor would directly or indirectly pay the following expenses on a
$1,000 investment in the Fund, assuming a 5% annual return:

        One Year          Three Years       Five Years          Ten Years
================================================================================
           $8                 $24               $41                $92
================================================================================

   
      This example assumes that all dividends and other distributions are
reinvested at net asset value and that the percentage amounts listed under
Annual Fund Operating Expenses remain the same in the years shown. The tables
and the assumptions in the above example of a 5% annual return and reinvestment
at net asset value are required by regulations of the SEC applicable to all
investment companies; the assumed 5% annual return is not a prediction of,
and does not represent, the projected or actual performance of the Fund's
Common Stock. This example should not be considered a representation of
past or future expenses, and the Fund's actual expenses may be more or
less than those shown.
    


                                                                               7
<PAGE>

--------------------------------------------------------------------------------
Financial Highlights
--------------------------------------------------------------------------------

The following information for the three-year period ended October 31, 1997 has
been audited by KPMG Peat Marwick LLP, independent auditors, whose report
thereon appears in the Fund's annual report dated October 31, 1997. The
following information for the fiscal years ended October 31, 1989 through
October 31, 1994 has been audited by other independent auditors. This
information should be read in conjunction with the financial statements and
related notes that also appear in the Fund's 1997 Annual Report, which is
incorporated by reference into the Statement of Additional Information.

For a share of capital stock outstanding throughout each year:

<TABLE>
<CAPTION>
Year Ended October 31,                       1997        1996        1995        1994        1993
-----------------------------------------------------------------------------------------------------
<S>                                        <C>         <C>         <C>         <C>         <C>     
Net Asset Value,
  Beginning of Year                        $   9.53    $   9.51    $   8.98    $   9.72    $   9.49
-----------------------------------------------------------------------------------------------------
Income (Loss) From Operations:
  Net investment income                        0.61        0.63        0.64        0.65        0.67
  Net realized and unrealized gain (loss)      0.24          --        0.54       (0.72)       0.23
-----------------------------------------------------------------------------------------------------
Total Income (Loss) From Operations            0.85        0.63        1.18       (0.07)       0.90
-----------------------------------------------------------------------------------------------------
Less Distributions From:
  Net investment income                       (0.62)      (0.61)      (0.65)      (0.65)      (0.67)
  Net realized gains                             --          --          --       (0.02)         --
-----------------------------------------------------------------------------------------------------
Total Distributions                           (0.62)      (0.61)      (0.65)      (0.67)      (0.67)
-----------------------------------------------------------------------------------------------------
Net Asset Value, End of Year               $   9.76    $   9.53    $   9.51    $   8.98    $   9.72
-----------------------------------------------------------------------------------------------------
Total Return, Based on Market Value           17.22%      10.22%      14.17%     (10.11)%     17.76%
-----------------------------------------------------------------------------------------------------
Total Return, Based on Net Asset Value         9.41%       7.39%      14.00%      (0.54)%      9.87%
=====================================================================================================
Net Assets, End of Year (millions)             $194    $187    $187    $176    $188
-----------------------------------------------------------------------------------------------------
Ratios to Average Net Assets:
  Expenses                                     0.74%       0.77%       0.84%       0.84%       0.87%
  Net investment income                        6.38        6.65        6.87        6.98        6.89
-----------------------------------------------------------------------------------------------------
Portfolio Turnover Rate                          35%         17%         18%         17%         13%
=====================================================================================================
Market Value, End of Year                  $  9.875    $  9.000    $  9.000    $  8.250    $  9.875
=====================================================================================================
</TABLE>


8
<PAGE>

--------------------------------------------------------------------------------
Financial Highlights (continued)
--------------------------------------------------------------------------------

For a share of capital stock outstanding throughout each year:

<TABLE>
<CAPTION>
Year Ended October 31,                       1992        1991        1990        1989(1)
------------------------------------------------------------------------------------------
<S>                                        <C>         <C>         <C>         <C>     
Net Asset Value,
  Beginning of Year                        $   9.42    $   9.28    $   9.52    $   9.35
------------------------------------------------------------------------------------------
Income (Loss) From Operations:
  Net investment income                        0.70        0.74        0.75        0.66
  Net realized and unrealized gain (loss)      0.06        0.15       (0.23)       0.15
------------------------------------------------------------------------------------------
Total Income (Loss) From Operations            0.76        0.89        0.52        0.81
------------------------------------------------------------------------------------------
Less Distributions From:
  Net investment income                       (0.69)      (0.75)      (0.76)      (0.64)
  Net realized gains                             --          --          --          --
------------------------------------------------------------------------------------------
Total Distributions                           (0.69)      (0.75)      (0.76)      (0.64)
------------------------------------------------------------------------------------------
Net Asset Value, End of Year               $   9.49    $   9.42    $   9.28    $   9.52
------------------------------------------------------------------------------------------
Total Return, Based on Market Value            3.37%      17.88%      (1.45)%    1.72%#
------------------------------------------------------------------------------------------
Total Return, Based on Net Asset Value         8.47%      10.15%       5.75%       9.02%
==========================================================================================
Net Assets, End of Year (millions)             $179    $173    $165    $164
------------------------------------------------------------------------------------------
Ratios to Average Net Assets:
  Expenses                                     0.87%       0.90%       0.87%       0.86%*(2)
  Net investment income                        7.31        7.90        8.00        7.54*
------------------------------------------------------------------------------------------
Portfolio Turnover Rate                          12%         22%         11%         16%
==========================================================================================
Market Value, End of Year                  $  9.125    $   9.50    $   9.00    $   9.50
==========================================================================================
</TABLE>

(1)   For the period from November 28, 1988 (commencement of operations) to
      October 31, 1989.
(2)   Annualized expense ratio before fees waived by investment adviser was
      0.88%
*     Annualized
#     Total return is not annualized, as it may not be representative of the
      total return for the year.


                                                                               9
<PAGE>

--------------------------------------------------------------------------------
The Fund
--------------------------------------------------------------------------------

      The Fund is a diversified, closed-end management investment company
designed to invest primarily in Municipal Obligations. The Fund, which was
incorporated under the laws of the State of Maryland on March 4, 1988, is
registered under the Investment Company Act of 1940, as amended (the "1940
Act"), and has its principal office at 388 Greenwich Street, New York, New York
10013. The Fund's telephone number is (800) 451-2010.

--------------------------------------------------------------------------------
The Offering
--------------------------------------------------------------------------------

      Smith Barney intends to make a market in the Common Stock, although it is
not obligated to conduct market-making activities and any such activities may be
discontinued at any time without notice at the sole discretion of Smith Barney.
No assurance can be given as to the liquidity of, or the trading market for, the
Common Stock as a result of any market-making activities undertaken by Smith
Barney. This Prospectus is to be used by Smith Barney in connection with offers
and sales of the Common Stock in market-making transactions in the
over-the-counter market at negotiated prices related to prevailing market prices
at the time of the sale.

--------------------------------------------------------------------------------
Use of Proceeds
--------------------------------------------------------------------------------

      The Fund will not receive any proceeds from the sale of any Common Stock
offered pursuant to this Prospectus. Proceeds received by Smith Barney as a
result of its market-making in Common Stock will be utilized by Smith Barney in
connection with its secondary market operations and for general corporate
purposes.

--------------------------------------------------------------------------------
Investment Objective and Policies
--------------------------------------------------------------------------------

   
      The Fund's investment objective is high tax-exempt current income. The
Fund's investment objective may not be changed without the affirmative vote of
the holders of a "majority of the Fund's outstanding voting securities" (as
defined in the 1940 Act). To achieve this objective, the Fund seeks to invest
substantially all of its assets in a diversified portfolio of long-term
Municipal Obligations. Under normal conditions, at least 80% of the Fund's
assets will be invested in Municipal Obligations. The Fund may invest up to 100%
of its assets in Municipal Obligations rated as low as Ba by Moody's, BB by S&P
or BB by Fitch, or in unrated Municipal Obligations deemed to be of comparable
quality. The Fund will not invest in Municipal Obligations that are rated lower
than Ba, MIG 1/VMIG 1 or P-2 by Moody's, BB, SP-1 or A-1 by S&P, or BB by Fitch.
A description of relevant Moody's, S&P and Fitch 
    


10
<PAGE>

--------------------------------------------------------------------------------
Investment Objective and Policies (continued)
--------------------------------------------------------------------------------

ratings is set forth in the Appendix to the SAI. Lower-rated bonds are judged to
have speculative elements. Although these bonds will likely have some quality
and protective characteristics, these are outweighed by large uncertainties or
major risk exposure to adverse conditions. Often, protection of principal
payments may be characteristically unreliable over any great length of time. The
Fund is not restricted in its ability to purchase securities for which a liquid
market does not exist and up to 30% of the Fund's assets may be invested in
non-publicly traded securities. No assurance can be given that the Fund's
investment objective will be achieved.

      Municipal Obligations are debt securities, the interest from which is, in
the opinion of bond counsel to their issuer, excluded from gross income for
regular Federal income tax purposes. Municipal Obligations bear fixed, floating
and variable rates of interest. Municipal Obligations include "public purpose"
obligations, which generate interest that is exempt from regular Federal income
tax and, for individual taxpayers, is not subject to the AMT, and qualified
"private activity" obligations, which generate interest that is exempt from
regular Federal income tax but that is subject to the AMT. Variations exist in
the security of Municipal Obligations, both within a particular classification
and between classifications. The types of Municipal Obligations in which the
Fund may invest are described in an Appendix to this Prospectus.

      The yields on and values of Municipal Obligations are dependent on a
variety of factors, including general economic and monetary conditions, money
market factors, conditions in the Municipal Obligations market, size of a
particular offering, maturity of the obligation and rating of the issue.
Consequently, Municipal Obligations with the same maturity, coupon and rating
may have different yields or values, whereas obligations of the same maturity
and coupon with different ratings may have the same yield or value.

      Certain Municipal Obligations held by the Fund may permit the issuer to
call or redeem the obligations, in whole or in part, at its option. If an issuer
were to redeem Municipal Obligations held by the Fund during a time of declining
interest rates, the Fund might realize capital gains or losses at a time when it
would not otherwise do so, and the Fund might not be able to reinvest the
proceeds of the redemption in Municipal Obligations providing as high a level of
income as the obligations that were redeemed.

   
      Opinions relating to the validity of Municipal Obligations and to the
exemption of interest thereon from regular Federal income tax (and also, when
applicable, from the AMT) are rendered by bond counsel to the issuer at the time
of issuance. Neither the Fund nor MMC review the proceedings relating to the
issuance of Municipal Obligations or the bases for such opinions. Issuers of
Municipal Obligations may be subject to the provisions of bankruptcy, insolvency
and other laws, such as Federal bankruptcy laws, affecting the rights and
remedies of creditors.
    


                                                                              11
<PAGE>

--------------------------------------------------------------------------------
Investment Objective and Policies (continued)
--------------------------------------------------------------------------------

      In addition, the obligations of those issuers may become subject to laws
enacted in the future by Congress, state legislatures or referenda extending the
time for payment of principal and/or interest, or imposing other constraints
upon enforcement of the obligations or upon the ability of municipalities to
levy taxes. The possibility also exists that, as a result of litigation or other
conditions, the power or ability of any issuer to pay, when due, the principal
of, and interest on, its obligations may be materially affected.

   
      Under normal conditions, the Fund may hold up to 20% of its assets in cash
or money market instruments, including taxable money market instruments
("Taxable Investments"). When MMC believes that long-term Municipal Obligations
consistent with the Fund's investment objective are unavailable, the Fund may
take a temporary defensive posture and invest without limitation in short-term
Municipal Obligations and Taxable Investments. To the extent that the Fund holds
Taxable Investments and, under certain market conditions, short-term Municipal
Obligations, the Fund will not be fully pursuing its investment objective.
    

      INVESTMENT TECHNIQUES

      The Fund may employ, among others, the investment techniques described
below, which may give rise to taxable income.

      When-Issued Securities. New issues of Municipal Obligations usually are
offered on a when-issued basis, which means that delivery and payment for the
Municipal Obligations normally take place within 45 days after the date of the
commitment to purchase. The payment obligation and the interest rate that will
be received on the Municipal Obligations are fixed at the time the buyer enters
into the commitment. The Fund will make commitments to purchase when-issued
Municipal Obligations only with the intention of acquiring the securities, but
may sell these securities before the settlement date if MMC deems it advisable.
Any gain realized on the sale would be taxable.

      Stand-By Commitments. The Fund may acquire "stand-by commitments" with
respect to Municipal Obligations held in its portfolio. Under a stand-by
commitment, a dealer is obligated to repurchase at the Fund's option specified
securities at a specified price and, in this way, stand-by commitments are
comparable to put options. The exercise of a stand-by commitment, therefore, is
subject to the ability of the seller to make payment on demand. The Fund will
acquire stand-by commitments solely to facilitate portfolio liquidity and does
not intend to exercise its rights thereunder for trading purposes.

      Financial Futures and Options Transactions. To protect against a decline
in the value of Municipal Obligations it owns or an increase in the price of
Municipal Obligations it proposes to purchase in the future, the Fund may engage
in financial futures and options transactions. The futures contracts or options
on futures contracts


12
<PAGE>

--------------------------------------------------------------------------------
Investment Objective and Policies (continued)
--------------------------------------------------------------------------------

that may be entered into by the Fund will be restricted to those that are either
based on an index of long-term Municipal Obligations or relate to debt
securities the prices of which are anticipated by MMC to correlate with the
prices of the Municipal Obligations owned or to be purchased by the Fund.
Regulations by the Commodities Futures Trading Commission (the "CFTC")
applicable to the Fund require that the Fund's transactions in futures and
options be engaged in for "bona fide hedging" purposes or other permitted
purposes, provided that aggregate initial margin deposits and premiums required
to establish positions other than those considered by the CFTC to be "bona fide
hedging" will not exceed 5% of the Fund's net asset value, after taking into
account unrealized profits and unrealized losses on any such contracts.

      An interest rate futures contract provides for the future sale by one
party and the purchase by the other party of a certain amount of a specific debt
security at a specified price, date, time and place. The Fund may enter into
interest rate futures contracts in order to protect against the adverse effect
of changing interest rates on its portfolio securities or those to be purchased
by the Fund.

      The Fund may purchase and sell call and put options on interest rate
futures contracts that are traded on a United States exchange or board of trade.
Unlike the direct investment in a futures contract, an option on an interest
rate futures contract gives the purchaser the right, in return for the premium
paid, to assume a position in an interest rate futures contract at a specified
exercise price at any time prior to the expiration date of the option. Upon
exercise of an option, the delivery of the futures position by the writer of the
option to the holder of the option will be accompanied by delivery of the
accumulated balance in the writer's futures margin account, which represents the
amount by which the market price of the futures contract exceeds, in the case of
a call, or is less than, in the case of a put, the exercise price of the option
on the futures contract. The potential loss related to the purchase of an option
on interest rate futures contracts is limited to the premium paid for the option
(plus transaction costs). The value of the option may change daily and that
change would be reflected in the net asset value of the Fund. The Fund may
purchase options on interest rate futures contracts to hedge its portfolio
securities against the risk of adverse changes in interest rates. The Fund will
sell options on interest rate futures contracts as part of closing purchase
transactions to terminate its options positions.

      The Fund anticipates utilizing municipal bond index futures to protect
against changes in the market value of the Municipal Obligations in its
portfolio or that it intends to acquire. Municipal bond index futures contracts
are based on an index of long-term Municipal Obligations. The index assigns
relative values to the Municipal Obligations included in the index, and
fluctuates with changes in the market value of the Municipal Obligations. The
contract is an agreement pursuant to which two parties agree to take or make
delivery of an amount of cash based upon the difference between the value of the
index at the close of the last trading day of the contract and 


                                                                              13
<PAGE>

--------------------------------------------------------------------------------
Investment Objective and Policies (continued)
--------------------------------------------------------------------------------

the price at which the index contract was originally written. The acquisition or
sale of a municipal bond index futures contract enables the Fund to protect its
assets from fluctuations in the value of tax-exempt securities without actually
buying or selling the securities. The Fund may purchase and sell put and call
options on municipal bond indexes and municipal bond index futures and enter
into closing transactions with respect to those options.

      Lending Portfolio Securities. The Fund is authorized to lend securities it
holds to brokers, dealers and other financial organizations, but it will not
lend securities to any affiliate of MMC unless the Fund applies for and receives
specific authority to do so from the SEC. Loans of the Fund's securities, if and
when made, may not exceed 33 1/3% of the Fund's assets taken at value. The
Fund's loans of securities will be collateralized by cash, letters of credit or
U.S. Government securities that will be maintained at all times in a segregated
account with the Fund's custodian in an amount at least equal to 100% of the
current market value of the loaned securities.

      Repurchase Agreements. The Fund may enter into repurchase agreement
transactions with member banks of the Federal Reserve System or with certain
dealers listed on the Federal Reserve Bank of New York's list of reporting
dealers. A repurchase agreement is a contract under which the buyer of a
security simultaneously commits to resell the security to the seller at an
agreed-upon price on an agreed-upon date. Under the terms of a typical
repurchase agreement, the Fund would acquire an underlying debt obligation for a
relatively short period (usually not more than seven days) subject to an
obligation of the seller to repurchase, and the Fund to resell, the obligation
at an agreed-upon price and time, thereby determining the yield during the
Fund's holding period. This arrangement results in a fixed rate of return that
is not subject to market fluctuations during the Fund's holding period. Under
each repurchase agreement, the selling institution will be required to maintain
the value of the securities subject to the repurchase agreement at not less than
their repurchase price.

      RISK FACTORS AND SPECIAL CONSIDERATIONS

      Even though interest-bearing securities, like Municipal Obligations, are
investments that promise payments of income, their prices are inversely affected
by changes in interest rates and, therefore, are subject to the risk of market
price fluctuations. The values of Municipal Obligations with longer remaining
maturities typically fluctuate more than those of similarly rated Municipal
Obligations with shorter remaining maturities. The values of fixed-income
securities may also be affected by changes in the credit rating or financial
condition of the issuing entities.

      Although they may offer higher current yields than do higher-rated
securities, low-rated and unrated securities generally involve greater
volatility of price and risk of principal and income, including the possibility
of default by, or bankruptcy of, the issuers of the securities; the Fund may
incur additional expenses to the extent it is 


14
<PAGE>

--------------------------------------------------------------------------------
Investment Objective and Policies (continued)
--------------------------------------------------------------------------------

required to seek recovery upon a default in the payment of principal or interest
on its portfolio holdings.

      Municipal leases in which the Fund may invest have special risks not
normally associated with Municipal Obligations. These obligations frequently
contain "non-appropriation" clauses that provide that the governmental issuer of
the obligation has no obligation to make future payments under the lease or
contract unless money is appropriated for that purpose by the legislative body
on a yearly or other periodic basis. Moreover, although a municipal lease will
be secured by financed equipment, the disposition of the equipment in the event
of foreclosure might prove difficult.

      The sale of securities that are not traded publicly is typically
restricted under the Federal securities laws. As a result, the Fund may be
forced to sell these securities at less than fair market value or may not be
able to sell them when MMC believes it desirable to do so.

      The Fund's investments in illiquid securities are subject to the risk that
should the Fund desire to sell any of these securities when a ready buyer is not
available at a price the Fund deems representative of their value, the value of
the Fund's net assets could be adversely affected.

      The purchase of securities on a when-issued or delayed-delivery basis
involves the risk that, as a result of an increase in yields available in the
marketplace, the value of the securities purchased will decline prior to the
settlement date. The sale of securities for delayed delivery involves the risk
that the prices available in the market on the delivery date may be greater than
those obtained in the sale transaction.

   
      The risks associated with lending portfolio securities, as with other
extensions of credit, consist of possible loss should the borrower fail
financially.
    

      There are several risks in connection with the use of futures contracts
and options on futures contracts as a hedging device. A decision of whether,
when and how to hedge involves the exercise of skill and judgment, and even a
well-conceived hedge may be unsuccessful to some degree because of market
behavior or unexpected trends in interest rates. There can be no assurance that
there will be a correlation between price movements in the securities underlying
the futures or options thereon, on the one hand, and price movements in the
Fund's portfolio securities which are the subject of the hedge, on the other
hand. In addition, the Fund's transactions in futures contracts or put or call
options on them will be based upon predictions as to anticipated interest rate
trends, which could prove to be inaccurate. The potential loss related to the
purchase of an option on a futures contract is limited to the premium paid for
the option. Positions in futures contracts and options on futures contracts may
be closed out only on the exchange or board of trade on which they were entered
into, and there can be no assurance that an active market will exist or be
maintained or that closing transactions can be effected. Losses incurred in
hedging transactions and the costs of these transactions will affect the Fund's
performance.


                                                                              15
<PAGE>

--------------------------------------------------------------------------------
Investment Objective and Policies (continued)
--------------------------------------------------------------------------------

      INVESTMENT RESTRICTIONS

      The Fund has adopted certain fundamental investment restrictions that may
not be changed without the prior approval of the holders of a majority of the
Fund's outstanding voting securities. A "majority of the Fund's outstanding
voting securities" for this purpose means the lesser of (a) 67% or more of the
shares of the Fund's Common Stock present at a meeting of shareholders, if the
holders of 50% of the outstanding shares are present or represented by proxy at
the meeting or (b) more than 50% of the outstanding shares. Among the investment
restrictions applicable to the Fund is that the Fund is prohibited from
borrowing money, except for temporary or emergency purposes, or for clearance of
transactions, in amounts exceeding 15% of its total assets (not including the
amount borrowed) and as otherwise described in this Prospectus. When the Fund's
borrowings exceed 5% of the value of its total assets, the Fund will not make
any additional investments. In addition, the Fund will not invest more than 25%
of its total assets in the securities of issuers in any single industry, except
that this limitation will not be applicable to the purchase of Municipal
Obligations and U.S. government securities. For purposes of this restriction,
industrial development bonds ("IDBs"), with respect to which the payment of
principal and interest is the ultimate responsibility of companies within the
same industry, are grouped together as an "industry." For a complete listing of
the investment restrictions applicable to the Fund, see "Investment
Restrictions" in the SAI.


16
<PAGE>

--------------------------------------------------------------------------------
Share Price Data
--------------------------------------------------------------------------------

      The Fund's Common Stock is listed on the NYSE under the symbol "MHF."
Smith Barney also intends to make a market in the Common Stock.

      The following table sets forth the high and low sales prices for the
Fund's Common Stock, the net asset value per share and the discount or premium
to net asset value represented by the quotation for each quarterly period for
the two most recent fiscal years.

   
                       Quarterly High Price           Quarterly Low Price
                       --------------------           -------------------
                                       Premium                         Premium
                 Net Asset   NYSE     (Discount)  Net Asset  NYSE     (Discount)
                   Value     Price      to NAV      Value    Price     to NAV
================================================================================
1/31/98             9.92    10.2500      3.33%      9.75     9.1875    (5.77%)
10/31/97            9.76    10.0625      3.10%      9.76     9.3750    (3.94%)
7/31/97             9.71    10.0000      2.99%      9.71     9.1250    (6.02%)
4/30/97             9.64     9.5000     (1.45%)     9.47     9.1250    (3.64%)
1/31/97             9.61     9.5000     (1.14%)     9.52     9.0000    (5.46%)
10/31/96            9.54     9.0000     (5.66%)     9.40     8.7500    (6.92%)
7/31/96             9.42     9.0000     (4.46%)     9.31     8.5000    (8.70%)
4/31/96             9.64     9.0000     (6.64%)     9.36     8.6250    (7.85%)
1/31/96             9.63     9.0000     (6.54%)     9.52     8.3750   (12.03%)
================================================================================

      As of January 30, 1998, the price per share of Common Stock as quoted on
the NYSE was $10.125, representing a 2.48% premium from the Common Stock's net
asset value calculated on that day.

      Since the Fund's commencement of operations, the Fund's Common Stock has
traded in the market at prices that were generally below net asset value.
    

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

      BOARD OF DIRECTORS

   
      Overall responsibility for management and supervision of the Fund rests
with the Fund's Board of Directors. The Board of Directors approves all
significant agreements between the Fund and the companies that furnish services
to the Fund, including agreements with the Fund's investment adviser,
administrator, custodian and transfer agent. The day-to-day operations of the
Fund are delegated to MMC. The SAI contains background information regarding
each Director and executive officer of the Fund.
    


                                                                              17
<PAGE>

--------------------------------------------------------------------------------
Management of the Fund (continued)
--------------------------------------------------------------------------------

      INVESTMENT MANAGER AND ADMINISTRATOR

   
      MMC, located at 388 Greenwich Street, New York, New York 10013, serves as
the Fund's investment manager. MMC, through its predecessors, has been in the
investment counseling business since 1934 and is a registered investment
adviser. MMC renders investment advice to a wide variety of individual,
institutional and investment company clients that, as of January 31, 1998, had
aggregate assets under management in excess of $94 billion.

      Subject to the supervision and direction of the Fund's Board of Directors,
MMC manages the Fund's portfolio in accordance with the Fund's investment
objective and policies, places orders to purchase and sell securities and
employs professional portfolio managers and securities analysts who provide
research services to the Fund. For its services, MMC is paid a Management Fee at
an annual rate of 0.40% of the value of the Fund's average daily net assets. In
addition, MMC serves as the Fund's administrator and is paid a fee by the Fund
that is computed daily and paid monthly at a rate of 0.20% of the value of its
average daily net assets.
    

      Transactions on behalf of the Fund are allocated to various dealers by MMC
in its best judgment. The primary consideration is prompt and effective
execution of orders at the most favorable price. Subject to that primary
consideration, dealers may be selected for research, statistical or other
services that enable MMC to supplement its own research and analysis with the
views and information of other securities firms. The Fund may utilize Smith
Barney or a Smith Barney-affiliated broker-dealer in connection with a purchase
or sale of securities when MMC believes that the charge for the transaction does
not exceed usual and customary levels. The same standard applies to the use of
Smith Barney in connection with entering into options and futures contracts. The
Fund paid no brokerage commissions in the last fiscal year.

   
Year 2000.  The investment management services provided to 
the Fund by MMC and the services provided to shareholders by Smith 
Barney depend on the smooth functioning 
of their computer systems.  Many computer software systems in use 
today cannot recognize the year 2000, but revert to 1900 or some 
other date, due to the manner in which dates were encoded and 
calculated.  That failure could have a negative impact on the 
Fund's operations, including the handling of securities trades, 
pricing and account services.  MMC and Smith Barney have advised 
the Fund that they have been reviewing all of their computer 
systems and actively working on necessary changes to their systems 
to prepare for the year 2000 and expect that their systems will be 
compliant before that date.  In addition, MMC has been advised by 
the Fund's custodian, transfer agent and accounting service agent 
that they are also in the process of modifying their systems with 
the same goal. There can, however, be no assurance that MMC, Smith 
Barney or any other service provider will be successful, or that 
interaction with other non-complying computer systems will not 
impair Fund services at that time.
    

      PORTFOLIO MANAGEMENT

      Lawrence T. McDermott, a Vice President and Investment Officer of the
Fund, is primarily responsible for the management of the Fund's assets. Mr.
McDermott has served the Fund in this capacity since the Fund commenced
operations in 1988 


18
<PAGE>

--------------------------------------------------------------------------------
Management of the Fund (continued)
--------------------------------------------------------------------------------

and manages the day-to-day operations of the Fund, including making all
investment decisions. Mr. McDermott is a Managing Director of Smith Barney and
is the senior asset manager for a number of investment companies and other
accounts investing in tax-exempt securities. Prior to August 1993, Mr. McDermott
was a Managing Director of Shearson Lehman Advisors.

--------------------------------------------------------------------------------
Dividends and Distributions; Dividend Reinvestment Plan
--------------------------------------------------------------------------------

      The Fund's policy, which may be changed by the Fund's Board of Directors,
is generally to make monthly distributions of substantially all its net
investment income (i.e., income other than net realized capital gains) to the
holders of the Fund's Common Stock. From time to time, when the Fund makes a
substantial capital gains distribution, it may do so in lieu of paying its
regular monthly dividend. Net income of the Fund consists of all interest income
accrued on portfolio assets less all expenses of the Fund. Expenses of the Fund
are accrued each day. Net realized capital gains, if any, will be distributed to
the shareholders at least once a year.

      Under the Fund's Dividend Reinvestment Plan (the "Plan"), a shareholder
whose Common Stock is registered in his or her own name will have all
distributions reinvested automatically by First Data as purchasing agent under
the Plan, unless the shareholder elects to receive cash. Distributions with
respect to shares registered in the name of a broker-dealer or other nominee
(that is, in "street name") will be reinvested by the broker or nominee in
additional shares under the Plan, unless the service is not provided by the
broker or nominee or the shareholder elects to receive distributions in cash.
Investors who own Common Stock registered in street name should consult their
broker-dealers for details regarding reinvestment. All distributions to
shareholders who do not participate in the Plan will be paid by check mailed
directly to the record holder by or under the direction of First Data, as
dividend-paying agent.

      The number of shares of Common Stock distributed to participants in the
Plan in lieu of a cash dividend is determined in the following manner. Whenever
the market price of the Common Stock is equal to or exceeds 98% of net asset
value per share on the date of valuation, participants will be issued shares of
Common Stock valued at the greater of (1) 98% of the net asset value most
recently determined as provided under "Net Asset Value" or (2) 95% of the market
price. To the extent that the Fund issues shares to participants in the Plan at
a discount to net asset value, the interests of remaining shareholders (i.e.,
those who do not participate in the Plan) in the Fund's net assets will be
proportionately diluted.

      If 98% of the net asset value per share of the Common Stock at the time of
valuation exceeds the market price of Common Stock, or if the Fund declares a
dividend or capital gains distribution payable only in cash, First Data will buy


                                                                              19
<PAGE>

--------------------------------------------------------------------------------
Dividends and Distributions; Dividend Reinvestment Plan (continued)
--------------------------------------------------------------------------------

Common Stock in the open market, on the NYSE or elsewhere, for the participants'
accounts. If, following the commencement of the purchases and before First Data
has completed its purchases, the market price exceeds 98% of the net asset value
per share of the Common Stock, First Data will attempt to terminate purchases in
the open market and cause the Fund to issue the remaining portion of the
dividend or distribution by issuing shares at a price equal to 98% of the net
asset value per share. In this case, the number of shares of Common Stock
received by a Plan participant will be based on the weighted average of prices
paid for shares purchased in the open market and the price at which the Fund
issues the remaining shares. To the extent First Data is unable to stop open
market purchases and cause the Fund to issue the remaining shares, the average
per share price paid by First Data may exceed 98% of the net asset value per
share of the Common Stock, resulting in the acquisition of fewer shares of
Common Stock than if the dividend or capital gains distribution had been paid in
Common Stock issued by the Fund at 98% of the net asset value per share. First
Data will begin to purchase Common Stock on the open market as soon as
practicable after the payment date of the dividend or capital gains
distribution, but in no event shall such purchases continue later than 30 days
after that date, except when necessary to comply with applicable provisions of
the Federal securities laws.

      First Data maintains all shareholder accounts in the Plan and furnishes
written confirmations of all transactions in each account, including information
needed by a shareholder for personal and tax records. The automatic reinvestment
of dividends and capital gains distributions will not relieve Plan participants
of any income tax that may be payable on the dividends or capital gains
distributions. Common Stock in the account of each Plan participant will be held
by First Data in uncertificated form in the name of the Plan participant.

      Plan participants are subject to no charge for reinvesting dividends and
capital gains distributions under the Plan. First Data's fees for handling the
reinvestment of dividends and capital gains distributions will be paid by the
Fund. No brokerage charges shall apply with respect to shares of Common Stock
issued directly by the Fund under the Plan. Each Plan participant will, however,
bear a pro-rata share of brokerage commissions incurred with respect to any open
market purchases made under the Plan.

      Experience under the Plan may indicate that changes to it are desirable.
The Fund reserves the right to amend or terminate the Plan as applied to any
dividend or capital gains distribution paid subsequent to written notice of the
change sent to participants at least 30 days before the record date for the
dividend or capital gains distribution. The Plan also may be amended or
terminated by First Data or the Fund on at least 30 days' written notice to Plan
participants. All correspondence concerning the Plan should be directed by mail
to First Data Investor Services Group, Inc., P.O. Box 8030, Boston,
Massachusetts 02266-8030 or by telephone at 1-800-331-1710.


20
<PAGE>

--------------------------------------------------------------------------------
Net Asset Value
--------------------------------------------------------------------------------

      The Fund's net asset value will be calculated as of the close of regular
trading on the NYSE, currently 4:00 p.m. New York time, on the last day on which
the NYSE is open for trading of each week and month. Net asset value is
calculated by dividing the value of the Fund's net assets (the value of its
assets less its liabilities, exclusive of capital stock and surplus) by the
total number of shares of Common Stock outstanding. Investments in U.S.
government securities having a maturity of 60 days or less are valued at
amortized cost. All other securities and assets are taken at fair value as
determined in good faith by or under the direction of the Board of Directors.

      The valuation of the Fund's assets is made by MMC after consultation with
an independent pricing service (the "Service") approved by the Board of
Directors. When, in the judgment of the Service, quoted bid prices for
investments are readily available and are representative of the bid side of the
market, these investments are valued at the mean between the quoted bid prices
and asked prices. Investments for which, in the judgment of the Service, no
readily obtainable market quotation is available (which may constitute a
majority of the Fund's portfolio securities), are carried at fair value as
determined by the Service. The Service may use electronic data processing
techniques and/or a matrix system to determine valuations. The procedures of the
Service are reviewed periodically by the officers of the Fund under the general
supervision and responsibility of the Board of Directors, which may replace the
Service at any time if it determines it to be in the best interests of the Fund
to do so.

--------------------------------------------------------------------------------
Taxation
--------------------------------------------------------------------------------

      The following is a summary of the material Federal tax considerations
affecting the Fund and Fund shareholders; please refer to the SAI for further
discussion. In addition to the considerations described below and in the SAI,
there may be other Federal, state, local or foreign tax applications to
consider. Because taxes are a complex matter, prospective shareholders are urged
to consult their tax advisers for more detailed information with respect to the
tax consequences of any investment.

   
      The Fund has qualified and intends to qualify, so long as such
qualification is in the best interests of its shareholders, under Subchapter M
of the Internal Revenue Code (the "Code") for tax treatment as a regulated
investment company. In each taxable year that the Fund qualifies, the Fund will
pay no Federal income tax on its net investment income and long-term capital
gains that are distributed to shareholders. The Fund also intends to satisfy
conditions that will enable it to pay "exempt-interest dividends" to
shareholders. Exempt-interest dividends are generally not subject to regular
Federal income taxes but may be considered taxable for state and local income
(or intangible) tax purposes.
    


                                                                              21
<PAGE>

--------------------------------------------------------------------------------
Taxation (continued)
--------------------------------------------------------------------------------

      Exempt-interest dividends attributable to interest received by the Fund on
certain private activity bonds will be treated as a specific tax preference item
to be included in a shareholder's Federal AMT computation. In addition to the
AMT, corporate shareholders must include 75% of the interest as an adjustment
("the current earnings adjustment") in computing corporate minimum taxable
income. Exempt-interest dividends derived from the interest earned on private
activity bonds will not be exempt from Federal income tax for those shareholders
who are "substantial users" (or persons related to "substantial users") of the
facilities financed by these bonds.

      Shareholders who receive social security or equivalent railroad retirement
benefits should note that exempt-interest dividends are one of the items taken
into consideration in determining the amount of these benefits that may be
subject to Federal income tax.

      The interest expenses incurred by a shareholder on borrowings made to
purchase or carry Fund shares are not deductible for Federal income tax purposes
to the extent related to the exempt-interest dividends received on such shares.

      Dividends paid by the Fund from interest income on taxable investments,
net realized short-term securities gains, and all or a portion of any gains
realized from the sale or other disposition of certain market discount bonds are
subject to Federal income tax as ordinary income.

      Distributions, if any, from net realized long-term securities gains are
taxable as long-term capital gains, regardless of the length of time a
shareholder has owned Fund shares. The recently enacted Taxpayer Relief Act of
1997 provides that net capital gains, for taxpayers other than corporations,
generally will not be subject to Federal income taxes at a rate in excess of 28%
for assets held for more than one year but not more than 18 months, with a
reduced maximum rate of 20% for assets held more than 18 months.

      Shareholders are required to pay tax on all taxable distributions even if
those distributions are automatically reinvested in additional Fund shares. None
of the dividends paid by the Fund will qualify for the corporate dividends
received deduction. The Fund will inform shareholders of the source and tax
status of all distributions, including their eligibility for the reduced maximum
20% capital gains tax rate, promptly after the close of each calendar year.

      The Fund is required to withhold ("backup withholding") 31% of all taxable
dividends, capital gain distributions, and the proceeds of any redemption,
regardless of whether gain or loss is realized upon the redemption, for
shareholders who do not provide the Fund with a correct taxpayer identification
number (social security or employer identification number). Withholding from
taxable dividends and capital gain distributions also is required for
shareholders who otherwise are subject to backup withholding. Any tax withheld
as a result of backup withholding does not constitute an additional tax, and may
be claimed as a credit on the shareholders' Federal income tax return.


22
<PAGE>

--------------------------------------------------------------------------------
Description of Common Stock
--------------------------------------------------------------------------------

                                                                 Amount
                                                               Outstanding
                                                           Exclusive of Shares
                                         Amount Held      Held by Fund for its
                          Amount       by Fund for its         Own Account
      Title of Class    Authorized       Own Account     as of December 17, 1997
================================================================================
          Common        500,000,000           0             71,616,565.375
           Stock          Shares
================================================================================

      No shares of Common Stock, other than those currently outstanding, are
offered for sale pursuant to this Prospectus. All shares of Common Stock are
equal as to earnings, assets, dividends and voting privileges and, when issued,
will be fully paid and non-assessable. Shares of Common Stock are subject to no
conversion, preemptive or other subscription rights. In the event of
liquidation, each share of Common Stock is entitled to its proportion of the
Fund's assets after debts and expenses. Shareholders are entitled to one vote
per share and do not have cumulative voting rights. A majority of the votes cast
at any meeting of shareholders is sufficient to take or authorize action, except
for election of Directors or as otherwise provided in the Fund's Articles of
Incorporation as described under "Certain Provisions of the Articles of
Incorporation."

      Under the rules of the NYSE applicable to listed companies, the Fund will
be required to hold an annual meeting of shareholders in each year. If the
Fund's shares are no longer listed on the NYSE (or any other national securities
exchange the rules of which require annual meetings of shareholders), the Fund
may decide not to hold annual meetings of shareholders. See "Certain Provisions
of the Articles of Incorporation."

      The Fund has no current intention of offering additional shares, except
that additional shares may be issued under the Plan. See "Dividends and
Distributions; Dividend Reinvestment Plan." Other offerings of shares, if made,
will require approval of the Fund's Board of Directors and will be subject to
the requirement of the 1940 Act that shares may not be sold at a price below the
then-current net asset value (exclusive of underwriting discounts and
commissions) except in connection with an offering to existing shareholders or
with the consent of a majority of the Fund's outstanding shares.


                                                                              23
<PAGE>

--------------------------------------------------------------------------------
Certain Provisions of the Articles of Incorporation
--------------------------------------------------------------------------------

      The Fund's Articles of Incorporation include provisions that could have
the effect of limiting the ability of other entities or persons to acquire
control of the Fund or to change the composition of its Board of Directors and
could have the effect of depriving shareholders of an opportunity to sell their
shares at a premium over prevailing market prices by discouraging a third party
from seeking to obtain control of the Fund. The Board of Directors is divided
into three classes, each having a term of three years. At the annual meeting of
shareholders in each year, the term of one class expires. This provision could
delay for up to two years the replacement of a majority of the Board of
Directors. The Articles of Incorporation specify the maximum number of
Directors. A Director may be removed from office or the maximum number of
Directors increased only by vote of the holders of at least 75% of the shares of
the Fund entitled to be voted on the matter.

      The Articles of Incorporation require the favorable vote of the holders of
at least 75% of the shares of the Fund then entitled to be voted to approve,
adopt or authorize the following:

      (i)   merger or consolidation or statutory share exchange of the Fund with
            or into another corporation;

      (ii)  sale of all or substantially all of the Fund's assets (other than in
            the regular course of the Fund's investment activities); or

      (iii) liquidation of the Fund;

unless the action has been approved, adopted or authorized by the affirmative
vote of two-thirds of the total number of Directors fixed in accordance with the
Fund's By-Laws, in which case the affirmative vote of a majority of the
outstanding shares is required. Conversion of the Fund to an open-end investment
company would require an amendment to the Articles of Incorporation. Such an
amendment would require the affirmative vote of the holders of a majority of the
shares entitled to vote on the matter. Such a vote also would satisfy a separate
requirement in the 1940 Act that the change be approved by the shareholders. At
any time, the amendment would have to be declared advisable by the Board of
Directors prior to its submission to shareholders. Shareholders of an open-end
investment company may require the company to redeem their shares at any time
(except in certain circumstances as authorized by or under the 1940 Act) at
their net asset value, less any redemption charges that might be in effect at
the time of a redemption.

      The Board of Directors has determined that the 75% voting requirements
described above, which are greater than the minimum requirements under Maryland
law or the 1940 Act and can only be changed by a similar 75% vote, are in the
best interests of shareholders generally. Reference should be made to the
Articles of Incorporation on file with the SEC for the full text of these
provisions.


24
<PAGE>

--------------------------------------------------------------------------------
Custodian, Transfer Agent, Dividend-Paying Agent, Registrar and Plan Agent
--------------------------------------------------------------------------------

      PNC Bank, located at 17th and Chestnut Streets, Philadelphia, Pennsylvania
19103 acts as custodian of the Fund's investments. First Data, One Exchange
Place, Boston, Massachusetts 02109, acts as the Fund's transfer agent, dividend
paying agent, registrar and as agent under the Plan.

--------------------------------------------------------------------------------
Independent Auditors
--------------------------------------------------------------------------------

      The audited financial statements have been incorporated by reference in
the SAI in reliance upon the report of KPMG Peat Marwick LLP, independent
auditors.

--------------------------------------------------------------------------------
Further Information
--------------------------------------------------------------------------------

      Further information concerning the Common Stock and the Fund may be found
in the Registration Statement, of which this Prospectus and the SAI constitute a
part, on file with the SEC.


                                                                              25
<PAGE>

--------------------------------------------------------------------------------
Appendix
--------------------------------------------------------------------------------

      TYPES OF MUNICIPAL OBLIGATIONS

The Fund may invest in the following types of Municipal Obligations and in such
other types of Municipal Obligations as become available in the market from time
to time.

      MUNICIPAL BONDS

      Municipal bonds are debt obligations issued to obtain funds for various
public purposes. The two principal classifications of municipal bonds are
"general obligation" and "revenue" bonds. General obligation bonds are secured
by the issuer's pledge of its full faith, credit and taxing power for the
payment of principal and interest. Revenue bonds are payable only from the
revenues derived from a particular facility or class of facilities or, in some
cases, from the proceeds of a special excise tax or from another specific
source, such as the user of the facility being financed. Certain municipal bonds
are "moral obligation" issues, which normally are issued by special purpose
public authorities. In the case of such issues, an express or implied "moral
obligation" of a related government unit is pledged to the payment of the debt
service but is usually subject to annual budget appropriations.

      INDUSTRIAL DEVELOPMENT AND PRIVATE ACTIVITY BONDS

      Industrial development bonds ("IDBs") and private activity bonds ("PABs")
are municipal bonds issued by or on behalf of public authorities to finance
various privately operated facilities, such as airports or pollution control
facilities. IDBs and PABs are generally revenue bonds and thus are not payable
from the unrestricted revenue of the issuer. The credit quality of IDBs and PABs
is usually directly related to the credit standing of the user of the facilities
being financed.

      MUNICIPAL LEASE OBLIGATIONS

      Municipal lease obligations are Municipal Obligations that may take the
form of leases, installment purchase contracts or conditional sales contracts,
or certificates of participation with respect to such contracts or leases.
Municipal lease obligations are issued by state and local governments and
authorities to purchase land or various types of equipment and facilities.
Although municipal lease obligations do not constitute general obligations of
the municipality for which the municipality's taxing power is pledged, they
ordinarily are backed by the municipality's covenant to budget for, appropriate
and make the payments due under the lease obligation. The leases underlying
certain Municipal Obligations, however, provide that lease payments are subject
to partial or full abatement if, because of material damage or destruction of
the leased property, there is substantial interference with the lessee's use or
occupancy of such property. This "abatement risk" may be reduced by the
existence of insurance covering the leased property, the maintenance by the
lessee of reserve funds or the provision of credit enhancements such as letters
of credit.


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      The liquidity of municipal lease obligations varies. Certain municipal
lease obligations contain "non-appropriation" clauses which provide that the
municipality has no obligation to make lease or installment purchase payments in
future years unless money is appropriated for such purpose on a yearly basis. In
the case of a "non-appropriation" lease, the Fund's ability to recover under the
lease in the event of non-appropriation or default will be limited solely to the
repossession of the leased property, without recourse to the general credit of
the lessee, and disposition of the property in the event of foreclosure might
prove difficult. The Fund will not invest more than 10% of its assets in such
"non-appropriation" municipal lease obligations. There is no limitation on the
Fund's ability to invest in other municipal lease obligations.

      ZERO COUPON OBLIGATIONS

      The Fund may invest up to 25% of its total assets in zero coupon Municipal
Obligations. Such obligations include "pure zero" obligations, which pay no
interest for their entire life (either because they bear no stated rate of
interest or because their stated rate of interest is not payable until
maturity), and "zero/fixed" obligations, which pay no interest for an initial
period and thereafter pay interest currently. Zero coupon obligations also
include securities representing the principal-only components of Municipal
Obligations from which the interest components have been stripped and sold
separately by the holders of the underlying Municipal Obligations. Zero coupon
securities usually trade at a deep discount from their face or par value and
will be subject to greater fluctuations in market value in response to changing
rates than obligations of comparable maturities that make current distributions
of interest. While zero coupon Municipal Obligations will not contribute to the
cash available to the Fund for purposes of paying dividends to stockholders, MMC
believes that limited investments in such securities may facilitate the Fund's
ability to preserve capital while generating tax-free income through the accrual
of original issue discount. Zero coupon Municipal Obligations generally are
liquid, although such liquidity may be reduced from time to time due to interest
rate volatility and other factors.

      FLOATING-RATE OBLIGATIONS

      The Fund also may purchase floating- and variable-rate municipal notes and
bonds, which frequently permit the holder to demand payment of principal at any
time, or at specified intervals, and permit the issuer to prepay principal, plus
accrued interest, at its discretion after a specified notice period. The
issuer's obligations under the demand feature of such notes and bonds generally
are secured by bank letters of credit or other credit support arrangements.
There frequently will be no secondary market for variable- and floating-rate
obligations held by the Fund, although the Fund may be able to obtain payment of
principal at face value by exercising the demand feature of the obligation.


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      PARTICIPATION INTERESTS

      The Fund may invest in participation interests in municipal bonds,
including IDBs, PABs and floating- and variable-rate securities. A participation
interest gives the Fund an undivided interest in a municipal bond owned by a
bank. The Fund has the right to sell the instrument back to the bank. Such right
is generally backed by the bank's irrevocable letter of credit or guarantee and
permits the Fund to draw on the letter of credit on demand, after specified
notice, for all or any part of the principal amount of the Fund's participation
interest plus accrued interest. Generally, the Fund intends to exercise due
demand under the letters of credit or other guarantees only upon a default under
the terms of the underlying bond, or to maintain the Fund's portfolio in
accordance with its investment objective and policies. The ability of a bank to
fulfill its obligations under a letter of credit or guarantee might be affected
by possible financial difficulties of its borrowers, adverse interest rate or
economic conditions, regulatory limitations or other factors. MMC will monitor
the pricing, quality and liquidity of the participation interests held by the
Fund, and the credit standing of banks issuing letters of credit or guarantees
supporting such participation interests on the basis of published financial
information reports of rating services and bank analytical services.

      CUSTODIAL RECEIPTS

      The Fund may acquire custodial receipts or certificates underwritten by
securities dealers or banks that evidence ownership of future interest payments,
principal payments or both on certain Municipal Obligations. The underwriter of
these certificates or receipts typically purchases Municipal Obligations and
deposits the obligations in an irrevocable trust or custodial account with a
custodian bank, which then issues receipts or certificates that evidence
ownership of the periodic unmatured coupon payments and the final principal
payment on the obligations. Custodial receipts evidencing specific coupon or
principal payments have the same economic attributes as zero coupon Municipal
Obligations described herein. Although under the terms of a custodial receipt
the Fund would be typically authorized to assert its rights directly against the
issuer of the underlying obligation, the Fund could be required to assert
through the custodian bank those rights that may exist against the underlying
issuer. Thus, in the event the underlying issuer fails to pay principal or
interest when due, the Fund may be subject to delays, expenses and risks that
are greater than those that would have been involved if the Fund had purchased a
direct obligation of the issuer. In addition, in the event that the trust or
custodial account in which the underlying security has been deposited is
determined to be an association taxable as a corporation, instead of a
non-taxable entity, the yield on the underlying security would be reduced in
recognition of any taxes paid.


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SMITH BARNEY

      A Member of TravelersGroup[Logo]

Municipal 
High Income 
Fund Inc.

Common Stock

388 Greenwich Street
New York, New York 10013

FD 01257  2/98