As filed with the Securities and Exchange Commission on    December 19, 
1997    
Securities Act File No. 33-54549
Investment Company Act File No. 811-7201

SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
___________
FORM N-2

REGISTRATION STATEMENT UNDER
THE SECURITIES ACT OF 1933 [ X ]
Pre-Effective Amendment No. [    ]
Post-Effective Amendment No. 3    [ X ]    

and/or

REGISTRATION STATEMENT UNDER
THE INVESTMENT COMPANY ACT OF 1940 [ X ]
Amendment No.    5       [ X ]

(check appropriate box or boxes)
___________

GREENWICH STREET CALIFORNIA
MUNICIPAL FUND INC.
(Exact Name of Registrant as Specified in Charter)

388 Greenwich Street, New York, New York 10013
(Address of Principal Executive Offices) (zip code)

Registrant's Telephone Number, including Area Code: (800) 451-2010

Christina T. Sydor, Secretary
Greenwich Street California Municipal Fund Inc.
388 Greenwich Street, 22nd Floor
New York, New York 10013
(Name and Address of Agent for Service of Process)
___________
Copies to:

Jon S. Rand, Esq.
Willkie Farr & Gallagher
One Citicorp Center
153 East 53rd Street
New York, New York 10022


	Approximate Date of Proposed Public Offering:  As soon as practicable after 
the effective date of this Registration Statement.

	If any of the securities being registered on this Form N-2 are to be 
offered on a delayed or continuous basis pursuant to Rule 415 of the 
Securities Act of 1933, as amended (the "1933 Act"), other than securities 
offered only in connection with dividend or interest reinvestment plans, check 
the following box. [ X ]

	It is proposed that this filing will become effective:
	[ X ] when declared effective pursuant to section 8(c).

	This Registration Statement relates to the registration of an 
indeterminate number of shares solely for market-making transactions.  
Pursuant to Rule 429, this Registration Statement relates to shares previously 
registered on Form N-2. (Registration No. 33-54549).

	Registrant amends this Registration Statement under the 1933 Act, on 
such date as may be necessary to delay its effective date until Registrant 
files a further amendment that specifically states that this Registration 
Statement will thereafter become effective in accordance with the provisions 
of Section 8(a) of the 1933 Act, or until the Registration Statement becomes 
effective on such date as the Securities and Exchange Commission, acting 
pursuant to Section 8(a), may determine.



GREENWICH STREET CALIFORNIA MUNICIPAL FUND INC.
Form N-2
Cross-Reference Sheet
Parts A and B of Prospectus*



Items in Parts A and B of Form N-2*

Location





 1.
Outside Front Cover	
Outside Front Cover

 2.
Inside Front and Outside Back Cover 
Page	
Inside Front and Outside Back Cover 
Page

 3.
Fee Table and Synopsis	
Prospectus Summary; Fee Table

 4.
Financial Highlights	
Financial Highlights

 5.
Plan of Distribution	
Outside Front Cover

 6.
Selling Shareholders	
Not Applicable

 7.
Use of Proceeds	
Use of Proceeds; Investment Objective 
and Management Policies

 8.
General Description of Registrant	
The Portfolio; Investment Objective and 
Management Policies; Investment 
Restrictions; Net Asset Value; 
Securities Transactions and Turnover; 
Description of Shares

 9.
Management	
Management of the Portfolio; Custodian, 
Transfer Agent, Dividend-Paying Agent, 
Registrar and Plan Agent

10.
Capital Stock, Long-Term Debt, and 
Other Securities	
Dividends and Distributions; Dividend 
Reinvestment Plan; Description of 
Shares; Taxation

11.
Defaults and Arrears on Senior 
Securities	
Not Applicable

12.
Legal Proceedings	
Not Applicable

13.
Table of Contents of Statement of 
Additional Information	

Not Applicable

14
Cover Page
Not Applicable

15.
Table of Contents
Not Applicable

16.
General Information and  History	
The Portfolio, Investment Objective and 
Management Policies

17.
Investment Objective and Policies
Investment Objective and Management 
Policies; Investment Restrictions; 
Securities Transactions and Turnover

18.
Management
Management of the Portfolio; Custodian, 
Transfer Agent, Dividend-Paying Agent, 
Registrar and Plan Agent

19.
Control Persons and Principal Holders 
of Securities
Description of Shares


* Pursuant to General Instructions of Form N-2, all information required to be 
set forth in 
   Part B: Statement of Additional Information, has been included in Part A:  
The Prospectus.




20.
Investment Advisory and Other Services	
Management of the Portfolio

21.
Brokerage Allocation and Other 
Practices	
Securities Transactions and Turnover

22.
Tax Status	
Dividends and Distributions; Dividend 
Reinvestment Plan; Taxation

23.
Financial Statements	
Experts




<PAGE>
================================================================================

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

                                             SMITH BARNEY

                                                A Member of TravelersGroup[LOGO]

                                             Greenwich 
                                             Street 
                                             California
                                             Municipal 
                                             Fund Inc.

                                             Common Stock

                                             388 Greenwich Street
                                             New York, New York 10013

   
                                             FD0620        12/97
    
<PAGE>

--------------------------------------------------------------------------------
Prospectus                                                     December __, 1997
--------------------------------------------------------------------------------

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

      Greenwich Street California Municipal Fund Inc. (the "Portfolio") is a
non-diversified, closed-end management investment company that seeks as high a
level of current income exempt from federal income tax and California personal
income tax as is consistent with the preservation of principal. Under normal
conditions, the Portfolio, in seeking to achieve its investment objective,
invests its assets primarily in long-term, investment grade obligations issued
by, or on behalf of, the State of California and its political subdivisions,
agencies and instrumentalities or multistate agencies or authorities. There is
no assurance that the Portfolio will achieve its investment objective. The
shares of closed-end investment companies have in the past frequently traded at
discounts from their net asset values. Investors should carefully assess the
risks associated with an investment in the Portfolio. See "Investment Objective
and Management Policies -- Risk Factors and Special Considerations."

   
      This Prospectus sets forth concisely the information about the Portfolio
that a prospective investor ought to know before investing and should be
retained for future reference. Additional information about the Portfolio has
been filed with the Securities and Exchange Commission (the "SEC") and is
available upon written or oral request by calling or writing to the Portfolio at
the telephone number or address set forth above or by contacting a Smith Barney
Financial Consultant.


    
   
      Smith Barney Inc. ("Smith Barney") intends to make a market in the
Portfolio's Common Stock (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 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 
                                                           (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)                                         December __, 1997
--------------------------------------------------------------------------------


    
   
Portfolio on September 23, 1994 in an initial public offering at a price of
$12.00 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 Portfolio will not receive any proceeds from the
sale of any Common Stock offered pursuant to this Prospectus. The Portfolio's
Common Stock has been approved for listing on the American Stock Exchange
("AMEX") under the symbol "GCM."
    

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

      Investors are advised to read this Prospectus and to retain it for future
reference.


2
<PAGE>

--------------------------------------------------------------------------------
Table of Contents
--------------------------------------------------------------------------------

   
Prospectus Summary                                                             4
--------------------------------------------------------------------------------
Portfolio Expenses                                                             8
--------------------------------------------------------------------------------
Financial Highlights                                                           9
--------------------------------------------------------------------------------
The Portfolio                                                                 10
--------------------------------------------------------------------------------
The Offering                                                                  10
--------------------------------------------------------------------------------
Use of Proceeds                                                               10
--------------------------------------------------------------------------------
Investment Objective and Management Policies                                  10
--------------------------------------------------------------------------------
Investment Restrictions                                                       32
--------------------------------------------------------------------------------
Share Price Data                                                              33
--------------------------------------------------------------------------------
Management of the Portfolio                                                   34
--------------------------------------------------------------------------------
Securities Transactions and Turnover                                          37
--------------------------------------------------------------------------------
Dividends and Distributions; Dividend Reinvestment Plan                       38
--------------------------------------------------------------------------------
Net Asset Value                                                               40
--------------------------------------------------------------------------------
Taxation                                                                      41
--------------------------------------------------------------------------------
Description of Shares                                                         46
--------------------------------------------------------------------------------
Certain Provisions of the Articles of Incorporation                           47
--------------------------------------------------------------------------------
Custodian, Transfer Agent, Dividend-Paying Agent,
  Registrar and Plan Agent                                                    49
--------------------------------------------------------------------------------
Reports to Shareholders                                                       49
--------------------------------------------------------------------------------
Experts                                                                       49
--------------------------------------------------------------------------------
Further Information                                                           50
--------------------------------------------------------------------------------
Appendix A                                                                   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, the
information or representations must not be relied upon as having been authorized
by the Portfolio, the Investment Manager or Smith Barney. 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 offered by this Prospectus, 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 the offer or
solicitation would be unlawful. Neither the delivery of this Prospectus nor any
sale made hereunder will, under any circumstances, create any implication that
there has been no change in the affairs of the Portfolio since the date of this
Prospectus. 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 appearing in the body of this Prospectus. Cross references in this
summary are to headings in the body of the Prospectus.

THE PORTFOLIO The Portfolio is a non-diversified, closed-end management
investment company. See "The Portfolio."

INVESTMENT OBJECTIVE The Portfolio seeks as high a level of current income
exempt from federal income tax and California personal income tax as is
consistent with the preservation of principal. See "Investment Objective and
Management Policies."

TAX-EXEMPT INCOME The Portfolio is intended to operate in such a manner that
dividends paid by the Portfolio may be excluded by the Portfolio's shareholders
from their gross incomes for federal income tax and California personal income
tax purposes. See "Investment Objective and Management Policies" and "Taxation."

   
QUALITY OF INVESTMENTS The Portfolio invests substantially all of its assets in
long-term, investment grade obligations issued by state and local governments,
political subdivisions, agencies and public authorities. The Portfolio operates
subject to a fundamental investment policy providing that, under normal
conditions, the Portfolio will invest not less than 80% of its net assets in
municipal obligations and not less than 65% of its net assets in California
obligations. At least 80% of the Portfolio's total assets will be invested in
securities rated investment grade by Moody's Investors Service, Inc.
("Moody's"), Standard & Poor's Rating Group ("S&P"), Fitch Investors Service,
Inc. ("Fitch") or another nationally recognized rating agency (that is, rated no
lower than Baa, MIG or Prime-1 by Moody's, BBB, SP-2 or A-1 by S&P or BBB or F-1
by Fitch). Up to 20% of the Portfolio's total assets may be invested in unrated
securities that are deemed by the Portfolio's investment manager to be of a
quality comparable to investment grade. See "Investment Objective and Management
Policies" and "Appendix A."

THE OFFERING Smith Barney intends to make a market in the Common Stock in
addition to the trading of the Common Stock which occurs on the AMEX. 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 AMEX.

SYMBOL GCM.

   
INVESTMENT MANAGER Smith Barney Mutual Funds Management Inc. ("SBMFM" or the
"Investment Manager") serves as the Portfolio's investment manager. The
Investment Manager provides investment advisory and management services to
investment companies affiliated with Smith Barney. SBMFM is a wholly owned
subsidiary of Salomon Smith Barney Holdings Inc. ("Holdings")
    


4
<PAGE>

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

   
which is, in turn, a wholly owned subsidiary of Travelers Group Inc.
("Travelers"), a diversified financial services holding company engaged, through
its subsidiaries, principally in four business segments: Investments Services,
Consumer Finance Services, Life Insurance Services and Property & Casualty
Insurance Services. Subject to the supervision and direction of the Portfolio's
Board of Directors, the Investment Manager manages the securities held by the
Portfolio in accordance with the Portfolio's stated investment objective and
policies, makes investment decisions for the Portfolio, places orders to
purchase and sell securities on behalf of the Portfolio and employs professional
portfolio managers. SBMFM acts as administrator of the Portfolio and in that
capacity provides certain administrative services, including overseeing the
Portfolio's non-investment operations and its relations with other service
providers and providing executive and other officers to the Portfolio. The
Portfolio pays the Investment Manager a fee (the "Management Fee") for services
provided to the Portfolio that is computed daily and paid monthly at the annual
rate of 0.90% of the value of the Portfolio's average daily net assets. The
Management Fee is higher than the rates paid for similar services by other
publicly offered, closed-end management investment companies that have
investment objectives and policies similar to those of the Portfolio. The
Portfolio will bear other expenses and costs in connection with its operation in
addition to the costs of investment management services. See "Management of the
Portfolio -- Investment Manager."
    

CUSTODIAN PNC Bank, National Association ("PNC Bank") serves as the Portfolio's
custodian. See "Custodian, Transfer Agent, Dividend-Paying Agent, Registrar and
Plan Agent."

   
TRANSFER AGENT, DIVIDEND-PAYING AGENT, REGISTRAR AND PLAN AGENT First Data
Investor Services Group, Inc. ("First Data") serves as the Portfolio's transfer
agent, dividend-paying agent and registrar. See "Custodian, Transfer Agent,
Dividend-Paying Agent, Registrar and Plan Agent."

DIVIDENDS AND DISTRIBUTIONS Dividends from net investment income (that is,
income other than net realized capital gains) are generally paid monthly and
distributions of net realized capital gains, if any, are paid annually. All
dividends or distributions with respect to shares of Common Stock are reinvested
automatically in additional shares through participation in the Portfolio's
Dividend Reinvestment Plan, unless a shareholder elects to receive cash. When
the market price of the Common Stock is equal to or exceeds net asset value,
participants in the Portfolio's Dividend Reinvestment Plan will receive
distributions through issuance of additional shares of Common Stock valued at
the greater of net asset value or 95% of the market price. If the market price
is less than net asset value, participants will receive distributions of shares
purchased at the market price. See "Dividends and Distributions; Dividend
Reinvestment Plan."
    


                                                                               5
<PAGE>

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

RISK FACTORS AND SPECIAL CONSIDERATIONS The Portfolio is a closed-end investment
company. The net asset value of the Common Stock will change with changes in the
value of the securities held by the Portfolio. Because the Portfolio invests
primarily in fixed-income securities, the net asset value of the Common Stock
can be expected to change as levels of interest rates fluctuate; generally, when
prevailing interest rates increase, the value of fixed-income securities held by
the Portfolio can be expected to decrease and when prevailing interest rates
decrease, the value of the fixed-income securities held by the Portfolio can be
expected to increase. The value of the fixed-income securities held by the
Portfolio, and thus the Portfolio's net asset value, may also be affected by
other economic, market and credit factors. The net asset value of the Portfolio
may be subject to greater fluctuation to the extent that the Portfolio invests
in zero coupon securities. See "Investment Objective and Management Policies --
Risk Factors and Special Considerations."

   
      The Portfolio does not purchase securities that are rated lower than Baa
by Moody's, BBB by S&P or BBB by Fitch at the time of purchase. Although
obligations rated Baa by Moody's, BBB by S&P or BBB by Fitch are considered to
be investment grade, they may be subject to greater risks than higher rated
investment grade securities. Obligations rated Baa by Moody's, for example, are
considered medium grade obligations that lack outstanding investment
characteristics and have speculative characteristics as well; obligations rated
BBB by S&P are regarded as having an adequate capacity to pay principal and
interest, and obligations rated BBB by Fitch are deemed to be subject to an
increased likelihood that their rating will fall below investment grade than
higher rated bonds. See "Investment Objective and Management Policies -- Quality
Standards" and "Investment Objective and Management Policies --Risk Factors and
Special Considerations."
    

      The Portfolio may invest up to 20% of its total assets in unrated
securities that the Investment Manager determines to be of comparable quality to
the securities rated investment grade in which the Portfolio may invest. Dealers
may not maintain daily markets in unrated securities and retail secondary
markets for many of them may not exist; this lack of markets may affect the
Portfolio's ability to sell these securities when the Investment Manager deems
it appropriate. The Portfolio has the right to invest without limitation in
state and local 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. Thus, the Portfolio may not be a suitable investment
for investors who are subject to the alternative minimum tax. See "Investment
Objective and Management Policies" and "Taxation."

   
      Certain of the instruments held by the Portfolio and certain of the
investment techniques that the Portfolio employs (which may include instruments
and techniques commonly referred to as "derivatives") might expose the Portfolio
to special risks. The instruments presenting the Portfolio with such risks are
municipal leases,
    


6
<PAGE>

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

zero coupon securities, custodial receipts, municipal obligation components,
floating and variable rate demand notes and bonds, and participation interests.
Entering into securities transactions on a when-issued or delayed delivery
basis, entering into repurchase agreements, lending portfolio securities, and
engaging in financial futures and options transactions, are investment
techniques involving risks to the Portfolio. As a non-diversified fund within
the meaning of the Investment Company Act of 1940, as amended (the "1940 Act"),
the Portfolio may invest a greater proportion of its assets in the obligations
of a smaller number of issuers and, as a result, may be subject to greater risk
than a diversified fund with respect to its holdings of securities. See
"Investment Objective and Management Policies -- Types of Municipal Obligations
Held by the Portfolio," "Investment Objective and Management Policies --
Investment Techniques" and "Investment Objective and Management Policies -- Risk
Factors and Special Considerations."

   
      The Portfolio's concentration in California obligations involves certain
additional risks that should be considered carefully by investors. Certain
California constitutional amendments, legislative measures, executive orders,
administrative regulations, court decisions and voter initiatives could result
in certain adverse consequences affecting California obligations. In particular,
there are risks resulting from certain amendments to the California Constitution
and other statutes that limit the taxing and spending authority of California
governmental entities, and these may have the effect of impairing the ability of
certain issuers of California obligations to pay principal and interest on their
obligations. See "Investment Objective and Management Policies -- Risk Factors
and Special Considerations" and "Taxation."
    

      The Portfolio'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 Portfolio and of depriving shareholders of an opportunity to sell
their shares of Common Stock at a premium over prevailing market prices. See
"Certain Provisions of the Articles of Incorporation."

      The following tables are intended to assist investors in understanding the
various costs and expenses directly or indirectly associated with investing in
the Portfolio.

   
Greenwich Street California Municipal Fund Inc.
--------------------------------------------------------------------------------
   Annual Expenses
      (as a percentage of net assets attributable to Common Stock)
      Management Fees                                                      0.90%
      Other Expenses*                                                      0.31
--------------------------------------------------------------------------------
      TOTAL ANNUAL OPERATING EXPENSES*                                     1.21%
================================================================================
*     "Other Expenses," as shown above, is based upon amounts of expenses for
      the fiscal year ended August 31, 1997.
    


                                                                               7
<PAGE>

--------------------------------------------------------------------------------
Portfolio Expenses
--------------------------------------------------------------------------------

      EXAMPLE

      The following example demonstrates the projected dollar amount of total
cumulative expenses that would be incurred over various periods with respect to
a hypothetical investment in the Portfolio. These amounts are based upon payment
by the Portfolio of operating expenses at the levels set forth in the table
above.

      An investor would pay the following expenses on a $1,000 investment,
assuming (1) a 5% annual return and (2) reinvestment of all dividends and
distributions at net asset value:

   
                                    1 year      3 years     5 years    10 years
--------------------------------------------------------------------------------
                                      $12         $38         $66        $147
    

      This example should not be considered a representation of future expenses
of the Portfolio and actual expenses may be greater or less than those shown.
Moreover, while the example assumes a 5% annual return, the Portfolio's
performance will vary and may result in a return greater or less than 5%. In
addition, while the example assumes reinvestment of all dividends and
distributions at net asset value, participants in the Portfolio's Dividend
Reinvestment Plan may receive shares purchased or issued at a price or value
different from net asset value. See "Dividends and Distributions; Dividend
Reinvestment Plan."


8
<PAGE>

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

   
      The following information for the two-year period ended August 31, 1997
and for the period from September 23, 1994 (commencement of operations) to
August 31, 1995 has been audited in conjunction with the annual audit of the
financial statements of the Portfolio by KPMG Peat Marwick LLP, independent
auditors, whose report thereon appears in the Portfolio's August 31, 1997 Annual
Report to Shareholders. The information set out below should be read in
conjunction with the financial statements and related notes that also appear in
the Portfolio's Annual Report, which is incorporated by reference into this
Prospectus.

For a share of capital stock outstanding throughout each year:
    
   
Greenwich Street California Municipal Fund Inc.   1997       1996    1995(1)(2)
================================================================================

Net Asset Value, Beginning of Year ...........  $ 13.13    $ 12.92    $ 12.00
--------------------------------------------------------------------------------
Income From Investment Operations:
     Net investment income(3) ................     0.62       0.63       0.60
     Net realized and unrealized gain ........     0.87       0.30       0.84
--------------------------------------------------------------------------------
Total Income from Investment Operations ......     1.49       0.93       1.44
--------------------------------------------------------------------------------
Less Distributions From:
     Net investment income ...................    (0.63)     (0.70)     (0.52)
     Net realized gains ......................    (0.33)     (0.02)        --
--------------------------------------------------------------------------------
Total Distributions ..........................    (0.96)     (0.72)     (0.52)
--------------------------------------------------------------------------------
Net Asset Value, End of Year .................  $ 13.66    $ 13.13    $ 12.92
--------------------------------------------------------------------------------
Total Return, Based on Market Value ..........    13.39%     11.92%      0.25%++
--------------------------------------------------------------------------------
Total Return, Based on Net Asset Value .......    12.19%      7.96%     12.24%++
--------------------------------------------------------------------------------
Net Assets, End of Period (000s) .............  $49,985    $48,030    $47,250
--------------------------------------------------------------------------------
Ratios to Average Net Assets:
     Expenses(3) .............................     1.21%      1.15%      1.02%+
     Net investment income ...................     4.64       4.75       5.16+
--------------------------------------------------------------------------------
Portfolio Turnover Rate ......................       28%        42%         7%
--------------------------------------------------------------------------------
Market Price at End of Period ................  $ 12.75    $ 12.25    $ 11.50
================================================================================
    

(1)   Based on weighted average shares outstanding for period.
(2)   For the period from September 23, 1994 (commencement of operations) to
      August 31, 1995.
(3)   The Investment Manager waived a portion of its fees for the period from
      September 23, 1994 to August 31, 1995. If such fees were not waived, the
      per share decrease in net investment income would have been $0.01, and the
      ratio of expenses to average net assets would have been 1.14%, annualized.
+     Annualized.
++    Total return is not annualized as it may not be representative of the
      total return for the period.


                                                                               9
<PAGE>

--------------------------------------------------------------------------------
The Portfolio
--------------------------------------------------------------------------------

   
      The Portfolio is a non-diversified, closed-end management investment
company that seeks as high a level of current income exempt from federal income
tax and California personal income taxes as is consistent with the preservation
of principal. The Portfolio, which was incorporated under the laws of the State
of Maryland on July 8, 1994, is registered under the 1940 Act, and has its
principal office at 388 Greenwich Street, New York, New York 10013. The
Portfolio'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 Portfolio will not receive any proceeds from the sale of the Common
Stock offered pursuant to this Prospectus. Proceeds received by Smith Barney as
a result of its market-making in the Common Stock will be utilized by Smith
Barney in connection with its secondary market operations and for general
corporate purposes.

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

      Set out below is a description of the investment objective and principal
investment policies of the Portfolio. No assurance can be given that the
Portfolio will be able to achieve its investment objective, which may be changed
only with the approval of a majority of the Portfolio's outstanding voting
securities as defined in the 1940 Act, which is defined in the 1940 Act as the
lesser of (1) 67% or more of the shares present at a meeting of the Portfolio,
if the holders of more than 50% of the outstanding shares of the Portfolio are
present or represented by proxy, or (2) more than 50% of the outstanding shares
of the Portfolio.


10
<PAGE>

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

      GENERAL

   
      The Portfolio's investment objective is to seek as high a level of current
income exempt from federal income tax and California personal income taxes as is
consistent with the preservation of principal. In seeking its objective, the
Portfolio invests primarily in investment grade debt obligations issued by, or
on behalf of, the State of California and its political subdivisions, agencies
and instrumentalities or multistate agencies or authorities, the interest from
which is, in the opinion of bond counsel to the issuers, excluded from gross
income for the purposes of federal income tax as well as California personal
income tax. The Portfolio operates subject to a fundamental investment policy
providing that, under normal conditions, the Portfolio will invest not less than
80% of its net assets in municipal obligations the interest on which is exempt
from federal income tax (other than the alternative minimum tax) ("Municipal
Obligations") and not less than 65% of its net assets in Municipal Obligations
the interest on which is also exempt from California personal income tax in the
opinion of bond counsel to the issuers ("California obligations"). The Portfolio
generally invests in long-term Municipal Obligations; under normal market
conditions, the weighted average maturity of the Portfolio's securities is
generally in excess of 20 years.

      The Portfolio is classified as a non-diversified fund under the 1940 Act,
which means that the Portfolio is not limited by the 1940 Act in the proportion
of its assets that it may invest in the obligations of a single issuer. The
Portfolio conducts its operations, however, so as to qualify as a "regulated
investment company" for purposes of the Internal Revenue Code of 1986, as
amended (the "Code"), which relieves the Portfolio of any liability for federal
income tax to the extent that its earnings are distributed to shareholders. To
qualify as a regulated investment company, the Portfolio, among other things,
limits its investments so that, at the close of each quarter of its taxable year
(1) not more than 25% of the market value of the Portfolio's total assets will
be invested in the securities of a single issuer and (2) with respect to 50% of
the market value of its total assets, not more than 5% of the market value of
its total assets will be invested in the securities of a single issuer. See
"Taxation."
    

      The Portfolio generally does not invest more than 25% of its total assets
in any industry. Governmental issuers of Municipal Obligations are not
considered part of any "industry." Municipal Obligations backed only by the
assets and revenues of non-governmental users may be deemed to be issued by the
non-governmental users, and would be subject to the Portfolio's 25% industry
limitation.

      The Portfolio may invest more than 25% of its total assets in a broad
segment of the Municipal Obligations market, such as revenue obligations of
hospitals and other health care facilities, housing agency revenue obligations,
or airport revenue obligations, if the Investment Manager determines that the
yields available from 


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Investment Objective and Management Policies (continued)
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obligations in a particular segment of the market justify the additional risks
associated with a large investment in the segment. Although these Municipal
Obligations could be supported by the credit of governmental users, or by the
credit of non-governmental users engaged in a number of industries, economic,
business, political and other developments generally affecting the revenues of
the users (for example, proposed legislation or pending court decisions
affecting the financing of projects and market factors affecting the demand for
their services or products) may have a general adverse effect on all municipal
securities in such a market segment.

      From time to time, the Portfolio's investments include securities as to
which the Portfolio, by itself or together with other funds or accounts managed
by the Investment Manager, holds a major portion or all of an issue of Municipal
Obligations. Because relatively few potential purchasers may by available for
these investments and, in some cases, contractual restrictions may apply on
resales, the Portfolio may find it more difficult to sell these securities at a
time when the Investment Manager believes it is advisable to do so.

      MUNICIPAL OBLIGATIONS

      Municipal Obligations are classified as general obligation bonds, revenue
bonds and notes. 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 from the revenue derived from a particular
facility or class of facilities or, in some cases, from the proceeds of a
special excise or other specific revenue source, but not from the general taxing
power. Notes are short-term obligations of issuing municipalities or agencies
and are sold in anticipation of a bond sale, collection of taxes or receipt of
other revenues. Municipal Obligations bear fixed, floating and variable rates of
interest, and variations exist in the security of Municipal Obligations, both
within a particular classification and between classifications.

      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 Obligation markets, 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. See "Risk
Factors and Special Considerations--Municipal Obligations."

      Issuers of Municipal Obligations may be subject to the provisions of
bankruptcy, insolvency and other laws, such as the Federal Bankruptcy Reform Act
of 1978, affecting the rights and remedies of creditors. 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,


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Investment Objective and Management Policies (continued)
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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.

      QUALITY STANDARDS

      The Portfolio typically purchases Municipal Obligations if the Investment
Manager believes that the yield of the obligation is sufficiently attractive in
light of the risks of ownership of the obligation. In determining whether the
Portfolio should invest in particular Municipal Obligations, the Investment
Manager will consider factors such as: the price, coupon and yield to maturity
of the obligations; the Investment Manager's assessment of the credit quality of
the issuer of the obligations; the issuer's available cash flow and the related
coverage ratios; the property, if any, securing the obligations; and the terms
of the obligations, including subordination, default, sinking fund and early
redemption provisions. The Investment Manager will also review the ratings, if
any, assigned to the securities by Moody's, S&P, Fitch or another nationally
recognized rating agency.

      The Portfolio will invest at least 80% of its total assets in Municipal
Obligations rated investment grade, that is, rated no lower than Baa, MIG 3 or
Prime-1 by Moody's, BBB, SP-2 or A-1 by S&P or BBB or F-1 by Fitch. Up to 20% of
the Portfolio's total assets may be invested in unrated securities that are
deemed by the Investment Manager to be of a quality comparable to investment
grade. The Portfolio will not invest in Municipal Obligations that are rated
lower than Baa by Moody's, BBB by S&P or BBB by Fitch, at the time of purchase.
Although Municipal Obligations rated Baa by Moody's, BBB by S& P or BBB by Fitch
are considered to be investment grade, they may be subject to greater risks than
other higher rated investment grade securities. Municipal Obligations rated Baa
by Moody's, for example, are considered medium grade obligations that lack
outstanding investment characteristics and have speculative characteristics as
well. Municipal Obligations rated BBB by S&P are regarded as having an adequate
capacity to pay principal and interest. Municipal Obligations rated BBB by Fitch
are deemed to be subject to a higher likelihood that their rating will fall
below investment grade than higher rated bonds.

      The ratings of agencies such as Moody's, S&P and Fitch represent their
opinions as to the quality of the Municipal Obligations that they undertake to
rate; the ratings are relative and subjective and are not absolute standards of
quality. The Investment Manager's judgment as to the credit quality of a
Municipal Obligation, thus, may differ from that suggested by the ratings
published by a rating service. A description of Moody's, S&P and Fitch ratings
relevant to the Portfolio's investments is included as Appendix A to this
Prospectus. The policies of the Portfolio described above as to ratings of
investments will apply only at the time of 


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Investment Objective and Management Policies (continued)
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the purchase of a security, and the Portfolio will not be required to dispose of
a security in the event Moody's, S&P or Fitch downgrades its assessment of the
credit characteristics of the security's issuer.

      PRIVATE ACTIVITY BONDS

      The Portfolio may invest without limit in Municipal Obligations that are
tax-exempt "private activity bonds," as defined in the Code, which are in most
cases revenue bonds. Private activity bonds generally do not carry the pledge of
the credit of the issuing municipality, but are guaranteed by the corporate
entity on whose behalf they are issued. Interest income on certain types of
private activity bonds issued after August 7, 1986 to finance non-governmental
activities is a specific tax preference item for purposes of the federal
individual and corporate alternative minimum taxes. Individual and corporate
shareholders may be subject to a federal alternative minimum tax to the extent
that the Portfolio's dividends are derived from interest on these bonds.
Dividends derived from interest income on Municipal Obligations are a "current
earnings" adjustment item for purposes of the federal corporate alternative
minimum tax. See "Taxation." Private activity bonds held by the Portfolio will
be included in the term Municipal Obligations for purposes of determining
compliance with the Portfolio's policy of investing at least 80% of its total
assets in Municipal Obligations.

      TYPES OF MUNICIPAL OBLIGATIONS HELD BY THE PORTFOLIO

      Municipal Leases. Among the Municipal Obligations in which the Portfolio
may invest are municipal leases, which may take the form of a lease or an
installment purchase or conditional sales contract to acquire a wide variety of
equipment and facilities. Interest payments on qualifying municipal leases are
exempt from federal income taxes and state income taxes within the state of
issuance. The Portfolio may invest in municipal leases containing
"non-appropriation" clauses that provide that the governmental issuer has no
obligation to make future payments under the lease or contract unless money is
appropriated for the purpose by the applicable legislative body on a yearly or
other periodic basis.

      Municipal leases that the Portfolio may acquire will be both rated and
unrated. Rated leases that may be held by the Portfolio include those rated
investment grade at the time of investment (that is, rated no lower than Baa by
Moody's, BBB by S&P or BBB by Fitch). The Portfolio may acquire unrated issues
that the Investment Manager deems to be comparable in quality to rated issues in
which the Portfolio is authorized to invest. A determination by the Investment
Manager that an unrated lease obligation is comparable in quality to a rated
lease obligation will be made on the basis of, among other things, a
consideration of whether the nature of the leased equipment or other property is
such that its ownership or use is reasonably essential to a governmental
function of the issuing municipality. In 


14
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Investment Objective and Management Policies (continued)
--------------------------------------------------------------------------------

addition, all such determinations made by the Investment Manager will be subject
to oversight and approval by the Portfolio's Board of Directors.

      Municipal leases held by the Portfolio are considered illiquid securities
unless the Portfolio's Board of Directors determines on an ongoing basis that
the leases are readily marketable. An unrated municipal lease with a
non-appropriation risk that is backed by an irrevocable bank letter of credit or
an insurance policy issued by a bank or insurer deemed by the Investment Manager
to be of high quality and minimal credit risk will not be deemed to be illiquid
solely because the underlying municipal lease is unrated, if the Investment
Manager determines that the lease is readily marketable because it is backed by
the letter of credit or insurance policy.

      Municipal leases are subject to special risks described below under "Risk
Factors and Special Considerations." To limit those risks, the Portfolio will
invest no more than 5% of its total assets in lease obligations that contain
non-appropriation clauses and will only purchase a non-appropriation lease
obligation with respect to which (1) the nature of the leased equipment or other
property is such that its ownership or use is reasonably essential to a
governmental function of the issuing municipality, (2) the lease payments will
begin to amortize the principal balance due at an early date, resulting in an
average life of five years or less for the lease obligation, (3) appropriate
covenants will be obtained from the municipal obligor prohibiting the
substitution or purchase of similar equipment or other property if lease
payments are not appropriated, (4) the lease obligor has maintained good market
acceptability in the past, (5) the investment is of a size that will be
attractive to institutional investors and (6) the underlying leased equipment or
other property has elements of portability and/or use that enhance its
marketability in the event that foreclosure on the underlying equipment or other
property were ever required.

   
      Zero Coupon Securities. The Portfolio may invest its assets in zero coupon
Municipal Obligations. Zero coupon Municipal Obligations are generally divided
into two categories: Pure Zero Obligations, which are those that pay no interest
for their entire term, and Zero/Fixed Obligations, which pay no interest for
some initial period and thereafter pay interest currently. In the case of a Pure
Zero Obligation, the failure to pay interest currently may result from the
obligation's having no stated interest rate, in which case the obligation pays
only principal at maturity and is issued at a discount from its stated principal
amount. A Pure Zero Obligation may, in the alternative, specify a stated
interest rate, but provide that no interest is payable until maturity, in which
case accrued unpaid interest on the obligation may be capitalized as incremental
principal. The value to the investor of a zero coupon Municipal Obligation
consists of the economic accretion either of the difference between the purchase
price and the nominal principal amount (if no interest is stated to accrue) or
of accrued, unpaid interest during the Municipal Obligation's life or payment
deferral period.
    


                                                                              15
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Investment Objective and Management Policies (continued)
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      Custodial Receipts. The Portfolio 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 general
attributes as zero coupon Municipal Obligations described above. Although under
the terms of a custodial receipt, the Portfolio would be typically authorized to
assert its rights directly against the issuer of the underlying obligation, the
Portfolio could be required to assert through the custodian bank those rights as
may exist against the underlying issuer. Thus, in the event the underlying
issuer fails to pay principal and/or interest when due, the Portfolio may be
subject to delays, expenses and risks that are greater than those that would
have been involved if the Portfolio 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.

      Municipal Obligation Components. The Portfolio may invest in Municipal
Obligations, the interest rate on which has been divided by the issuer into two
different and variable components, which together result in a fixed interest
rate. Typically, the first of the components (the "Auction Component") pays an
interest rate that is reset periodically through an auction process, whereas the
second of the components (the "Residual Component") pays a residual interest
rate based on the difference between the total interest paid by the issuer on
the Municipal Obligation and the auction rate paid on the Auction Component. The
Portfolio may purchase both Auction and Residual Components.

      Because the interest rate paid to holders of Residual Components, which
are also sometimes referred to as "inverse floaters," is generally determined by
subtracting the interest rate paid to the holders of Auction Components from a
fixed amount, the interest rate paid to Residual Component holders will decrease
as the Auction Component's rate increases and increase as the Auction
Component's rate decreases. Moreover, the extent of the increases and decreases
in market value of Residual Components may be larger than comparable changes in
the market value of an equal principal amount of a fixed rate Municipal
Obligation having similar credit quality, redemption provisions and maturity.

      Floating and Variable Rate Instruments. The Portfolio may purchase
floating and variable rate demand notes and bonds, which are Municipal
Obligations 


16
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Investment Objective and Management Policies (continued)
--------------------------------------------------------------------------------

normally having a stated maturity in excess of one year, but which permit their
holder to demand payment of principal at any time, or at specified intervals.
The issuer of floating and variable rate demand obligations normally has a
corresponding right, after a given period, to prepay at its discretion the
outstanding principal amount of the obligations plus accrued interest upon a
specified number of days' notice to the holders of the obligations. The interest
rate on a floating rate demand obligation is based on a known lending rate, such
as a bank's prime rate, and is adjusted automatically each time that rate is
adjusted. The interest rate on a variable rate demand obligation is adjusted
automatically at specified intervals. Frequently, floating and variable rate
obligations are secured by letters of credit or other credit support
arrangements provided by banks. Use of letters of credit or other credit support
arrangements will not adversely affect the tax-exempt status of these
obligations. Because they are direct lending arrangements between the lender and
borrower, floating and variable rate obligations will generally not be traded.
In addition, no secondary market generally exists for these obligations,
although their holders may demand their payment at face value. For these
reasons, when floating and variable rate obligations held by the Portfolio are
not secured by letters of credit or other credit support arrangements, the
Portfolio's right to demand payment is dependent on the ability of the borrower
to pay principal and interest on demand. The Investment Manager, on behalf of
the Portfolio, will consider, on an ongoing basis, the creditworthiness of the
issuers of floating and variable rate demand obligations held by the Portfolio.
To the extent the Portfolio holds certain floating and variable rate demand
obligations or Auction Components, the Portfolio may not, under certain market
conditions, be fully achieving its investment objective.

      Participation Interests. The Portfolio may purchase from financial
institutions tax-exempt participation interests in Municipal Obligations. A
participation interest gives the Portfolio an undivided interest in the
Municipal Obligation in the proportion that the Portfolio's participation
interest bears to the total amount of the Municipal Obligation. These
instruments may have floating or variable rates of interest. If the
participation interest is unrated, it will be backed by an irrevocable letter of
credit or guarantee of a bank that the portfolio's Board of Directors has
determined meets certain quality standards or the payment obligation otherwise
will be collateralized by obligations issued or guaranteed by the U.S.
Government or its agencies or instrumentalities ("U.S. Government securities").
The portfolio will have the right, with respect to certain participation
interests, to demand payment, on a specified number of days' notice, for all or
any part of the Portfolio's interest in the Municipal Obligation, plus accrued
interest. The Portfolio intends to exercise its right with respect to these
instruments to demand payment only upon a default under the terms of the
Municipal Obligation or to maintain or improve the quality of the instruments it
holds. In addition, the Portfolio will invest no more than 5% of its total
assets in participation interests.


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Investment Objective and Management Policies (continued)
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      TAXABLE INVESTMENTS

      Under normal conditions, the Portfolio may hold up to 20% of its total
assets in cash or money market instruments, including taxable money market
instruments (collectively, "Taxable Investments"). In addition, the Portfolio
may take a temporary defensive posture and invest without limitation in
short-term Municipal Obligations and Taxable Investments, upon a determination
by the Investment Manager that market conditions warrant such a posture. To the
extent the Portfolio holds Taxable Investments, the Portfolio will not be
pursuing its investment objective.

      Money market instruments in which the Portfolio may invest include: U.S.
Government securities; tax-exempt notes of municipal issuers rated, at the time
of purchase, no lower than MIG 1 by Moody's, SP-1 by S&P or F-1 by Fitch or, if
not rated, by issuers having outstanding, unsecured debt then rated within the
three highest rating categories; bank obligations (including certificates of
deposit, time deposits and bankers' acceptances of domestic banks, domestic
savings and loan associations and similar institutions); commercial paper rated
no lower than P-1 by Moody's, A-1 by S&P or F-1 by Fitch or the equivalent from
another nationally recognized rating agency or, if unrated, of an issuer having
an outstanding, unsecured debt issue then rated within the three highest rating
categories; and repurchase agreements. At no time will the Portfolio's
investments in bank obligations, including time deposits, exceed 25% of the
value of its assets.

   
      U.S. Government securities in which the Portfolio may invest include
direct obligations of the United States and obligations issued by U.S.
Government agencies and instrumentalities. Included among direct obligations of
the United States are Treasury Bills, Treasury Notes and Treasury Bonds, which
differ principally in terms of their maturities. Included among the securities
issued by U.S. Government agencies and instrumentalities are: securities that
are supported by the full faith and credit of the United States (such as
Government National Mortgage Association certificates); securities that are
supported by the right of the issuer to borrow from the U.S. Treasury (such as
securities of Federal Home Loan Banks); and securities that are supported only
by the credit of the instrumentality (such as Federal National Mortgage
Association and Federal Home Loan Mortgage Corporation bonds).
    

      The Portfolio 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
portfolio would acquire an underlying debt obligation for a relatively short
period subject to an obligation of the seller to 


18
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Investment Objective and Management Policies (continued)
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repurchase, and the Portfolio to resell, the obligation at an agreed-upon price
and time, thereby determining the yield during the portfolio's holding period.
This arrangement results in a fixed rate of return that is not subject to market
fluctuations during the Portfolio'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.

      The value of the securities underlying a repurchase agreement of the
Portfolio will be monitored on an ongoing basis by the Investment Manager to
ensure that the value is at least equal at all times to the total amount of the
repurchase obligation, including interest. The Investment Manager will also
monitor, on an ongoing basis to evaluate potential risks, the creditworthiness
of the banks and dealers with which the Portfolio enters into repurchase
agreements.

      INVESTMENT TECHNIQUES

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

   
      When-Issued and Delayed Delivery Securities. The Portfolio may purchase
securities on a when-issued basis, or may purchase or sell securities for
delayed delivery. In when-issued or delayed delivery transactions, delivery of
the securities occurs beyond normal settlement periods, but no payment or
delivery will be made by the Portfolio prior to the actual delivery or payment
by the other party to the transaction. The Portfolio will not accrue income with
respect to a when-issued or delayed delivery security prior to its stated
delivery date. The Portfolio will establish with PNC Bank a segregated account
consisting of cash, debt securities of any grade or equity securities, having a
value equal to or greater than the Portfolio's purchase commitments, provided
such securities have been determined by SBMFM to be liquid and unencumbered, and
are marked to market daily, pursuant to guidelines established by the directors.
Placing securities rather than cash in the segregated account may have a
leveraging effect on the Portfolio's net asset value per share; that is, to the
extent that the Portfolio remains substantially fully invested in securities at
the same time that it has committed to purchase securities on a when-issued or
delayed delivery basis, greater fluctuations in its net asset value per share
may occur than if it had set aside cash to satisfy its purchase commitments.
    

      Stand-By Commitments. The Portfolio may acquire "stand-by commitments"
with respect to Municipal Obligations it holds. Under a stand-by commitment,
which resembles a put option, a broker, dealer or bank is obligated to
repurchase at the Portfolio's option specified securities at a specified price.
Each exercise of a stand-by commitment, therefore, is subject to the ability of
the seller to make payment on demand. The Portfolio will acquire stand-by
commitments solely to facilitate liquidity and does not intend to exercise the
rights afforded by the commitments for trading purposes. The Portfolio
anticipates that stand-by commitments will be 


                                                                              19
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Investment Objective and Management Policies (continued)
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available from brokers, dealers and banks without the payment of any direct or
indirect consideration. The Portfolio may pay for stand-by commitments if
payment is deemed necessary, thus increasing to a degree the cost of the
underlying Municipal Obligation and similarly decreasing the obligation's yield
to investors.

      Financial Futures and Options Transactions. To hedge against a decline in
the value of Municipal Obligations it owns or an increase in the price of
Municipal Obligations it proposes to purchase, the Portfolio may enter into
financial futures contracts and invest in options on financial futures contracts
that are traded on a U.S. exchange or board of trade. The futures contracts or
options on futures contracts that may be entered into by the Portfolio will be
restricted to those that are either based on an index of Municipal Obligations
or relate to debt securities the prices of which are anticipated by the
Investment Manager to correlate with the prices of the Municipal Obligations
owned or to be purchased by the Portfolio.

      In entering into a financial futures contract, the Portfolio will be
required to deposit with the broker through which it undertakes the transaction
an amount of cash or cash equivalents equal to approximately 5% of the contract
amount. This amount, which is known as "initial margin," is subject to change by
the exchange or board of trade on which the contract is traded, and members of
the exchange or board of trade may charge a higher amount. Initial margin is in
the nature of a performance bond or good faith deposit on the contract that is
returned to the Portfolio upon termination of the futures contract, assuming all
contractual obligations have been satisfied. In accordance with a process known
as "marking-to-market," subsequent payments, known as "variation margin," to and
from the broker will be made daily as the price of the index or securities
underlying the futures contract fluctuates, making the long and short positions
in the futures contract more or less valuable. At any time prior to the
expiration of a futures contract, the Portfolio may elect to close the position
by taking an opposite position, which will operate to terminate the Portfolio's
existing position in the contract.

      A financial futures contract provides for the future sale by one party and
the purchase by the other party of a certain amount of a specified property at a
specified price, date, time and place. Unlike the direct investment in a futures
contract, an option on a financial futures contract gives the purchaser the
right, in return for the premium paid, to assume a position in the financial
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 financial futures contracts is
limited to the premium paid for the option (plus transaction costs). The value
of the


20
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Investment Objective and Management Policies (continued)
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option may change daily, and that change would be reflected in the net asset
value of the Portfolio.

      Regulations of the Commodity Futures Trading Commission applicable to the
Portfolio require that its transactions in financial futures contracts and
options on financial futures contracts be engaged in for bona fide hedging
purposes or other permitted purposes, and that no such transactions may be
entered into by the Portfolio if the aggregate initial margin deposits and
premiums paid by the Portfolio exceed 5% of the market value of its assets. In
addition, the Portfolio will, with respect to its purchases of financial futures
contracts, establish a segregated account consisting of cash or cash equivalents
in an amount equal to the total market value of the futures contracts, less the
amount of initial margin on deposit for the contracts. The Portfolio's ability
to trade in financial futures contracts and options on financial futures
contracts may be limited to some extent by the requirements of the Code
applicable to a regulated investment company that are described below under
"Taxation."

   
      Lending Securities. The Portfolio is authorized to lend securities it
holds to brokers, dealers and other financial organizations, but it will not
lend securities to any affiliate of the Investment Manager, including Smith
Barney, unless the Portfolio applies for and receives specific authority to do
so from the SEC. Loans of the Portfolio's securities, if and when made, may not
exceed 3311/43 % of the Portfolio's assets taken at value. The Portfolio'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 PNC Bank in an amount equal to the current market value of the
loaned securities. From time to time, the Portfolio may pay a part of the
interest earned from the investment of collateral received for securities loaned
to the borrower and/or a third party that is unaffiliated with the Portfolio and
that is acting as a "finder."
    

      By lending its securities, the Portfolio can increase its income by
continuing to receive interest on the loaned securities, by investing the cash
collateral in short-term instruments or by obtaining yield in the form of
interest (which is taxable to shareholders as ordinary income) paid by the
borrower when U.S. Government securities are used as collateral. The Portfolio
will adhere to the following conditions whenever it lends its securities: (1)
the Portfolio must receive at least 100% cash collateral or equivalent
securities from the borrower which amount of collateral will be maintained by
daily marking to market; (2) the borrower must increase the collateral whenever
the market value of the securities loaned rises above the level of the
collateral; (3) the Portfolio must able to terminate the loan any time; (4) the
Portfolio must receive reasonable interest on the loan, as well as any
dividends, interest or other distributions on the loaned securities, and any
increase in market value; (5) the Portfolio may pay only reasonable custodian
fees in connection with the loan; and (6) voting rights on the loaned securities
may pass


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Investment Objective and Management Policies (continued)
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to the borrower, except that, if a material event adversely affecting the
investment in the loaned securities occurs, the Portfolio's Board of Directors
must terminate the loan and retain the Portfolio's right to vote the securities.

      RISK FACTORS AND SPECIAL CONSIDERATIONS

      Investment in the Portfolio involves risk factors and special
considerations, such as those described below:

      Municipal Obligations. Substantially all of the Portfolio's total assets
will be invested, under normal market conditions, in Municipal Obligations rated
investment grade at the time of investment. Market rates of interest available
with respect to Municipal Obligations generally may be lower than those
available with respect to taxable securities, although the differences may be
wholly or partially offset by the effects of federal income tax on income
derived from taxable securities. The amount of available information about the
financial condition of issuers of Municipal Obligations may be less extensive
than that for corporate issuers with publicly traded securities, and the market
for Municipal Obligations may be less liquid than the market for corporate debt
obligations. Municipal Obligations in which the Portfolio may invest include
special obligation bonds, lease obligations, participation certificates and
variable rate instruments. The market for these Municipal Obligations may be
less liquid than the market for general obligation Municipal Obligations.
Although the Portfolio's policy is generally to hold Municipal Obligations until
their maturity, the relative illiquidity of some of the Portfolio's securities
may adversely affect the ability of the Portfolio to dispose of the securities
in a timely manner and at a fair price. The market for less liquid securities
tends to be more volatile than the market for more liquid securities and market
values of relatively illiquid securities may be more susceptible to change as a
result of adverse publicity and investor perceptions than are the market values
of more liquid securities. Although the issuer of certain Municipal Obligations
may be obligated to redeem the obligations at face value, redemption could
result in capital losses to the Portfolio to the extent that the Municipal
Obligations were purchased by the Portfolio at a premium to face value.

      Although the Municipal Obligations in which the Portfolio may invest are,
at the time of investment, rated investment grade, municipal securities, like
other debt obligations, are subject to the risk of non-payment by their issuers.
The ability of issuers of Municipal Obligations to make timely payments of
interest and principal may be adversely affected in general economic downturns
and as relative governmental cost burdens are allocated and reallocated among
federal, state and local governmental units. Non-payment by an issuer would
result in a reduction of income to the Portfolio, and could result in a
reduction in the value of the Municipal Obligations experiencing non-payment and
a potential decrease in the net asset value of the Portfolio.


22
<PAGE>

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

      Issuers of Municipal Obligations may from time to time seek protection
under federal bankruptcy laws. In the event of bankruptcy of an issuer of a
Municipal Obligation it holds, the Portfolio could experience delays and
limitations with respect to the collection of principal and interest on the
obligation, and the Portfolio may not, in all circumstances, be able to collect
all principal and interest to which it is entitled. To enforce its rights in the
event of a default in the payment of interest or repayment of principal, or
both, the Portfolio may take possession of and manage the assets securing the
issuer's obligations on the securities, which may increase the Portfolio's
operating expenses and adversely affect the net asset value of the Portfolio.
Any income derived from the Portfolio's ownership or operation of these assets
may not be tax-exempt. In addition, the Portfolio's intention to qualify as a
regulated investment company under the Code may limit the extent to which the
Portfolio may exercise its rights by taking possession of the assets, because as
a regulated investment company the Portfolio is subject to certain limitations
on its investments and on the nature of its income. See "Taxation."

   
      Opinions relating to the validity of Municipal Obligations and to the
exemption of interest on them from federal income taxes and/or California
personal income taxes are rendered by bond counsel to the respective issuers at
the time of issuance. Neither the Portfolio nor the Investment Manager reviews
the procedures relating to the issuance of Municipal Obligations or the basis
for opinions of counsel.

      The Investment Manager values the Portfolio's investments pursuant to
guidelines adopted and periodically reviewed by the Portfolio's Board of
Directors. To the extent that no established retail market exists for some of
the securities in which the Portfolio may invest, trading in the securities may
be relatively inactive and the ability of the Investment Manager to value the
securities accurately may be adversely affected. During periods of reduced
market liquidity and in the absence of readily available market quotations for
Municipal Obligations held by the Portfolio, the responsibility of the
Investment Manager to value the Portfolio's securities will become more
difficult. The Investment Manager's judgment may play a greater role in the
valuation of the Portfolio's securities as a result of the reduced availability
of reliable objective data. To the extent that the Portfolio invests in illiquid
securities and securities that are restricted as to resale, the Portfolio may
incur additional risks and costs. The sale of illiquid securities may be
particularly difficult.
    

      The net asset value of the Common Stock will change when the 4 the
Portfolio's securities changes. Because the Portfolio invests primarily in fixed
income securities, the net asset value of the Common Stock can be expected to
change as levels of interest rates fluctuate; generally, when prevailing
interest rates increase, the value of fixed-income securities held by the
Portfolio can be expected to decrease and when prevailing interest rates
decrease, the value of the fixed-income securities held by the Portfolio can be
expected to increase. The value of 


                                                                              23
<PAGE>

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

the fixed-income securities held by the Portfolio, and thus the Portfolio's net
asset value, may also be affected by other economic, market and credit factors.

      Special Considerations Relating to California Obligations. The Portfolio's
concentration in California obligations involves certain additional risks that
should be considered carefully by investors. Certain California constitutional
amendments, legislative measures, executive orders, administrative regulations,
court decisions and voter initiatives could result in certain adverse
consequences affecting California obligations. In particular, there are risks
resulting from certain amendments to the California Constitution and other
statutes that limit the taxing and spending authority of California governmental
entities, and these may have the effect of impairing the ability of certain
issuers of California obligations to pay principal and interest on their
obligations.

      The following information is a summary of special factors affecting
California obligations. It does not purport to be a complete description and is
based on information from statements relating to securities offerings of
California issuers.

      Beginning in the 1990-91 fiscal year, California (the "State") has faced
the worst economic, fiscal and budget conditions since the 1930s. The State was
adversely affected by the national recession and the cutbacks in aerospace and
defense spending, both of which have had a severe impact on the economy in
Southern California. Job losses were the worst of any post-war recession and
have been estimated to exceed 800,000.

      The recession has seriously affected State tax revenues. It also caused
increased expenditures for health and welfare programs. The State has also faced
a structural imbalance in its budget with the largest programs supported by the
General Fund -- K-12 schools and community colleges, health, welfare and
corrections -- growing at rates higher than the growth rates for the principal
revenue sources of the General Fund. (The General Fund, the State's main
operating fund, consists of revenues which are not required to be credited to
any other fund.) The State experienced recurring budget deficits. The State
Controller reported that expenditures exceeded revenues for four of the six
fiscal years ending with 1992-93, and were essentially equal in 1993-94.
According to the Department of Finance, the State suffered a continuing budget
deficit of approximately $2.8 billion in the Special Fund for Economic
Uncertainties. (Special Funds account for revenues obtained from specific
revenue sources, and which are legally restricted to expenditures for specified
purposes.) The 1993-94 Budget Act incorporated a Deficit Reduction Plan to repay
this deficit over two years. The original budget for 1993-94 reflected revenues
which exceeded expenditures by approximately $2.8 billion. As a result of
continuing recession, the excess of revenues over expenditures for the 1993-94
fiscal year was less than $300 million. The accumulated budget deficit at June
30, 1994 was not able to be retired by June 30, 1995 as planned. When the
economy failed to recover sufficiently in 1993-94, a second two-year plan was
implemented 


24
<PAGE>

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

in 1994-95. The accumulated budget deficits over the past several years,
together with expenditures for school funding which have not been reflected in
the budget, and the reduction of available internal borrowable funds, have
combined to significantly deplete the State's cash resources to pay its ongoing
expenses. In order to meet its cash needs, the State has had to rely for several
years on a series of external borrowings, including borrowings past the end of a
fiscal year. At the end of its 1995-96 fiscal year, however, the State did not
borrow moneys into the subsequent fiscal year.

   
      Many California counties continue to be under severe fiscal stress. Such
stress has impacted smaller, rural counties and larger urban counties such as
Los Angeles, and Orange County, which declared bankruptcy in 1994. Orange County
has implemented significant reductions in services and personnel, and continues
to face fiscal constraints in the aftermath of its bankruptcy.

      By June 30, 1994, the General Fund had an accumulated deficit, on a
budgeted basis, of approximately $2 billion. In addition, the accumulated budget
deficits over the past several years had exhausted the State's available cash
reserves and resources. In July and August, 1994, the State was required to
issue a total of $7 billion of short-term revenue anticipation warrants to fund,
in part, the State's cash flow management needs for the 1994-95 fiscal year. May
1995 reports by the Department of Finance indicated that General Fund revenues
for the 1994-95 Fiscal Year exceeded projections, and expenditures were lower
than projected due to slower than anticipated health/welfare caseload growth and
school enrollments. The overall effect was to improve the budget by
approximately $500 million, leaving an estimated deficit of about $630 million
as of June 30, 1995. The State began the 1995-96 fiscal year with strengthening
revenues based on an improving economy and the smallest nominal "budget gap" to
be closed in many years.

      The 1995-96 Budget Act, signed by the Governor on August 3, 1995, projects
General Fund revenues and transfers of $44.1 billion, about $2.2 billion higher
than projected revenues in 1994-95. The Budget Act projects Special Fund
revenues of $12.7 billion, an increase from $12.1 billion projected in 1994-95.
The Department of Finance released updated projections for the 1995-96 fiscal
year in May, 1996, estimating that revenues and transfers to be $46.1 billion,
approximately $2 billion over the original fiscal year estimate. Expenditures
also increased, to an estimated $45.4 billion, as a result of the requirement to
expend revenues for schools under Proposition 98, and, among other things,
failure of the federal government to budget new aid for illegal immigrant costs
which had been counted on to allow reductions in costs.
    

      The 1996-97 Budget Act was signed by the Governor on July 15, 1996, and
projected General Fund revenues and transfers of approximately $47.64 billion
and General Fund expenditures of approximately $47.25 billion. The Governor
vetoed about $82 million of appropriations (both General Fund and Special Fund)
and the


                                                                              25
<PAGE>

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

State has implemented its regular cash flow borrowing program with the issuance
of $3.0 billion of Revenue Anticipation Notes to mature on or before June 30,
1997. The 1996-97 Budget Act appropriated a budget reserve in the Special Fund
for Economic Uncertainties af $305 million, as of June 30, 1997. The Department
of Finance projects that, on June 30, 1997, the State's available internal
borrowable (cash) resources will be approximately $2.9 billion, after payment of
all obligations due by that date, so that no cross-fiscal year borrowing will be
needed.

      The State Legislature rejected the Governor's proposed 15% cut in personal
income taxes (to be phased over three years), but did approve a 5% cut in bank
and corporation taxes, to be effective for income years starting on June 1,
1997. As a result, revenues for the Fiscal Year will be an estimated $550
million higher than projected in the May Revision to the 1996-97 Budget, and are
now estimated to total $47.643 billion, a 3.3 percent increase over the final
estimated 1995-96 revenues. Special Fund revenues are estimated to be $13.3
billion.

   
      On August 11, 1997, the State Legislature approved a 1997-98 State Budget
of approximately $68 billion which included approximately $32 billion for public
schools, an increase of approximately $4 billion over the prior year. The Budget
also includes approximately $100 million for local law enforcement and
approximately $75 million in spending to subsidize hospitals that care for large
numbers of uninsured patients, as well as approximately $40 million for legal
immigrants and an increase of approximately $223 million in welfare spending,
including job training. The education portion of the State Budget approved by
the Legislature for 1997-98 includes approximately $850 million to expand the
class-size reduction program and full statutory funding of the Revenue Limit
COLA comprising a 2.65% COLA, consistent with the May Revision. Revenue Limit
Equalization is to be funded in the amount of approximately $261 million for the
school district revenue limit equalization for 1996-97 and is thereafter to be
funded commencing in February of 1998. The State Budget also provides that
school districts will be entitled to use their operational funds entitlement up
to an amount of approximately $40,000 for each new eligible classroom, provided
that certain conditions are met.

      The final State Budget was signed by the Governor on August 18, 1997 after
using his line-item veto authority to veto, with reservation until an acceptable
school testing bill is passed, a significant amount of education funding from
the State Budget approved by the Legislature. Vetoes which would be restored if
a testing bill acceptable to the Governor is passed include approximately
$955,000 in Department of Education spending, and approximately $900 million in
local assistance. Vetoes not relating to the testing issue, but which need
legislation in order to restore the vetoed funds, include more than $20 million
in Department of Education spending. The final State Budget also provides
approximately $377 million for child care programs administered by the
Department of Education and the Department of Social Services, approximately
$160 million for welfare-to-work 
    


26
<PAGE>

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

   
programs, approximately $25 million in adult education funding and approximately
$50 million to California community colleges, approximately $100 million to
cities and counties to enhance local law enforcement, approximately $55 million
in federal funds to local government for the construction of detention
facilities and approximately $1.2 billion in deferred general fund contributions
to the Public Employees Retirement System. The final State Budget did not
include the Governor's proposed 10% tax cut for banks and corporations.
    

      The State is subject to an annual appropriations limit imposed by Article
XIIIB of the State Constitution (the "Appropriations Limit"), and is prohibited
from spending "appropriations subject to limitation" in excess of the
Appropriations Limit. Article XIIIB, originally adopted in 1979, was modified
substantially by Propositions 98 and 111 in 1988 and 1990, respectively.
"Appropriations subject to limitation" are authorizations to spend "proceeds of
taxes," which consist of tax revenues and certain other funds, including
proceeds from regulatory licenses, user charges or other fees to the extent that
such proceeds exceed the reasonable cost of providing the regulation, product or
service. The Appropriations Limit is based on the limit for the prior year,
adjusted annually for certain changes, and 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.

      Exempted from the Appropriations Limit are debt service costs of certain
bonds, court or federally mandated costs, and, pursuant to Proposition 111,
qualified capital outlay projects and appropriations or revenues derived from
any increase in gasoline taxes and motor vehicle weight fees above January 1,
1990 levels. Some recent initiatives were structured to create new tax revenues
dedicated to specific uses and expressly exempted from the Article XIIIB limits.
The Appropriations Limit may also be exceeded in cases of emergency arising from
civil disturbance or natural disaster declared by the Governor and approved by
two-thirds of the Legislature. If not so declared and approved, the
Appropriations Limit for the next three years must be reduced by the amount of
the excess.

      Article XIIIB, as amended by Proposition 98 on November 8, 1988, also
establishes a minimum level of state funding for school and community college
districts and requires that excess revenues up to a certain limit be transferred
to schools and community college districts instead of returned to the taxpayers.
Determination of the minimum level of funding is based on several tests set
forth in Proposition 98.

      Because of the complexities of Article XIIIB, the ambiguities and possible
inconsistencies in its terms, the applicability of its exceptions and exemptions
and the impossibility of predicting future appropriations, it is not currently
possible to predict with any confidence the impact of this or related
legislation on the 


                                                                              27
<PAGE>

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

California obligations in the Portfolio. Other Constitutional amendments
affecting state and local taxes and appropriations have been proposed from time
to time. If any such initiatives are adopted, the State could be pressured to
provide additional financial assistance to local governments or appropriate
revenues as mandated by such initiatives. Propositions such as Proposition 98
and others that may be adopted in the future, may place increasing pressure on
the State's budget over future years, potentially reducing resources available
for other State programs, especially to the extent the Article XIIIB spending
limit would restrain the State's ability to fund such other programs by raising
taxes.

   
      "Proposition 218" or the "Right to Vote on Taxes Act" (the "Proposition")
was approved by the California electorate at the November, 1996 general
election. Officially titled "Voter Approval For Local Government Taxes,
Limitation on Fees, Assessments and Charges Initiative Constitutional
Amendment," the Act was approved by a majority of the voters voting at the
election and adds Articles XIIIC and XIIID to the California Constitution.

      The Proposition, among other things, requires local governments to follow
certain procedures in imposing or increasing any fee or charge as defined. "Fee"
or "charge" is defined to mean "any levy other than an ad valorem tax, a special
tax or an assessment imposed by an agency upon a parcel or upon a person as an
incident of property ownership, including user fees or charges for a property
related service."

      The procedure required by the Proposition to impose or increase any fee or
charge include a public hearing upon the proposed fee or charge and the
opportunity to present written protests by the owners of the parcels subject to
the proposed fee or charge. If written protests against the proposed fee or
charge are presented by a majority of owners of the identified parcels, the
local government shall not impose the fee or charge.

      The Proposition provides that beginning July 1, 1997, all fees or charges
shall comply with the Proposition's requirements.

      The Proposition is silent with respect to future increases of pre-existing
fees or charges which are pledged to payment of indebtedness or obligations
previously incurred by the local government. Presumably, the Proposition cannot
preempt outstanding contractual obligations protected by the contract impairment
clause of the federal constitution. However, with respect to any given situation
or case, litigation may be the method which will settle any question concerning
the authority of a local government to increase fees or charges outside of the
strictures of the Proposition in order to meet contractual obligations.

      Proposition 218 also contains a new provision subjecting "matters of
reducing or repealing any local tax, assessments and charges" to the initiative
power. This means that no city or local agency revenue source is safe from
reduction or repeal pursuant to the initiative process.
    


28
<PAGE>

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

   
      Litigation concerning various elements of the Proposition may ultimately
ensue and clarifying legislation may be enacted.

      As of March 1, 1997, the State had over $17.69 billion aggregate amount of
its general obligation bonds outstanding. General obligation bond authorizations
in the aggregate amount of approximately $8.38 billion remain unissued as of
March 1, 1997. The State also builds and acquires capital facilities through the
use of lease purchase borrowing. As of March 1, 1997, the State had
approximately $6.12 billion of outstanding Lease-Purchase Debt.

      In addition to the general obligation bonds, State agencies and
authorities had approximately $20.86 billion aggregate principal amount of
revenue bonds and notes outstanding as of December 31, 1996. Revenue bonds
represent both 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 such
revenue bonds. Such enterprises and projects include transportation projects,
various public works and exposition projects, education facilities (including
the California State University and University of California systems), housing
health facilities and pollution control facilities.
    

      The State is a party to numerous legal proceedings, many of which normally
occur in governmental operations. In addition, the State is involved in certain
other legal proceedings that, if decided against the State, might require the
State to make significant future expenditure or impair future revenue sources.
Examples of such cases include challenges to certain vehicle license fees, and
challenges to the State's use of Public Employee Retirement System funds to
offset future State and local pension contributions. Other cases which could
significantly impact revenue or expenditures involve challenges of payments of
wages under the Fair Labor Standards Act, the method of determining gross
insurance premiums involving health insurance, property tax challenges,
challenges of transfer of moneys from State Treasury Special Fund accounts to
the State's General Fund pursuant to 1991, 1992, 1993 and 1994 Budget Acts.
Because of the prospective nature of such proceedings, it is not presently
possible to predict the outcome of such litigation or estimate the potential
impact on the ability of the State to pay debt service on its obligations.

      During 1996, the ratings of California's general obligation bonds was
upgraded by the following rating agencies. Recently Standard & Poor's Ratings
Group upgraded its rating of such debt to A+; the same rating has been assigned
to such debt by Fitch Investor Service. Moody's Investors Service has assigned
such debt an A1 rating. Any explanation of the significance of such ratings may
be obtained only from the rating agency furnishing such ratings. There is no
assurance that such ratings will continue for any given period of time or that
they will not be revised downward or withdrawn entirely if, in the judgment of
the particular rating agency, circumstances so warrant.


                                                                              29
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Investment Objective and Management Policies (continued)
--------------------------------------------------------------------------------

      Potential Legislation. In past years, the U.S. Government has enacted
various laws that have restricted or diminished the income tax exemption on
various types of Municipal Obligations and may enact other similar laws in the
future. If any such laws are enacted that would reduce the availability of
Municipal Obligations for investment by the Portfolio so as to affect the
Portfolio's shareholders adversely, the Portfolio's Board of Directors will
reevaluate the Portfolio's investment objective and management policies and
might submit possible changes in the Portfolio's structure to the shareholders
for their consideration. If legislation was enacted that would treat a type of
Municipal Obligation as taxable for federal income tax purposes, the Portfolio
would treat the security as a permissible Taxable Investment within the
applicable limits described in this Prospectus.

      Unrated Securities. The Portfolio may invest in unrated securities that
the Investment Manager determines to be of comparable quality to the rated
securities in which the Portfolio may invest. Dealers may not maintain daily
markets in unrated securities and retail secondary markets for many of them may
not exist. As a result, the Portfolio's ability to sell these securities when
the Investment Manager deems it appropriate may be diminished.

      Municipal Leases. Municipal leases in which the Portfolio 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 need not make future payments under the
lease or contract unless money is appropriated for that purpose by a legislative
body annually or on another periodic basis. Municipal leases have additional
risks because they represent a type of financing that has not yet developed the
depth of marketability generally associated with other Municipal Obligations.
Moreover, although a municipal lease typically will be secured by financed
equipment or facilities, the disposition of the equipment or facilities in the
event of foreclosure might prove difficult. In addition, in certain instances
the tax-exempt status of the municipal lease will not be subject to the legal
opinion of a nationally recognized bond counsel, although in all cases the
Investment Manager will require that a municipal lease purchased by the
Portfolio be covered by a legal opinion to the effect that, as of the effective
date of the municipal lease, the lease is the valid and binding obligation of
the governmental issuer.

      Non-Publicly Traded Securities. As suggested above, the Portfolio may,
from time to time, invest a portion of its assets in non-publicly traded
Municipal Obligations. Non-publicly traded securities may be less liquid than
publicly traded securities. Although non-publicly traded securities may be
resold in privately negotiated transactions, the prices realized from these
sales could be less than those originally paid by the Portfolio.

      Repurchase Agreements. By entering into a repurchase agreement, the
Portfolio bears a risk of loss in the event that the other party to the
transaction defaults on its Obligations and the Portfolio is delayed or
prevented from exercising 


30
<PAGE>

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

its rights to dispose of the underlying securities, including the risk of a
possible decline in the value of the underlying securities during the period in
which the Portfolio seeks to assert its rights to them, the risk of incurring
expenses associated with asserting those rights and the risk of losing all or a
part of the income from the agreement.

      When-Issued and Delayed Delivery Transactions. Securities purchased on a
when-issued or delayed delivery basis may expose the Portfolio to risk because
the securities may experience fluctuations in value prior to their delivery.
Purchasing securities on a when-issued or delayed delivery basis can involve the
additional risk that the yield available in the market when the delivery takes
place may be higher than that obtained in the transaction itself.

      Financial Futures and Options. Although the Portfolio intends to enter
into financial futures contracts and options on financial futures contracts that
are traded on a U.S. exchange or board of trade only if an active market exists
for those instruments, no assurance can be given that an active market will
exist for them at any particular time. If closing a futures position in
anticipation of adverse price movements is not possible, the Portfolio would be
required to make daily cash payments of variation margin. In those
circumstances, an increase in the value of the portion of the Portfolio's
investments being hedged, if any, may offset partially or completely losses on
the futures contract. No assurance can be given, however, that the price of the
securities being hedged will correlate with the price movements in a futures
contract and, thus, provide an offset to losses on the futures contract or
option on the futures contract. In addition, in light of the risk of an
imperfect correlation between securities held by the Portfolio that are the
subject of a hedging transaction and the futures or options used as a hedging
device, the hedge may not be fully effective because, for example, losses on the
securities held by the Portfolio may be in excess of gains on the futures
contract or losses on the futures contract may be in excess of gains on the
securities held by the Portfolio that were the subject of the hedge. In an
effort to compensate for the imperfect correlation of movement in the price of
the securities being hedged and movements in the price of futures contracts, the
Portfolio may enter into financial futures contracts or options on financial
futures contracts in a greater or lesser dollar amount than the dollar amount of
the securities being hedged if the historical volatility of the futures contract
has been less or greater than that of the securities. This "over hedging" or
"under hedging" may adversely affect the Portfolio's net investment results if
market movements are not as anticipated when the hedge is established.

      If the Portfolio has hedged against the possibility of an increase in
interest rates adversely affecting the value of securities it holds and rates
decrease instead, the Portfolio will lose part or all of the benefit of the
increased value of securities that it has hedged because it will have offsetting
losses in its futures or options positions. In addition, in those situations, if
the Portfolio has insufficient cash, it may have to sell securities to meet
daily variation margin requirements on the futures contracts


                                                                              31
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--------------------------------------------------------------------------------
Investment Objective and Management Policies (continued)
--------------------------------------------------------------------------------

at a time when it may be disadvantageous to do so. These sales of securities
may, but will not necessarily, be at increased prices that reflect the decline
in interest rates.

      Non-Diversified Classification. Investment in the Portfolio, which is
classified as a non-diversified fund under the 1940 Act, may present greater
risks to investors than an investment in a diversified fund. The investment
return on a non-diversified fund typically is dependent upon the performance of
a smaller number of securities relative to the number of securities held in a
diversified fund. The Portfolio's assumption of large positions in the
obligations of a small number of issuers will affect the value of the securities
it holds to a greater extent than that of a diversified fund in the event of
changes in the financial condition, or in the market's assessment, of the
issuers.

--------------------------------------------------------------------------------
Investment Restrictions
--------------------------------------------------------------------------------

      The Portfolio has adopted certain fundamental investment restrictions that
may not be changed without the prior approval of the holders of a majority of
the Portfolio's outstanding voting securities as defined in the 1940 Act. All
percentage limitations included in the investment restrictions below apply
immediately after a purchase or initial investment, and any subsequent change in
any applicable percentage resulting from market fluctuations will not require
the Portfolio to dispose of any security that it holds. Under its fundamental
restrictions, the Portfolio may not:

      1. Borrow money, except for temporary or emergency purposes, or for
      clearance of transactions, and then only in amounts not exceeding 15% of
      its total assets (not including the amount borrowed) and as otherwise
      described in this Prospectus. When the Portfolio's borrowings exceed 5% of
      the value of its total assets, the Portfolio will not make any additional
      investments.

      2. Sell securities short or purchase securities on margin, except for
      short-term credits as are necessary for the clearance of transactions, but
      the Portfolio may make margin deposits in connection with transactions in
      options, futures and options on futures.

      3. Underwrite any issue of securities, except to the extent that the
      purchase of Municipal Obligations may be deemed to be an underwriting.

      4. Purchase, hold or deal in real estate or oil and gas interests, except
      that the Portfolio may invest in Municipal Obligations secured by real
      estate or interests in real estate.


32
<PAGE>

--------------------------------------------------------------------------------
Investment Restrictions (continued)
--------------------------------------------------------------------------------

      5. Invest in commodities, except that the Portfolio may enter into futures
      contracts, including those relating to indexes, and options on futures
      contracts or indexes, as described in this Prospectus.

      6. Lend any funds or other assets, except through purchasing Municipal
      Obligations or Taxable Investments, lending securities and entering into
      repurchase agreements consistent with the Portfolio's investment
      objective.

      7. Issue senior securities.

      8. 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 U.S. Government securities.

      9. Make any investments for the purpose of exercising control or
      management of any company.

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

      The Common Stock is listed on the AMEX under the symbol "GCM." 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
Portfolio's Common Stock, the net asset value per share and the discount or
premium to net asset value represented by the quotation for each the two 
most recent fiscal years and each full fiscal quarter since the 
beginning of the current fiscal year. 
    

                                                    AMEX
                       AMEX             NAV        Price at   NAV at
                       Price           Price       Quarter-  Quarter-  Premium
Three Months Ended     Range           Range         End       End    (Discount)
================================================================================
   
11/30/95          $11.25- $12.00   $12.83- $13.69   $11.94    $13.69   (12.80)%
 2/29/96           11.63-  12.13    13.58-  14.02    11.88     13.60   (12.68)
 5/31/96           11.63-  12.38    12.85-  13.73    12.13     13.01    (6.80)
 8/31/96           11.38-  12.88    12.82-  13.53    12.13     13.13    (7.65)
11/30/96           11.75-  12.75    13.08-  13.76    12.63     13.49    (6.41)
 2/28/97           12.06-  12.88    13.13-  13.52    12.75     13.32    (4.28)
 5/31/97           12.25-  12.88    12.86-  13.26    12.63     13.26    (4.79)
 8/31/97           12.44-  13.25    13.41-  13.84    12.75     13.66    (6.66)
11/30/97           12.63- 13.19     13.70-14.00     12.75     14.00    (8.93)
    
===========================================================================

   
      As of December 5, 1997, the price per share of Common Stock as quoted on
the AMEX was $13.19, representing a 6.41% discount from the Common Stock's net
asset value calculated on that day.
    


                                                                              33
<PAGE>

--------------------------------------------------------------------------------
Management of the Portfolio
--------------------------------------------------------------------------------

      DIRECTORS AND OFFICERS

      The business and affairs of the Portfolio, including the general
supervision of the duties performed by the Investment Manager under the
Investment Management Agreement, are the responsibility of the Portfolio's Board
of Directors. The Directors and officers of the Portfolio, their addresses and
their principal occupations for at least the past five years are set forth
below:

                        Positions Held                 Principal Occupations
Name and Address        with the Portfolio        During Past Five Years and Age
================================================================================

   
*+Heath B. McLendon     Chairman of the Board of  Managing Director of Smith    
388 Greenwich Street    Directors, President and  Barney; Director of forty-one 
New York, NY 10013      Chief Executive Officer   investment companies          
                                                  associated with Smith Barney; 
                                                  Chairman of the Board of Smith
                                                  Barney Strategy Advisers Inc. 
                                                  and Director and President of 
                                                  SBMFM and Travelers Investment
                                                  Adviser, Inc.("TIA"); prior to
                                                  July 1993, Senior Executive   
                                                  Vice President of Shearson    
                                                  Lehman Brothers Inc.; Vice    
                                                  Chairman of Shearson Asset    
                                                  Management; 64.               

+Donald R. Foley        Director                  Retired; Director of ten     
3668 Freshwater Drive                             investment companies         
Jupiter, FL 33477                                 associated with Smith Barney.
                                                  Formerly Vice President of   
                                                  Edwin Bird Wilson,           
                                                  Incorporated (advertising);  
                                                  75.                          

+Paul Hardin            Director                  Professor of Law at the       
60134 Davie Street                                University of North Carolina  
Chapel Hill, NC 27599                             at Chapel Hill; Director of   
                                                  twelve investment companies   
                                                  associated with Smith Barney. 
                                                  Director of The Summit        
                                                  Bancorporation. Formerly,     
                                                  Chancellor of the University  
                                                  of North Carolina at Chapel 
                                                  Hill; 66.

+Roderick C. Rasmussen  Director                  Investment Counselor; Director
81 Mountain Road                                  of ten investment companies   
Verona, NJ 07044                                  associated with Smith Barney. 
                                                  Formerly Vice President of    
                                                  Dresdner and Company Inc.     
                                                  (Investment counselors); 70.  

+John P. Toolan         Director                  Retired; Director of ten      
82 Druid Road                                     investment companies          
Summit, NJ 07901                                  associated with Smith Barney; 
                                                  Director of John Hancock      
                                                  Funds. Formerly, Director and 
                                                  Chairman of Smith Barney Trust
                                                  Company, Director of Smith    
                                                  Barney and SBMFM. Prior to    
                                                  1992, Senior Executive Vice   
                                                  President and Member of the   
                                                  Executive Committee of Smith 
                                                  Barney; 67.
    

================================================================================
*     "Interested person" of the Portfolio as defined in the 1940 Act.
+     Director, trustee and/or general partner of other investment companies
      registered under the 1940 Act with which Smith Barney is affiliated.


34
<PAGE>

--------------------------------------------------------------------------------
Management of the Portfolio (continued)
--------------------------------------------------------------------------------

                        Positions Held                 Principal Occupations
Name and Address        with the Portfolio        During Past Five Years and Age
================================================================================

   
Lewis F. Daidone        Senior Vice President     Managing Director of Smith    
388 Greenwich Street    and Treasurer             Barney, Senior Vice President 
New York, NY 10013                                and Treasurer of other        
                                                  investment companies          
                                                  associated with Smith Barney; 
                                                  Director and Senior Vice      
                                                  President of SBMFM, and TIA,  
                                                  and Senior Vice President of  
                                                  Smith Barney Strategy Advisers
                                                  Inc.; 40.
                                                                                
Joseph P. Deane         Vice President and        Managing Director of Smith    
388 Greenwich Street    Investment Officer        Barney and investment officer 
New York, NY 10013                                of other investment companies 
                                                  associated with Smith Barney; 
                                                  50.

Thomas M. Reynolds      Controller                Director of Smith Barney and  
388 Greenwich Street                              Controller and Assistant      
New York, NY 10013                                Secretary of certain other    
                                                  investment companies          
                                                  associated with Smith Barney; 
                                                  37.                           

Christina T. Sydor      Secretary                 Managing Director of Smith    
388 Greenwich Street                              Barney; Secretary of the other
New York, NY 10013                                investment companies          
                                                  associated with Smith Barney; 
                                                  Secretary and General Counsel 
                                                  of SBMFM and TIA; 46.

================================================================================
    
*     "Interested person" of the Portfolio as defined in the 1940 Act.
+     Director, trustee and/or general partner of other investment companies
      registered under the 1940 Act with which Smith Barney is affiliated.

   
      Fees for Directors who are not "interested persons" of the Portfolio and
who are directors of a group of funds sponsored by Smith Barney are set at
$42,000 per annum and are allocated based on relative net assets of each fund in
the group. In addition, these Directors receive $100 per fund or portfolio for
each Board meeting attended plus travel and out-of-pocket expenses incurred in
connection with Board meetings. The Board meeting fees and out-of-pocket
expenses are borne equally by each individual fund or portfolio in the group.
    


                                                                              35
<PAGE>

--------------------------------------------------------------------------------
Management of the Portfolio (continued)
--------------------------------------------------------------------------------

   
      The following table shows the compensation paid by the Portfolio to each
Director for the Portfolio's fiscal year ended August 31, 1997.
    

                             COMPENSATION TABLE

<TABLE>
<CAPTION>
                                                                                Total
                                        Pension or         Compensation       Number of
                                        Retirement        from Portfolio      Funds for
                        Aggregate    Benefits Accrued        and Fund       Which Director
                      Compensation      as part of           Complex        Serves Within
Name of Person       from Portfolio  Portfolio Expenses  Paid to Directors   Fund Complex
--------------        -------------  -----------------   ---------------   --------------
<S>                       <C>                <C>              <C>                 <C>

   
Joseph H. Fleiss++        $645+              0                58,200              10
Donald R. Foley            645+              0                58,700              10
Paul Hardin                645               0                76,300              12
Heath B. McLendon*           0               0                     0              41
Roderick C. Rasmussen      645               0                58,700              10
John P. Toolan             645+              0                58,700              10
C. Richard Youngdahl++     312               0                18,700              10
    
</TABLE>

----------
*     Designates an "interested director."
   
+     Pursuant to the Portfolio's deferred compensation plan, the indicated
      Directors have elected to defer the following payment of some or all of
      their compensation: Joseph H. Fleiss: $527, Donald R. Foley: $627, and
      John P. Toolan: $649.
++    Effective January 1, 1997, Mr. Youngdahl, and effective January 1, 1998,
      Mr. Fleiss have elected to become Director Emeritus. Upon attainment of
      age 72 the Portfolio's current directors may elect to change to emeritus
      status. Any directors elected or appointed to the Board of Directors in
      the future will be required to change to emeritus status upon attainment
      of age 80. Directors Emeritus are entitled to serve in emeritus status for
      a maximum of 10 years during which time they are paid 50% of the annual
      retainer fee and meeting fees otherwise applicable to the Portfolio's
      directors, together with reasonable out-of-pocket expenses for each
      meeting attended.

      At the close of business on December 5 1997, 3,592,969 shares of Common
Stock or 98.29% of the Portfolio's total shares outstanding on that date were
held of record, but not beneficially, owned by CEDE & Co., c/o Depository Trust
Company, Box 20, Bowling Green Station, NY, NY 10004-9998. As of that date, the
officers and Board members of the Portfolio as a group beneficially owned less
than 1% of the outstanding shares of the Portfolio.
    

      INVESTMENT MANAGER

   
      SBMFM serves as the Portfolio's investment manager. The Investment Manager
provides investment advisory and management services to investment companies
affiliated with Smith Barney. SBMFM was incorporated in 1968 and manages
investment companies that had total assets in excess of $85 billion as of
November 30, 1997. SBMFM is located at 388 Greenwich Street, New York, New York
10013.
    

      Subject to the supervision and direction of the Portfolio's Board of
Directors, the Investment Manager manages the securities held by the Portfolio
in accordance with the Portfolio's stated investment objectives and policies,
makes investment decisions for the Portfolio, places orders to purchase and sell
securities on behalf of the Portfolio and employs managers and securities
analysts who provide research 


36
<PAGE>

--------------------------------------------------------------------------------
Management of the Portfolio (continued)
--------------------------------------------------------------------------------

   
services to the Portfolio. SBMFM also provides certain administration services
to the Portfolio, including overseeing the Portfolio's non-investment operations
and its relations with other service providers and providing executive and other
officers to the Portfolio. The Portfolio pays the Investment Manager a
management fee for the services provided to the Portfolio that is computed daily
and paid monthly at the annual rate of 0.90% of the value of the Portfolio's
average daily net assets, which is higher than the rates for similar services
paid by other recently organized publicly offered, closed-end management
investment companies that have investment objectives and policies similar to
those of the Portfolio. For the fiscal year ended August 31, 1997, the Portfolio
paid $438,661 in management fees to SBMFM.

      Joseph P. Deane, Vice President and Investment Officer of the Portfolio,
is primarily responsible for management of the Portfolio's assets. Mr. Deane is
a Managing Director of Smith Barney and is the senior asset manager for seven
other investment companies.

      The Investment Manager bears all expenses in connection with the
performance of the services it provides to the Portfolio. The Portfolio will
bear all other expenses to be incurred in its operation including, but not
limited to, the costs incurred in connection with the Portfolio's organization;
management fees; fees for necessary professional and brokerage services fees for
any pricing service; the costs of regulatory compliance; the costs associated
with maintaining the Portfolio's corporate existence; and costs of corresponding
with the Portfolio's shareholders.
    

--------------------------------------------------------------------------------
Securities Transactions and Turnover
--------------------------------------------------------------------------------

      GENERAL

   
      The Portfolio's securities ordinarily are purchased from and sold to
parties acting as either principal or agent. Newly issued securities ordinarily
are purchased directly from the issuer or from an underwriter; other purchases
and sales usually are placed with those dealers from which the Investment
Manager determines that the best prices or execution will be obtained. Usually
no brokerage commissions, as such, are paid by the Portfolio for purchases and
sales undertaken through principal transactions, although the price paid usually
includes an undisclosed compensation to the dealer. The prices paid to
underwriters of newly issued securities typically include a concession paid by
the issuer to the underwriter, and purchases of after-market securities from
dealers ordinarily are executed at a price between the bid and asked price.
    

      Transactions on behalf of the Portfolio are allocated to various dealers
by the Investment Manager 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 to 


                                                                              37
<PAGE>

--------------------------------------------------------------------------------
Securities Transactions and Turnover (continued)
--------------------------------------------------------------------------------

enable the Investment Manager to supplement its own research and analysis with
the views and information of other securities firms.

      Research services furnished by broker-dealers through which the Portfolio
effects securities transactions may be used by the Investment Manager in
managing other investment funds and accounts and conversely, research services
furnished to the Investment Manager by broker-dealers in connection with other
funds and accounts the Investment Manager advises may be used by the Investment
Manager in advising the Portfolio. Although it is not possible to place a dollar
value on these services, the Investment Manager is of the view that the receipt
of the services should not reduce the overall costs of its research services.

      Investment decisions for the Portfolio are made independently from those
of other investment companies or accounts managed by the Investment Manager. If
those investment companies or accounts are prepared to invest in, or desire to
dispose of, Municipal Obligations or Taxable Investments at the same time as the
Portfolio, however, available investments or opportunities for sales will be
allocated equitably to each client of the Investment Manager. In some cases,
this procedure may adversely affect the size of the position obtained for or
disposed of by the Portfolio or the price paid or received by the Portfolio.

   
      TURNOVER
    

      The Portfolio cannot accurately predict its turnover rate, but anticipates
that its annual turnover rate will not exceed 100%. The Portfolio's turnover
rate is calculated by dividing the lesser of the Portfolio's sales or purchases
of securities during a year (excluding any security the maturity of which at the
time of acquisition is one year or less) by the average monthly value of the
Portfolio's securities for the year. Higher turnover rates can result in
corresponding increases in the Portfolio's transaction costs. The Portfolio will
not consider turnover rate a limiting factor in making investment decisions
consistent with its investment objective and policies.

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

   
     The Portfolio expects to pay monthly dividends of substantially all net
investment income to the holders of the Common Stock. Net investment income is
income (including tax-exempt income and accrued original issue discount income)
other than net realized capital gains. Under the Portfolio's current policy,
which may be changed at any time by its Board of Directors, the Portfolio's
monthly dividends will be made at a level that reflects the past and projected
performance of the Portfolio, which policy over time will result in the
distribution of all net investment income of the Portfolio. From time to time,
the Portfolio may make a 
    


38
<PAGE>

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

   
capital gains distribution in lieu of its regular monthly dividend. Net income
of the Portfolio consists of all interest income accrued on the Portfolio's
assets less all expenses of the Portfolio. Expenses of the Portfolio are accrued
each day. Net realized capital gains, if any, will be distributed to the
shareholders at least once a year.

      Under the Portfolio's Dividend Reinvestment Plan (the "Plan"), a
shareholder whose shares of Common Stock are registered in his own name will
have all distributions from the Portfolio reinvested automatically by First Data
as 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 or other nominees 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.

      If the Portfolio declares a dividend or capital gains distribution payable
either in shares of Common Stock or in cash, shareholders who are not Plan
participants will receive cash, and Plan participants will receive the
equivalent amount in shares of Common Stock. When the market price of the Common
Stock is equal to or exceeds the net asset value per share of the Common Stock
on the date of valuation, Plan participants will be issued shares of Common
Stock valued at the greater of net asset value most recently determined as
described below under "Net Asset Value" or 95% of the market value of the Common
Stock.

      If the market price of the Common Stock is less than the net asset value
of the Common Stock, or if the Portfolio declares a dividend or capital gains
distribution payable only in cash, First Data, as purchasing agent for Plan
participants (the "Purchasing Agent"), will buy Common Stock in the open market,
on the AMEX or elsewhere, for the participants' accounts. If following the
commencement of the purchases and before the Purchasing Agent has completed its
purchases, the market price exceeds the net asset value of the Common Stock, the
average per share purchase price paid by the Purchasing Agent may exceed the net
asset value of the Common Stock, resulting in the acquisition of fewer shares
than if the dividend or capital gains distribution had been paid in Common Stock
issued by the Portfolio at net asset value. Additionally, if the market price
exceeds the net asset value of shares before the Purchasing Agent has completed
its purchases, the Purchasing Agent is permitted to cease purchasing shares and
the Portfolio may issue the remaining shares at a price equal to the greater of
(a) net asset value or (b) 95% of the then current market price. In a case where
the Purchasing Agent has terminated open market purchases and the Portfolio has
issued the remaining shares, the
    


                                                                              39
<PAGE>

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

   
number of shares received by the participant in respect of the cash dividend or
distribution will be based on the weighted average of prices paid for shares
purchased in the open market and the price at which the Portfolio issues the
remaining shares. First Data will apply all cash received as a dividend or
capital gains distribution to purchase Common Stock on the open market as soon
as practicable after the record date of the dividend or capital gains
distribution, but in no event later than 30 days after that date, except when
necessary to comply with applicable provisions of the federal securities laws.
    

      First Data will maintain all shareholder accounts in the Plan and will
furnish 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, and each shareholder's proxy will include those shares purchased
pursuant to the Plan.

   
      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
Portfolio. No brokerage charges apply with respect to shares of Common Stock
issued directly by the Portfolio under the Plan. Each Plan participant will,
however, bear a proportionate share of brokerage commissions incurred with
respect to open market purchases made under the Plan.

      Experience under the Plan may indicate that changes to it are desirable.
The Portfolio 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, with the Portfolio's prior written consent, 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, P.O. Box 1376, Boston, Massachusetts 02104 or by telephone at
1-800-331-1710.
    

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

   
      The net asset value of shares of the Common Stock will be calculated as of
the close of regular trading on the New York Stock Exchange (the "NYSE"),
currently 4:00 p.m. New York time, on each day on which the NYSE is open for
trading. The Portfolio reserves the right to cause its net asset value to be
calculated on a less frequent basis as determined by the Portfolio's Board of
Directors. For purposes of 

    
   

40
<PAGE>

--------------------------------------------------------------------------------
Net Asset Value (continued)
--------------------------------------------------------------------------------

determining net asset value, futures contracts and options on futures contracts
will be valued 15 minutes after the close of regular trading on the NYSE.


    
   
      Net asset value per share of Common Stock is calculated based on the value
of the Portfolio's total assets less liabilities. In general, the Portfolio's
investments will be valued at market value, or, in the absence of market value,
at fair value as determined by or under the direction of the Portfolio's Board
of Directors. Short-term investments that mature in 60 days or less are valued
on the basis of amortized cost (which involves valuing an investment at its cost
and, thereafter, assuming a constant amortization to maturity of any discount or
premium, regardless of the effect of fluctuating interest rates on the market
value of the investment) when the Board of Directors has determined that
amortized cost represents fair value.
    

      The valuation of the Portfolio's assets is made after consultation with an
independent pricing service (the "Service") approved by the Portfolio's 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, are carried at fair value as
determined by the Service, based on methods that include consideration of:
yields or prices of Municipal Obligations of comparable quality, coupon,
maturity and type; indications as to values from dealers; and general market
conditions. 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 Portfolio 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
Portfolio to do so.

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

      The discussion set out below of tax considerations generally affecting the
Portfolio and its shareholders is intended to be only a summary and is not
intended as a substitute for careful tax planning by prospective shareholders.

      TAXATION OF THE PORTFOLIO AND ITS INVESTMENTS

      The Portfolio has qualified and intends to continue to qualify each year
as a "regulated investment company" under Subchapter M of the Code. In addition,
the Portfolio intends to satisfy each year conditions contained in the Code that
will enable interest from Municipal Obligations, excluded from gross income for
federal income tax purposes with respect to the Portfolio, to retain that
tax-exempt status when distributed to the shareholders of the Portfolio (that
is, to be classified as "exempt-interest" dividends of the Portfolio).


                                                                              41
<PAGE>

--------------------------------------------------------------------------------
Taxation (continued)
--------------------------------------------------------------------------------
   
      As a regulated investment company, the Portfolio pays no federal income
taxes on its taxable net investment income (that is, taxable income other than
net realized capital gains) and its net realized capital gains that are
distributed to shareholders. To qualify under Subchapter M of the Code, the
Portfolio must, among other things: (1) distribute to its shareholders at least
90% of its taxable net investment income (for this purpose consisting of taxable
net investment income and net realized short-term capital gains) and 90% of its
tax-exempt net investment income (reduced by certain expenses); (2) derive at
least 90% of its gross income from dividends, interest, payments with respect to
loans of securities, gains from the sale or other disposition of securities, or
other income (including, but not limited to, gains from options, futures and
forward contracts) derived with respect to the Portfolio's business of investing
in securities; and (3) diversify its holdings so that, at the end
of each fiscal quarter of the Portfolio (a) at least 50% of the market value of
the Portfolio's assets is represented by cash, U.S. Government securities and
securities of other regulated investment companies, and other securities, with
those other securities limited, with respect to any one issuer, to an amount no
greater than 5% of the Portfolio's assets and (b) not more than 25% of the
market value of the Portfolio's assets is invested in the securities of any one
issuer (other than U.S. Government securities or securities of other regulated
investment companies) or of two or more issuers that the Portfolio controls and
that are determined to be in the same or similar trades or businesses or related
trades or businesses. As a regulated investment company, the Portfolio is 
subject to a 4% non-deductible excise tax measured with respect to 
certain undistributed amounts
of ordinary income and capital gain. The Portfolio pays dividends and
distributions necessary to avoid the application of this excise tax.
    

       

      As described above, the Portfolio may invest in financial futures
contracts and options on financial futures contracts that are traded on a U.S.
exchange or board of trade. As a general rule, these investment activities will
increase or decrease the 


42
<PAGE>

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

amount of long-term and short-term capital gains or losses realized by the
Portfolio and, thus, will affect the amount of capital gains distributed to the
Portfolio's shareholders.

      For federal income tax purposes, gain or loss on the futures and options
described above (collectively referred to as "Section 1256 Contracts") would, as
a general rule, be taxed pursuant to a special "mark-to-market system." Under
the mark-to-market system, the Portfolio may be treated as realizing a greater
or lesser amount of gains or losses than actually realized. As a general rule,
gain or loss on Section 1256 Contracts is treated as 60% long-term capital gain
or loss and 40% short-term capital gain or loss, and as a result, the
mark-to-market system will generally affect the amount of capital gains or
losses taxable to the Portfolio and the amount of distributions taxable to a
shareholder. Moreover, if the Portfolio invests in both Section 1256 Contracts
and offsetting positions in those contracts, then the Portfolio might not be
able to receive the benefit of certain realized losses for an indeterminate
period of time. The Portfolio expects that its activities with respect to
Section 1256 Contracts and offsetting positions in those Contracts (1) will not
cause it or its shareholders to be treated as receiving a materially greater
amount of capital gains or distributions than actually realized or received and
(2) will permit it to use substantially all of its losses for the fiscal years
in which the losses actually occur.

      TAXATION OF THE PORTFOLIO'S STOCKHOLDERS
   
      Dividends paid by the Portfolio, other than dividends from Taxable
Investments and market discount on Municipal Obligations and from income or gain
derived from securities transactions and from the use of certain of the
investment techniques described under "Investment Objective and Management
Policies--Investment Techniques," are derived from interest on Municipal
Obligations and are exempt-interest dividends that may be excluded by
shareholders from their gross income for federal income tax purposes if the
Portfolio satisfies certain asset percentage requirements. Distributions 
of the Portfolio's net
realized short-term capital gains are taxable to stockholders of the Portfolio
as ordinary income, and distributions of  net realized long-term capital 
gains are taxable to shareholders as long-term capital gains, 
regardless of the length of time stockholders have held
shares of Common Stock and whether the dividends or distributions are received
in cash or reinvested in additional shares. As a general rule, a stockholder's
gain or loss on a sale of his shares of Common Stock will be a long-term gain or
loss if he has held his shares for more than one year and will be a short-term
capital gain or loss if he has held his shares for one year or less. 
Gain on shares held for more than 18 months will be eligible for the 
reduced 20% maximum capital gains tax rate. Dividends
and distributions paid by the Portfolio do not qualify for the federal
dividends-received deduction for corporations.
    
      In general, investors should recognize that the benefits of the exemption
from state and local taxes, in addition to the exemption from federal taxes,
necessarily limits the Portfolio's ability to diversify geographically.


                                                                              43
<PAGE>

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

      EXEMPT-INTEREST DIVIDENDS
   
      Interest on indebtedness incurred by a shareholder to purchase or carry
shares of Common Stock is not deductible for federal income tax purposes. If a
shareholder receives exempt-interest dividends with respect to any share of
Common Stock and if the share is held by the shareholder for six months or less,
then any loss on the sale of the share may, to the extent of the exempt-interest
dividends, be disallowed. The Code may also require a shareholder, if he
receives exempt-interest dividends, to treat as taxable income a portion of
certain otherwise non-taxable social security and railroad retirement benefit
payments. In addition, the portion of any exempt-interest dividend paid by the
Portfolio that represents income derived from private activity bonds held by the
Portfolio may not retain its tax-exempt status in the hands of a shareholder who
is a "substantial user" of a facility financed by the bonds, or a "related
person" of the substantial user. Although the Portfolio's exempt-interest
dividends may be excluded by shareholders from their gross income for federal
income tax purposes some or all of the Portfolio's exempt-interest dividends
may be a specific preference item, or a component of an adjustment item, for
purposes of the federal individual and corporate alternative minimum taxes 
The receipt of
dividends and distributions from the Portfolio may affect a foreign corporate
shareholder's federal "branch profits" tax liability and the federal "excess net
passive income" tax liability of a shareholder of an S corporation. Shareholders
should consult their own tax advisors to determine whether they are (1)
"substantial users" with respect to a facility or "related" to those users
within the meaning of the Code or (2) subject to a federal alternative minimum
tax, the federal "branch profits" tax, or the
federal "excess net passive income" tax.
    
   
      DIVIDEND REINVESTMENT PLAN
    

      A shareholder of the Portfolio receiving dividends or distributions in
additional shares pursuant to the Plan should be treated for federal income tax
purposes as receiving a distribution in an amount equal to the amount of money
that a shareholder receiving cash dividends or distributions receives, and
should have a cost basis in the shares received equal to that amount.

      CALIFORNIA TAXATION
   
      California law relating to taxation of regulated investment companies and
their shareholders was generally conformed to federal law effective January 1,
1997. In any year in which the Portfolio qualifies as a regulated investment
company under the Code and is exempt from federal income tax, (i) the Portfolio
will also be exempt from the California corporate income and franchise taxes to
the extent 


44
<PAGE>

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

it distributes its income and (ii) provided 50% or more of the value of the
total assets of the Portfolio at the close of each quarter of its taxable year
consists of "California obligations, the interest on which (when held by an
individual) is exempt from personal income taxation under the laws of
California, the Portfolio will be qualified under California law to pay
exempt-interest dividends which will be exempt from the California personal
income tax.  Prior to its taxable year beginning August 1, 1997, a requirement 
of the Portfolio's qualification as a "regulated investment company"
under Subchapter M of the Code was that it derive less than 30% of its
annual grosss income from the sale or other disposition of securities,
options, futures or forward contracts held for less than three months
(the "Short-short Requirement").  While the Short-short Requirement
of federal law was repealed by the Tax Relief Act of  1997 (the "1997 Tax Act"),
it remains in effect under California law.  Until California conforms its law
to the 1997 Tax Act, the Portfolio intends to continue to satisfy the 
Short-short Requirement. In doing so, the Portfolio may be restricted in 
the selling of securities held by the
Portfolio less than three months and in the utilization of certain of the 
investment techniques described ablove under 
"Investment Objective and Management Policies - Investment Techniques."
    

      Individual shareholders of the Portfolio who reside in California will not
be subject to the California personal income tax on distributions received from
the Portfolio which are exempt-interest dividends. The portion of any
distribution constituting exempt-interest dividends is that (i) portion derived
from California obligations and (ii) designated as such by the Portfolio. The
total amount of exempt-interest dividends paid by the Portfolio to its
shareholders with respect to any taxable year cannot exceed the amount of
interest received by the Portfolio during such year on California obligations
less any expenses and expenditures deemed to have been paid from such interest.

      Distributions from the Portfolio that are attributable to sources other
than California obligations, generally will be taxable to such shareholders as
ordinary income. In addition, distributions of short-term capital gains realized
by the Portfolio will be taxable to the shareholders as ordinary income.
Distributions of long-term capital gains will be taxable as such to the
shareholders regardless of how long they held their shares. Any dividends paid
to corporate shareholders subject to the California franchise tax will be taxed
to such shareholders.

      Interest on indebtedness incurred or continued by shareholders to purchase
or carry shares of the Portfolio will not be deductible for California personal
income tax purposes. 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 be disallowed to the extent of any
exempt-interest dividends received with respect to such shares. Any loss
realized upon the redemption of shares within 30 days before or after the
acquisition of other shares of the same series may be disallowed under the "wash
sale" rules. With respect to individual shareholders, California does not treat
tax-exempt interest as a tax preference item for purposes of its alternative
minimum tax. To the extent a corporate shareholder receives dividends which are
exempt from California taxation, a portion of such dividends may be subject to
the alternative minimum tax.

      STATEMENTS AND NOTICES
   
      Statements as to the tax status of the dividends and distributions
received by shareholders of the Portfolio are mailed annually. These statements
show the dollar amount of income excluded from federal income taxes and the
dollar amount, if any, subject to federal income taxes, including the portion,
if any, of long-term capital gains distributions eligible for the reduced 20%
maximum capital gains tax rate. The statements will also
designate the amount 


                                                                              45
<PAGE>

of exempt-interest dividends that are a specific preference item for purposes of
the federal individual and corporate alternative minimum taxes. The Portfolio
will notify shareholders annually as to the interest excluded from federal
income taxes earned by the Portfolio with respect to those states and
possessions in which the Portfolio has or had investments. The dollar amount of
dividends paid by the Portfolio that is excluded from federal income taxation
and the dollar amount of dividends paid by the Portfolio that is subject to
federal income taxation, if any, will vary for each shareholder depending upon
the size and duration of the shareholder's investment in the Portfolio. To the
extent that the Portfolio earns taxable net investment income, it intends to
designate as taxable dividends the same percentage of each day's dividend as its
taxable net investment income bears to its total net investment income earned on
that date. Therefore, the percentage of each day's dividend designated as
taxable, if any, may vary from day to day.
    
      BACKUP WITHHOLDING

      If a shareholder fails to furnish a correct taxpayer identification
number, fails to report fully dividend or interest income, or fails to certify
that he has provided a correct taxpayer identification number and that he is not
subject to "backup withholding," the shareholder may be subject to a 31% "backup
withholding" tax with respect to (1) taxable dividends and distributions and (2)
the proceeds of any sales or repurchases of shares of Common Stock. An
individual's taxpayer identification number is his social security number. The
31% backup withholding tax is not an additional tax and may be credited against
a taxpayer's federal income tax liability.

--------------------------------------------------------------------------------
Description of Shares
--------------------------------------------------------------------------------

   
      The Portfolio was incorporated under the laws of the State of Maryland on
July 8, 1994 pursuant to its Articles of Incorporation. The Articles of
Incorporation authorize issuance of the Common Stock. The Articles of
Incorporation provide that the Fund shall continue without limitation of time.
    

      COMMON STOCK

   
                                                               Amount
                                                             Outstanding
                                                         Exclusive of Shares
                                                      Held by Portfolio for its
                                     Amount Held          Own Account as of
                      Shares    by Portfolio for Its         December 5,
  Title of Class    Authorized       Own Account                1997
    
================================================================================
Common Stock        500,000,000           0                   3,658,334


46
<PAGE>

--------------------------------------------------------------------------------
Description of Shares (continued)
--------------------------------------------------------------------------------

      No shares, other than those currently outstanding, are offered for sale
pursuant to this Prospectus. All shares of Common Stock have equal
non-cumulative voting rights and equal rights with respect to dividends, assets
and liquidation. Shares of Common Stock will be fully paid and non-assessable
when issued and have no preemptive, conversion or exchange rights.

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

      Anti-Takeover Provisions

      The Portfolio'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 Portfolio 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 of Common Stock at a premium over prevailing market prices by
discouraging a third party from seeking to obtain control of the Portfolio.
Commencing with the first annual meeting of shareholders, the Board of Directors
will be divided into three classes. At the annual meeting of shareholders in
each year thereafter, the term of one class will expire and each Director
elected to the class will hold office for a term of three years. The
classification of the Board of Directors in this manner could delay for up to
two years the replacement of a majority of the Board. The Articles of
Incorporation provide that the maximum number of Directors that may constitute
the Portfolio's entire board is 12. 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 Common Stock entitled to be voted on the matter.

      The affirmative votes of at least 75% of the Directors and the holders of
at least 75% of the shares of the Portfolio are required to authorize any of the
following transactions (referred to individually as a "Business Combination"):
(1) a merger, consolidation or share exchange of the Portfolio with or into any
other person (referred to individually as a "Reorganization Transaction"); (2)
the issuance or transfer by the Portfolio (in one or a series of transactions in
any 12-month period) of any securities of the Portfolio to any other person or
entity for cash, securities or other property (or combination thereof) having an
aggregate fair market value of $1,000,000 or more, excluding sales of securities
of the Portfolio in connection with a public offering, issuances of securities
of the Portfolio pursuant to a dividend reinvestment plan adopted by the
Portfolio and issuances of securities of the Portfolio upon the exercise of any
stock subscription rights distributed by the Portfolio; or (3) a sale, lease,
exchange, mortgage, pledge, transfer or other disposition by the Portfolio (in
one or a series of transactions in any 12-month period) to or with any person of
any assets of the Portfolio having an aggregate fair market value of $1,000,000
or more, except for transactions in securities effected 


                                                                              47
<PAGE>

--------------------------------------------------------------------------------
Certain Provisions of the Articles of Incorporation (continued)
--------------------------------------------------------------------------------

by the Portfolio in the ordinary course of its business (each such sale, lease,
exchange, mortgage, pledge, transfer or other disposition being referred to
individually as a "Transfer Transaction"). The same affirmative votes are
required with respect to: any proposal as to the voluntary liquidation or
dissolution of the Portfolio or any amendment to the Portfolio's Articles of
Incorporation to terminate its existence (referred to individually as
"Termination Transaction"); and any shareholder proposal as to specific
investment decisions made or to be made with respect to the Portfolio's assets.

      A 75% shareholder vote will not be required with respect to a Business
Combination if the transaction is approved by a vote of at least 75% of the
Continuing Directors (as defined below) or if certain conditions regarding the
consideration paid by the person entering into, or proposing to enter into, a
Business Combination with the Portfolio and various other requirements are
satisfied. In such case, a majority of the votes entitled to be cast by
shareholders of the Portfolio will be required to approve the transaction if it
is a Reorganization Transaction or a Transfer Transaction that involves
substantially all of the Portfolio's assets and no shareholder vote will be
required to approve the transaction if it is any other Business Combination. In
addition, a 75% shareholder vote will not be required with respect to a
Termination Transaction if it is approved by a vote of at least 75% of the
Continuing Directors, in which case a majority of the votes entitled to be cast
by shareholders of the Portfolio will be required to approve the transaction.

      The voting provisions described above could have the effect of depriving
shareholders of the Portfolio of an opportunity to sell their Common Stock at a
premium over prevailing market prices by discouraging a third party from seeking
to obtain control of the Portfolio in a tender offer or similar transaction. In
view of the Portfolio's Board of Directors, however, these provisions offer
several possible advantages, including: (1) requiring persons seeking control of
the Portfolio to negotiate with its management regarding the price to be paid
for the amount of Common Stock required to obtain control; (2) promoting
continuity and stability; and (3) enhancing the Portfolio's ability to pursue
long-term strategies that are consistent with its investment objective and
management policies. The Board of Directors has determined that the voting
requirements described above, which are generally greater than the minimum
requirements under Maryland law and the 1940 Act, are in the best interests of
shareholders generally.

      A "Continuing Director," as used in the discussion above, is any member of
the Portfolio's Board of Directors (1) who is not a person or affiliate of a
person who enters or proposes to enter into a Business Combination with the
Portfolio (such a person or affiliate being referred to individually as an
"Interested Party") and (2) who has been a member of the Board of Directors for
a period of at least 12 months (or since the commencement of the Portfolio's
operations, if less than 12 


48
<PAGE>

--------------------------------------------------------------------------------
Certain Provisions of the Articles of Incorporation (continued)
--------------------------------------------------------------------------------

months), or is a successor of a Continuing Director who is unaffiliated with an
Interested Party and is recommended to succeed a Continuing Director by a
majority of the Continuing Directors then members of the Board of Directors.

      Conversion to Open-End Fund

      The Portfolio's Articles of Incorporation require the favorable vote of
the holders of at least two-thirds of the shares of Common Stock then entitled
to be voted to authorize the conversion of the Portfolio from a closed-end to an
open-end investment company as defined in the 1940 Act, unless two-thirds of the
Continuing Directors (as defined above) approve such a conversion. In the latter
case, the affirmative vote of a majority of the shares outstanding will be
required to approve the amendment to the Portfolio's Articles of Incorporation
providing for the conversion of the Portfolio.

--------------------------------------------------------------------------------
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 Portfolio's investments.

   
      First Data, located at One Exchange Place, Boston, Massachusetts 02109,
serves as the Portfolio's transfer agent, dividend-paying agent and registrar.
First Data also serves as purchasing agent in connection with the Plan.
    

--------------------------------------------------------------------------------
Reports to Shareholders
--------------------------------------------------------------------------------

      The Portfolio sends unaudited quarterly and audited annual reports,
including a list of investments held, to its stockholders.

--------------------------------------------------------------------------------
Experts
--------------------------------------------------------------------------------

      The audited financial statements incorporated into this Prospectus have
been so included in reliance on the report of KPMG Peat Marwick LLP, independent
auditors, given on the authority of said firm as experts in auditing and
accounting.

   
      KPMG Peat Marwick LLP, has been selected as the Fund's independent auditor
to examine and report on the Fund's financial statements and highlights for the
fiscal year ending August 31, 1998.
    


                                                                              49
<PAGE>

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

      This Prospectus does not contain all of the information set forth in the
Registration Statement filed with the SEC. The complete Registration Statement
may be obtained from the SEC upon payment of the fee prescribed by its Rules and
Regulations.


50
<PAGE>

--------------------------------------------------------------------------------
Appendix A
--------------------------------------------------------------------------------

                  DESCRIPTION OF MOODY'S, S&P AND FITCH RATINGS

                 DESCRIPTION OF MOODY'S MUNICIPAL BOND RATINGS:

      Aaa -- Bonds that are rated Aaa are judged to be of the best quality,
carry the smallest degree of investment risk and are generally referred to as
"gilt edge." Interest payments with respect to these bonds are protected by a
large or by an exceptionally stable margin, and principal is secure. Although
the various protective elements applicable to these bonds are likely to change,
those changes are most unlikely to impair the fundamentally strong position of
these bonds.

      Aa -- Bonds that are rated Aa are judged to be of high quality by all
standards and together with the Aaa group comprise what are generally known as
high grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in Aaa securities, or fluctuation of
protective elements may be of greater amplitude, or other elements may be
present that make the long-term risks appear somewhat larger than in Aaa
securities.

      A -- Bonds that are rated A possess many favorable investment attributes
and are to be considered as upper medium grade obligations. Factors giving
security to principal and interest with respect to these bonds are considered
adequate, but elements may be present that suggest a susceptibility to
impairment sometime in the future.

      Baa -- Bonds rated Baa are considered to be medium grade obligations, that
is they are neither highly protected nor poorly secured. Interest payment and
principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. These bonds lack outstanding investment characteristics and may
have speculative characteristics as well.

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

      DESCRIPTION OF MOODY'S MUNICIPAL NOTE RATINGS:

      Moody's ratings for state and municipal notes and other short-term loans
are designated Moody's Investment Grade (MIG) and for variable demand
obligations are designated Variable Moody's Investment Grade (VMIG). This
distinction recognizes the differences between short-term credit risk and
long-term risk. Loans 


                                                                             A-1
<PAGE>

--------------------------------------------------------------------------------
Appendix A (continued)
--------------------------------------------------------------------------------

bearing the designation MIG 1/VMIG 1 are of the best quality, enjoying strong
protection from established cash flows of funds for their servicing or from
established and broad-based access to the market for refinancing, or both. Loans
bearing the description MIG 2/VMIG 2 are of high quality, with margins of
protection ample, although not as large as the preceding group. Loans bearing
the designation MIG 3/VMIG 3 are of favorable quality, with all security
elements accounted for but lacking the undeniable strength of the preceding
grades. Market access for refinancing, in particular, is likely to be less well
established.

      DESCRIPTION OF MOODY'S COMMERCIAL PAPER RATINGS:

      The rating Prime-1 is the highest commercial paper rating assigned by
Moody's. Issuers rated Prime-1 (or related supporting institutions) are
considered to have a superior capacity for repayment of short-term promissory
obligations. Issuers rates Prime-2 (or related supporting institutions) are
considered to have a strong capacity for repayment of short-term promissory
obligations, normally evidenced by many of the characteristics of issuers rated
Prime-1 but to a lesser degree. Earnings trends and coverage ratios, while
sound, will be more subject to variation. Capitalization characteristics, while
still appropriate, may be more affected by external conditions. Ample
alternative liquidity is maintained.

      DESCRIPTION OF S&P MUNICIPAL BOND RATINGS:

      AAA -- These bonds are the obligations of the higher quality and have the
strongest capacity for timely payment of debt service.

      General Obligation Bonds rated AAA -- In a period of economic stress, the
issuers of these bonds will suffer the smallest declines in income and will be
least susceptible to autonomous decline. Debt burden is moderate. A strong
revenue structure appears more than adequate to meet future expenditure
requirements. Quality of management appears superior.

   
      Revenue Bonds Rated AAA -- Debt service coverage with respect to these
bonds has been, and is expected to remain, substantial. Stability of the pledged
revenues is also exceptionally strong due to the competitive position of the
municipal enterprise or to the nature of the revenues. Basic security provisions
(including rate covenant, earnings test for issuance of additional bonds, debt
service reserve requirements) are rigorous. There is evidence of superior
management.
    

      AA -- The investment characteristics of bonds in this group are only
slightly less marked than those of the prime quality issues. Bonds rated AA have
the second strongest capacity for payment of debt service.


A-2
<PAGE>

--------------------------------------------------------------------------------
Appendix A (continued)
--------------------------------------------------------------------------------

      A -- Principal and interest payments on bonds in this category are
regarded as safe although the bonds are somewhat more susceptible to the adverse
effects of changes in circumstances and economic conditions than bonds in higher
rated categories. This rating describes the third strongest capacity for payment
of debt service.

      General Obligation Bonds Rated A -- There is some weakness, either in the
local economic base, in debt burden, in the balance between revenues and
expenditures, or in quality of management. Under certain adverse circumstances,
any one such weakness might impair the ability of the issuer to meet debt
obligations at some future date.

      Revenue Bonds Rated A -- Debt service coverage is good, but not
exceptional. Stability of the pledged revenues could show some variations
because of increased competition or economic influences on revenues. Basic
security provisions, while satisfactory, are less stringent. Management
performance appearance appears adequate.

      BBB -- The bonds in this group are regarded as having an adequate capacity
to pay interest and repay principal. Whereas bonds in this group normally
exhibit adequate protection parameters, adverse economic conditions or changing
circumstances are more likely to lead to a weakened capacity to pay interest and
repay principal for debt in this category than in higher rated categories. Bonds
rated BBB have the fourth strongest capacity or payment of debt service.

      S&P's letter ratings may be modified by the addition of a plus or a minus
sign, which is used to show relative standing within the major rating
categories, except in the AAA category.

      DESCRIPTION OF S&P MUNICIPAL NOTE RATINGS:

      Municipal notes with maturities of three years or less are usually given
note ratings (designated SP-1, -2 or -3) to distinguish more clearly the credit
quality of notes as compared to bonds. Notes rated SP-1 have a very strong or
strong capacity to pay principal and interest. Those issues determined to
possess overwhelming safety characteristics are given the designation of SP-1+.
Notes rated SP-2 have a satisfactory capacity to pay principal and interest.


                                                                             A-3
<PAGE>

--------------------------------------------------------------------------------
Appendix A (continued)
--------------------------------------------------------------------------------

      DESCRIPTION OF S&P COMMERCIAL PAPER RATINGS:

      Commercial paper rated A-1 by S&P indicates that the degree of safety
regarding timely payment is either overwhelming or very strong. Those issues
determined to possess overwhelming safety characteristics are denoted A-1+.
Capacity for timely payment on commercial paper rated A-2 is strong, but the
relative degree of safety is not as high as for issues designated A-1.

      DESCRIPTION OF FITCH MUNICIPAL BOND RATINGS:

      AAA -- Bonds rated AAA by Fitch are considered to be investment grade and
of the highest credit quality. The obligor has an exceptionally strong ability
to pay interest and repay principal, which is unlikely to be affected by
reasonably foreseeable events.

      AA -- Bonds rated AA by Fitch are considered to be investment grade and of
very high credit quality. The obligor's ability to pay interest and repay
principal is very strong, although not quite as strong as bonds rated AAA.
Because bonds rated in the AAA and AA categories are not significantly
vulnerable to foreseeable future developments, short-term debt of these issues
is generally rated F-1+ by Fitch.

      A -- Bonds rated A by Fitch are considered to be investment grade and of
high credit quality. The obligor's ability to pay interest and repay principal
is considered to be strong, but may be more vulnerable to adverse changes in
economic conditions and circumstances than bonds with higher ratings.

      BBB -- Bonds rated BBB by Fitch are considered to be investment grade and
of satisfactory credit quality. The obligor's ability to pay interest and repay
principal is considered to be adequate. Adverse changes in economic conditions
and circumstances, however, are more likely to have adverse consequences on
these bonds, and therefore impair timely payment. The likelihood that the
ratings of these bonds will fall below investment grade is higher than for bonds
with higher ratings.

      Plus and minus signs are used by Fitch to indicate the relative position
of a credit within a rating category. Plus and minus signs, however, are not
used in the AAA category.


A-4
<PAGE>

--------------------------------------------------------------------------------
Appendix A (continued)
--------------------------------------------------------------------------------

      DESCRIPTION OF FITCH SHORT-TERM RATINGS:

      Fitch's short-term ratings apply to debt obligations that are payable on
demand or have original maturities of generally up to three years, including
commercial paper, certificates of deposit, medium-term notes, and municipal and
investment notes.

      The short-term rating places greater emphasis than a long-term rating on
the existence of liquidity necessary to meet the issuer's obligations in a
timely manner.

      Fitch's short-term ratings are as follows:

      F-1+ -- Issues assigned this rating are regarded as having the strongest
degree of assurance for timely payment.

      F-1 -- Issues assigned this rating reflect an assurance of timely payment
only slightly less in degree than issues rated F-1+.

      F-2 -- Issues assigned this rating have a satisfactory degree of assurance
for timely payment, but the margin of safety is not as great as for issues
assigned F-1+ and F-1 ratings.

      F-3 -- Issues assigned this rating have characteristics suggesting that
the degree of assurance for timely payment is adequate, although near-term
adverse changes could cause these securities to be rated below investment grade.

      LOC -- The symbol LOC indicates that the rating is based on a letter of
credit issued by a commercial bank.

       


                                                                             A-5

PART C




Information required to be included in Part C is set forth, under the 
appropriate item so numbered, in Part C of this Registration Statement.



	PART C
	OTHER INFORMATION

Item 24. Financial Statements and Exhibits

	(1) Financial Statements 

	Parts A and B
		(a)	Financial Highlights

	(b)	   The Registrant's Annual Report for the period ended 
		August 	31, 1997, and the Independent Auditors' Report are 
		incorporated
		by reference to the definitive 30b2-1 filed on October 24, 
		1997 as accession number 0000091155-97-471.    

	Part C
		None

	(2)	Exhibits:

	Exhibit
	Number			Description

	(a)		Articles of Incorporation of Registrant*
	(b)		By-Laws*
	(c)		Not Applicable
	(d)		Form of Specimen Certificate representing shares of
			Common Stock, par value $.001 per share**
	(e)		Registrant's Dividend Reinvestment Plan*
	(f)		Not Applicable
	(g)(1)		Form of Investment Management Agreement**
	    (2)		Form of Transfer and Assumption of Investment
			Management Agreement between Registrant, Mutual
			Management Corp. and Smith Barney Mutual Funds
			Management Inc.***
	(h)(1)		Form of Purchase Agreement*
	    (2)		Form of Underwriting Agreement**
	(i)		Not Applicable
	(j)		Form of Custodian Services Agreement**
	(k)		Form of Transfer Agency and Registrar Agreement*
	(l)(1)		Opinion and consent of Willkie Farr & Gallagher**
	   (2)		Opinion and consent of Venable, Baetjer and Howard**
	(m)		Not Applicable.
	(n)		Consent of KPMG Peat Marwick LLP (filed  herewith)
	(o)		Not Applicable.
	(p)		Not Applicable
	(q)		Not Applicable.
	(r)		Financial Data Schedule (filed herewith)

*   Previously filed by Registrant with its initial Registration 
Statement (No. 33-54549) on July 12, 1994.

** Previously filed by Registrant with Pre-Effective Amendment No. 2 to 
its Registration Statement (No. 33-54549) on September 22, 1994.

***Previously filed by Registrant with Post-Effective Amendment No. 2 
to its Registration Statement on December 21, 1995.

Item 25. Marketing Arrangements

	Reference is made to the Purchase Agreement and the Underwriting 
Agreement filed as Exhibits (h)(1) and (h)(2) by Registrant with Pre-Effective 
Amendment No. 2 to its Registration Statement.

Item 26. Other Expenses of Issuance and Distribution

			The following table sets forth the estimated expenses to be incurred in 
connection with the offering described in this Registration Statement:

Securities and Exchange Commission registration fees $   N/A    
Printing (other than stock 
certificates).$ 5,000  
Legal fees and 
expenses.......................................................
 ..............$_________
Accounting fees and 
expenses......................................................................
 ......$______      
Miscellaneous.................................................................
 ...................................$________ 
		
	TOTAL.......................................................................
 ........................... $5,000        


Item 27. Person Controlled by or Under Common Control


	None. 

Item 28. Number of Holders of Securities

	The number of record holders of Registrant as of December    5, 1997 
     is as follows: 

		(1)						(2)

	Title of Class:				Number of Record Holders:

	Shares of  Common Stock,		   	59     
	$.001 Par Value

Item 29. Indemnification

	Under Article Seventh of Registrant's Articles of Incorporation, any 
past or present director or officer of Registrant is indemnified to the 
fullest extent permitted by the Maryland General Corporation Law ("MGCL") 
against liability and all expenses reasonable incurred by him in connection 
with any action, suit or proceeding to which he may be a party or otherwise 
involved by reason of his being or having been a Director or officer of 
Registrant. This provision does not authorize indemnification when it is 
determined that the Director or officer would otherwise be liable to 
Registrant or its shareholders by reason of willful misfeasance, bad faith, 
gross negligence or reckless disregard of his duties. Expenses may be paid by 
Registrant to its currently acting and its former Directors and officers, to 
the fullest extent that indemnification of directors is permitted by the MGCL, 
the 1933 Act and the 1940 Act, in advance of the final dispositions of any 
action, suit or proceeding. The Board may, by by-law, resolution or agreement, 
make further provision for indemnification of Directors, officers, employees 
and agents to the fullest extent permitted by MGCL.

	Insofar as indemnification for liabilities arising under the 1933 Act 
may be permitted to directors, officers and controlling persons of Registrant 
pursuant to the foregoing provisions, or otherwise, Registrant has been 
advised that, in the opinion of the SEC, such indemnification is against 
public policy as expressed in the 1933 Act 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 director, 
officer or controlling person of Registrant in the successful defense of any 
action, suit or proceeding) is asserted by such director, officer or 
controlling person in connection with the securities being registered, 
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 of whether such indemnification by it is against 
public policy as expressed in the 1933 Act and will be governed by the final 
adjudication of such issue.


Item 30. Business and Other Connections of the Investment Adviser

	Smith Barney Mutual Funds Management Inc. ("SBMFM"). 
SBMFM was incorporated in 1968 and is 
a wholly owned subsidiary of  Salomon Smith Barney Holdings Inc. 
("Holdings"), which is 
in turn a wholly owned subsidiary of Travelers Group Inc. ("Travelers"). 

	The list required by this Item 30 of officers and directors of SBMFM 
together with information as to any other business, 
profession, vocation or employment of a substantial nature engaged in by such 
officers and directors during the past two fiscal years, is incorporated by 
reference to Schedules A and D of FORM ADV filed by SBMFM pursuant to the 
Investment Advisers Act of 1940, as amended (SEC File No. 801-8314). 

Item 31. Location of Accounts and Records

	Each Person maintaining physical possession of accounts, books and other 
documents required to be maintained pursuant to Section 31(a) of the 1940 Act 
is listed below:

		(1)	Smith Barney Inc.
			388 Greenwich Street
			New York, New York  10013 

		(2)	Greenwich Street California Municipal Fund Inc.
			388 Greenwich Street
			New York, New York  10013

		(3)	Smith Barney Mutual Funds Management Inc.
			388 Greenwich Street
	`		New York, New York 10013

		(4) 	PNC Bank, National Association
			17th and Chestnut Streets
			Philadelphia, Pennsylvania 19103

		(5) 	First Data Investor Services Group, Inc.
			Exchange Place
			Boston, Massachusetts 02109

Item 32. Management Services

	Not applicable. 

Item 33. Undertakings

	(1) Not Applicable.

	(2) Not Applicable.

	(3) Not applicable. 

	(4) (a)	Registrant undertakes to file, during any period in which 
offers or sales are being made, a Post-Effective Amendment to the Registration 
Statement:

		(1) to include any prospectus required by Section 10(a)(3) of 
the 1933 Act;

		(2) to reflect in the prospectus any facts or events after the 
effective date of the Registration Statement (or the most recent Post-
Effective Amendment hereof) which, individually or in the aggregate, represent 
a fundamental change in the information set forth in the Registration 
Statement; and

		(3) to include any material information with respect to the plan 
of distribution not previously disclosed in this Registration Statement or any 
material change to such information in this Registration Statement.

	(4) (b)	Registrant undertakes that, for the purpose of determining 
any liability under the 1933 Act, each subsequent Post-Effective Amendment 
shall be deemed to be a new Registration Statement relating to the securities 
offered therein, and the offering of those securities at that time shall be 
deemed to be the initial bona fide offering thereof.

	(4) (c)	Not applicable.

	(5)	Not applicable. 

	(6)	Not Applicable


	SIGNATURES

   	Pursuant to the requirements of the Securities Act of 1933, as amended, 
and the Investment Company Act of 1940, as amended, the Registrant has duly 
caused this Post-Effective Amendment No. 3 to its Registration Statement on 
Form N-2 to be signed on its behalf by the undersigned, thereunto duly 
authorized, in the City of New York, on the 
    
   18th day of December, 1997. 
    

						GREENWICH STREET CALIFORNIA
						MUNICIPAL FUND INC.

						By	/s/ HEATH B. MCLENDON
							_________________
							Heath B. McLendon
							Chairman of the Board and
							Chief Executive Officer

	Pursuant to the requirements of the Securities Act of 1933, as amended, 
this Post-Effective Amendment to the Registration Statement has been signed by 
the following persons in the capacities and on the dates indicated: 

Signature
Title
Date



/s/ Heath B. Mclendon
Heath B. McLendon
Chairman of the Board and
Chief Executive Officer
   12/18/97     


        



/s/ Joseph H. Fleiss*
Joseph H. Fleiss
Director
   12/18/97     




/s/ Donald R. Foley*
Donald R. Foley

Director
   12/18/97     




/s/ Paul Hardin III*
Paul Hardin III
Director
   12/18/97     




        


/s/ Roderick C. 
Rasmussen*
Roderick C. Rasmussen
Director

   12/18/97     



/s/ John P. Toolan*
John P. Toolan
Director
   12/18/97     





/s/ Lewis E. Daidone
Lewis E. Daidone

Senior Vice President,
Treasurer (Chief Financial
and Accounting Officer)


   12/18/97     


*By: /s/ Lewis E. Daidone
        Lewis E. Daidone
        Pursuant to a Power of Attorney




GREENWICH STREET CALIFORNIA MUNICIPAL FUND INC.

EXHIBIT INDEX

Exhibit No.			Description of Exhibit




(n)			Consent of KPMG Peat Marwick LLP, independent
			accountants for the  Fund.

(r)			Financial Data Schedule