--------------------------------------------------------------------------------
Prospectus                                                        April 30, 1998
--------------------------------------------------------------------------------

Smith Barney Municipal Fund, Inc.
388 Greenwich Street
New York, New York 10013
(800) 331-1710

   
      Smith Barney Municipal Fund, Inc. (the "Fund") is a diversified,
closed-end management investment company. The Fund's investment objective is to
provide common shareholders a high level of current income exempt from regular
Federal income taxes consistent with prudent investing. In normal market
conditions, the Fund will invest only in investment grade municipal securities
and will invest at least two thirds of its total assets in municipal
securities rated in the three highest ratings categories, at the time of
investment. Investment grade securities are securities rated within the four
highest ratings categories by a nationally recognized statistical rating
organization ("NRSRO"), such as those rated BBB or higher by Standard & Poor's
Ratings Group ("S&P") or Baa or higher by Moody's Investors Service, Inc.
("Moody's"). The Fund's policy is to invest at least 80% of its total assets in
municipal securities with remaining maturities of less than fifteen years. There
can be no assurance that the Fund will achieve its investment objective. The
Fund may invest an unlimited portion of its assets in municipal securities that
pay interest that is subject to the Federal alternative minimum tax. See
"Investment Objective and Management Policies" and "Taxation". The shares of
closed-end investment companies have frequently traded at discounts from their
net asset values. Investors should carefully assess the risks associated with an
investment in the Fund. See "Investment Objective and Management Policies --
Risk Factors and Special Considerations."
    

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


                                                           (Continued on page 2)

Smith Barney Inc.




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)                                            April 30, 1998
--------------------------------------------------------------------------------


      Smith Barney Inc. ("Smith Barney") intends to make a market in the Fund's
Common Stock ("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 the Fund's Common Stock that
may be offered from time to time pursuant to this Prospectus were issued and
sold by the Fund on July 31, 1992 in an initial public offering at a price of
$15.00 per share. No assurance can be given as to the liquidity of, or the
trading market for, the Common Stock as a result of any market-making activities
undertaken by Smith Barney. The Fund will not receive any proceeds from the sale
of any Common Stock offered pursuant to this Prospectus. The Fund's shares of
Common Stock are listed for trading on the American Stock Exchange under the
symbol, "SBT."


      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
--------------------------------------------------------------------------------
Fund Expenses                                                                  8
--------------------------------------------------------------------------------
Financial Highlights                                                           9
--------------------------------------------------------------------------------
The Fund                                                                      10
--------------------------------------------------------------------------------
The Offering                                                                  10
--------------------------------------------------------------------------------
Use of Proceeds                                                               10
--------------------------------------------------------------------------------
Investment Objectives and Management Policies                                 10
--------------------------------------------------------------------------------
Investment Restrictions                                                       25
--------------------------------------------------------------------------------
Share Price Data                                                              27
--------------------------------------------------------------------------------
Management of the Fund                                                        28
--------------------------------------------------------------------------------
Securities Transactions and Turnover                                          32
--------------------------------------------------------------------------------
Dividends and Distributions; Dividend Reinvestment Plan                       34
--------------------------------------------------------------------------------
Net Asset Value                                                               36
--------------------------------------------------------------------------------
Taxation                                                                      36
--------------------------------------------------------------------------------
Description of Shares                                                         40
--------------------------------------------------------------------------------
Certain Provisions of the Articles of Incorporation and Market Discount       41
--------------------------------------------------------------------------------
Custodian, Transfer, and Dividend-Paying Agent, Registrar and Plan Agent      42
--------------------------------------------------------------------------------
Reports to Shareholders                                                       43
--------------------------------------------------------------------------------
Independent Auditors                                                          43
--------------------------------------------------------------------------------
Additional Information                                                        43
--------------------------------------------------------------------------------
Appendix A                                                                   A-1
--------------------------------------------------------------------------------
Appendix B                                                                   B-1
--------------------------------------------------------------------------------



                                       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 Fund Smith Barney Municipal Fund, Inc. (the "Fund") is a diversified,
closed-end management investment company. See "The Fund."

   
Investment Objective The Fund seeks a high level of current income exempt from
regular Federal income tax consistent with prudent investing. See "Investment
Objective and Management Policies."
    

Tax-Exempt Income The Fund is intended to operate in such a manner that
dividends paid by the Fund may be excluded by the Fund's shareholders from their
gross incomes for regular Federal income tax purposes. There is no specific
limitation on the amount of the Fund's assets which may be invested in municipal
securities that pay interest that is subject to the Federal alternative minimum
tax. Accordingly, the Fund's dividends which would otherwise be tax-exempt may
not be completely tax-exempt to an investor who is subject to the alternative
minimum tax, or may cause an investor to be subject to such tax. See "Investment
Objective and Management Policies" and "Taxation."

   
Quality of Investments The Fund intends to pursue its objective primarily by
investing in a diversified portfolio of municipal securities which the Fund's
investment manager believes does not involve undue risk to income or principal.
Under normal market conditions, the Fund will invest only in investment grade
municipal securities and at least two thirds of its total assets in
municipal securities rated within the three highest ratings categories by an
NRSRO at the time of investment. Investment grade securities are securities 
rated BBB or higher by S&P, Baa or higher by Moody's, or otherwise within the 
four highest ratings categories by any NRSRO (or, if not so rated, which are, 
in the opinion of the Fund's investment manager applying standards established 
by the Fund's Board of Directors, of comparable credit quality to those so 
rated). Securities rated BBB by S&P or Baa by Moody's are considered as medium 
grade obligations, i.e., they are neither highly protected nor poorly secured. 
Such securities lack outstanding investment characteristics and in fact may have
Speculative characteristics as well. The Fund's policy is to invest at least 80%
of its total assets in municipal securities with remaining maturities of less 
than fifteen years. The Fund may vary from its investment policies for temporary
defensive purposes. See "Investment Objective and Management Policies" and
"Appendix A."
    

The Offering The Common Stock is listed for trading on the American Stock
Exchange, Inc. ("AMEX"). In addition, Smith Barney intends to make a market in
the Common Stock. Smith Barney, however, is not obligated to conduct
market-making activities and any such activities may be discontinued at any time
without notice, at the sole discretion of Smith Barney.





                                       4
<PAGE>

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

Listing AMEX

Symbol SBT

   
Investment Manager Mutual Management Corp. ("MMC") (formerly known as Smith
Barney Mutual Funds Management Inc.) serves as the Fund's investment manager
(the "Investment Manager"). The Investment Manager provides investment advisory
and management services to investment companies affiliated with Smith Barney.
Smith Barney 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"), a diversified financial services holding company engaged, through
its subsidiaries, principally in four business segments: Investment Services,
including Asset Management, Consumer Finance Services, Life Insurance Services 
and Property & Casualty Financial Services. Subject to the supervision and 
direction of the Fund's Board of Directors, the Investment Manager manages the 
securities held by the Fund in accordance with the Fund's stated investment 
objective and policies, makes investment decisions for the Fund, places orders 
to purchase and sell securities on behalf of the Fund and employs professional 
portfolio managers. MMC acts as administrator of the Fund and in that capacity 
provides certain administrative services, including overseeing the Fund's non-
investment operations and its relations with other service providers and 
providing executive and other officers to the Fund. The Fund pays the Investment
Manager an investment management fee ("Management Fee") at the annual rate of 
0.70% of the value of the Fund's average daily net assets. The Fund will bear 
other expenses and costs in connection with its operation in addition to the 
costs of investment management services. See "Management of the Fund -- 
Investment Manager."
    

Custodian PNC Bank, National Association ("PNC Bank") serves as the Fund'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"), a subsidiary of First Data
Corporation, serves as the Fund'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 may be
reinvested automatically in additional shares through participation in the
Fund's Dividend Reinvestment Plan, or a shareholder may elect to receive cash.
When the market price of the Common Stock is equal to or exceeds net asset
value, participants in the Fund's Dividend Reinvestment Plan will receive
distributions through issuance of additional shares of Common Stock valued at
net asset value or, if the net asset value is less than 95% of the then current
market price of the Common Stock, then at 95%



                                       5
<PAGE>

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

of the market price. When the market price is less than net asset value,
participants will receive distributions through purchases of shares on the open
market. See "Dividends and Distributions; Dividend Reinvestment Plan."
    

Risk Factors and Special Considerations The Fund is a diversified, closed-end
investment company designed primarily for the long-term investor and should not
be considered a vehicle for short-term trading.

      Shares of closed-end investment companies frequently trade at a discount
from net asset value. This characteristic of shares of closed-end funds is a
risk separate and distinct from the risk that the Fund's net asset value will
decrease. The Fund cannot predict whether its Common Stock will trade at, above
or below net asset value.

      The amount of available information about the financial condition of
municipal securities issuers may be less extensive than that for corporate
issuers with publicly-traded securities and the market for municipal securities
may be less liquid than the market for corporate debt obligations. See
"Investment Objectives and Management Policies -- Risk Factors and Special
Considerations".

      Lease obligations (including installment purchase contract agreements) in
which the Fund may invest may contain "non-appropriation" clauses which provide
that the municipality has no obligation to make lease or installment purchase
payments in future years unless money is appropriated for such purpose on a
yearly basis. See "Investment Objectives and Management Policies -- Risk Factors
and Special Considerations."


      The Fund may invest in unrated municipal securities believed, at the time
of investment, by the Investment Manager to have credit characteristics
equivalent to, and be of comparable credit quality with, municipal securities
that are rated investment grade. The Fund may be more dependent upon the
Investment Manager's investment analysis of such unrated municipal securities
than is the case with respect to rated municipal securities.

      The Fund may also purchase and sell options on municipal securities and
may engage in interest rate and other hedging transactions, such as purchasing
and selling financial futures contracts and related options thereon. The Fund
also may engage in when-issued and delayed delivery transactions. See
"Investment Techniques" and Appendix B.


      The net asset value of the Fund's Common Stock will change with changes in
the value of its portfolio securities. The net asset value of the Common Stock
of the Fund should be expected to change as general levels of interest rates
fluctuate.

      The Fund may invest more than 25% of its assets in municipal securities
that finance the same or similar types of facilities or in issuers located in
the same state. If the Fund so invests more than 25% of its assets in such
securities, the Fund will



6
<PAGE>

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

be more susceptible to economic, business, political, regulatory and other
developments generally affecting issuers of such types of municipal securities.


      The Fund is authorized to borrow amounts up to 331/3% of its total assets
(including the amount borrowed), although currently the Fund anticipates that it
will not borrow. The use of borrowed funds involves the speculative factor known
as "leverage". The Fund is also permitted to issue preferred stock, which would
permit it to assume leverage in an amount up to 50% of its total assets. If any
preferred stock were to be issued, it would have a priority on the income and
assets of the Fund over the Common Stock and would have certain other rights
with respect to voting and the election of directors. See "Investment Objective
and Management Policies -- Investment Techniques -- Borrowing and Leverage."

      In certain circumstances, the net asset value of and dividends payable on
shares of Common Stock could be adversely affected by such preferences. The use
of leverage would create an opportunity for increased returns to holders of the
Common Stock, but, at the same time, would create special risks. The Fund will
only utilize leverage when there is an expectation that it will benefit the Fund
or the holders of Common Stock. To the extent the income or other gain derived
from securities purchased with the proceeds of borrowings or preferred stock
issuances exceeds the interest or dividends the Fund would have to pay thereon,
the Fund's net income or other gain would be greater than if leverage had not
been used. Conversely, if the income or other gain from the securities purchased
through leverage is not sufficient to cover the cost of such leverage, the total
return of the Fund would be less than if leverage had not been used. If leverage
is used, in certain circumstances the Fund could be required to liquidate
securities it would not otherwise sell in order to satisfy dividend or interest
obligations. The Fund may also borrow up to an additional 5% of its total assets
for temporary purposes without regard to the foregoing limitations. See
"Investment Objective and Management Policies -- Investment Techniques --
Borrowing and Leverage."


      Certain anti-takeover provisions will make a change in the Fund's business
or management more difficult without the approval of the Fund's Board of
Directors and may have the effect of depriving Shareholders of an opportunity to
sell their Common Stock at a premium above the prevailing market price. See
"Certain Provisions of the Articles of Incorporation and Market Discount --
Anti-Takeover Provisions."


      Under the Internal Revenue Code (the "Code"), the interest on certain
"private activity" bonds is treated as a preference item for the purpose of
calculating alternative minimum taxable income. There is no specific limitation
on the amount of the Fund's assets which may be invested in municipal securities
that pay interest that is subject to the Federal alternative minimum tax.
Accordingly, the Fund's dividends which would otherwise be tax-exempt may not be
completely tax-exempt



                                                                               7
<PAGE>

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

to an investor who is subject to the alternative minimum tax, or may cause an
investor to be subject to such tax. As such, an investment in the Fund may not
be appropriate for investors who are already subject to the Federal alternative
minimum tax or who would become subject to the Federal alternative minimum tax
as a result of an investment in the Fund. In addition, investors should consider
the tax implications of certain hedging transactions in which the Fund may
engage. See "Taxation."

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

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


--------------------------------------------------------------------------------
  Annual Expenses
    (as a percentage of net assets attributable to Common Stock)
    Management Fees                                                        0.70%
    Other Expenses*                                                        0.15
--------------------------------------------------------------------------------
  TOTAL ANNUAL OPERATING EXPENSES*                                         0.85%
================================================================================
*     "Other Expenses", as shown above, is based upon amounts of expenses for
      the fiscal year ended December 31, 1997.


      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 Fund. These amounts are based upon payment by
the Fund 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:


Smith Barney Municipal Fund, Inc.     1 year   3 years    5 years   10 years
--------------------------------------------------------------------------------
                                        $9       $27        $47       $105
--------------------------------------------------------------------------------


      Moreover, while the example assumes a 5% annual return, the Fund'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 Fund'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." This example should not be considered a representation of
future expenses of the Fund and actual expenses may be greater or less than
those shown.


                                                                               8
<PAGE>

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


      The following information has been audited by KPMG Peat Marwick LLP,
independent auditors, whose report thereon appears in the Fund's annual report
dated December 31, 1997. The information set out below should be read in
conjunction with the financial statements and related notes that also appear in
the Fund's Annual Report to Shareholders.


For a share of capital stock outstanding throughout the year:

<TABLE>
<CAPTION>
Smith Barney Municipal Fund, Inc.        1997      1996        1995        1994        1993      1992(a)(b)
------------------------------------------------------------------------------------------------------------
<S>                                    <C>       <C>         <C>         <C>         <C>         <C>    

Net Asset Value, Beginning of Year     $ 15.42   $ 15.75     $ 14.30     $ 15.85     $ 14.81     $ 15.00
------------------------------------------------------------------------------------------------------------
Income (Loss) From Operations:                   
  Net investment income                   0.83      0.84        0.83        0.84        0.84        0.32*
  Net realized and unrealized gain (loss) 0.50     (0.32)       1.47       (1.54)       1.00       (0.21)
------------------------------------------------------------------------------------------------------------
Total Income (Loss) from Operations       1.33      0.52        2.30       (0.70)       1.84        0.11
------------------------------------------------------------------------------------------------------------
Less Distributions From:                         
   Net investment income                 (0.84)    (0.85)      (0.85)      (0.85)      (0.80)      (0.30)
  In excess of net investment income     (0.01)     --          --          --          --          --
  Net realized gains                     (0.06)     --          --          --          --          --
------------------------------------------------------------------------------------------------------------
  Total Distributions                    (0.91)    (0.85)      (0.85)      (0.80)      (0.85)      (0.83)
------------------------------------------------------------------------------------------------------------
Net Asset Value, End of Year           $ 15.84   $ 15.42     $ 15.75     $ 14.30     $ 15.85     $ 14.81
------------------------------------------------------------------------------------------------------------
Total Return, Based on                           
  Market Value                           10.18%    11.02%      15.83%     (12.96)%     14.30%      (3.47)%++
------------------------------------------------------------------------------------------------------------
Total Return, Based on                           
  Net Asset Value                         9.38%     3.96%      17.11%      (4.09)%     12.82%       0.81%++
------------------------------------------------------------------------------------------------------------
Net Assets, End of Year (000s)         $63,678   $62,012     $63,341     $57,508     $63,724     $59,561
------------------------------------------------------------------------------------------------------------
Ratios to Average Net Assets:                    
  Expenses                                0.85%     0.90%       0.86%       0.86%       0.85%       0.56%+*
  Net investment income                   5.31      5.45        5.48        5.59        5.42        5.22+
------------------------------------------------------------------------------------------------------------
Fund Turnover Rate                          58%       30%         21%         35%         23%         36%
------------------------------------------------------------------------------------------------------------
Market Price, End of Year              $ 14.88   $ 14.38     $ 13.75     $ 12.63     $ 15.38     $ 14.25
============================================================================================================
</TABLE>


(a)   Based on the weighted average shares outstanding for period.
(b)   For the period from July 31, 1992 (commencement of operations) to December
      31, 1992.
++    Total return is not annualized as it may not be representative of the
      total return for the year.
+     Annualized.
*     The Investment Manager waived a portion of its fees for the period from
      July 31, 1992 to December 31, 1992. If such fees were not waived, the per
      share decrease in net investment income would have been $0.014, and the
      ratio of expenses to average net assets would have been 0.79%
      (annualized).


                                                                               9
<PAGE>

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


      The Fund is a diversified, closed-end management investment company that
seeks a high level of current income exempt from ordinary Federal income tax
consistent with prudent investing. The Fund, which was incorporated under the
laws of the State of Maryland on May 19, 1992, is registered under the
Investment Company Act of 1940, as amended (the "1940 Act"), and has its
principal office at 388 Greenwich Street, New York, New York 10013. The Fund's
telephone number is (800) 331-1710.


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


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


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

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

--------------------------------------------------------------------------------
Investment Objectives and Management Policies
--------------------------------------------------------------------------------


      Set out below is a description of the investment objective and principal
investment policies of the Fund. No assurance can be given that the Fund will be
able to achieve its investment objective, which may be changed only with the
approval of a "majority of the outstanding voting securities" as defined in the
1940 Act. Such term is defined in the 1940 Act as the lesser of (i) more than
50% of the Fund's outstanding Common Stock and of any outstanding shares of
preferred stock, voting by class, or (ii) 67% of the Fund's outstanding Common
Stock and of any outstanding shares of preferred stock, voting by class, present
at a meeting at which the holders of more than 50% of the outstanding shares of
each such class are



10
<PAGE>

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

present in person or by proxy. All other investment policies or practices are
considered by the Fund not to be fundamental and accordingly may be changed
without shareholder approval.

      General

   
      The Fund's investment objective is to provide shareholders a high level of
current income exempt from regular Federal income tax consistent with prudent
investing. Under normal market conditions, the Fund will invest at least two
thirds of its total assets in municipal securities rated in the category A or
better by S&P or by Moody's, or otherwise within the three highest ratings
categories by an NRSRO (or, if not so rated, which are, in the opinion of the
Investment Manager applying standards established by the Fund's Board of
Directors, of comparable credit quality to those so rated), at the time of
investment. Under normal market conditions, the Fund will also invest only in
municipal securities rated investment grade at the time of investment.
Investment grade securities are securities rated BBB or higher by S&P, Baa or
higher by Moody's or otherwise within the four highest ratings categories of an
NRSRO (or, if not so rated, which are, in the opinion of the Investment Manager
applying standards established by the Fund's Board of Directors, of comparable
credit quality to those so rated). The Fund will not invest in any municipal
securities that are rated lower than BBB by S&P or Baa by Moody's if they are
not otherwise rated as investment grade by another NRSRO. Securities rated BBB
by S&P are regarded by S&P as having an adequate capacity to pay interest and
repay principal; whereas such securities 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. Securities rated Baa by
Moody's are considered by Moody's as medium grade obligations; they are neither
highly protected nor poorly secured; interest payments and principal security
appear adequate for the present but certain protective elements may be lacking
or may be characteristically unreliable over any great length of time; they lack
outstanding investment characteristics and in fact have speculative
characteristics as well. The Fund may be more dependent upon the Investment
Manager's investment analysis of unrated municipal securities than is the case
with respect to rated municipal securities. See "Investment Objective and
Management Policies -- Risk Factors and Special Considerations" and Appendix A.
The Fund's policy is to invest at least 80% of its total assets in municipal
securities with remaining maturities of less than fifteen years.
    
      The foregoing policies with respect to credit quality of portfolio
investments will apply only at the time of the purchase of a security, and the
Fund will not be required to dispose of securities in the event that S&P or
Moody's or any other NRSRO downgrades its assessment of the credit
characteristics of a particular



                                                                              11
<PAGE>

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

issuer or in the event the Investment Manager reassesses its view with respect
to the credit quality of the issuer thereof.

      Municipal securities are obligations issued by or on behalf of states,
territories and possessions of the United States and the District of Columbia
and their political subdivisions, agencies and instrumentalities, the interest
on which, in the opinion of bond counsel or other counsel to the issuer of such
securities is, at the time of issuance, not includable in gross income for
Federal income tax purposes. Under normal market conditions, at least 80% of the
Fund's total assets will be invested in municipal securities. The policy stated
in the foregoing sentence is a fundamental policy and cannot be changed without
shareholder approval. The Fund has not established any limit on the percentage
of its portfolio that may be invested in municipal securities subject to the
alternative minimum tax provisions of Federal tax law, and a substantial portion
of the income produced by the Fund may be taxable under the alternative minimum
tax. The Fund may not be a suitable investment for investors who are already
subject to the Federal alternative minimum tax or who would become subject to
the Federal alternative minimum tax as a result of an investment in the Fund.


      The two principal classifications of municipal bonds are "general
obligation" bonds and "revenue" or "special obligation" bonds, which include
"industrial revenue bonds." General obligation bonds are secured by the issuer's
pledge of its faith, credit and taxing power for the payment of principal and
interest, and accordingly the capacity of the issuer of a general obligation
bond as to the timely payment of interest and the repayment of principal when
due is affected by the issuer's maintenance of its tax base. Revenue or special
obligation bonds are payable only from the revenues derived from a particular
facility or class of facilities or, in some cases, from the proceeds of a
special tax or other specific revenue source such as from the user of the
facility being financed; accordingly, the timely payment of interest and the
repayment of principal in accordance with the terms of the revenue or special
obligation bond is a function of the economic viability of such facility or such
revenue source. Although the ratings of NRSROs of the municipal securities in
the Fund's portfolio are relative and subjective, and are not absolute standards
of quality, such ratings reflect the assessment of the NRSRO of the issuer's
ability, or the economic viability of the special revenue source, with respect
to the timely payment of interest and the repayment of principal in accordance
with the terms of the obligation. See Appendix A.


      Also included within the general category of municipal securities are
participations in lease obligations or installment purchase contract obligations
(hereinafter collectively called "lease obligations") of municipal authorities
or entities. Although lease obligations do not constitute general obligations of
the municipality for which the municipality's taxing power is pledged, a lease
obligation is ordinarily backed by the municipality's covenant to budget for,
appropriate and 


                                       12
<PAGE>

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

make the payments due under the lease obligation. However, certain lease
obligations contain "non-appropriation" clauses which provide that the
municipality has no obligation to make lease or installment purchase payments in
future years unless money is appropriated for such purpose on a yearly basis. In
addition to the "non-appropriation" risk, these securities represent a
relatively new type of financing that has not yet developed the depth of
marketability associated with more conventional bonds. Although
"non-appropriation" lease obligations are often secured by the underlying
property, disposition of the property in the event of foreclosure might prove
difficult. There is no limitation on the percentage of the Fund's assets that
may be invested in "non-appropriation" lease obligations and in unrated
"non-appropriation" lease obligations believed, at the time of investment, by
the Investment Manager to have credit characteristics equivalent to, and to be
of comparable quality as, securities that are rated investment grade. In
evaluating such unrated lease obligations, the Investment Manager will consider
such factors as it deems appropriate, including (a) whether the lease can be
cancelled, (b) the ability of the lease obligee to direct the sale of the
underlying assets, (c) the general creditworthiness of the lease obligor, (d)
the likelihood that the municipality will discontinue appropriating funding for
the leased property in the event such property is no longer considered essential
by the municipality, (e) the legal recourse of the lease obligee in the event of
such a failure to appropriate funding and (f) any limitations which are imposed
on the lease obligor's ability to utilize substitute property or services than
those covered by the lease obligations. See "Investment Objective and Management
Policies -- Risk Factors and Special Considerations."

      Participation certificates are obligations issued by state and local
governments or authorities to finance the acquisition of equipment and
facilities. They may represent participations in a lease, an installment
purchase contract, or a conditional sales contract. Some municipal leases and
participation certificates may not be readily marketable. See "Investment
Objective and Management Policies -- Risk Factors and Special Considerations."

      The "issuer" of municipal securities is generally deemed to be the
governmental agency, authority, instrumentality or other political subdivision,
or the non-governmental user of a revenue bond-financed facility, the assets and
revenues of which will be used to meet the payment obligations, or the guarantee
of such payment obligations, of the municipal securities.

      Municipal securities may have fixed or variable interest rates. The Fund
may purchase floating and variable rate demand notes, which are municipal
securities normally having a stated maturity in excess of one year, but which
permit the holder to tender the notes for purchase at the principal amount
thereof. The interest rate on a floating rate demand note is based on a known
lending rate, such as a bank's prime rate, and is adjusted each time such rate
is adjusted. The interest rate on a variable rate demand note is adjusted at
specified intervals. There generally is 


                                                                              13
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Investment Objectives and Management Policies (continued)
--------------------------------------------------------------------------------

no secondary market for these notes, although they may be tendered for
redemption or remarketing at face value. See "Investment Objectives and
Management Policies -- Risk Factors and Special Considerations." Each such note
purchased by the Fund will meet the criteria established for the purchase of
municipal securities.


      The Fund may invest in zero coupon bonds. A zero coupon bond pays no
interest in cash to its holder during its life, although interest is accrued
during that period. Its value to an investor consists of the difference between
its face value at the time of maturity and the price for which it was acquired,
which is generally an amount significantly less than its face value (sometimes
referred to as a "deep discount" price). Because such securities usually trade
at a deep discount, they will be subject to greater fluctuations of market value
in response to changing interest rates than debt obligations of comparable
maturities which make periodic distribu-tions of interest. On the other hand,
because there are no periodic interest payments to be reinvested prior to
maturity, zero coupon securities eliminate the reinvestment risk and lock in a
rate of return to maturity.


      Selection of Investments

      The Investment Manager will select securities for the Fund's portfolio
which the Investment Manager believes entail reasonable credit risk considered
in relative to the particular investment policies of the Fund. As a result, the
Fund will not necessarily invest in the highest yielding municipal securities
permitted by its investment policies if the Investment Manager determines that
market risks or credit risks associated with such investments would subject the
Fund's portfolio to excessive risk. The potential for realization of capital
gains resulting from possible changes in interest rates will not be a major
consideration. The Fund's policy is to invest at least 80% of its total assets
in municipal securities with remaining maturities of less than fifteen years.
For this purpose, any scheduled principal prepayments on municipal securities
will be reflected in the calculation of dollar-weighted average maturity. The
Investment Manager may adjust the average maturity of the Fund's portfolio from
time to time, depending on its assessment of the relative yields available on
securities of different maturities and its expectations of future changes in
interest rates.

      The Fund will not invest more than 25% of its total assets in any
industry, nor will the Fund invest more than 5% of its total assets in the
securities of any single issue. Governmental issuers of municipal securities are
not considered part of any "industry". However, municipal securities backed only
by the assets and revenues of nongovernmental users may for this purpose be
deemed to be issued by such nongovernmental users, and the 25% limitation would
apply to the industries of such nongovernmental users. It is nonetheless
possible that the Fund may invest more than 25% of its total assets in the
following types of municipal securities: hospital and other health care
facilities obligations, housing agency revenue obligations, airport revenue
obligations, electric utility obligations, water and


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

sewer obligations, university and college revenue obligations, student loan
obligations, bridge authority and toll road obligations and resource recovery
obligations. The Fund will invest more than 25% of its asset in such types of
municipal securities if the Investment Manager determines that the yields
available from such obligations justify the additional risks associated with a
large investment in such obligations. Although such obligations could be
supported by the credit of governmental users, or by the credit of
nongovernmental users engaged in a number of industries, economic, business,
political and other developments generally affecting the revenues of such users
(for example proposed legislation or pending court decisions affecting the
financing of such projects and market factors affecting the demand for their
services or products may have a general adverse effect on all such municipal
securities. The Fund reserves the right to invest more than 25% of its assets in
industrial development bonds or in issuers located in the same state, although
it has no present intention to invest more than 25% of its assets in issuers
located in the same state. If the Fund were to invest more than 25% of its total
assets in issuers located in the same state, it would be more susceptible to
adverse economic, business, or regulatory conditions in that state.

      From time to time, the Fund's investments may include securities as to
which the Fund, 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
securities. Because there may be relatively few potential purchasers for such
investments and, in some cases, there may be contractual restrictions on
resales, the Fund may find it more difficult to sell such securities at a time
when the Investment Manager believes it advisable to do so.

      Temporary Defensive Strategies


      During times when the Investment Manager believes a temporary defensive
posture in the market is warranted (e.g., times when, in the Investment
Manager's opinion, temporary imbalances of supply and demand or other temporary
dislocations in the municipal securities market adversely affect the price at
which municipal securities are available), and in order to keep cash on hand
fully invested, the Fund may temporarily invest to a substantial degree in high
quality, short-term municipal securities. If these high-quality, short-term
municipal securities are not available or, in the Investment Manager's judgment,
do not afford sufficient protection against adverse market conditions, the Fund
may invest in the following taxable securities: obligations of the U.S.
Government, its agencies or instrumentalities; other debt securities rated
within the four highest grades by an NRSRO; commercial paper rated in the
highest category by an NRSRO; certificates of deposit, time deposits and
bankers' acceptances; or repurchase agreements with respect to any of the
foregoing investments. To the extent the Fund invests in taxable securities, the
Fund will not at such times be in a position to achieve its investment objective
of income exempt from ordinary Federal income taxes.



                                       15
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Investment Objectives and Management Policies (continued)
--------------------------------------------------------------------------------

      Investment Techniques

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

      In connection with the investment objective and policies described above,
the Fund may: engage in interest rate and other hedging and risk management
transactions; purchase and sell options (including swaps, caps, floors and
collars) on municipal securities and on indices based on municipal securities
and purchase and sell municipal securities on a "when-issued" or "delayed
delivery" basis. These investment practices entail risks. The Investment Manager
may use some or all of the following hedging and risk management practices when
their use appears appropriate. Although the Investment Manager believes that
these investment practices may further the Fund's investment objective, no
assurance can be given that these investment practices will achieve this result.
The Investment Manager may also decide not to engage in any of these investment
practices.


      Securities Options Transactions. The Fund may invest in options on
municipal securities. Such options are traded over-the-counter, although if
options on municipal securities were to be listed for trading on a national
securities exchange, the Fund may trade in exchange-listed options. In general,
the Fund may purchase and sell (or write) options on up to 20% of its assets.
The SEC requires that obligations of investment companies such as the Fund, in
connection with options sold, must comply with certain segregation or cover
requirements which are more fully described in Appendix B. There is no
limitation on the amount of the Fund's assets which can be used to comply with
such segregation or cover requirements.


      A call option gives the purchaser the right to buy, and the writer the
obligation to sell, the underlying security at the agreed-upon exercise (or
"strike") price during the option period. A put option gives the purchaser the
right to sell, and the writer the obligation to buy, the underlying security at
the strike price during the option period. Purchasers of options pay an amount,
known as a premium, to the option writer in exchange for the right under the
option contract. Option contracts may be written with terms which would permit
the holder of the option to purchase or sell the underlying security only upon
the expiration date of the option.

      The Fund may purchase put and call options in hedging transactions to
protect against a decline in the market value of municipal securities in the
Fund's portfolio (e.g., by the purchase of a put option) and to protect against
an increase in the cost of fixed income securities that the Fund may seek to
purchase in the future (e.g., by the purchase of a call option). In the event
the Fund purchases put and call options, paying premiums therefor, and price
movements in the underlying securities are such that exercise of the options
would not be profitable for the Fund, to the extent such underlying securities
correlate in value to the Fund's portfolio securities, losses of the premiums
paid may be offset by an increase in the value of the Fund's


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

portfolio securities (in the case of a purchase of put options) or by a decrease
in the cost of acquisition of securities by the Fund (in the case of a purchase
of call options).

      The Fund may also sell put and call options in hedging transactions as a
means of providing limited protection against decreases in market value of the
Fund's portfolio. When the Fund sells an option, if the underlying securities do
not increase (in the case of a call option) or decrease (in the case of a put
option) to a price level that would make the exercise of the option profitable
to the holder of the option, the option generally will expire without being
exercised and the Fund will realize as profit the premium received for such
option. When a call option written by the Fund is exercised, the option holder
purchases the underlying security at the strike price and the Fund does not
participate in any increase in the price of such securities above the strike
price. When a put option written by the Fund is exercised, the Fund will be
required to purchase the underlying securities at the strike price, which may be
in excess of the market value of such securities.

      OTC Options. Over-the-counter options ("OTC options") differ from
exchange-traded options in several respects. They are transacted directly with
dealers and not with a clearing corporation, and there is a risk of
non-performance by the dealer. OTC options are available for a greater variety
of securities and for a wider range of expiration dates and exercise prices than
are exchange-traded options. Because OTC options are not traded on an exchange,
pricing is normally done by reference to information from a market maker, which
information is carefully monitored by the Investment Manager and verified in
appropriate cases. The Fund may be required to treat certain of its OTC options
transactions as illiquid securities. See Appendix B.

      It will generally be the Fund's policy, in order to avoid the exercise of
an option sold by it, to cancel its obligation under the option by entering into
a closing purchase transaction, if available, unless it is determined to be in
the Fund's interest to sell (in the case of a call option) or to purchase (in
the case of a put option) the underlying securities. A closing purchase
transaction consists of the Fund purchasing an option having the same terms as
the option sold by the Fund and has the effect of cancelling the Fund's position
as a seller. The premium which the Fund will pay in executing a closing purchase
transaction may be higher than the premium received when the option was sold,
depending in large part upon the relative price of the underlying security at
the time of each transaction. To the extent options sold by the Fund are
exercised and the Fund either delivers portfolio securities to the holder of a
call option or liquidates securities in its portfolio as a source of funds to
purchase securities put to the Fund, the Fund's portfolio turnover rate will
increase, which would cause the Fund to incur additional brokerage expenses.

      During the option period, the Fund, as a covered call writer, gives up the
potential appreciation above the exercise price should the underlying security
rise


                                                                              17
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Investment Objectives and Management Policies (continued)
--------------------------------------------------------------------------------

in value, and the Fund, as a secured put writer, retains the risk of loss should
the underlying security decline in value. For the covered call writer,
substantial appreciation in the value of the underlying security would result in
the security being "called away" at the strike price of the option which may be
substantially below the fair market value of such security. For the secured put
writer, substantial depreciation in the value of the underlying security would
result in the security being "put to" the writer at the strike price of the
option which may be substantially in excess of the fair market value of such
security. If a covered call option or a secured put option expires unexercised,
the writer realizes a gain, and the buyer a loss, in the amount of the premium.

      To the extent that an active market exists or develops, whether on a
national securities exchange or over-the-counter, in options on indices based
upon municipal securities, the Fund may purchase and sell options on such
indices, subject to the limitation that the Fund may purchase and sell options
on up to 20% of its assets. Through the writing or purchase of index options the
Fund can achieve many of the same objectives as through the use of options on
individual securities. Options on securities indices are similar to options on
securities except that, rather than the right to take or make delivery of a
security at a specified price, an option on a securities index gives the holder
the right to receive, upon exercise of the option, an amount of cash if the
closing level of the securities index upon which the option is based is greater
than, in the case of a call, or less than, in the case of a put, the strike
price of the option.

      Price movements in securities which the Fund owns or intends to purchase
will not correlate perfectly with movements in the level of an index and,
therefore, the Fund bears the risk of a loss on an index option which is not
completely offset by movements in the price of such securities. Because index
options are settled in cash, a call writer cannot determine the amount of its
settlement obligations in advance and, unlike call writing on specific
securities, cannot provide in advance for, or cover, its potential settlement
obligations by acquiring and holding the underlying securities.

      Gains, if any, recognized or deemed to be recognized by the Fund from
transactions in securities options will be taxable income of the Fund. Under a
revenue ruling issued by the Internal Revenue Service, the Fund is required to
allocate net capital gains and other taxable income, if any, among Common Stock
on a pro rata basis for the year in which such net capital gains or other
taxable income are realized. See "Taxation" and "Dividends and Distributions;
Dividend Reinvestment Plan." For a further discussion of certain characteristics
of options and risks associated with options transactions, see Appendix B.


      Borrowing and Leverage. The Fund is authorized to borrow amounts up to
331/3% of its total assets (including the amount borrowed). The use of borrowed
funds involves the speculative factor known as "leverage." The Fund is also



18
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Investment Objectives and Management Policies (continued)
--------------------------------------------------------------------------------

permitted to issue preferred stock which would permit it to assume leverage in
an amount up to 50% of its total assets. If any preferred stock were to be
issued, it would have a priority on the income and assets of the Fund over the
Common Stock and would have certain other rights with respect to voting and the
election of directors. See "Description of Shares." The Fund will only utilize
leverage when there is an expectation that it will benefit the Fund or the
holders of Common Stock. To the extent the income or other gain derived from
securities purchased with the proceeds of borrowings or preferred stock
issuances exceeds the interest or dividends the Fund would have to pay thereon,
the Fund's net income or other gain would be greater than if leverage had not
been used. Conversely, if the income or other gain from the securities purchased
through leverage is not sufficient to cover the cost of such leverage, the total
return of the Fund would be less than if leverage had not been used. If leverage
is used, in certain circumstances the Fund could be required to liquidate
securities it would not otherwise sell in order to satisfy dividend or interest
obligations. Leverage creates an opportunity for increased returns for the
holders of Common Stock, but creates special risks at the same time, including
the likelihood of greater volatility of the net asset value and market value of
the Common Stock, and the risk that fluctuations in the short-term dividend
rates of the preferred stock may affect the yield to the holders of Common
Stock. Similarly, since any decline in the net asset value of the Fund's
investments would be borne entirely by the holders of Common Stock, the effect
of leverage in a declining market would result in a greater decrease in net
asset value to the holders of Common Stock than if the Fund were not leveraged,
which would likely be reflected in a greater decline in the market price of the
Common Stock. See "Description of Shares."


      In addition to the foregoing, the Fund may borrow on a short-term basis in
order to facilitate the settlement of portfolio securities transactions.


      Interest Rate and Other Hedging Transactions. In order to seek to protect
the value of its portfolio securities against declines resulting from changes in
interest rates or other market changes, the Fund may enter into the following
hedging transactions: financial futures contracts and related options contracts.

      The Fund may enter into various interest rate hedging transactions using
financial instruments with a high degree of correlation to the municipal
securities which the Fund may purchase for its portfolio, including interest
rate futures contracts (e.g., futures contracts on U.S. Treasury securities) and
futures contracts on interest rate related indices (e.g., municipal bond
indices). The Fund may also purchase and write put and call options on such
futures contracts and on the underlying instruments. The Fund may enter into
these transactions in an attempt to "lock in" a return or spread on a particular
investment or portion of its portfolio, to protect against any increase in the
price of securities the Fund anticipates purchasing at a later date, or for
other risk management strategies. Financial futures


                                                                              19
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Investment Objectives and Management Policies (continued)
--------------------------------------------------------------------------------

and options contracts and the risks attendant to the Fund's use thereof, are
more completely described in Appendix B. The successful utilization of hedging
and risk management transactions requires skills different from those needed in
the selection of the Fund's portfolio securities. The Fund believes that the
Investment Manager possesses the skills necessary for the successful utilization
of hedging and risk management transactions.

      The Fund will not engage in the foregoing transactions for speculative
purposes, but only in limited circumstances as a means to hedge risks associated
with management of the Fund's portfolio. Typically, investments in futures
contracts and sales of futures options contracts require the Fund to deposit in
a custodial account a good faith deposit, known as "initial margin," in
connection with its obligations in an amount of cash or specified debt
securities which generally is equal to 1%-15% of the face amount of the
contract, which initial margin requirement may be revised periodically by the
applicable exchange as the volatility of the contract fluctuates. Thereafter,
the Fund must make additional deposits with the applicable financial
intermediary equal to any net losses due to unfavorable price movements of the
contract, and will be credited with an amount equal to any net gains due to
favorable price movements. These additional deposits or credits are calculated
and required daily and are known as "variation margin."

      The SEC generally requires that when investment companies, such as the
Fund, effect transactions of the foregoing nature, such funds must either
segregate cash or high quality, readily marketable portfolio securities with its
custodian or financial intermediary in the amount of its obligations under the
foregoing transactions, or cover such obligations by maintaining positions in
portfolio securities, futures contracts or options that would serve to satisfy
or offset the risk of such obligations. When effecting transactions of the
foregoing nature, the Fund will comply with such segregation or cover
requirements. There is no limitation on the percentage of the Fund's assets
which may be segregated with respect to such transactions. A large percentage of
the Fund's assets segregated to cover hedging transactions may impair the Fund's
ability to meet current obligations and may limit the Fund's flexibility to
manage its assets.

      The Fund will not enter into a futures contract or related option if,
immediately after such investment, the sum of the amount of its initial margin
deposits and premiums on open contracts and options would exceed 5% of the fair
market value of the Fund's total assets after taking into account unrealized
profits and unrealized losses on any such contracts. The Fund may, however,
invest more than such amount in the future if it obtains authority to do so from
the appropriate regulatory agencies without requiring the Fund to register as a
commodity pool operator or adversely affecting its status as an investment
company for Federal securities law or income tax purposes.

      All of the foregoing transactions present certain risks. In particular,
the variable


20
<PAGE>

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

degree of correlation between price movements of futures contracts and price
movements in the securities being hedged creates the possibility that losses on
the hedge may be greater than gains in the value of the Fund's securities. In
addition, these instruments may not be liquid in all circumstances and generally
are closed out by entering into offsetting transactions rather than by delivery
or cash settlement at maturity. As a result, in volatile markets, the Fund may
not be able to close out a transaction on favorable terms or at all. Although
the contemplated use of those contracts should tend to reduce the risk of loss
due to a decline in the value of the hedged security, at the same time the use
of these contracts could tend to limit any potential gain which might result
from an increase in the value of such security. Finally, the daily deposit
requirements for futures contracts and sales of futures options contracts create
an ongoing greater potential financial risk than do option purchase
transactions, where the exposure is limited to the cost of the premium for the
option.

      Successful use of futures contracts and options thereon by the Fund is
subject to the ability of the Investment Manager to predict correctly movements
in the direction of interest rates and other factors affecting markets
securities. If the Investment Manager's expectations are not met, the Fund would
be in a worse position than if a hedging strategy had not been pursued. For
example, if the Fund has hedged against the possibility of an increase in
interest rates which would adversely affect the price of securities in its
portfolio and the price of such securities increases instead, the Fund will lose
part or all of the benefit of the increased value of its securities because it
will have offsetting losses in its futures positions. In addition, in such
situations, if the Fund has insufficient cash to meet daily variation margin
requirements, it may have to sell securities to meet such requirements. Such
sales of securities may be, but will not necessarily be, at increased prices
which reflect the rising market. The Fund may have to sell securities at a time
when it is disadvantageous to do so.

      In addition to engaging in transactions utilizing options on futures
contracts, the Fund may purchase put and call options on securities and, as
developed from time to time, on interest indices and other instruments.
Purchasing options may increase investment flexibility and improve total return,
but also risks loss of the option premium if an asset the Fund has the option to
buy declines in value or if an asset the Fund has the option to sell increases
in value.

      Gains, if any, recognized or deemed to be recognized by the Fund from its
hedging activities, will be taxable income of the Fund. See "Taxation" and
"Dividends and Distributions; Dividend Reinvestment Plan."


      When-Issued and Delayed Delivery Transactions. The Fund may purchase
municipal securities on a "when-issued" and "delayed delivery" basis and may
purchase or sell municipal securities on a "delayed delivery" basis in order to
hedge against anticipated changes in interest rates and prices. No income
accrues to the



                                                                              21
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Investment Objectives and Management Policies (continued)
--------------------------------------------------------------------------------

Fund on municipal securities in connection with such transactions prior to the
date the Fund actually takes delivery of such securities. These transactions are
subject to market fluctuation; the value of the municipal securities at delivery
may be more or less than their purchase price, and yields generally available on
municipal securities when delivery occurs may be higher than yields on the
municipal securities obtained pursuant to such transactions. Because the Fund
relies on the buyer or seller, as the case may be, to consummate the
transaction, failure by the other party to complete the transaction may result
in the Fund missing the opportunity of obtaining a price or yield considered to
be advantageous. When the Fund is the buyer in such a transaction, however, it
will maintain, in a segregated account with its custodian, cash, debt securities
of any grade or equity securities, having a value equal to or greater than the
Fund's purchase commitments, provided such securities have been determined by
the Investment Manager to be liquid and unencumbered, and are marked to market
daily, pursuant to guidelines established by the Directors. When the Fund is the
seller in such a transaction, it will cover its commitment to deliver the
security by maintaining positions in portfolio securities that would serve to
satisfy or offset the risk of such obligations. The Fund will make commitments
to purchase municipal securities on such basis only with the intention of
actually acquiring these securities, but the Fund may sell such securities prior
to the settlement date if such sale is considered to be advisable.

      To the extent that the Fund engages in "when-issued" and "delayed
delivery" transactions, it will do so for the purpose of acquiring securities
for the Fund's portfolio consistent with the Fund's investment objective and
policies. However, although the Fund does not intend to engage in such
transactions for speculative purposes, purchases of securities on such basis may
involve more risk than other types of purchases. For example, if the Fund
determines it is necessary to sell the "when-issued" or "delayed delivery"
securities before delivery, it may incur a gain or a loss because of market
fluctuations since the time the commitment to purchase such securities was made.
Subject to the requirement of maintaining a segregated account, no specified
limitation exists as to the percentage of the Fund's assets which may be used to
acquire securities on a "when-issued" or "delayed delivery" basis. A significant
percentage of the Fund's assets committed to the purchase of securities on a
"when-issued" "delayed delivery" basis may increase the volatility of the Fund's
net asset value and may limit the flexibility to manage the Fund's investments.

      Risk Factors and Special Considerations

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

      The Fund is a closed-end investment company. Shares of closed-end
investment companies frequently trade at a discount from net asset value; but in
some


22
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Investment Objectives and Management Policies (continued)
--------------------------------------------------------------------------------

cases trade at a premium. The Fund cannot predict whether its Common Stock will
trade at, above or below net asset value.

      In normal market conditions, substantially all of the Fund's total assets
will be invested in municipal securities rated investment grade at the time of
investment. The Fund may invest in unrated municipal securities believed, at the
time of investment, by the Investment Manager to have credit characteristics
equivalent to, and to be of comparable quality as, municipal securities that are
rated investment grade. The amount of available information about the financial
condition of municipal securities issuers may be less extensive than that for
corporate issuers with publicly traded securities, and the market for municipal
securities may be less liquid than the market for corporate debt obligations.
Liquidity relates to the ability of the Fund to sell a security in a timely
manner at a price which reflects the value of that security. The market for
unrated municipal securities is considered generally to be less liquid than the
market for rated municipal securities. Further, municipal securities in which
the Fund may invest include special obligation bonds, lease obligations,
participation certificates and variable rate instruments. The market for such
securities may be less liquid than the market for general obligation municipal
securities. The relative illiquidity of some of the Fund's portfolio securities
may adversely affect the ability of the Fund to dispose of such 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 some municipal securities may be
obligated to redeem such securities at face value, such redemption could result
in capital losses to the Fund to the extent that such municipal securities were
purchased by the Fund at a premium to face value.

      Although the municipal securities in which the Fund may invest will be, at
the time of investment, rated investment grade or believed by the Investment
Manager to be of comparable quality, municipal securities, like other debt
obligations, are subject to the risk of non-payment. Such non-payment would
result in a reduction of income to the Fund, and could result in a reduction in
the value of the municipal security experiencing non-payment and a potential
decrease in the net asset value of the Fund. Issuers of municipal securities
might seek protection under the bankruptcy laws. In the event of bankruptcy of
such an issuer, the Fund could experience delays and limitations with respect to
the collection of principal and interest on such municipal securities, and the
Fund may not, in all circumstances, be able to collect all principal and
interest to which it is entitled. To enforce its rights in the event of a
default in the payment of interest or repayment of principal or both, the Fund
may take possession of and manage the assets securing the issuer's obligations
on such


                                       23
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Investment Objectives and Management Policies (continued)
--------------------------------------------------------------------------------

securities, which may increase the Fund's operating expenses and adversely
affect the net asset value of the Fund. Any income derived from the Fund's
ownership or operation of such assets may not be tax-exempt. In addition, the
Fund's intention to qualify as a "regulated investment company" under the Code,
may limit the extent to which the Fund may exercise its rights by taking
possession of such assets, because as a regulated investment company the Fund is
subject to certain limitations on its investments and on the nature of its
income. See "Taxation."

      Lease obligations in which the Fund may invest may contain
"non-appropriation" clauses which provide that the municipality has no
obligation to make lease or installment purchase payments in future years unless
money is appropriated for such purpose on a yearly basis. A risk exists that the
municipality will not, or will be unable to, appropriate money in the future in
the event of political changes, changes in the economic viability of the
project, general economic changes or for other reasons. Although such lease
obligations generally are secured by a lien on the leased property, disposition
of the property in the event of foreclosure could be costly, time consuming and
result in unsatisfactory recoupment of the Fund's original investment.


      The Investment Manager values the Fund's investment on the basis of bid
prices provided by a pricing service when the Fund believes such prices reflect
fair market value. To the extent that there is no established retail market for
some of the securities in which the Fund may invest, there may be relatively
inactive trading in such securities and the ability of a pricing service or the
Investment Manager to accurately value such securities may be adversely
affected. During periods of reduced market liquidity and in the absence of
readily available market quotations for municipal securities held in the Fund's
portfolio, the responsibility of the Investment Manager to value the Fund's
securities becomes more difficult and the Investment Manager's judgment may play
a greater role in the valuation of the Fund's securities due to the reduced
availability of reliable objective data. To the extent that the Fund invests in
illiquid securities and securities which are restricted as to resale, the Fund
may incur additional risks and costs. Illiquid securities are particularly
difficult to dispose of.

      The net asset value of the Fund's Common Stock will change with changes in
the value of its portfolio securities. The net asset value of the Common Stock
of the Fund can be expected to change as general levels of interest rates
fluctuate. All of the foregoing risks affecting net asset value will be
magnified if the Fund issues preferred stock or borrows money. Volatility may be
greater during periods of general economic uncertainty.

   
The Fund has not established any limit on the percentage of its portfolio
that may be invested in municipal securities subject to the alternative minimum
tax under Federal tax law, and a substantial portion of the income
produced by the Fund may be taxable under the alternative minimum tax. The Fund
may not be a


24
<PAGE>

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

suitable investment for investors who are already subject to the Federal
alternative minimum tax or who would become subject to the Federal alternative
minimum tax as a result of an investment in the Fund. In addition, income earned
or deemed to be earned with respect to the Fund's hedging transactions, if any,
will be taxable. See "Taxation."
    

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


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

      The following investment restrictions of the Fund are fundamental and
cannot be changed without the approval of the holders of a majority of the
Fund's outstanding voting securities as defined in the 1940 Act. If a percentage
restriction on investment or use of assets set forth below is adhered to at the
time a transaction is effected, later changes in percentage resulting from
changing market values will not be considered a deviation from policy. The Fund
may not:

      1. Purchase securities (other than obligations issued or guaranteed by the
      United States Government or by its agencies or instrumentalities) of any
      issuer if as a result of the purchase more than 5% of the value of the
      Fund's total assets would be invested in the securities of the issuer,
      except that up to 25% of the value of the Fund's total assets may be
      invested without regard to this 5% limitation.

      2. Invest more than 25% of its total assets in a single industry; however,
      as described above under "Investment Objective and Management Policies,"
      the Fund may from time to time invest more than 25% of its total assets in
      a certain types of municipal securities or in obligations of issuers
      located in the same state.


                                                                              25
<PAGE>

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


      3. Issue senior securities as defined in the 1940 Act, other than
      preferred stock, except to the extent such issuance might be involved with
      respect to borrowings described below or with respect to transactions
      involving futures contracts or the writing of options.


      4. Borrow money in excess of 331/3% of its total assets (including the
      amount of money borrowed but excluding any liabilities and indebtedness
      not constituting senior securities) except that the Fund may pledge its
      assets other than to secure such borrowings or in connection with
      when-issued and forward commitment transactions and similar investment
      strategies.

      5. Make loans of money or property to any person, except to the extent
      that the securities in which the Fund may invest are considered to be
      loans and except that the Fund may lend money or property in connection
      with the deposit of initial or variation margin in connection with hedging
      and risk management transactions.

      6. Buy any securities "on margin." Neither the deposit of initial or
      variation margin in connection with hedging and risk management
      transactions nor short-term credits as may be necessary for the clearance
      of transactions is considered the purchase of a security on margin.

      7. Sell any securities "short," write, purchase or sell puts, calls or
      combinations thereof, or purchase or sell financial futures or options,
      except as described under the heading "Investment Objective and Management
      Policies -- Investment Techniques" and in Appendix B to this Prospectus.

      8. Act as an underwriter of securities, except to the extent that the Fund
      may be deemed to be an underwriter in connection with the sale of
      securities held in its portfolio.

      9. Make investments for the purpose of exercising control or participation
      in management, except to the extent that exercise by the Fund of its
      rights under agreements related to municipal securities would be deemed to
      constitute such control or participation.

      10. Invest in securities of other investment companies in an amount
      exceeding the limitation set forth in the 1940 Act and the rules
      thereunder, except as part of a merger, consolidation or other
      acquisition.

      11. Invest in equity interests in oil, gas or other mineral exploration or
      development programs except pursuant to the exercise by the Fund of its
      rights under agreements relating to municipal securities.

      12. Purchase or sell real estate, except to the extent that the municipal
      securities the Fund may invest in are considered to be interests in real
      estate or to the extent that the Fund exercises its rights under
      agreements relating to such municipal securities (in which case the Fund
      may liquidate real estate acquired as a result of default on a mortgage).


26
<PAGE>

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

      13. Purchase or sell commodities or commodity contracts, except that the
      Fund may purchase or sell financial futures contracts and related options
      thereon.

      The Fund generally will not engage in the trading of securities for the
purpose of realizing short-term profits, but it will adjust its portfolio as it
deems advisable in view of prevailing or anticipated market conditions to
accomplish the Fund's investment objective. For example, the Fund may sell
portfolio securities in anticipation of a movement in interest rates. Other than
for tax purposes, frequency of portfolio turnover will not be a limiting factor
if the Fund considers it advantageous to purchase or sell securities, which must
be borne by the Fund and its shareholders. High portfolio turnover may also
result in the realization of substantial net short-term capital gains, and any
distributions resulting from such gains will be taxable at ordinary income rates
for federal income tax purposes.

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

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


      The following table sets forth for the Fund's Common Stock the following
information for each quarterly period during the last two fiscal years and for
the first quarter of 1998: high and low sales prices and net asset values; sales
price and net asset value at quarter-end; and the premium (discount) of the
sales price to net asset value at quarter-end.

                                                     AMEX
                        AMEX             NAV       Price at   NAV at
                       Price            Price      Quarter-  Quarter-  Premium
Three Months Ended     Range            Range         End      End    (Discount)
================================================================================
 3/31/96           $14.00 - 14.75  $15.25 - 15.85   $14.38   $15.36    (6.38)%
 6/30/96            13.50 - 14.50   15.06 - 15.37    13.88    15.23    (8.86)
 9/30/96            13.50 - 14.38   15.04 - 15.47    14.25    15.30    (6.86)
12/31/96            13.75 - 14.88   15.27 - 15.53    14.38    15.42    (6.74)
 3/31/97            13.88 - 14.38   15.22 - 15.60    14.13    15.22    (7.16)
 6/30/97            13.88 - 15.00   15.18 - 15.60    14.75    15.47    (4.65)
 9/30/97            14.25 - 15.00   15.49 - 15.78    14.75    15.71    (6.11)
12/31/97            14.06 - 15.00   15.63 - 15.89    14.88    15.84    (6.06)
 3/31/98            14.25 - 15.44   15.72 - 16.05    14.38    15.76    (8.76)
================================================================================

      As of April 3, 1998, the price per share of Common Stock as quoted on the
AMEX was $14.44, representing a 8.84% discount from the Common Stock's net asset
value calculated on that day.


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


                                                                              27
<PAGE>

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

      Directors and Officers

      The business and affairs of the Fund, including the general supervision of
the duties performed by the Investment Manager under the Investment Management
Agreement, are the responsibility of the Fund's Board of Directors. The
Directors and officers of the Fund, 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 Fund            During Past Five Years and Age
================================================================================


*+Heath B. McLendon      Chairman of the Board of   Managing Director of Smith
388 Greenwich Street     Directors, Chief Executive Barney; Director of       
New York, NY 10013       Officer and President      forty-two investment      
                                                    companies associated with 
                                                    Smith Barney; Chairman of 
                                                    the Board of Smith Barney 
                                                    Strategy Advisers Inc. and
                                                    President of MMC and      
                                                    Travelers Investment      
                                                    Adviser, Inc. ("TIA").    
                                                    Formerly Senior Executive 
                                                    Vice President of Shearson
                                                    Lehman Brothers Inc. and  
                                                    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     
12083 Morehead                                      University of North Carolina
Chapel Hill, NC 27514                               at Chapel Hill; Director of 
                                                    twelve investment companies 
                                                    associated with Smith Barney
                                                    and a Director of The Summit
                                                    Bancorporation. Formerly    
                                                    Chancellor of the University
                                                    of North Carolina at Chapel 
                                                    Hill; 66.                   

+Roderick C. Rasmussen   Director                   Investment Counselor;       
9 Cadence Court                                     Director of ten investment  
Morristown, NJ 07960                                companies associated with   
                                                    Smith Barney. Formerly Vice 
                                                    President of Dresdner and   
                                                    Company Inc.

--------------------------------------------------------------------------------
*     Denotes a director who is an "interested person" of the Fund 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.



28
<PAGE>

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

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


+John P. Toolan          Director                   Retired; Director of ten    
13 Chadwell Place                                   investment companies        
Morristown, NJ 07960                                associated with Smith       
                                                    Barney; Director of John    
                                                    Hancock Funds. Formerly     
                                                    Director and Chairman of    
                                                    Smith Barney Trust Company, 
                                                    Director of Smith Barney and
                                                    MMC Senior Executive Vice   
                                                    President, Director and     
                                                    Member of the Executive     
                                                    Committee of Smith Barney;  
                                                    67.                         

Lewis E. Daidone         Senior Vice President,     Managing Director of Smith 
388 Greenwich Street     Chief Financial and        Barney, Senior Vice        
New York, NY 10013       Accounting Officer and     President and Treasurer of
                         Treasurer                  forty-two investment      
                                                    companies associated with 
                                                    Smith Barney; Director and
                                                    Senior Vice President of 
                                                    MMC and TIA; 40.         

Peter Coffey             Vice President and         Managing Director of      
388 Greenwich Street     Investment Officer         Smith Barney, Vice President
New York, NY 10013                                  of MMC and certain other
                                                    investment companies    
                                                    associated with Smith   
                                                    Barney; 53.             

Thomas M. Reynolds       Controller and Assistant   Director of Smith Barney;  
388 Greenwich Street     Secretary                  Controller and Assistant   
New York, NY 10013                                  Secretary of certain other 
                                                    investment companies       
                                                    associated with Smith      
                                                    Barney; 38.                

Christina T. Sydor       Secretary                  Managing Director of Smith 
388 Greenwich Street                                Barney and Secretary of    
New York, NY 10013                                  forty-two investment       
                                                    companies associated with  
                                                    Smith Barney; Secretary and
                                                    General Counsel of MMC and 
                                                    TIA; 47.                   

--------------------------------------------------------------------------------
+     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 Fund 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
day of Board meetings 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.


                                       29
<PAGE>

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


      The following table shows the compensation paid by the Fund to each person
who was a Director during the Fund's most recent fiscal year (from January 1,
1997 to December 31, 1997).


                               Compensation Table


                                                                       Total
                                      Pension or                     Number of
                                      Retirement         Total       Funds for
                       Aggregate   Benefits Accrued  Compensation  Which Person
                     Compensation      as part of      from Fund  Serves Within
Name of Person        from Fund     Fund Expenses       Complex    Fund Complex
--------------        ---------     -------------       -------    ------------
Joseph H. Fleiss+ ++       556             0            54,900          10
Donald R. Foley+           556             0            55,400          10
Paul Hardin                556             0            73,000          12
Francis P. Martin+         456             0            53,000          10
Heath B. McLendon*           0             0                 0          42
Roderick C. Rasmussen      556             0            55,400          10
John P. Toolan+            556             0            55,400          10

----------
*     Designates a director who is an "interested person" of the Fund.
+     Pursuant to a deferred compensation plan, the indicated persons elected to
      defer the following amounts of their compensation from the Fund: Joseph H.
      Fleiss: $28, Donald R. Foley: $28, Francis P. Martin: $456 and John P.
      Toolan: $556, and the following amounts of their total compensation from
      the Fund Complex: Joseph H. Fleiss: $21,000, Donald R. Foley: $21,000,
      Francis P. Martin: $53,000 and John P. Toolan: $55,400.
++    Effective January 1, 1998, Mr. Fleiss became a Director Emeritus. Upon
      attainment of age 72 the Fund's current Directors may elect to change to
      emeritus status. Any directors elected or appointed to the Board 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 Fund Directors,
      together with reasonable out-of-pocket expenses for each meeting attended.
      During the Fund's last fiscal year aggregate compensation from the Fund to
      Emeritus Directors totaled $228.

      At the close of business on April 3, 1998, 3,934,329 shares of Common
Stock or 97.8% of the Fund's total shares outstanding on that date were held in
accounts of, but were not beneficially owned by, CEDE & Co., P.O. Box 20,
Bowling Green Station, NY, NY 10004. As of that date, the officers and Board
members of the Fund beneficially owned less than 1% of the outstanding shares of
the Fund.


      Investment Manager


      MMC serves as the Fund's investment manager. MMC (through its
predecessors) has been in the investment counseling business since 1934 and is a
registered investment adviser. MMC was incorporated in 1968 and currently
manages investment companies that had total assets in excess of $100.5 billion
as of March 31, 1998, of which approximately $7.68 billion consisted of
municipal bond portfolios.


      Pursuant to the Investment Management Agreement (the "Management
Agreement"), the Fund has retained the Investment Manager to manage the
investment of the Fund's assets and to provide such investment research, advice
and supervision,


30
<PAGE>

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

in conformity with the Fund's investment objective and policies, as may be
necessary for the investment activities of the Fund. The Investment Manager also
administers the Fund's corporate affairs subject to the supervision of the
Fund's Board of Directors and in connection therewith furnishes the Fund with
office facilities together with such ordinary clerical and bookkeeping services
(e.g., preparation of annual and other reports to shareholders and the SEC and
filing of Federal, state and local income tax returns) as are not being
furnished by the Fund's custodian.

      The Management Agreement provides, among other things, that the Investment
Manager will bear all expenses of its employees and overhead incurred in
connection with its duties under the Management Agreement, other than those
assumed by the Fund, as described below, and will pay all director's fees and
salaries of the Fund's directors and officers who are affiliated persons (as
such term is defined in the 1940 Act) of the Investment Manager.

      The Management Agreement provides that the Fund shall pay to the
Investment Manager a monthly fee in arrears equal to 0.70% per annum of the
Fund's average daily net assets during the month.

      Although the Investment Manager intends to devote such time and effort to
the business of the Fund as reasonably necessary to perform its duties to the
Fund, the services of the Investment Manager are not exclusive and the
Investment Manager provides similar services to other investment companies and
may engage in other activities.

      The Management Agreement also provides that in the absence of willful
misfeasance, bad faith, gross negligence or reckless disregard of its
obligations thereunder, the Investment Manager is not liable to the Fund or any
of the Fund's shareholders for any act or omission by the Investment Manager in
the supervision or management of its investment activities or for any loss
sustained by the Fund or the Fund's shareholders.

      The Management Agreement will continue in effect for successive periods of
12 months, provided that each continuance is specifically approved at least
annually by both (1) the vote of a majority of the Fund's Board of Directors or
the vote of a majority of the outstanding voting securities of the Fund (as such
term is defined in the 1940 Act) and (2) by the vote of a majority of the
directors who are not parties to such Agreement or interested persons (as such
term is defined in the 1940 Act) of any such party, cast in person at a meeting
called for the purpose of voting on such approval. The Management Agreement may
be terminated as a whole at any time by the Fund, without the payment of any
penalty, upon the vote of a majority of the Fund's Board of Directors or a
majority of the outstanding voting securities of the Fund or by the Investment
Manager, on 60 days' written


                                                                              31
<PAGE>

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

notice by either party to the other. The Management Agreement will terminate
automatically in the event of its assignment (as such term is defined in the
1940 Act and the rules thereunder).


      For each of the years ended December 31, 1995, December 31, 1996 and
December 31, 1997, the Fund paid $427,954, $432,659 and $436,257, respectively,
in management fees to MMC.

      Peter Coffey, Vice President and Investment Officer of the Fund, is
primarily responsible for management of the Fund's assets. Mr. Coffey is a Vice
President of the Investment Manager and is the senior asset manager for eight
other funds investing in tax-exempt securities with aggregate assets of
approximately $1.69 billion as of February 28, 1998.


      Except as indicated above, the Fund will pay all of its expenses,
including fees of the directors not affiliated with the Investment Manager and
Board meeting expenses; fees of the Investment Manager; interest charges; taxes;
charges and expenses of the Fund's legal counsel and independent accountants,
and of the transfer agent, registrar and dividend disbursing agent of the Fund;
expenses of repurchasing shares; expenses of printing and mailing share
certificates, shareholder reports, notices, proxy statements and reports to
governmental offices; brokerage and other expenses connected with the execution,
recording and settlement of portfolio security transactions; expenses connected
with negotiating of, effecting purchase or sale of, or registering privately
issued portfolio securities; fees and expenses of the Fund's custodian for all
services to the Fund, including safekeeping of funds and securities and
maintaining required books and accounts; expenses of calculating and publishing
the net asset value of the Fund's Common Stock; expenses of membership in
investment company associations; expenses of fidelity bonding and other
insurance premiums; expenses of shareholders' meetings; SEC and state blue sky
registration fees; American Stock Exchange listing fees; and its other business
and operating expenses.

   
On April 6, 1998, Travelers announced that it had entered into a Merger
Agreement with Citicorp.  The transaction, which is expected to be completed 
during the third quarter of 1998, is subject to various regulatory approvals,
including approval by the Federal Reserve Board.  The transaction is also 
subject to approval by the stockholders of each of Travelers and Citicorp. 
Upon consummation of the merger, the surviving corporation would be a bank 
holding company subject to regulation under the Bank Holding Company Act of 
1956 (the "BHCA"), the requirements of the Glass-Steagall Act and certain 
other laws and regulations.  Although the effects of the merger of Travelers
and Citicorp and compliance with the requirements of the BHCA and the Glass-
Steagall Act are still under review, MMC does not believe that its compliance
with applicable law following the merger of Travelers and Citicorp will have
a material adverse effect on its ability to continue to provide the Fund with
the same level of investment advisory services that it currently receives.
    

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

      General


      Subject to the general supervision of the Board of Directors, the
Investment Manager is responsible for decisions to buy and sell securities and
the selection of broker-dealers to effect the transactions. The Fund invests
primarily in the over-the-counter market. Securities are generally traded in the
over-the-counter market on a "net" basis with dealers acting as principal for
their own accounts without charging a stated commission, although the price of
the security usually includes a profit to



32
<PAGE>

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

the dealer. The Fund also purchases securities at times in underwritten
offerings, where the price includes a fixed amount of compensation, generally
referred to as the underwriter's concession or discount. On occasion, the Fund
may also purchase certain money market instruments directly from an issuer, in
which case no commissions or discounts are paid. The Fund will not engage in any
principal transactions with Smith Barney.

      The Investment Manager currently serves as investment adviser to other
investment companies, some of which invest principally in municipal securities.
In the future it may act as investment adviser to other investment companies or
accounts that invest in municipal securities. Although each investment company
is individually managed, from time to time the Investment Manager may, to the
extent permitted by law, allocate purchase or sale transactions among various
investment companies. In making such allocations the Investment Manager will
consider, among other things, the respective investment objectives, the relative
size of portfolio holdings of the same or comparable securities and the
liquidity of the portfolio.

      The policy of the Fund regarding purchases and sales of securities for its
portfolio is that primary consideration will be given to obtaining the most
favorable prices consistent with efficient execution of transactions in seeking
to implement the Fund's policies. The Investment Manager will effect
transactions with those dealers who the Investment Manager believes provide the
most favorable prices and who are capable of providing efficient executions.
Those factors that the Investment Manager believes contribute to efficient
execution include size of the order, difficulty of execution, operational
capabilities and facilities of the dealer involved, whether that dealer has
risked its own capital in positioning a block of securities and the dealer's
prior experience in effecting transactions of this type. If the Investment
Manager believes such price and execution are obtainable from more than one
dealer, it may give consideration to placing portfolio transactions with those
dealers who also furnish research and other services to the Investment Manager.
Such services may include, but are not limited to, any one or more of the
following: information as to the availability of securities for purchase or
sale; statistical or factual information or opinions pertaining to investment;
economic analysis; and appraisals or evaluations of portfolio securities.

      The information and services so received by the Investment Manager may be
of benefit to the Investment Manager in the management of other accounts and may
not in all cases benefit the Fund directly. While the receipt of such
information and services is useful in varying degrees and would generally reduce
the amount of research or services otherwise performed by the Investment Manager
and thus may reduce its expenses, it is of indeterminable value and the advisory
fee paid to the Investment Manager is not reduced by any amount that may be
attributable to the value of such services.


                                                                              33
<PAGE>

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

      Turnover

      The Fund cannot accurately predict its turnover rate, but anticipates that
its annual turnover rate will not exceed 100%. The Fund's turnover rate is
calculated by dividing the lesser of the Fund'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 Fund's
securities for the year. Higher turnover rates can result in corresponding
increases in the Fund's transaction costs. The Fund 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 Fund generally expects to pay monthly dividends of net investment
income (income other than net realized capital gains) and to distribute net
realized capital gains, if any, annually. From time to time, when the Fund makes
a substantial capital gains distribution, it may do so in lieu of paying its
regular monthly dividend. All dividends or distributions with respect to shares
of Common Stock are reinvested automatically in additional shares through
participation in the Fund's Dividend Reinvestment Plan (the "Plan"), unless a
shareholder elects to receive cash.

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


      The number of shares of Common Stock distributed to participants in the
Plan in lieu of a cash dividend is determined in the following manner. Whenever
the market price of the Common Stock is equal to or exceeds the net asset value
per share on the date of valuation, Plan participants will be issued shares of
Common Stock at a price equal to the greater of (1) the net asset value per
share most recently determined as described under "Net Asset Value" or (2) 95%
of the market price.


      If the net asset value per share of Common Stock at the time of valuation
ex-ceeds the market price of the Common Stock, or if the Fund declares a
dividend or


34
<PAGE>

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

capital gains distribution payable only in cash, First Data 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 First Data
has completed its purchases, the market price exceeds the net asset value of the
Common Stock, First Data will attempt to terminate purchases in the open market
and cause the Fund to issue the remaining portion of the dividend or
distribution by issuing shares at a price equal to the greater of (a) net asset
value or (b) 95% of the then current market price. In this case, the number of
shares of Common Stock received by a Plan participant will be based on the
weighted average of prices paid for shares purchased in the open market and the
price at which the Fund issues the remaining shares. To the extent First Data is
unable to stop open market purchases and cause the Fund to issue the remaining
shares, the average per share purchase price paid by First Data 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 Fund at net asset value. First Data will begin to
purchase Common Stock on the open market as soon as practicable after the
payment date of the dividend or capital gains distribution, but in no event
shall such purchases continue later than 30 days after that date, except when
necessary to comply with applicable provisions of the federal securities laws.

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

      Plan participants are subject to no charge for reinvesting dividends and
capital gains distributions under the Plan. First Data's fees for handling the
reinvestment of dividends and capital gains distributions will be paid by the
Fund. No brokerage charges apply with respect to shares of Common Stock issued
directly by the Fund 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 Fund reserves the right to amend or terminate the Plan as applied to any
dividend or capital gains distribution paid subsequent to written notice of the
change sent to participants at least 30 days before the record date for the
dividend or capital gains distribution. The Plan also may be amended or
terminated by First Data, with the Fund'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
8030, Boston, Massachusetts 02266 or by telephone at 1-800-331-1710.


                                                                              35
<PAGE>

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


      The net asset value per share of the Fund's Common Stock is determined by
calculating the total value of the Fund's assets, deducting its total
liabilities and dividing the result by the number of shares of Common Stock
outstanding. The net asset value will be computed as of the close of regular
trading on the New York Stock Exchange ("NYSE") on each day that the NYSE is
open. The Fund reserves the right to calculate the net asset value more
frequently if deemed desirable.


      The Fund's securities will be valued on the basis of bid prices provided
by a pricing service when the Fund believes such prices reflect fair market
value. Pricing services generally determine value by reference to transactions
in municipal securities, quotations from municipal bond dealers, market
transactions in comparable securities and various relationships between
securities. If a pricing service is not used, municipal securities will be
valued at the quoted bid prices provided by municipal bond dealers. Short-term
instruments maturing within 60 days will be valued at cost plus amortized
discount, if any, when the Board of Directors has determined that amortized cost
equals fair value. Securities and other assets that are not priced by a pricing
service and for which market quotations are not available will be valued in good
faith at fair value by or under the direction of the Board of Directors.

      If any securities held by the Fund are restricted as to resale, the
Investment Manager will determine their fair value following procedures approved
by the directors. The directors will periodically review such valuations and
procedures. The fair value of such securities generally will be determined as
the amount which the Fund could reasonably expect to realize from an orderly
disposition of such securities over a reasonable period of time. The valuation
procedures applied in any specific instance are likely to vary from case to
case. However, consideration will be generally given to the financial position
of the issuer and other fundamental analytical data relating to the investment
and to the nature of the restrictions on disposition of securities (including
any registration expenses that might be borne by the Fund in connection with
such disposition). In addition, specific factors also generally will be
considered, such as the cost of the investment, the market value of any
unrestricted securities of the same class (both at the time of purchase and at
the time of valuation), the size of the holding, the prices of any recent
transactions or offers with respect to such securities, and any available
analysts' reports regarding the issuer.

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

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


36
<PAGE>

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

      Taxation of the Fund and its Investments


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


      As a regulated investment company, the Fund 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 Fund 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 Fund's business of investing in
securities; and (3) diversify its holdings so that, at the end of each fiscal
quarter of the Fund (a) at least 50% of the market value of the Fund'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 Fund's assets and (b) not more than 25% of the market value of the
Fund'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 Fund 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 Fund is subject to a 4% non-deductible excise
tax measured with respect to certain undistributed amounts of ordinary income
and capital gain. The Fund pays dividends and distributions necessary to avoid
the application of this excise tax.

      As described above, the Fund 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 amount of long-term and short-term capital gains or losses realized
by the Fund and, thus, will affect the amount of capital gains distributed to
the Fund'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


                                                                              37
<PAGE>

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

mark-to-market system, the Fund 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 Fund and the amount of distributions taxable to a shareholder. Moreover, if
the Fund invests in both Section 1256 Contracts and offsetting positions in
those contracts, then the Fund might not be able to receive the benefit of
certain realized losses for an indeterminate amount of time. The Fund 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 Fund's Stockholders


      Dividends by the Fund, other than dividends from taxable investments and
market discount on municipal securities and from income or gain derived from
securities transactions and from the use of certain of the investment techniques
described under "Investment Objectives and Management Policies -- Investment
Techniques," are derived from interest on municipal securities and are
exempt-interest dividends that may be excluded by shareholders from their gross
income for federal income tax purposes if the Fund satisfies certain asset
percentage requirements. Distributions of the Fund's net realized short-term
capital gains are taxable to shareholders of the Fund 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
shareholders have held shares of Common Stock and whether the distributions are
received in cash or reinvested in additional shares. As a general rule, a
shareholder'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 Fund do not qualify for the federal dividends-received deduction for
corporations.

      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


38
<PAGE>

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

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 Fund that represents income
derived from private activity bonds held by the Fund 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 Fund's exempt-interest dividends may be excluded by shareholders
from their gross income for federal income tax purposes, some or all of the
Fund'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 Fund 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 Fund 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.

      Statements and Notices

      Statements as to the tax status of the dividends and distributions
received by shareholders of the Fund 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 of
exempt-interest dividends that are a specific preference item for purposes of
the federal individual and corporate alternative minimum taxes. The Fund will
notify shareholders annually as to the interest excluded from federal income
taxes earned by the Fund with respect to those states and possessions in which
the Fund has or had investments. The dollar amount of dividends paid by the Fund
that is excluded from federal income taxation and the dollar amount of dividends
paid by the Fund 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 Fund. To the extent that the Fund 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


                                                                              39
<PAGE>

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

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 Fund was incorporated under the laws of the State of Maryland on May
19, 1992 by the 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 Fund for Its
                                     Amount Held        Own Account as of
                      Shares       by Fund for Its            April 3,
Title of Class      Authorized       Own Account                1998
================================================================================
Common Stock        100,000,000           0                   4,021,161

                                  
      No shares, other than those currently outstanding, are offered for sale
pursuant to this Prospectus.

      The Fund has authorized capital of 100 million shares, all of which are
currently designated as Common Stock, par value $.001 per share. Unissued shares
of capital stock may be reclassified by the Board of Directors without a
shareholder vote into one or more classes of preferred or other stock with no
restrictions on the rights and preferences of any such classes except as may be
imposed by the 1940 Act or Maryland law.

      Shares of Common Stock, when issued, are fully paid and nonassessable.
Shareholders are entitled to one vote for each share of Common Stock held for


40
<PAGE>

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

the election of directors and other matters submitted to shareholders. There are
no preemptive rights. Each share of Common Stock is entitled to participate
equally in the net distributable assets of the Fund upon liquidation or
termination.


      The Fund has no present intention of making a secondary offering of Common
Stock. Other offerings of its Common Stock, if made, will require approval of
the Fund's Board of Directors. Any additional offering will be subject to the
requirements of the 1940 Act that such Common Stock may not be issued at a price
below the then current net asset value, exclusive of underwriting discounts and
commissions, except in connection with an offering to existing shareholders or
with the consent of the holders of a majority of the Fund's outstanding voting
securities.


--------------------------------------------------------------------------------
Certain Provisions of the Articles of Incorporation and Market Discount
--------------------------------------------------------------------------------

      Anti-Takeover Provisions

      The Fund presently has provisions in its Articles of Incorporation and
Bylaws (commonly referred to as "anti-takeover" provisions) which may have the
effect of limiting the ability of other entities or persons to acquire control
of the Fund, to cause it to engage in certain transactions or to modify its
structure.

      The Board of Directors is classified into three classes, each with a term
of three years with only one class of directors standing for election in any
year. Such classification may prevent replacement of a majority of the directors
for up to a two year period. Directors may be removed from office only for cause
by vote of at least 75% of the shares entitled to be voted on the matter. In
addition, unless 70% of the Board of Directors approves the transaction, the
affirmative vote of the holders of at least 75% of the shares will be required
to authorize the Fund's conversion from a closed-end to an open-end investment
company, or generally to authorize any of the following transactions: (i)
merger, consolidation or share exchange of the Fund with or into any other
corporation; (ii) dissolution or liquidation of the Fund; (iii) sale, lease,
exchange or other disposition of all or substantially all of the assets of the
Fund; (iv) change in the nature of the business of the Fund so that it would
cease to be an investment company registered under the 1940 Act; or (v) sale,
lease or exchange to the Fund, in exchange for securities of the Fund, of any
assets of any entity or person (except assets having an aggregate fair market
value of less than $1,000,000). The affirmative vote of at least 75% of the
shares will be required to amend the Articles of Incorporation or Bylaws to
change any of the foregoing provisions.

      The percentage votes required under these provisions, which are greater
than the minimum requirements under Maryland law or the 1940 Act, will make more
difficult a change in the Fund's business or management and may have the effect
of


                                                                              41
<PAGE>

--------------------------------------------------------------------------------
Certain Provisions of the Articles of Incorporation and Market 
Discount (continued)
--------------------------------------------------------------------------------

depriving shareholders of an opportunity to sell shares at a premium over
prevailing market prices by discouraging a third party from seeking to obtain
control of the Fund in a tender offer or similar transaction. The Fund's Board
of Directors, however, has considered these anti-takeover provisions and
believes they are in the best interests of shareholders.

      Market Discount


      Shares of common stock of closed-end investment companies frequently trade
at a discount from net asset value, or in some cases trade at a premium. Shares
of closed-end investment companies investing primarily in fixed income
securities tend to trade on the basis of income yield on the market price of the
shares and the market price may also be affected by trading volume, general
market conditions and economic conditions and other factors beyond the control
of the Fund. As a result, the market price of the Fund's shares may be greater
or less than the net asset value. From March 12, 1993 through April 3, 1998, the
Fund's shares have traded from a premium of 1.22% to a market discount of 12.7%.


      Some closed-end companies have taken certain actions, including the
repurchase of common stock in the market at market prices and the making of one
or more tender offers for common stock at net asset value, in an effort to
reduce or mitigate the discount, and others have converted to an open-end
investment company, the shares of which are redeemable at net asset value.

      The Fund's Board of Directors has seen no reason to adopt any of the
steps, which some other closed-end funds have used to address the discount. In
addition, the experience of many closed-end funds suggests that the effect of
many of these steps (other than open-ending) on the discount may be temporary or
insignificant. Accordingly, there can be no assurance that any of these actions
will be taken or, if undertaken, will cause the Fund's shares to trade at a
price equal to their net asset value.

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

      PNC Bank, located at 17th and Chestnut Streets, Philadelphia, Pennsylvania
19103, acts as custodian of the Fund and has custody of all securities and cash
of the Fund. The custodian, among other things, attends to the collection of
principal and income, and payment for any collection of proceeds of securities
bought and sold by the Fund. First Data, located at One Exchange Place, Boston,
Massachusetts 02109, serves as the Fund's transfer agent, dividend-paying agent
and registrar. First Data also serves as agent in connection with the Plan.


42
<PAGE>

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

      The Fund sends unaudited quarterly and audited annual reports to the
holders of its securities, including a list of investments held.

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


      KPMG Peat Marwick LLP, 345 Park Avenue, New York, New York 10154, has been
selected as the Fund's independent auditors to examine and report on the
financial statements and financial highlights of the Fund for its fiscal year
ending December 31, 1998.


--------------------------------------------------------------------------------
Additional 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.

                                   ----------

      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 Fund, 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 Fund 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.


                                                                              43
<PAGE>


44
<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.


                                                                             A-1
<PAGE>

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

      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 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.


A-2
<PAGE>

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

      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 -- 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.


                                                                             A-3
<PAGE>

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

      DESCRIPTION OF S&P MUNICIPAL NOTE RATINGS:

      Municipal notes with maturities of three years or less are usually given
note ratings (designated SP1, -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.

      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 have the lowest expectation of credit
risk. The obligor has an exceptionally strong capacity for timely payment of
financial commitments, which is highly unlikely to be adversely affected by
foreseeable events.

      AA -- Bonds rated AA by Fitch have a very low expectation of credit risk.
They indicate very strong capacity for timely payment of financial commitments.
This capacity is not significantly vulnerable to foreseeable events.

      A -- Bonds rated A by Fitch are considered to have a low expectation of
credit risk. The capacity for timely payment of financial commitments is
considered to be strong, but may be more vulnerable to changes in economic
conditions and circumstances than bonds with higher ratings.

      BBB -- Bonds rated BBB by Fitch currently have a low expectation of credit
risk. The capacity for timely payment of financial commitments is considered to
be adequate. Adverse changes in economic conditions and circumstances, however,
are more likely to impair this capacity. This is the lowest investment grade
category assigned by Fitch.

      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 on 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 financial commitments in a timely
manner.


      Fitch's short-term ratings are as follows:


      F1+ -- Issues assigned this rating are regarded as having the strongest
capacity for timely payment of financial commitments . The "+" denotes an
exceptionally strong credit feature.

      F1 -- Issues assigned this rating are regarded as having the strongest
capacity for timely payment of financial commitments.

      F2 -- Issues assigned this rating have a satisfactory capacity for timely
payment of financial commitments, but the margin of safety is not as great as in
the case of the higher ratings.

      F3 -- The capacity for timely payment of financial commitments is
adequate; however, near-term adverse changes could result in a reduction to
non-investment grade.



                                                                             A-5
<PAGE>

--------------------------------------------------------------------------------
Appendix B
--------------------------------------------------------------------------------

                               OPTIONS AND FUTURES

      General. The Fund may engage in futures and options transactions in
accordance with its investment objective and policies. The Fund may engage in
such transactions if it appears advantageous to the Investment Manager to do so
in order to pursue its investment objective, to hedge against the effects of
market conditions and to stabilize the value of its assets. The Investment
Manager may also decide not to engage in any of these investment practices. The
use of futures and options, and the possible benefits and attendant risks are
discussed below, along with information concerning certain other investment
policies and techniques.

      Financial Futures Contracts. The Fund may enter into financial futures
contracts for the future delivery of a financial instrument, such as a security,
or the cash value of a securities index. This investment technique is designed
primarily to hedge (i.e., protect) against anticipated future changes in market
conditions which otherwise might adversely affect the value of securities which
the Fund holds or intends to purchase. A "sale" of a futures contract means the
undertaking of a contractual obligation to deliver the securities, or the cash
value of an index, called for by the contract at a specified price during a
specified delivery period. A "purchase" of a futures contract means the
undertaking of a contractual obligation to acquire the securities, or cash value
of an index, at a specified price during a specified delivery period. At the
time of delivery, in the case of fixed income securities pursuant to the
contract, adjustments are made to recognize differences in value arising from
the delivery of securities with a different interest rate than that specified in
the contract. In some cases, securities called for by a futures contract may not
have been issued at the time the contract was written.

      Although some financial futures contracts by their terms call for the
actual delivery or acquisition of securities, in most cases the contractual
commitment is closed out before delivery without having to make or take delivery
of the security. The offsetting of a contractual obligation is accomplished by
purchasing (or selling, as the case may be) on a commodities exchange an
identical futures contract calling for delivery in the same period. Such a
transaction cancels the obligation to make or take delivery of the securities.
All transactions in the futures market are made, offset or fulfilled through a
clearing house associated with the exchange on which the contracts are traded.
The Fund will incur brokerage fees when it purchases or sells contracts, and
will be required to maintain margin deposits. Futures contracts entail risk. If
the Investment Manager's judgment about the general direction of securities
markets or interest rates is wrong, the Fund's overall performance may be poorer
than if the Fund had not entered into such contracts.

      There may be an imperfect correlation between movements in prices of
futures contracts and portfolio securities being hedged. In addition, the market
prices of


                                      B-1
<PAGE>

--------------------------------------------------------------------------------
Appendix B (continued)
--------------------------------------------------------------------------------

futures contracts may be affected by certain factors. If participants in the
futures market elect to close out their contracts through offsetting
transactions rather than meet margin requirements, distortions in the normal
relationship between the securities and futures markets could result. Price
distortions could also result if investors in futures contracts decide to make
or take delivery of underlying securities rather than engage in closing
transactions due to the resultant reduction in the liquidity of the futures
market. In addition, because from the point of view of speculators, the margin
requirements in the futures market may be less onerous than margin requirements
in the cash market, increased participation by speculators in the futures market
could cause temporary price distortions. Due to the possibility of price
distortions in the futures market and because of the imperfect correlation
between movements in the prices of securities and movements in the prices of
futures contracts, a correct forecast of market trends by the Investment Manager
may still not result in a successful hedging transaction. If this should occur,
the Fund could lose money on the financial futures contracts and also on the
value of its portfolio securities.

      Options on Financial Futures Contracts. The Fund may purchase and write
call and put options on financial futures contracts. An option on a futures
contract gives the purchaser the right, in return for the premium paid, to
assume a position in a futures contract at a specified exercise price at any
time during the period specified in the terms of the option. Upon exercise, the
writer of the option delivers the futures contract to the holder at the exercise
price. The Fund would be required to deposit with its custodian initial margin
and maintenance margin with respect to put and call options on futures contracts
written by it. Options on futures contracts involve risks similar to those risks
relating to transactions in financial futures contracts described above. Also,
an option purchased by the Fund may expire worthless, in which case the Fund
would lose the premium paid therefor.

      Options on Securities. The Fund may write covered call options so long as
it owns securities which are acceptable for escrow purposes and may write
secured put options, which means that so long as the Fund is obligated as a
writer of a put option, it will invest an amount, not less than the exercise
price of the put option, in securities consistent with the Fund's investment
objective and policies and restrictions on investment. See "Investment Objective
and Management Policies" and "Investment Restrictions." A call option gives the
purchaser the right to buy, and the writer the obligation to sell, the
underlying security at the exercise price during the period specified in the
terms of the option. A put option gives the purchaser the right to sell, and the
writer the obligation to buy, the underlying security at the exercise price
during the period specified in the terms of the option. The premium received for
writing an option will reflect, among other things, the current market price of
the underlying security, the relationship of the exercise price to the market
price, the price volatility of the underlying security, the option period,


B-2
<PAGE>

--------------------------------------------------------------------------------
Appendix B (continued)
--------------------------------------------------------------------------------

supply and demand and interest rates. The Fund may write or purchase spread
options, which are options for which the exercise price may be a fixed dollar
spread or yield spread between the security underlying the option and another
security that is used as a benchmark. The exercise price of an option may be
below, equal to or above the current market value of the underlying security at
the time the option is written. The buyer of a put who also owns the related
security is protected by ownership of a put option against any decline in that
security's price below the exercise price, less the amount paid for the option.
At times the Fund may wish to establish a position in a security upon which call
options are available. By purchasing a call option on such security the Fund
would be able to fix the cost of acquiring the security, this being the cost of
the call plus the exercise price of the option. This procedure also provides
some protection from an unexpected downturn in the market, because the Fund is
only at risk for the amount of the premium paid for the call option which it
can, if it chooses, permit to expire.

      Options on Securities Indices. The Fund also may purchase and write call
and put options on securities indices. Through the writing or purchase of index
options, the Fund can achieve many of the same objectives as through the use of
options on individual securities. Options on securities indices are similar to
options on a security except that, rather than the right to take or make
delivery of a security at a specified price, an option on a securities index
gives the holder the right to receive, upon exercise of the option, an amount of
cash, if the closing level of the securities index upon which the option is
based is greater than, in the case of a call, or less than, in the case of a
put, the exercise price of the option. This amount of cash is equal to the
difference between the closing price of the index and the exercise price of the
option. The writer of the option is obligated, in return for the premium
received, to make delivery of this amount. Unlike options on securities (which
require, upon exercise, delivery of the underlying security), settlements of
options on securities indices, upon exercise thereof, are in cash, and the gain
or loss of an option on an index depends on price movements in the market
generally (or in a particular industry or segment of the market on which the
underlying index base) rather than price movements in individual securities, as
is the case with respect to options on securities.

      When the Fund writes an option on a securities index, it will be required
to deposit with its custodian eligible securities equal in value to 100% of the
exercise price in the case of a put, or the contract's value in the case of a
call. In addition, where the Fund writes a call option on a securities index at
a time when the contract value exceeds the exercise price, the Fund will
segregate, until the option expires or is closed out, cash or cash equivalents
equal in value to such excess.

      Options on securities and index options involve risks similar to those
risks relating to transactions in financial futures described above. Also, an
option


                                                                             B-3
<PAGE>

--------------------------------------------------------------------------------
Appendix B (continued)
--------------------------------------------------------------------------------

purchased by the Fund may expire worthless, in which case the Fund would lose
the premium paid therefor.

      Over-the-Counter Options. As previously indicated in this Prospectus (see
"Investment Objectives and Management Policies -- Investment Techniques"), the
Fund may deal in OTC options. The Fund understands the position of the staff of
the SEC to be that purchased OTC options and the assets used as "cover" for
written OTC options are illiquid securities. The Fund and the Investment Manager
disagree with this position and have found the dealers with which they engage in
OTC options transactions generally agreeable to and capable of entering into
closing transactions. The Fund has adopted procedures for engaging in OTC
options for the purpose of reducing any potential adverse impact of such
transactions upon the liquidity of the Fund's portfolio.

      As part of these procedures the Fund will only engage in OTC options
transactions with respect to U.S. government securities with primary dealers
that have been specifically approved by the Board of Directors of the Fund. The
Fund will engage in OTC options transactions with respect to municipal
securities only with dealers that have been specifically approved by the Board
of Directors. The Fund and its Investment Manager believe that the approved
dealers should be agreeable and able to enter into closing transactions as
necessary and, therefore, present minimal credit risks to the Fund. The Fund
anticipates entering into written agreements with those dealers to whom the Fund
may sell OTC options, pursuant to which the Fund would have the absolute right
to repurchase the OTC options from such dealers at any time at a price with
respect to U.S. Government securities determined pursuant to a formula set forth
in certain no action letters published by the SEC staff. The Fund will not
engage in OTC options transactions if the amount invested by the Fund in OTC
options, plus, with respect to OTC options written by the Fund, the amounts
required to be treated as illiquid pursuant to the terms of such letters (and
the value of the assets used as cover with respect to OTC option sales which are
not within the scope of such letters), plus the amount invested by the Fund in
illiquid securities, would exceed 25% of the Fund's total assets. OTC options on
securities other than U.S. Government securities, including options on municipal
securities, may not be within the scope of such letters and, accordingly, the
amount invested by the Fund in OTC options on such other securities and the
value of the assets used as cover with respect to OTC options sales regarding
such non-U.S. Government securities will be treated as illiquid and subject to
the 25% limitation on the Fund's assets which may be invested in illiquid
securities.

      Regulatory Restrictions. To the extent required to comply with applicable
SEC releases and staff positions, when purchasing a futures contract or writing
a put option, the Fund will maintain, in a segregated account, cash or liquid
high-grade securities equal to the value of such contracts.


B-4
<PAGE>

--------------------------------------------------------------------------------
Appendix B (continued)
--------------------------------------------------------------------------------

      The Fund will not enter into a futures contract or purchase an option
thereon if immediately thereafter the initial margin deposits for futures
contracts held by the Fund plus premiums paid by it for open options on futures
would exceed 5% of the fair market value of the Fund's total assets after taking
into account unrealized profits and unrealized losses on any such contracts. The
Fund will not engage in transactions in financial futures contracts or options
thereon for speculation, but only to attempt to hedge against changes in market
conditions affecting the values of securities which the Fund holds or intends to
purchase.

      Accounting and Tax Considerations. When the Fund writes an option, an
amount equal to the premium received by it is included in the Fund's Statement
of Assets and Liabilities as a liability. The amount of the liability is
subsequently marked to market to reflect the current market value of the option
written. When the Fund purchases an option, the premium paid by the Fund is
recorded as an asset and is subsequently adjusted to the current market value of
the option.

      In the case of a regulated futures contract purchased or sold by the Fund,
an amount equal to the initial margin deposit is recorded as an asset. The
amount of the asset is subsequently adjusted to reflect changes in the amount of
the deposit as well as changes in the value of the contract.


      Certain listed options and futures contracts are considered "section 1256
contracts" for Federal income tax purposes. See "Taxation --Taxation of the Fund
and its Investments." In general, gain or loss realized by the Fund on section
1256 contracts will be considered 60% long term (and deemed to be attributable
to property held for more than 18 months) and 40% short term capital gain or
loss. Also, section 1256 contracts held by the Fund at the end of each taxable
year (and at October 31 for purposes of calculating the excise tax) will be
"marked to market", that is, treated for Federal income tax purposes as though
sold for fair market value on the last business day of such taxable year. The
Fund can elect to exempt its section 1256 contracts which are part of a "mixed
straddle" (as described below) from the application of section 1256.


      Gain or loss realized by the Fund upon the expiration or sale of certain
over-the-counter put and call options held by the Fund will be either long term
or short term capital gain or loss depending upon the Fund's holding period with
respect to such option. However, gain or loss realized upon the expiration or
closing out of such options that are written by the Fund will be treated as
short term capital gain or loss. In general, if the Fund exercises an option, or
an option that the Fund has written is exercised, gain or loss on the option
will not be separately recognized, but the premium received or paid will be
included in the calculation of gain or loss upon disposition of the property
underlying the option.

      Any security, option or futures contract, delayed delivery transaction, or
other position entered into or held by the Fund in conjunction with any other
position


                                                                             B-5
<PAGE>

--------------------------------------------------------------------------------
Appendix B (continued)
--------------------------------------------------------------------------------

held by the Fund may constitute a "straddle" for Federal income tax purposes. A
straddle of which at least one, but not all, the positions are section 1256
contracts will constitute a "mixed straddle". In general, straddles are subject
to certain rules that may affect the character and timing of the Funds' gains
and losses with respect to straddle positions by requiring, among other things,
that loss realized on disposition of one position of a straddle be deferred to
the extent of any unrealized gain in an offsetting position until such position
is disposed of; that the Fund's holding period in certain straddle positions not
begin until the straddle is terminated (possibly resulting in gain being treated
as short term capital gain rather than long term capital gain); and that losses
recognized with respect to certain straddle positions, that otherwise constitute
short term capital losses, be treated as long term capital losses. Different
elections are available to the Fund which may mitigate the effects of the
straddle rules, particularly with respect to mixed straddles.


B-6
<PAGE>

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

                                                      Smith Barney
                                                      [LOGO]


                                                      Smith
                                                      Barney 
                                                      Municipal 
                                                      Fund, Inc.

                                                      Common Stock

                                                      388 Greenwich Street
                                                      New York, New York 10013


                                                      FD0620   4/98