PROSPECTUS

                                                                    SMITH BARNEY
                                                                      MUNI FUNDS

                                                                         Limited
                                                                            Term
                                                                       Portfolio

   
                                                                   July 29, 1998
    

                                                   Prospectus begins on page one

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Prospectus                                                         July 29, 1998
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      Smith Barney Muni Funds
      Limited Term Portfolio
      388 Greenwich Street
      New York, New York 10013
      (800) 451-2010

   
      The Limited Term Portfolio (the "Portfolio") is one of eight investment
portfolios that currently comprise Smith Barney Muni Funds (the "Fund"). The
Portfolio seeks to pay its shareholders as high a level of income exempt from
Federal income taxes as is consistent with prudent investing. The Portfolio will
normally invest in securities with remaining maturities no greater than 20
years. The dollar-weighted average maturity of the Portfolio will normally be
not less than three nor more than 10 years. The Portfolio may invest without
limit in municipal obligations whose interest is a tax-preference item for
purposes of the Federal alternative minimum tax.
    

      This Prospectus sets forth concisely certain information about the Fund
and the Portfolio, including sales charges, distribution and service fees and
expenses, that prospective investors will find helpful in making an investment
decision. Investors are encouraged to read this Prospectus carefully and retain
it for future reference.

   
      Additional information about the Portfolio is contained in a Statement of
Additional Information dated July 29, 1998, as amended or supplemented from time
to time (the "SAI"), which is available upon request and without charge by
calling or writing the Fund at the telephone number or address set forth above
or by contacting a Smith Barney Financial Consultant. The SAI has been filed
with the Securities and Exchange Commission (the "SEC") and is incorporated by
reference into this Prospectus in its entirety.
    

SMITH BARNEY INC.
Distributor

   
MUTUAL MANAGEMENT CORP.
Investment Manager

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


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Table of Contents
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Prospectus Summary                                                             3
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Financial Highlights                                                           8
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Investment Objective and Management Policies                                  11
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Valuation of Shares                                                           16
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Dividends, Distributions and Taxes                                            17
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Purchase of Shares                                                            19
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Exchange Privilege                                                            25
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Redemption of Shares                                                          28
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Minimum Account Size                                                          30
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Performance                                                                   31
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Management of the Fund                                                        32
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Distribution                                                                  33
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Additional Information                                                        34
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================================================================================
      No person has been authorized to give any information or to make any
representations in connection with this offering other than those contained in
this Prospectus and, if given or made, such other information and
representations must not be relied upon as having been authorized by the
Portfolio or Smith Barney Inc. ("Smith Barney" or the "Distributor"). This
Prospectus does not constitute an offer by the Portfolio or the Distributor to
sell or a solicitation of an offer to buy any of the securities offered hereby
in any jurisdiction to any person to whom it is unlawful to make such offer or
solicitation in such jurisdiction.
================================================================================
    


2
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Prospectus Summary
--------------------------------------------------------------------------------

   
      The following summary is qualified in its entirety by detailed information
appearing elsewhere in this Prospectus and in the SAI. Cross references in this
summary are to headings in the Prospectus. See "Table of Contents."
    

      INVESTMENT OBJECTIVE The Portfolio seeks to pay its shareholders as high a
level of income exempt from Federal income taxes as is consistent with prudent
investing. The Portfolio will normally invest in securities with remaining
maturities no greater than 20 years. The dollar-weighted average maturity of the
Portfolio will normally be not less than three nor more than 10 years. The
Portfolio may invest without limit in municipal obligations whose interest is a
tax-preference item for purposes of the Federal alternative minimum tax. See
"Investment Objective and Management Policies."

   
      ALTERNATIVE PURCHASE ARRANGEMENTS The Portfolio offers three classes of
shares ("Classes") to investors designed to provide them with the flexibility of
selecting an investment best suited to their needs. The general public is
offered two Classes of shares: Class A shares and Class L shares, which differ
principally in terms of sales charges and rate of expenses to which they are
subject. A third Class of shares, Class Y shares, is offered only to investors
meeting an initial investment minimum of at least $15,000,000. See "Purchase of
Shares" and "Redemption of Shares."
    

      Class A Shares. Class A shares are sold at net asset value plus an initial
sales charge of 2.00% and are subject to an annual service fee of 0.15% of the
average daily net assets of the Class. The initial sales charge may be waived
for certain purchases. Purchases of Class A shares of $500,000 or more will be
made at net asset value with no initial sales charge, but will be subject to a
contingent deferred sales charge ("CDSC") of 1.00% on redemptions made within 12
months of purchase. See "Prospectus Summary -- Alternative Purchase Arrangements
-- No Initial Sales Charge."

   
      Class L Shares. Class L shares are sold at net asset value plus an initial
sales charge of 1.00% of the purchase price. They are subject to an annual
service fee of 0.15% and an annual distribution fee of 0.20% of the average
daily net assets of the Class, and investors pay a CDSC of 1.00% if they redeem
Class L shares within 12 months of purchase. The CDSC may be waived for certain
redemptions. The Class L shares' distribution fee may cause that Class to have
higher expenses and pay lower dividends than Class A shares. Purchases of
Portfolio shares, which when combined with current holdings of Class L shares of
the Portfolio equal or exceed $500,000 in the aggregate, should be made in Class
A shares at net asset value with no sales charge, which would be subject to a
CDSC of 1.00% on redemptions made within 12 months of purchase.

      Class Y Shares. Class Y shares are available only to investors meeting an
initial investment minimum of $15,000,000. Class Y shares are sold at net asset
    


                                                                               3
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Prospectus Summary (continued)
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value with no initial sales charge or CDSC. They are not subject to any service
or distribution fees.

      In deciding which Class of Portfolio shares to purchase, investors should
consider the following factors, as well as any other relevant facts and
circumstances:

   
      Intended Holding Period. The decision as to which Class of shares is more
beneficial to an investor depends on the amount and intended duration of his or
her investment. Shareholders who are planning to establish a program of regular
investment may wish to consider Class A shares; as the investment accumulates
shareholders may qualify for purchase of shares without an initial sales charge
and the shares are subject to lower ongoing expenses over the term of the
investment. As an alternative, Class L shares, which have a lower upfront sales
charge but are subject to higher distribution fees than Class A shares, are
suitable for investors who are not investing or intending to invest an amount
which would receive a sales charge discount and who have a short-term or
undetermined time frame. Finally, investors should consider the effect of the
CDSC period in the context of their own investment time frame.

      Reduced or No Initial Sales Charge. The initial sales charge on Class A
shares may be waived for certain eligible purchasers, and the entire purchase
price would be immediately invested in the Portfolio. In addition, Class A share
purchases of $500,000 or more will be made at net asset value with no initial
sales charge, but will be subject to a CDSC of 1.00% on redemptions made within
12 months of purchase. The $500,000 investment may be met by adding the purchase
to the net asset value of all Class A shares offered with a sales charge held in
funds sponsored by Smith Barney Inc. ("Smith Barney") listed under "Exchange
Privilege." See "Purchase of Shares." Because the ongoing expenses of Class A
shares will be lower than those for Class L shares, purchasers eligible to
purchase Class A shares at net asset value should consider doing so.

      Financial Consultants of Smith Barney Inc. ("Smith Barney" or the
"Distributor") may receive different compensation for selling different Classes
of shares. Investors should understand that the purpose of the CDSC on the Class
L shares is the same as that of an initial sales charge.
    

      See "Purchase of Shares" and "Management of the Fund" for a complete
description of the sales charges and service and distribution fees for each
Class of shares and "Valuation of Shares," "Dividends, Distributions and Taxes"
and "Exchange Privilege" for other differences between the Classes of shares.

      PURCHASE OF SHARES Shares may be purchased through a brokerage account
maintained with Smith Barney, a broker that clears securities transactions
through Smith Barney on a fully disclosed basis (an "Introducing Broker") or an
investment dealer in the selling group. See "Purchase of Shares."


4
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Prospectus Summary (continued)
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      INVESTMENT MINIMUMS Investors in Class A and Class L shares may open an
account by making an initial investment of at least $1,000 for each account.
Investors in Class Y shares may open an account for an initial investment of
$15,000,000. Subsequent investments of at least $50 may be made for all Classes.
The minimum investment requirements for purchases of Portfolio shares through
the Systematic Investment Plan are described below. There is no minimum
investment requirement in Class A shares for unitholders who invest
distributions from a unit investment trust ("UIT") sponsored by Smith Barney. It
is not recommended that the Portfolio be used as a vehicle for Keogh, IRA or
other qualified retirement plans. See "Purchase of Shares."

      SYSTEMATIC INVESTMENT PLAN The Portfolio offers shareholders a Systematic
Investment Plan under which they may authorize the automatic placement of a
purchase order each month or quarter for Portfolio shares. The minimum initial
investment requirement for Class A and Class L shares and the subsequent
investment requirement for all Classes for shareholders purchasing shares
through the Systematic Investment Plan on a monthly basis is $25, and on a
quarterly basis is $50. See "Purchase of Shares."
    

      REDEMPTION OF SHARES Shares may be redeemed on each day the New York Stock
Exchange, Inc. ("NYSE") is open for business. See "Purchase of Shares" and
"Redemption of Shares."

   
      MANAGEMENT OF THE PORTFOLIO Mutual Management Corp. ("MMC" or the
"Manager"), formerly known as Smith Barney Mutual Funds Management Inc., serves
as the Portfolio's investment manager. MMC provides investment advisory and
management services to various investment companies comprising the Smith Barney
Mutual Funds. MMC is a wholly owned subsidiary of Salomon Smith Barney Holdings
Inc. ("Holdings"). Holdings is 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 Insurance Services. See "Management of the Fund."
    

      EXCHANGE PRIVILEGE Shares of a Class may be exchanged for shares of the
same Class of certain other funds of the Smith Barney Mutual Funds at the
respective net asset values next determined. See "Exchange Privilege."

      VALUATION OF SHARES Net asset value of the Portfolio for the prior day
generally is quoted daily in the financial section of most newspapers and is
also available from a Smith Barney Financial Consultant. See "Valuation of
Shares."

   
      DIVIDENDS AND DISTRIBUTIONS Dividends from net investment income are paid
monthly. Distributions of net realized capital gains, if any, are paid at least
annually. See "Dividends, Distributions and Taxes."
    


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Prospectus Summary (continued)
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      REINVESTMENT OF DIVIDENDS Dividends and distributions paid on shares of
any Class will be reinvested automatically, unless otherwise specified by an
investor, in additional shares of the same Class at current net asset value.
Shares acquired by dividend and distribution reinvestments will not be subject
to any sales charge or CDSC. See "Dividends, Distributions and Taxes."

      RISK FACTORS AND SPECIAL CONSIDERATIONS There can be no assurance that the
Portfolio's investment objective will be achieved. The value of the Portfolio's
investments, and thus the net asset value of the Portfolio's shares, will
fluctuate in response to changes in market and economic conditions, as well as
the financial condition and prospects of issuers of municipal obligations
purchased by the Portfolio. See "Investment Objective and Management Policies."

   
      THE PORTFOLIO'S EXPENSES The following expense table lists the costs and
expenses an investor will incur either directly or indirectly as a shareholder
of the Portfolio, based on the maximum sales charge or maximum CDSC that may be
incurred at the time of purchase or redemption and, unless otherwise noted, the
Portfolio's operating expenses for its most recent fiscal year:

Limited Term Portfolio                        Class A     Class L*    Class Y
--------------------------------------------------------------------------------
Shareholder Transaction Expenses
  Maximum sales charge imposed on
    purchases (as a percentage of
    offering price)                            2.00%       1.00%*       None
  Maximum CDSC (as a percentage of                                      
    original cost or redemption                                         
    proceeds, whichever is lower)              None**      1.00%        None
                                                                        
Annual Portfolio Operating Expenses                                     
(as a percentage of average net assets)                                 
  Management fees                              0.50%       0.50%        0.50%
  12b-1 fees***                                0.15        0.35          --
  Other expenses                               0.09        0.14         0.09****
                                               ----        ----         ----
Total Portfolio Operating Expenses             0.74%       0.99%        0.59%
                                               ====        ====         ==== 
--------------------------------------------------------------------------------

* Class L shares were previously named Class C shares. For shareholders who
owned Class C shares of the Portfolio, Class L shares may be purchased without
incurring the 1% initial sales charge until June 25, 1999.

** Purchases of Class A shares of $500,000 or more will be made at net asset
value with no sales charge, but will be subject to a CDSC of 1.00% on
redemptions made within 12 months of purchase.

*** Class L shares do not have a conversion feature and, therefore, are subject
to an ongoing distribution fee. As a result, long-term shareholders of Class L
shares may pay more than the economic equivalent of the maximum front-end sales
charge permitted by the National Association of Securities Dealers, Inc.

**** For Class Y shares, "Other expenses" have been estimated because no Class Y
shares were outstanding for the fiscal year ended March 31, 1998.
    

      Class A shares of the Portfolio purchased through the Smith Barney
AssetOne Program will be subject to an annual asset-based fee, payable
quarterly, in lieu of


6
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Prospectus Summary (continued)
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the initial sales charge. The fee will vary to a maximum of 1.50%, depending on
the amount of the assets held through the Program. For more information, please
call your Smith Barney Financial Consultant.

   
      The sales charge and CDSC set forth in the above table are the maximum
charges imposed on purchases or redemptions of Portfolio shares and investors
may actually pay lower or no charges, depending on the amount purchased and, in
the case of Class L shares and certain Class A shares, the length of time the
shares are held. See "Purchase of Shares" and "Redemption of Shares." Smith
Barney receives an annual 12b-1 service fee of 0.15% of the value of average
daily net assets of Class A shares. Smith Barney also receives, with respect to
Class L shares, an annual 12b-1 fee of 0.35% of the value of average daily net
assets of that Class, consisting of a 0.20% distribution fee and a 0.15% service
fee. "Other expenses" in the above table include fees for shareholder services,
custodial fees, legal and accounting fees, printing costs and registration fees.
    

      Example

      The following example is intended to assist an investor in understanding
the various costs that an investor in the Portfolio will bear directly or
indirectly. The example assumes payment by the Portfolio of operating expenses
at the levels set forth in the table above. See "Purchase of Shares,"
"Redemption of Shares" and "Management of the Fund."

   
Limited Term Portfolio            1 Year      3 Years      5 Years      10 Years
--------------------------------------------------------------------------------
An investor would pay the
   following expenses on a
   $1,000 investment, assuming
   (1) 5.00% annual return and
   (2) redemption at the end
   of each time period:
      Class A...................   $27          $43           $60         $110
      Class L...................    30           41            64          130
      Class Y...................     6           19            33           74

An investor would pay the
   following expenses on the
   same investment, assuming
   the same annual return
   and no redemption:
      Class A...................   $27          $43           $60         $110
      Class L...................    20           41            64          130
      Class Y...................     6           19            33           74
--------------------------------------------------------------------------------
    

      The example also provides a means for the investor to compare expense
levels of funds with different fee structures over varying investment periods.
To facilitate such comparison, all funds are required to utilize a 5.00% annual
return assumption. However, the Portfolio's actual return will vary and may be
greater or less than 5.00%. This example should not be considered a
representation of past or future expenses and actual expenses may be greater or
less than those shown.


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

   
      The following information has been audited by KPMG Peat Marwick LLP,
independent auditors, whose report thereon for the five-year period ended March
31, 1998 appears in the Portfolio's annual report dated March 31, 1998. The
information set out below should be read in conjunction with the financial
statements and related notes that also appear in the Portfolio's Annual Report
to Shareholders, which is incorporated by reference into the SAI. As of March
31, 1998, no Class Y shares were outstanding and, accordingly, no comparable
information is available for that class.
    

For a share of beneficial interest outstanding throughout each year:

   
Limited Term Portfolio                           Class A Shares
--------------------------------------------------------------------------------
Year Ended March 31,              1998    1997    1996    1995    1994(1)  1993
--------------------------------------------------------------------------------
Net Asset Value,
Beginning of Year                $6.54   $6.61   $6.54   $6.55   $6.68    $6.45
--------------------------------------------------------------------------------
Income From Operations:
  Net investment income (2)       0.34    0.34    0.36    0.36    0.37     0.39
  Net realized and unrealized
  gain (loss)                     0.22   (0.06)   0.07      --   (0.13)    0.23
--------------------------------------------------------------------------------
Total Income from Operations      0.56    0.28    0.43    0.36    0.24     0.62
================================================================================
Less Distributions From:
  Net investment income          (0.34)  (0.35)  (0.36)  (0.37)  (0.37)   (0.39)
--------------------------------------------------------------------------------
Total Distributions              (0.34)  (0.35)  (0.36)  (0.37)  (0.37)   (0.39)
--------------------------------------------------------------------------------
Net Asset Value, End of Year     $6.76   $6.54   $6.61   $6.54   $6.55    $6.68
================================================================================
Total Return(P.)                  8.66%   4.30%   6.65%   5.69%   3.65%    9.82%
--------------------------------------------------------------------------------
Net Assets, End of Year
  (millions)                      $257    $260    $278    $245    $282     $242
--------------------------------------------------------------------------------
Ratios to Average Net Assets:
  Expenses (2)                    0.74%   0.75%   0.75%   0.61%   0.53%    0.55%
  Net Investment Income           5.14    5.16    5.43    5.61    5.53     5.90
--------------------------------------------------------------------------------
Portfolio Turnover Rate             58%     46%     26%     22%     25%      25%
================================================================================
                                                                 
(1)  On October 10, 1994, the former Class C shares were exchanged into Class A
     shares.
(2)  The Manager has waived all or a part of its fees for each of the years in
     the four-year period ended March 31, 1992. If such fees were not waived,
     the per share decrease of net investment income and the ratios of expenses
     to average net assets would have been:
(P.) Total returns do not reflect sales loads or contingent deferred sales
     charges.
    
       


8
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Financial Highlights (continued)
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For a share of beneficial interest outstanding throughout each year:

   
Limited Term Portfolio*                          Class A Shares
--------------------------------------------------------------------------------
Year Ended March 31,              1992          1991         1990       1989**
--------------------------------------------------------------------------------
Net Asset Value,
Beginning of Year                $6.38         $6.28        $6.20      $6.25
--------------------------------------------------------------------------------
Income From Operations:
  Net investment income(1)        0.42          0.43         0.44       0.13
  Net realized and unrealized
  gain (loss)                     0.07          0.07         0.10      (0.05)
--------------------------------------------------------------------------------
Total Income from Operations      0.49          0.50         0.54       0.08
================================================================================
Less Distributions From:
  Net investment income          (0.42)        (0.40)       (0.46)     (0.13)
--------------------------------------------------------------------------------
Total Distributions              (0.42)        (0.40)       (0.46)     (0.13)
--------------------------------------------------------------------------------
Net Asset Value, End of Year     $6.45         $6.38        $6.28      $6.20
================================================================================
Total Return(P.)                  7.99%         8.23%        9.07%      1.09%++
--------------------------------------------------------------------------------
Net Assets, End of Year
  (millions)                      $157           $65          $20         $5
--------------------------------------------------------------------------------
Ratios to Average Net Assets:
  Expenses(1)                     0.49%         0.33%        0.30%      0.30%+
  Net Investment Income           6.42          6.77         6.98       6.58+
--------------------------------------------------------------------------------
Portfolio Turnover Rate             26%           15%          65%        14%
================================================================================

(1) The Manager has waived all or a part of its fees for each of the years in
    the four-year period ended March 31, 1992. If such fees were not waived, the
    per share decrease of net investment income and the ratios of expenses to
    average net assets would have been:
    

                Net Investment Income                   Expense Ratios
                  Per Share Decrease                  Without Fee Waivers
           ---------------------------------      ------------------------------
            1992     1991     1990     1989       1992    1991    1990    1989
--------------------------------------------------------------------------------
Class A    $0.003   $0.011   $0.018   $0.022      0.56%   0.30%   0.30%   0.30%+
--------------------------------------------------------------------------------

(P.) Total returns do not reflect sales loads or contingent deferred sales
     charges.
++   Total return is not annualized, as it may not be representative of the
     total return for the year.
+    Annualized.

   
*    Table continued from p. 8.
**   For the period from November 28, 1988 (inception date) to March 31, 1989.
    


                                                                               9
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Financial Highlights (continued)
--------------------------------------------------------------------------------

For a share of beneficial interest outstanding throughout each year:

   
                                                                        Class Y
Limited Term Portfolio               Class L Shares (1)                 Shares*
--------------------------------------------------------------------------------
Year Ended March 31,    1998    1997    1996    1995    1994   1993(2)   1996(3)
--------------------------------------------------------------------------------
Net Asset Value,
Beginning of Year      $6.54   $6.61   $6.54   $6.54   $6.68   $6.62    $6.56
--------------------------------------------------------------------------------
Income From Operations:
  Net investment
    income              0.33    0.33    0.35    0.35    0.35    0.10     0.37
--------------------------------------------------------------------------------
  Net realized and
    unrealized gain
    (loss)              0.21   (0.06)   0.06    0.00   (0.14)   0.05     0.06
--------------------------------------------------------------------------------
Total Income from
  Operations            0.54    0.27    0.41    0.35    0.21    0.15     0.43
================================================================================
Less Distributions From:
  Net investment
    income             (0.32)  (0.34)  (0.34)  (0.35)  (0.35)  (0.09)   (0.37)
--------------------------------------------------------------------------------
Total distributions    (0.32)  (0.34)  (0.34)  (0.35)  (0.35)  (0.09)   (0.37)
--------------------------------------------------------------------------------
Net Asset Value,
  End of Year          $6.76   $6.54   $6.61   $6.54   $6.54   $6.68    $6.62
================================================================================
Total Return(P.)        8.36%   4.10%   6.45%   5.51%   3.15%   2.28%++  6.63%++
--------------------------------------------------------------------------------
Net Assets,
  End of Year
  (millions)             $31     $28     $29     $27     $27      $6     $0.2
--------------------------------------------------------------------------------
Ratios to Average
  Net Assets:
  Expenses              0.99%   0.97%   0.96%   0.89%   0.88%   0.88%+   0.58%+
  Net investment
    income              4.89    4.94    5.22    5.34    5.10    5.35+    5.56+
--------------------------------------------------------------------------------
Portfolio Turnover
  Rate                    58%     46%     26%     22%     25%     25%      26%
================================================================================

(1)  On November 7, 1994 the former Class B Shares were renamed Class C Shares.
     On June 12, 1998, Class C shares were renamed Class L shares.
(2)  For the period from January 5, 1993 (inception date) to March 31, 1993.
(3)  For the period from April 4, 1995 (inception date) to March 31, 1996.
(P.) Total returns do not reflect sales loads or contingent deferred sales
     charges.
++   Total return is not annualized, as it may not be representative of the
     total return for the year.
+    Annualized.
*    As of April 11, 1996, there was complete redemption of Class Y Shares. As
     of March 31, 1998, no Class Y Shares were outstanding and, accordingly, no
     comparable information is available at this time for that class.
    


10
<PAGE>

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

      The Portfolio seeks as high a level of income exempt from Federal income
taxes as is consistent with prudent investing.

      The Portfolio will normally invest in securities with remaining maturities
no greater than 20 years. The dollar-weighted average maturity of the Portfolio
will normally be not less than three nor more than 10 years.

   
      The Portfolio will seek to be fully invested in obligations that are
issued by or on behalf of states, territories and possessions of the United
States and their political subdivisions, agencies and instrumentalities that
were, in the opinion of bond counsel to the issuer, exempt from Federal income
taxes at the time of their issuance. For certain shareholders, a portion of the
Portfolio's income may be subject to the alternative minimum tax ("AMT") on
tax-exempt income discussed below.

      The two principal classifications of municipal obligations are "general
obligation" and "revenue." General obligations are secured by a municipal
issuer's pledge of its full faith, credit and taxing power for the payment of
principal and interest. Revenue obligations are payable only from the revenues
derived from a particular facility or class of facilities or, in some cases from
the proceeds of a special excise tax or other specific revenue source. Such
obligations are often issued to raise money for public projects that enhance the
quality of life including health facilities, housing, airports, schools,
highways and bridges. Please see the SAI for a more detailed discussion about
the different types of municipal obligations.
    

      Under the Tax Reform Act of 1986, interest income from municipal
obligations issued to finance certain "private activities" ("AMT-Subject Bonds")
becomes an item of "tax preference" which is subject to the AMT when received by
a person in a tax year during which he or she is subject to that tax. Such
private activity bonds include bonds issued to finance such projects as certain
solid waste disposal facilities, student loan programs and water and sewage
projects. Because interest income on AMT-Subject Bonds is taxable to certain
investors, it is expected, although there can be no guarantee, that such
municipal obligations generally will provide somewhat higher yields than other
municipal obligations of comparable quality and maturity. There is no limitation
on the percent or amount of the Portfolio's assets that may be invested in
AMT-Subject Bonds.

   
      Municipal bonds purchased for the Portfolio must, at the time of purchase,
be investment-grade municipal bonds, and at least two-thirds of the Portfolio's
municipal bonds must be rated within the three highest ratings categories by a
nationally recognized statistical rating organization ("NRSRO").
Investment-grade bonds are rated within the four highest ratings categories by
an NRSRO, such as those rated Aaa, Aa, A and Baa by Moody's Investors Service,
Inc. ("Moody's") or AAA, AA, A and BBB by Standard & Poor's Ratings Group
("S&P"); pre-refunded bonds escrowed by U.S. Treasury obligations are considered
AAA rated
    


                                                                              11
<PAGE>

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

   
(the highest credit rating) even though the issuer does not obtain a new rating.
Up to one-third of the assets of the Portfolio may be invested in municipal
bonds rated in the fourth highest category (this grade, while regarded as having
an adequate capacity to pay interest and repay principal, is considered to be of
medium quality and has speculative characteristics; in addition, changes in
economic conditions or other circumstances are more likely to lead to a weakened
capacity to make principal and interest payments than is the case with higher
grade bonds) or in unrated municipal bonds if, based upon credit analysis by the
Manager, it is believed that such securities are at least of comparable quality
to those securities in which the Portfolio may invest. In determining the
suitability of an investment in an unrated municipal bond, the Manager will take
into consideration debt service coverage, the purpose of the financing, history
of the issuer, existence of other rated securities of the issuer and other
general conditions as may be relevant, including comparability to other issues.
After the Portfolio purchases a municipal bond, the issue may cease to be rated
or its rating may be reduced below the minimum required for purchase. Such an
event would not require the elimination of the issue from the Portfolio but the
Manager will consider such an event in determining whether the Portfolio should
continue to hold the security.

      The Portfolio's short-term municipal obligations will be limited to
high-grade obligations (obligations that are secured by the full faith and
credit of the United States or are rated MIG I or MIG 2, VMIG I or VMIG 2 or
Prime-1 or Aa or better by Moody's or SP-I +, SP-I, SP-2, or A-1 or AA or better
by S&P or have a rating within comparable categories by any other NRSRO, or
obligations that are unrated but determined by the Manager to be comparable).
Among the types of short-term instruments in which the Portfolio may invest are
floating- or variable-rate demand instruments, tax-exempt commercial paper
(generally having a maturity of less than nine months), and other types of notes
generally having maturities of less than three years, such as Tax Anticipation
Notes, Revenue Anticipation Notes, Tax and Revenue Anticipation Notes and Bond
Anticipation Notes. Demand instruments usually have an indicated maturity of
more than one year, but contain a demand feature that enables the holder to
liquidate the investment on no more than 30-days' notice; variable-rate demand
instruments provide for automatic establishment of a new interest rate on set
dates; floating-rate demand instruments provide for automatic adjustment of
their interest rates whenever some other specified interest rate changes (e.g.,
the prime rate). The Portfolio may purchase participation interests in
variable-rate tax-exempt securities (such as industrial development bonds) owned
by banks. Participations are frequently backed by an irrevocable letter of
credit or guarantee of a bank that the Manager has determined meets the
prescribed quality standards for the Portfolio. Participation interests will be
purchased only if management believes interest income on such interests will be
tax exempt when distributed as dividends to shareholders.
    


12
<PAGE>

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

   
      The Portfolio will not invest more than 15% of the value of its net assets
in illiquid securities, including those for which there is no established
market.

      The Portfolio may purchase new issues of municipal obligations on a
when-issued basis, i.e. delivery and payment normally take place 15 to 45 days
after the purchase date. The payment obligation and the interest rate to be
received are each fixed on the purchase date, although no interest accrues with
respect to a when-issued security prior to its stated delivery date. During the
period between purchase and settlement, assets consisting of cash or debt
securities of any grade having a value equal to or greater than the Portfolio's
purchase commitments, provided such securities have been determined by the
Manager to be liquid and unencumbered and are marked market daily pursuant to
guidelines established by the Board of Trustees, will be segregated at the
custodian bank. Interest rates at settlement may be lower or higher than on the
purchase date, which would result in appreciation or depreciation, respectively.
Although the Portfolio will only purchase municipal obligations on a when-issued
basis with the intention of actually acquiring the securities, the Portfolio may
sell these securities before the settlement date if it is deemed advisable.
    

      Portfolio transactions will be undertaken principally to accomplish the
Portfolio's objective in relation to anticipated movements in the general level
of interest rates, but the Portfolio may also engage in short-term trading
consistent with its objective.

   
      The Portfolio may borrow on a short-term basis in amounts of up to 5% of
its assets in order to facilitate the settlement of portfolio securities
transactions.

      The Portfolio may invest in municipal bond index futures contracts
(currently traded on the Chicago Board of Trade) or in listed contracts based on
U.S. government securities as a hedging policy in pursuit of its investment
objective, provided that immediately thereafter not more than 33 1/3% of its net
assets would be hedged or the amount of margin deposits on the Portfolio's
existing futures contracts would not exceed 5% of the value of its total assets.
Since any income would be taxable, it is anticipated that such investments will
be made only in those circumstances when the Manager anticipates the possibility
of an extreme change in interest rates or market conditions but does not wish to
liquidate the Portfolio's securities. A further discussion of futures contracts
and their associated risks is contained in the SAI.
    

      The Portfolio 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


                                                                              13
<PAGE>

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

rates than debt obligations of comparable maturities which make periodic
distributions 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.

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

      The liquidity of municipal lease obligations varies. Municipal leases held
by the Portfolio will be considered illiquid securities unless the Board of
Trustees determines that the leases are readily marketable. Certain municipal
lease obligations contain "non-appropriation" clauses which provide that the
municipality has no obligation to make lease or installment purchase payments in
future years unless money is appropriated for such purpose on a yearly basis. In
the case of a "non-appropriation" lease, the Portfolio's ability to recover
under the lease in the event of non-appropriation or default will be limited
solely to the repossession of the leased property, without recourse to the
general credit of the lessee, and disposition of the property in the event of
foreclosure might be difficult. The Portfolio will not invest more than 5% of
its assets in such "non-appropriation" municipal lease obligations.

      In each of the Portfolio's prior fiscal years, 100% of the Portfolio's
dividends were exempt-interest dividends, excludable from gross income for
Federal income tax purposes. It is a fundamental policy that under normal market
conditions, the Portfolio will seek to invest 100% of its assets -- and the
Portfolio will invest not less than 80% of its assets -- in municipal
obligations the interest on which is exempt from Federal income taxes (other
than the AMT.) The Portfolio may invest up to 20% of its assets in taxable
fixed-income securities issued or guaranteed by the full faith and credit of the
United States and may invest more than 20% of its assets in U.S. government
securities during periods when in the Manager's opinion a temporary defensive
posture is warranted, including any period when the Fund's monies available for
investment exceed the municipal obligations available for purchase that meet the
Fund's rating, maturity and other investment criteria.
    


14
<PAGE>

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

   
      Year 2000. The investment management services provided to the Fund by the
Manager 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. The Manager 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, the Manager 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 the Manager, Smith Barney or any other service provider will be successful,
or that interaction with other non-complying computer systems will not impair
Fund or shareholder services at that time.

      In addition, the ability of issuers to make timely payments of interest
and principal or to continue their operations or services may be impaired by the
inadequate preparation of their computer systems for the year 2000. This may
adversely affect the market values of securities of specific issuers or of
securities generally if the inadequacy of preparation is perceived as widespread
or as affecting trading markets.
    

      RISK AND INVESTMENT CONSIDERATIONS

      The ability of the Portfolio to achieve its investment objective is
dependent on a number of factors, including the skills of the Manager in
purchasing municipal obligations whose issuers have the continuing ability to
meet their obligations for the payment of interest and principal when due. The
ability to achieve a high level of income is dependent on the yields of the
securities in the portfolio. Yields on municipal obligations are the product of
a variety of factors, including the general conditions of the municipal bond
markets, the size of a particular offering, the maturity of the obligation and
the rating of the issue. In general, the longer the maturity of a municipal
obligation, the higher the rate of interest it pays. However, a longer average
maturity is generally associated with a higher level of volatility in the market
value of a municipal obligation. During periods of falling interest rates, the
values of long-term municipal obligations generally rise. Conversely, during
periods of rising interest rates, the values of such securities generally
decline. Changes in the value of Portfolio securities will not affect interest
income derived from those securities but will affect the Portfolio's net asset
value. Since the Portfolio's objective is to provide high current income, they
will invest in municipal obligations with an emphasis on income rather than
stability of net asset values.


                                                                              15
<PAGE>

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

   
      From time to time, proposals have been introduced before Congress for the
purpose of restricting or eliminating the Federal income tax exemption for
interest on municipal obligations, and similar proposals may be introduced in
the future. If one of these proposals were enacted, the availability of
tax-exempt obligations for investment by the Portfolio and the value of the
portfolio securities would be affected. The Board of Trustees would then
reevaluate the Portfolios' investment objectives and policies.
    

      PORTFOLIO TRANSACTIONS AND TURNOVER

   
      The Portfolio's portfolio securities ordinarily are purchased from and
sold to parties acting as either principal or agent. Newly issued securities
ordinarily are purchased directly from the issuer or from an underwriter; other
purchases and sales usually are placed with those dealers from which it appears
that the best price or execution will be obtained. Usually, no brokerage
commissions, as such, are paid by the Portfolio, since purchases and sales of
municipal bonds and other debt securities are traded through broker-dealers in
principal transactions, although the price usually includes a compensation to
the dealer.
    

      The Portfolio cannot accurately predict its portfolio turnover rate, but
anticipates that the annual turnover will not exceed 100%. An annual turnover
rate of 100% would occur when all of the securities held by the Portfolio are
replaced one time during a period of one year. The Manager will not consider
turnover rate a limiting factor in making investment decisions consistent with
the investment objective and policies of the Portfolio. See "Financial
Highlights" for the Portfolio's annual turnover rate during each year since
inception.

--------------------------------------------------------------------------------
Valuation of Shares
--------------------------------------------------------------------------------

   
      The Portfolio's net asset value per share is determined as of the close of
regular trading on the NYSE, which is currently 4:00 p.m. (New York City time),
on each day that the NYSE is open, by dividing the value of the Portfolio's net
asset values attributable to each Class by the total number of shares of the
Class outstanding.
    

      When, in the judgment of the pricing service, quoted bid prices for
investments are readily available and are representative of the bid side of the
market, these investments are valued at the mean between the quoted bid and
asked prices. Investments for which, in the judgment of the pricing service,
there are no readily obtainable market quotations (which may constitute a
majority of the portfolio securities) are carried at fair value of securities of
similar type, yield and maturity. Pricing services generally determine value by
reference to transactions in municipal obligations, quotations from municipal
bond dealers, market transactions in comparable securities and various
relationships between securities. Short-term instru-


16
<PAGE>

--------------------------------------------------------------------------------
Valuation of Shares (continued)
--------------------------------------------------------------------------------

   
ments maturing within 60 days will be valued at cost plus (minus) amortized
discount (premium), if any, when amortized cost approximates 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 Trustees.
    

--------------------------------------------------------------------------------
Dividends, Distributions and Taxes
--------------------------------------------------------------------------------

      DIVIDENDS AND DISTRIBUTIONS

   
      Dividends from the Portfolio's net investment income are paid monthly, and
any net realized capital gains are distributed at least annually.
    

      If a shareholder does not otherwise instruct, dividends and capital gains
distributions will be reinvested automatically in additional shares of the same
Class at net asset value, subject to no sales charge or CDSC.

      Income dividends and capital gain distributions that are invested are
credited to shareholders' accounts in additional shares at the net asset value
as of the close of business on the payment date. A shareholder may change the
option at any time by notifying his or her Smith Barney Financial Consultant.
Accounts held directly by the Fund's transfer agent, First Data Investor
Services Group, Inc. ("First Data"), should notify First Data in writing at
least five business days prior to the payment date to permit the change to be
entered in the shareholder's account.

   
      The per share dividends on Class L shares of the Portfolio may be lower
than the per share dividends on Class A and Class Y shares principally as a
result of the distribution fee applicable with respect to Class L shares. The
per share dividends on Class A shares of the Portfolio may be lower than the per
share dividends on Class Y shares principally as a result of the service fee
applicable to Class A shares. Distributions of capital gains, if any, will be in
the same amount for Class A, Class L and Class Y shares.

      TAXES

      The following is a summary of the material federal tax considerations
affecting the Portfolio and its shareholders. Please refer to the SAI for
further discussion. In addition to the considerations described below and in the
SAI, there may be other federal, state, local, or foreign tax implications to
consider. Because taxes are a complex matter, prospective shareholders are urged
to consult their tax advisors for more detailed information with respect to the
tax consequences of an investment.

      The Portfolio intends to qualify, as it has in prior years, under
Subchapter M of the Internal Revenue Code (the "Code") for tax treatment as a
separate regulated
    


                                                                              17
<PAGE>

--------------------------------------------------------------------------------
Dividends, Distributions and Taxes (continued)
--------------------------------------------------------------------------------

   
investment company. In each taxable year that the Portfolio qualifies, so long
as such qualification is in the best interests of its shareholders, the
Portfolio will pay no federal income tax on its net investment income and
long-term capital gain that is distributed to shareholders, provided the
Portfolio distributes at least 90% of its net investment income and net
short-term capital gains for the taxable year. The Portfolio also intends to
satisfy conditions that will enable it to pay "exempt-interest dividends" to
shareholders. Exempt-interest dividends are generally not subject to regular
federal income taxes, although they may be considered taxable for certain state
and local income (or intangible) tax purposes.

      Exempt-interest dividends attributable to interest received by the
Portfolio on certain "private-activity" bonds will be treated as a specific tax
preference item to be included in a shareholder's alternative minimum tax
computation. All exempt-interest dividends will be a component of the "current
earnings" adjustment item for purposes of the federal corporate alternative
minimum tax. Exempt-interest dividends derived from the interest earned on
private activity bonds will not be exempt from federal income tax for those
shareholders who are "substantial users" (or persons related to "substantial
users") of the facilities financed by these bonds.

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

      The interest expense incurred by a shareholder on borrowing made to
purchase or carry Portfolio shares is not deductible for federal income tax
purposes to the extent related to the exempt-interest dividends received on such
shares.

      Dividends paid by the Portfolio from interest income on taxable
investments, net realized short-term securities gains and all or a portion of
any gains realized from the sale or other disposition of certain market discount
bonds are subject to federal income tax as ordinary income. Distributions, if
any, from net realized long-term securities gains derived from the sale of bonds
held by the Portfolio for more than one year are taxable as long-term capital
gains regardless of the length of time a shareholder has owned Portfolio shares.

      Shareholders are required to pay tax on all taxable distributions even if
those distributions are automatically reinvested in additional shares. None of
the dividends paid by the Portfolio will qualify for the corporate dividends
received deduction. The Fund will inform shareholders of the source and tax
status of all distributions promptly after the close of each calendar year.

      A shareholder's gain or loss on the disposition of shares (whether by
redemption, sale or exchange), generally will be a long-term or short-term gain
or loss depending on whether the shares had been owned for more than 12 months,
or 12 months or less, respectively. Losses realized by a shareholder on the
disposition of
    


18
<PAGE>

--------------------------------------------------------------------------------
Dividends, Distributions and Taxes (continued)
--------------------------------------------------------------------------------

   
shares owned for six months or less will be treated as a long-term capital loss
to the extent a capital gain dividend had been distributed on such shares.

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

--------------------------------------------------------------------------------
Purchase of Shares
--------------------------------------------------------------------------------
    

      GENERAL

   
      The Portfolio offers three Classes of shares. Class A and Class L shares
are sold to investors with an initial sales charge. Class Y shares are sold
without an initial sales charge or a CDSC and are available only to investors
investing a minimum of $15,000,000 (except for purchases of Class Y shares by
Smith Barney Concert Allocation Series Inc., for which there is no minimum
purchase amount). Until June 25, 1999, purchases of Class L shares by investors
who were holders of Class C shares of the Portfolio on June 12, 1998 will not be
subject to the 1% initial sales charge. See "Prospectus Summary -- Alternative
Purchase Arrangements" for a discussion of factors to consider in selecting
which Class of shares to purchase.

      Purchases of Portfolio shares must be made through a brokerage account
maintained with Smith Barney, an Introducing Broker or an investment dealer in
the selling group. When purchasing shares of the Portfolio, investors must
specify whether the purchase is for Class A, Class L or Class Y shares. Smith
Barney and other broker-dealers may charge their customers an annual account
maintenance fee in connection with a brokerage account through which an investor
purchases or holds shares. Accounts held directly at First Data are not subject
to a maintenance fee.

      Investors in Class A and Class L shares may open an account by making an
initial investment of at least $1,000 for each account in the Portfolio.
Investors in Class Y shares may open an account by making an initial investment
of at least $15,000,000. Subsequent investments of at least $50 may be made for
all Classes. For shareholders purchasing shares of the Portfolio through the
Systematic Investment Plan on a monthly basis, the minimum initial investment
requirement for Class A and Class L shares and the subsequent investment
requirement for all
    


                                                                              19
<PAGE>

--------------------------------------------------------------------------------
Purchase of Shares (continued)
--------------------------------------------------------------------------------

   
Classes is $25. For shareholders purchasing shares of the Portfolio through the
Systematic Investment Plan on a quarterly basis, the minimum initial investment
requirement for Class A and Class L shares and the subsequent investment
requirement for all Classes is $50. There are no minimum investment requirements
for Class A shares for employees of Travelers and its subsidiaries, including
Smith Barney, and their spouses and children, unitholders who invest
distributions from a UIT sponsored by Smith Barney, and Directors or Trustees of
any Travelers-affiliated funds, including the Smith Barney Mutual Funds, and
their spouses and children. The Fund reserves the right to waive or change
minimums, to decline any order to purchase its shares and to suspend the
offering of shares from time to time. Shares purchased will be held in the
shareholder's account by the Fund's transfer agent, First Data. Share
certificates are issued only upon a shareholder's written request to First Data.
It is not recommended that the Portfolio be used as a vehicle for Keogh, IRA or
other qualified retirement plans.

      Purchase orders received by the Fund or Smith Barney prior to the close of
regular trading on the NYSE on any day the Portfolio calculates its net asset
value are priced according to the net asset value determined on that day (the
"trade date"). Orders received by dealers or Introducing Brokers prior to the
close of regular trading on the NYSE on any day the Portfolio calculates its net
asset value are priced according to the net asset value determined on that day,
provided the order is received by the Fund or Smith Barney prior to Smith
Barney's close of business. For shares purchased through Smith Barney or
Introducing Brokers purchasing through the Distributor, payment for Portfolio
shares is due on the third business day after the trade date. In all other
cases, payment must be made with the purchase order.
    

      SYSTEMATIC INVESTMENT PLAN

      Shareholders may make additions to their accounts at any time by
purchasing shares through a service known as the Systematic Investment Plan.
Under the Systematic Investment Plan, Smith Barney or First Data is authorized
through preauthorized transfers of at least $25 on a monthly basis or at least
$50 on a quarterly basis to charge the regular bank account or other financial
institution indicated by the shareholder to provide systematic additions to the
shareholder's Portfolio account. A shareholder who has insufficient funds to
complete the transfer will be charged a fee of up to $25 by Smith Barney or
First Data. The Systematic Investment Plan also authorizes Smith Barney to apply
cash held in the shareholder's Smith Barney brokerage account or redeem the
shareholder's shares of a Smith Barney money market fund to make additions to
the account. Additional information is available from the Fund or a Smith Barney
Financial Consultant.


20
<PAGE>

--------------------------------------------------------------------------------
Purchase of Shares (continued)
--------------------------------------------------------------------------------

      INITIAL SALES CHARGE ALTERNATIVE -- CLASS A SHARES

      The sales charges applicable to purchases of Class A shares of the
Portfolio are as follows:

================================================================================
                                    Sales Charge                 Dealer's
                              % of           % of Amount   Reallowance as % of
Amount of Investment      Offering Price      Invested        Offering Price
--------------------------------------------------------------------------------
  Less than $500,000          2.00%             2.04%             1.80%
  $500,000 and over             *                 *                 *
================================================================================

   
      * Purchases of Class A shares of $500,000 or more will be made at net
asset value without any initial sales charge, but will be subject to a CDSC of
1.00% on redemptions made within 12 months of purchase. The CDSC on Class A
shares is payable to Smith Barney, which compensates Smith Barney Financial
Consultants and other dealers whose clients make purchases of $500,000 or more.
The CDSC is waived in the same circumstances in which the CDSC applicable to
Class L shares is waived. See "Deferred Sales Charge Alternatives" and "Waivers
of CDSC."

      The $500,000 investment may be met by aggregating the purchases of Class A
shares of the Portfolio made at one time by "any person," which includes an
individual and his or her immediate family, or a trustee or other fiduciary of a
single trust estate or single fiduciary account.

      INITIAL SALES CHARGE WAIVERS -- CLASS A SHARES

      Purchases of Class A shares may be made at net asset value without a sales
charge in the following circumstances: (a) sales to (i) Board members and
employees of Travelers and its subsidiaries and any Travelers-affiliated funds,
including the Smith Barney Mutual Funds (including retired Board members and
employees); the immediate families of such persons (including the surviving
spouse of a deceased Board member or employee); and to a pension, profit-sharing
or other benefit plan for such persons and (ii) employees of members of the
National Association of Securities Dealers, Inc., provided such sales are made
upon the assurance of the purchaser that the purchase is made for investment
purposes and that the securities will not be resold except through redemption or
repurchase; (b) offers of Class A shares to any other investment company to
effect the combination of such company with the Portfolio by merger, acquisition
of assets or otherwise; (c) purchases of Class A shares by any client of a newly
employed Smith Barney Financial Consultant (for a period up to 90 days from the
commencement of the Financial Consultant's employment with Smith Barney), on the
condition the purchase of Class A shares is made with the proceeds of the
redemption of shares of a mutual fund which (i) was sponsored by the Financial
Consultant's prior employer, (ii) was sold to the client by the Financial
Consultant and (iii) was subject to a sales charge; (d) purchases by
shareholders who have redeemed Class A shares in the Portfolio (or Class A
shares of another fund of the Smith Barney Mutual Funds that are offered with a
sales charge) and who wish to reinvest their redemption proceeds in
    


                                                                              21
<PAGE>

--------------------------------------------------------------------------------
Purchase of Shares (continued)
--------------------------------------------------------------------------------

the Portfolio, provided the reinvestment is made within 60 calendar days of the
redemption; (e) purchases by accounts managed by registered investment advisory
subsidiaries of Travelers; (f) investments of distributions from a UIT sponsored
by Smith Barney; and (g) purchases by investors participating in a Smith Barney
fee-based arrangement. In order to obtain such discounts, the purchaser must
provide sufficient information at the time of purchase to permit verification
that the purchase would qualify for the elimination of the sales charge.

      RIGHT OF ACCUMULATION

   
      Class A shares of the Portfolio may be purchased by "any person" (as
defined above) at net asset value determined by aggregating the dollar amount of
the new purchase and the total net asset value of all Class A shares of the
Portfolio and other Smith Barney Mutual Funds offered with a sales charge, as
currently listed under "Exchange Privilege," then held by such person and
applying the sales charge applicable to such aggregate. In order to obtain such
discount, the purchaser must provide sufficient information at the time of
purchase to permit verification that the purchase qualifies for purchase at net
asset value. The right of accumulation is subject to modification or
discontinuance at any time with respect to all shares purchased thereafter.
    

      GROUP PURCHASES

   
      Upon completion of certain automated systems, purchase at net asset value
will also be available to employees (and partners) of the same employer
purchasing as a group, provided each participant makes the minimum initial
investment required. The sales charge applicable to purchases by each member of
such a group will be determined by the table set forth above under "Initial
Sales Charge Alternative -- Class A Shares," and will be based upon the
aggregate sales of Class A shares of Smith Barney Mutual Funds offered with a
sales charge to, and share holdings of, all members of the group. To be eligible
for such purchase at net asset value, all purchases must be made pursuant to an
employer- or partnership-sanctioned plan meeting certain requirements. One such
requirement is that the plan must be open to specified partners or employees of
the employer and its subsidiaries, if any. Such plan may, but is not required
to, provide for payroll deductions. The Distributor may also offer net asset
value purchase for aggregating related fiduciary accounts under such conditions
that it will realize economies of sales efforts and sales-related expenses. An
individual who is a member of a qualified group may also purchase Class A shares
at the sales charge applicable to the group as a whole. The sales charge is
based upon the aggregate dollar value of Class A shares offered with a sales
charge that have been previously purchased and are still owned by the group,
plus the amount of the current purchase. A "qualified group" is one which (a)
has been in existence for more than six months, (b) has a purpose other than
acquiring Portfolio shares at a discount and (c) satisfies uniform criteria
which enable Smith Barney to realize economies of scale in its costs of
distributing shares. A qualified
    


22
<PAGE>

--------------------------------------------------------------------------------
Purchase of Shares (continued)
--------------------------------------------------------------------------------

   
group must have more than 10 members, must be available to arrange for group
meetings between representatives of the Portfolio and the members, and must
agree to include sales and other materials related to the Portfolio in its
publications and mailings to members at no cost to the Distributor. In order to
purchase at net asset value, the purchaser must provide sufficient information
at the time of purchase to permit verification that the purchase qualifies for
purchase at net asset value. Approval of group purchase at net asset value is
subject to the discretion of the Distributor.
    

   LETTER OF INTENT

   Class A Shares. A Letter of Intent for amounts of $500,000 or more provides
an opportunity for an investor to purchase shares at net asset value by
aggregating the investments over a 13-month period, provided that the investor
refers to such Letter when placing orders. For purposes of a Letter of Intent,
the "Amount of Investment" as referred to in the preceding sales charge table
includes purchases of all Class A shares of the Portfolio and other funds of the
Smith Barney Mutual Funds offered with a sales charge over a 13-month period
based on the total amount of intended purchases plus the value of all Class A
shares previously purchased and still owned. An alternative is to compute the
13-month period starting up to 90 days before the date of execution of a Letter
of Intent. Each investment made during the period receives the sales charge
applicable to the total amount of the investment goal. If the goal is not
achieved within the period, the investor must pay the difference between the
sales charges applicable to the purchases made and the charges previously paid,
or an appropriate number of escrowed shares will be redeemed. Please contact a
Smith Barney Financial Consultant or First Data to obtain a Letter of Intent
application.

   
      Class Y Shares. A Letter of Intent may also be used as a way for investors
to meet the minimum investment requirement for Class Y shares. Such investors
must make an initial minimum purchase of $5,000,000 in Class Y shares of the
Portfolio and agree to purchase a total of $15,000,000 of Class Y shares of the
same Portfolio within 13 months from the date of the Letter. If a total
investment of $15,000,000 is not made within the 13-month period, all Class Y
shares purchased to date will be transferred to Class A shares, where they will
be subject to all fees (including a service fee of 0.15%) and expenses
applicable to the Portfolio's Class A shares, which may include a CDSC of 1.00%.
Please contact a Smith Barney Financial Consultant or First Data for further
information.

      INITIAL SALES CHARGE ALTERNATIVE -- CLASS L SHARES

      The sales charge applicable to purchases of Class L shares is 1.00% of the
public offering price, which is 1.01% of the amount invested, and all of this
amount is reallowed to dealers who sell Class L shares.
    


                                                                              23
<PAGE>

--------------------------------------------------------------------------------
Purchase of Shares (continued)
--------------------------------------------------------------------------------

   

      The initial sales charge on Class L shares is paid to the Distributor.
Members of the selling group may be deemed to be underwriters of the Fund as
defined in the Securities Act of 1933, as amended.
    

      DEFERRED SALES CHARGE ALTERNATIVES

   
      "CDSC Shares" include any shares for which a CDSC may be imposed on
certain redemptions. "CDSC Shares" are: (a) Class L shares; and (b) Class A
shares that were purchased without an initial sales charge but subject to a
CDSC.

      Any applicable CDSC will be assessed on an amount equal to the lesser of
the original investment in the shares being redeemed or their account value at
the time of redemption. CDSC Shares that are redeemed will not be subject to a
CDSC to the extent that the value of such shares represents: (a) capital
appreciation of Portfolio assets; (b) reinvestment of dividends or capital gain
distributions; or (c) CDSC Shares redeemed more than 12 months after their
purchase.
    

      In determining the applicability of any CDSC, it will be assumed that a
redemption is made first of shares representing capital appreciation, next of
shares representing the reinvestment of dividends and capital gain distributions
and finally of other shares held by the shareholder for the longest period of
time. The length of time that CDSC Shares acquired through an exchange have been
held will be calculated from the date that the shares exchanged were initially
acquired in one of the other Smith Barney Mutual Funds, and Portfolio shares
being redeemed will be considered to represent, as applicable, capital
appreciation or dividend and capital gain distribution reinvestments in such
other funds. For Federal income tax purposes, the amount of the CDSC will reduce
the gain or increase the loss, as the case may be, on the amount realized on
redemption. The amount of any CDSC will be paid to Smith Barney.

   
      To provide an example, assume an investor purchased 100 Class L shares at
$10 per share, net of the initial sales charge, for an investment in the
Portfolio of $1,000 after deduction of the initial sales charge. Subsequently,
the investor acquired five additional shares through dividend reinvestment.
During the tenth month after the purchase, the investor decided to redeem $500
of his or her investment. Assuming at the time of the redemption the net asset
value had appreciated to $12 per share, the value of the investor's shares would
be $1,260 (105 shares at $12 per share). The CDSC would not be applied to the
amount which represents appreciation ($200) and the value of the reinvested
dividend shares ($60). Therefore, $240 of the $500 redemption proceeds ($500
minus $260) would be charged at a rate of 1.00% (the applicable rate for Class L
shares) for a total deferred sales charge of $2.40.
    

      WAIVERS OF CDSC

      The CDSC will be waived on: (a) exchanges (see "Exchange Privilege"); (b)
automatic cash withdrawals in amounts equal to or less than 1.00% per month


24
<PAGE>

--------------------------------------------------------------------------------
Purchase of Shares (continued)
--------------------------------------------------------------------------------

of the value of the shareholder's shares at the time the withdrawal plan
commences (see "Automatic Cash Withdrawal Plan") provided, however, that
automatic cash withdrawals in amounts equal to or less than 2.00% per month of
the value of the shareholder's shares will be permitted for withdrawal plans
that were established prior to November 7, 1994; (c) redemptions of shares
within 12 months following the death or disability of the shareholder; (d)
involuntary redemptions; and (e) redemptions of shares to effect a combination
of the Portfolio with any investment company by merger, acquisition of assets or
otherwise. In addition, a shareholder who has redeemed shares from other funds
of the Smith Barney Mutual Funds may, under certain circumstances, reinvest all
or part of the redemption proceeds within 60 days and receive pro rata credit
for any CDSC imposed on the prior redemption.

      CDSC waivers will be granted subject to confirmation (by Smith Barney in
the case of shareholders who are also Smith Barney clients or by First Data in
the case of all other shareholders) of the shareholder's status or holdings, as
the case may be.

--------------------------------------------------------------------------------
Exchange Privilege
--------------------------------------------------------------------------------

      Except as otherwise noted below, shares of each Class may be exchanged for
shares of the same Class in the following funds of the Smith Barney Mutual
Funds, to the extent shares are offered for sale in the shareholder's state of
residence. Exchanges of Class A and Class C shares are subject to minimum
investment requirements and all shares are subject to other requirements of the
fund into which exchanges are made.

Fund Name
--------------------------------------------------------------------------------
Growth Funds

   
      Concert Peachtree Growth Fund
      Concert Social Awareness Fund
      Smith Barney Aggressive Growth Fund Inc.
      Smith Barney Appreciation Fund Inc.
      Smith Barney Balanced Fund
      Smith Barney Contrarian Fund
      Smith Barney Convertible Fund
      Smith Barney Fundamental Value Fund Inc.
      Smith Barney Funds, Inc. -- Large Cap Value Fund
      Smith Barney Large Cap Blend Fund
      Smith Barney Large Capitalization Growth Fund
      Smith Barney Natural Resources Fund Inc.
      Smith Barney Premium Total Return Fund
    


                                                                              25
<PAGE>

--------------------------------------------------------------------------------
Exchange Privilege (continued)
--------------------------------------------------------------------------------

   
      Smith Barney Small Cap Blend Fund, Inc.
      Smith Barney Special Equities Fund

Taxable Fixed-Income Funds

*     Smith Barney Adjustable Rate Government Income Fund
      Smith Barney Diversified Strategic Income Fund
*     Smith Barney Funds, Inc. -- Short-Term High Grade Bond Fund
      Smith Barney Funds, Inc. -- U.S. Government Securities Fund
      Smith Barney Government Securities Fund
      Smith Barney High Income Fund
      Smith Barney Investment Grade Bond Fund
      Smith Barney Managed Governments Fund Inc.

      Smith Barney Total Return Bond Fund
    

Tax-Exempt Funds

      Smith Barney Arizona Municipals Fund Inc.
      Smith Barney California Municipals Fund Inc.
      Smith Barney Intermediate Maturity California Municipals Fund
      Smith Barney Intermediate Maturity New York Municipals Fund
      Smith Barney Managed Municipals Fund Inc.
      Smith Barney Massachusetts Municipals Fund

   
      Smith Barney Municipal High Income Fund
    

      Smith Barney Muni Funds -- Florida Portfolio
      Smith Barney Muni Funds -- Georgia Portfolio
      Smith Barney Muni Funds -- National Portfolio
      Smith Barney Muni Funds -- New York Portfolio
      Smith Barney Muni Funds -- Pennsylvania Portfolio
      Smith Barney New Jersey Municipals Fund Inc.
      Smith Barney Oregon Municipals Fund

       

Global-International Funds

   
      Smith Barney Hansberger Global Small Cap Value Fund
      Smith Barney Hansberger Global Value Fund
    

      Smith Barney World Funds, Inc. -- Emerging Markets Portfolio
      Smith Barney World Funds, Inc. -- European Portfolio
      Smith Barney World Funds, Inc. -- Global Government Bond Portfolio
      Smith Barney World Funds, Inc. -- International Balanced Portfolio
      Smith Barney World Funds, Inc. -- International Equity Portfolio
      Smith Barney World Funds, Inc. -- Pacific Portfolio

Smith Barney Concert Allocation Series Inc.

      Smith Barney Concert Allocation Series Inc. -- Balanced Portfolio
      Smith Barney Concert Allocation Series Inc. -- Conservative Portfolio

   
      Smith Barney Concert Allocation Series Inc. -- Global Portfolio
    

      Smith Barney Concert Allocation Series Inc. -- Growth Portfolio


26
<PAGE>

--------------------------------------------------------------------------------
Exchange Privilege (continued)
--------------------------------------------------------------------------------

      Smith Barney Concert Allocation Series Inc. -- High Growth Portfolio
      Smith Barney Concert Allocation Series Inc. -- Income Portfolio

Money Market Funds

**    Smith Barney Exchange Reserve Fund
 *    Smith Barney Money Funds, Inc. -- Cash Portfolio
 *    Smith Barney Money Funds, Inc. -- Government Portfolio
 *    Smith Barney Money Funds, Inc. -- Retirement Portfolio
 *    Smith Barney Municipal Money Market Fund, Inc.
 *    Smith Barney Muni Funds -- California Money Market Portfolio
 *    Smith Barney Muni Funds -- New York Money Market Portfolio

----------
*     Available for exchange with Class A shares of the Portfolio.

   
**    Available for exchange with Class L shares of the Portfolio.

      Class L Exchanges. Upon an exchange, the new Class L shares will be deemed
to have been purchased on the same date as the Class L shares of the Portfolio
that have been exchanged.
    

      Class A and Class Y Exchanges. Class A and Class Y shareholders of the
Portfolio who wish to exchange all or a portion of their shares for shares of
the respective Class in any of the funds identified above may do so without
imposition of any charge.

   
      Additional Information Regarding the Exchange Privilege. Excessive
exchange transactions may be detrimental to the Portfolio's performance and its
shareholders. The Manager may determine that a pattern of frequent exchanges is
excessive and contrary to the best interests of the Portfolio's other
shareholders. In this event, the Fund may, at its discretion, decide to limit
additional purchases and/or exchanges by the shareholder. Upon such a
determination, the Fund will provide notice in writing or by telephone to the
shareholder at least 15 days prior to suspending the exchange privilege and
during the 15-day period the shareholder will be required to (a) redeem his or
her shares in the Portfolio or (b) remain invested in the Portfolio or exchange
into any of the funds in the Smith Barney Mutual Funds ordinarily available,
which position the shareholder would be expected to maintain for a significant
period of time. All relevant factors will be considered in determining what
constitutes an abusive pattern of exchanges.
    

      Certain shareholders may be able to exchange shares by telephone. See
"Redemption of Shares -- Telephone Redemption and Exchange Program." Exchanges
will be processed at the net asset value next determined. Redemption procedures
discussed below are also applicable for exchanging shares and exchanges will be
made upon receipt of all supporting documents in proper form. If the account
registration of the shares of the fund being acquired is identical to the
registration of the shares of the fund exchanged, no signature guarantee is
required. A capital gain or loss for tax purposes will be realized upon the
exchange, depending upon the cost or other basis of shares redeemed. Before
exchanging shares,


                                                                              27
<PAGE>

--------------------------------------------------------------------------------
Exchange Privilege (continued)
--------------------------------------------------------------------------------

investors should read the current prospectus describing the shares to be
acquired. The Portfolio reserves the right to modify or discontinue exchange
privileges upon 60 days' prior notice to shareholders.

--------------------------------------------------------------------------------
Redemption of Shares
--------------------------------------------------------------------------------

      The Fund is required to redeem the shares of the Portfolio tendered to it,
as described below, at a redemption price equal to their net asset value per
share next determined after receipt of a written request in proper form at no
charge other than any applicable CDSC. Redemption requests received after the
close of regular trading on the NYSE are priced at the net asset value next
determined.

      If a shareholder holds shares in more than one Class, any request for
redemption must specify the Class being redeemed. In the event of a failure to
specify which Class, or if the investor owns fewer shares of the Class than
specified, the redemption request will be delayed until the Fund's transfer
agent receives further instructions from Smith Barney, or if the shareholder's
account is not with Smith Barney, from the shareholder directly. The redemption
proceeds will be remitted on or before the third business day following receipt
of proper tender, except on a day on which the NYSE is closed or as permitted
under the 1940 Act in extraordinary circumstances. Generally, if the redemption
proceeds are remitted to a Smith Barney brokerage account, these funds will not
be invested for the shareholder's benefit without specific instruction and Smith
Barney will benefit from the use of temporarily uninvested funds. Redemption
proceeds for shares purchased by check, other than a certified or official bank
check, will be remitted upon clearance of the check, which may take up to 10
days or more.

      Shares held by Smith Barney as custodian must be redeemed by submitting a
written request to a Smith Barney Financial Consultant. Shares other than those
held by Smith Barney as custodian may be redeemed through an investor's
Financial Consultant, Introducing Broker or dealer in the selling group, or by
submitting a written request for redemption to:

   
      Smith Barney Muni Funds/Limited Term Portfolio
      Class A, L or Y (please specify)
      c/o First Data Investor Services Group, Inc.
      P.O. Box 5128
      Westborough, Massachusetts 01581-5128
    

      A written redemption request must (a) state the Class and number or dollar
amount of shares to be redeemed, (b) identify the shareholder's account number
and (c) be signed by each registered owner exactly as the shares are registered.
If the shares to be redeemed were issued in certificate form, the certificates
must be endorsed for transfer (or be accompanied by an endorsed stock power) and
must


28
<PAGE>

--------------------------------------------------------------------------------
Redemption of Shares (continued)
--------------------------------------------------------------------------------

   
be submitted to First Data together with the redemption request. Any signature
appearing on a share certificate, stock power or written redemption request in
excess of $10,000 must be guaranteed by an eligible guarantor institution such
as a domestic bank, savings and loan institution, domestic credit union, member
bank of the Federal Reserve System or member firm of a national securities
exchange. Written redemption requests of $10,000 or less do not require a
signature guarantee unless more than one such redemption request is made in any
10-day period. Redemption proceeds will be mailed to an investor's address of
record. First Data may require additional supporting documents for redemptions
made by corporations, executors, administrators, trustees or guardians. A
redemption request will not be deemed properly received until First Data
receives all required documents in proper form.
    

      AUTOMATIC CASH WITHDRAWAL PLAN

      The Portfolio offers shareholders an automatic cash withdrawal plan, under
which shareholders who own shares with a value of at least $10,000 may elect to
receive cash payments of at least $50 monthly or quarterly. The withdrawal plan
will be carried over on exchanges between funds or Classes of the Portfolio. Any
applicable CDSC will not be waived on amounts withdrawn by a shareholder that
exceed 1.00% per month of the value of the shareholder's shares subject to the
CDSC at the time the withdrawal plan commences. With respect to withdrawal plans
in effect prior to November 7, 1994, any applicable CDSC will be waived on
amounts withdrawn that do not exceed 2.00% per month of the value of the
shareholder's shares subject to the CDSC. For further information regarding the
automatic cash withdrawal plan, shareholders should contact a Smith Barney
Financial Consultant.

      TELEPHONE REDEMPTION AND EXCHANGE PROGRAM

      Shareholders who do not have a Smith Barney brokerage account may be
eligible to redeem and exchange Portfolio shares by telephone. To determine if a
shareholder is entitled to participate in this program, he or she should contact
First Data at 1-800-451-2010. Once eligibility is confirmed, the shareholder
must complete and return a Telephone/Wire Authorization Form, along with a
signature guarantee, that will be provided by First Data upon request.
Alternatively, an investor may authorize telephone redemptions on the new
account application with the applicant's signature guarantee when making his or
her initial investment in the Portfolio.

   
      Redemptions. Redemption requests of up to $10,000 of any class or classes
of the Portfolio's shares may be made by eligible shareholders by calling First
Data at 1-800-451-2010. Such requests may be made between 9:00 a.m. and 4:00
p.m. (New York City time) on any day the NYSE is open. Redemption requests
received after the close of regular trading on the NYSE are priced at the net
asset value next
    


                                                                              29
<PAGE>

--------------------------------------------------------------------------------
Redemption of Shares (continued)
--------------------------------------------------------------------------------

determined. Redemptions of shares (i) by retirement plans or (ii) for which
certificates have been issued are not permitted under this program.

      A shareholder will have the option of having the redemption proceeds
mailed to his or her address of record or wired to a bank account predesignated
by the shareholder. Generally, redemption proceeds will be mailed or wired, as
the case may be, on the next business day following the redemption request. In
order to use the wire procedures, the bank receiving the proceeds must be a
member of the Federal Reserve System or have a correspondent relationship with a
member bank. The Fund reserves the right to charge shareholders a nominal fee
for each wire redemption. Such charges, if any, will be assessed against the
shareholder's account from which shares were redeemed. In order to change the
bank account designated to receive redemption proceeds, a shareholder must
complete a new Telephone/ Wire Authorization Form and, for the protection of the
shareholder's assets, will be required to provide a signature guarantee and
certain other documentation.

   
      Exchanges. Eligible shareholders may make exchanges by telephone if the
account registration of the shares of the fund being acquired is identical to
the registration of the shares of the fund exchanged. Such exchange requests may
be made by calling First Data at 1-800-451-2010 between 9:00 a.m. and 4:00 p.m.
(New York City time) on any day on which the NYSE is open. Exchange requests
received after the close of regular trading on the NYSE are processed at the net
asset value next determined.
    

      Additional Information regarding Telephone Redemption and Exchange
Program. Neither the Fund nor its agents will be liable for following
instructions communicated by telephone that are reasonably believed to be
genuine. The Fund and its agents will employ procedures designed to verify the
identity of the caller and legitimacy of instructions (for example, a
shareholder's name and account number will be required and phone calls may be
recorded). The Fund reserves the right to suspend, modify or discontinue the
telephone redemption and exchange program or to impose a charge for this service
at any time following at least seven days' prior notice to shareholders.

--------------------------------------------------------------------------------
Minimum Account Size
--------------------------------------------------------------------------------

      The Fund reserves the right to involuntarily liquidate any shareholder's
account if the aggregate net asset value of the shares held in the Portfolio
account is less than $500. (If a shareholder has more than one account in this
Portfolio, each account must satisfy the minimum account size.) The Fund,
however, will not redeem shares based solely on market reductions in net asset
value. Before the Fund exercises such right, shareholders will receive written
notice and will be permitted 60 days to bring the account up to the minimum to
avoid involuntary liquidation.


30
<PAGE>

--------------------------------------------------------------------------------
Performance
--------------------------------------------------------------------------------

   
      From time to time the Fund may include the Portfolio's yield, taxable
equivalent yield, total return and average annual total return in
advertisements. In addition, in other types of sales literature the Fund may
also include the Portfolio's distribution rate. These figures are computed
separately for Class A, Class L and Class Y shares of the Portfolio. These
figures are based on historical earnings and are not intended to indicate future
performance. The yield of a Portfolio Class refers to the net income earned by
an investment in the Class over a 30-day period ending at month end. This net
income is then annualized, i.e., the amount of income earned by the investment
during that 30-day period is assumed to be earned each 30-day period for 12
periods and is expressed as a percentage of the investment. The net income
earned on the investment for six periods is also assumed to be reinvested at the
end of the sixth 30-day period. The taxable equivalent yield is calculated
similarly to the yield, except that a stated income tax rate is used to
demonstrate the taxable yield necessary to produce an after-tax yield equivalent
to the tax-exempt yield of the Class. The yield and taxable equivalent yield
quotations are calculated according to a formula prescribed by the SEC to
facilitate comparison with yields quoted by other investment companies. The
distribution rate is calculated by annualizing the latest monthly distribution
and dividing the result by the maximum offering price per share as of the end of
the period to which the distribution relates. The distribution rate is not
computed in the same manner as, and therefore can be significantly different
from, the above-described yield. Total return is computed for a specified period
of time assuming deduction of the maximum sales charge, if any, from the initial
amount invested and reinvestment of all income dividends and capital gains
distributions on the reinvestment dates at prices calculated as stated in this
Prospectus, then dividing the value of the investment at the end of the period
so calculated by the initial amount invested and subtracting 100%. The standard
average annual total return, as prescribed by the SEC, is derived from this
total return, which provides the ending redeemable value. Such standard total
return information may also be accompanied with nonstandard total return
information for differing periods computed in the same manner but without
annualizing the total return or taking sales charges into account. The Fund may
also include comparative performance information in advertising or marketing the
Portfolio's shares. Such performance information may include data from Lipper
Analytical Services, Inc. and other financial publications.
    


                                                                              31
<PAGE>

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

   
BOARD OF TRUSTEES

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

      MANAGER

      The Manager manages the day-to-day operations of the Portfolio pursuant to
a management agreement entered into by the Fund on behalf of the Portfolio.

   
      MMC was incorporated in 1968 under the laws of Delaware. MMC, Holdings and
Smith Barney are each located at 388 Greenwich Street, New York, New York 10013.
As of March 31, 1998, MMC had aggregate assets under management of approximately
$100.5 billion.

      MMC provides the Portfolio with investment management services and
executive and other personnel, pays the remuneration of Fund officers, provides
the Fund with office space and equipment, furnishes the Fund with bookkeeping,
accounting, administrative services and services relating to research,
statistical work and supervision of the Portfolio. For the services provided,
the Management Agreement provides that the Portfolio will pay MMC a management
fee of 0.50% of the Portfolio's average daily net assets. MMC has voluntarily
agreed to waive its fee if in any fiscal year the aggregate expenses of any
Class of the Portfolio, exclusive of 12b-1 fees, taxes, brokerage, interest, and
extraordinary expenses, such as litigation costs, exceed 0.70% of such Class'
average daily net assets. The expense limitation shall be in effect until it is
terminated by notice to shareholders and by supplement to the then-current
prospectus. The management fee and expense limitation became effective on
December 18, 1995.

      For the last fiscal year total expenses were 0.74% of the average daily
net assets for Class A shares and 0.99% of the average daily net assets for
Class L shares.

      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 has been
approved by the stockholders of each of Travelers and Citicorp. Travelers has
filed an application to become a bank holding company so that, 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
    


32
<PAGE>

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

   
BHCA, the Glass-Steagall Act and certain other laws and regulations will then be
applicable to Travelers and its subsidiaries.

      The Manager 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. Smith Barney and the
Manager believe that the Manager's services under the Management Agreement and
the shareholder service activities performed by Smith Barney are not
underwriting and would be consistent with the Glass-Steagall Act and other
relevant federal and state laws. However, there is little controlling precedent
regarding the performance of the combination of investment advisory, shareholder
servicing and administrative activities by subsidiaries of bank holding
companies. If Smith Barney and the Manager, or their affiliates, were to be
prevented from acting as the manager or a shareholder service agent, the Fund
would seek alternative means for obtaining these services. The Fund does not
expect that shareholders would suffer any adverse financial consequences as a
result of any such occurrence.
    

      PORTFOLIO MANAGEMENT

   
      Lawrence T. McDermott, a Managing Director of Smith Barney, has served as
Vice President of the Fund and portfolio manager of the Portfolio since January
1996 and manages the day-to-day operations of the Fund, including making all
investment decisions. Mr. McDermott also serves as the portfolio manager for
other tax-exempt bond funds of the Smith Barney Mutual Funds.

      Management's discussion and analysis, and additional performance
information regarding the Portfolio during the fiscal year ended March 31, 1998
is included in the Annual Report dated March 31, 1998. A copy of the Annual
Report may be obtained upon request and without charge from a Smith Barney
Financial Consultant or by writing or calling the Fund at the address or phone
number listed on page one of this Prospectus.
    

--------------------------------------------------------------------------------
Distribution
--------------------------------------------------------------------------------

   
      Smith Barney distributes shares of the Portfolio as principal underwriter
and as such conducts a continuous offering pursuant to a "best efforts"
arrangement requiring Smith Barney to take and pay for only such securities as
may be sold to the public. Pursuant to a plan of distribution adopted by the
Portfolio under Rule 12b-1 under the 1940 Act (the "Plan"), Smith Barney is paid
a service fee with respect to Class A and Class L shares of the Portfolio at the
annual rate of 0.15% of the average daily net assets attributable to these
Classes. Smith Barney is also paid a distribution fee with respect to Class L
shares at the annual rate of 0.20% of the
    


                                                                              33
<PAGE>

--------------------------------------------------------------------------------
Distribution (continued)
--------------------------------------------------------------------------------

   
average daily net assets attributable to this class. The fees are used by Smith
Barney to pay its Financial Consultants for servicing shareholder accounts and,
in the case of Class L shares, to cover expenses primarily intended to result in
the sale of those shares. These expenses include: advertising expenses; the cost
of printing and mailing prospectuses to potential investors; payments to and
expenses of Smith Barney Financial Consultants and other persons who provide
support services in connection with the distribution of shares; interest and/or
carrying charges; and indirect and overhead costs of Smith Barney associated
with the sale of Portfolio shares, including lease, utility, communications and
sales promotion expenses.

      The payments to Smith Barney Financial Consultants for selling shares of a
Class include a commission or fee paid by the investor or Smith Barney at the
time of sale and, with respect to Class A and Class L shares, a continuing fee
for servicing shareholder accounts for as long as a shareholder remains a holder
of that Class. Smith Barney Financial Consultants may receive different levels
of compensation for selling the different Classes of shares.

      Payments under the Plan with respect to Class L shares are not tied
exclusively to the distribution and shareholder services expenses actually
incurred by Smith Barney and the payments may exceed distribution expenses
actually incurred. The Fund's Board of Trustees will evaluate the
appropriateness of the Plan and its payment terms on a continuing basis and in
so doing will consider all relevant factors, including expenses borne by Smith
Barney, amounts received under the Plan and proceeds of the CDSC.

      The Glass-Steagall Act currently prohibits certain financial institutions
from underwriting securities of open-end investment companies, such as the Fund.
Therefore, in connection with the anticipated merger of Travelers and Citicorp
and as a consequence of the anticipated applicability of the BHCA and the
Glass-Steagall Act, the Fund plans to retain the services of a new entity (which
is not otherwise affiliated with Travelers) to act as distributor of the
Portfolio's shares.
    

--------------------------------------------------------------------------------
Additional Information
--------------------------------------------------------------------------------

   
      The Fund, an open-end management investment company, is organized as a
"Massachusetts business trust" pursuant to a Declaration of Trust dated August
14, 1985. Pursuant to the Declaration of Trust, the Board of Trustees has
authorized the issuance of different series of shares, each representing shares
in one of the separate portfolios. The assets of the Portfolio are segregated
and separately managed. Class A, Class L and Class Y shares of the Portfolio
represent interests in the assets of the Portfolio and have identical voting,
dividend, liquidation and other rights on the same terms and conditions, except
that expenses related to the shareholder service and distribution of Class A and
Class L shares are borne solely by the

    


34
<PAGE>

--------------------------------------------------------------------------------
Additional Information (continued)
--------------------------------------------------------------------------------

   
respective Class and each such Class of shares has exclusive voting rights with
respect to provisions of the Portfolio's Rule 12b-1 distribution plan which
pertain to that Class. It is the intention of the Fund not to hold annual
meetings of shareholders. The Board of Trustees may call meetings of
shareholders for action by shareholder vote as may be required by the 1940 Act
or the Declaration of Trust, and shareholders are entitled to call a meeting
upon a vote of 10% of the Fund's outstanding shares for purposes of voting on
removal of a Trustee or Trustees. Shareholders will receive assistance in
communicating with other shareholders in connection with the removal of Trustees
as required by Section 16(c) of the 1940 Act. Shares do not have cumulative
voting rights or preemptive rights and have only such conversion or exchange
rights as the Board of Trustees may grant in their discretion. When issued for
payment as described in this Prospectus, the Fund's shares will be fully paid
and transferable (subject to the Portfolio's minimum account size). Shares are
redeemable as set forth under "Redemption of Shares" and are subject to
involuntary redemption as set forth under "Minimum Account Size."
    

      PNC Bank, National Association, located at 17th and Chestnut Streets,
Philadelphia, Pennsylvania 19103, serves as Custodian of the Portfolio's
investments.

      First Data, located at Exchange Place, Boston, Massachusetts 02109, serves
as the Fund's transfer agent.

      The Fund sends its shareholders a semi-annual report and an audited annual
report, which include listings of the investment securities held by the
Portfolio at the end of the period covered. In an effort to reduce the Fund's
printing and mailing costs, the Fund plans to consolidate the mailing of its
semi-annual and annual reports by household. This consolidation means that a
household having multiple accounts with the identical address of record will
receive a single copy of each report. Shareholders who do not want this
consolidation to apply to their account should contact their Smith Barney
Financial Consultant or the Fund's transfer agent.


                                                                              35
<PAGE>
                                                                     SMITHBARNEY

                                                A Member of TravelersGroup[LOGO]



                                                                    Smith Barney
                                                                      Muni Funds
                                                                    Limited Term
                                                                       Portfolio


                                                            388 Greenwich Street
                                                       New York, New York  10013


   
                                                                    FD 0664 7/98
    

PROSPECTUS
                                                                    SMITH BARNEY
                                                                      MUNI FUNDS

                                                                         Florida
                                                                       Portfolio

   
                                                                   JULY 29, 1998
    

                                                   Prospectus begins on page one

[LOGO] Smith Barney Muni Funds
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<PAGE>

   
--------------------------------------------------------------------------------
Prospectus                                                         July 29, 1998
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      Smith Barney Muni Funds
      Florida Portfolio
      388 Greenwich Street
      New York, NY 10013
      (800) 451-2010

   
      The Florida Portfolio (the "Portfolio") is one of eight investment
portfolios that currently comprise Smith Barney Muni Funds (the "Fund"). The
Portfolio seeks to pay its shareholders as high a level of monthly income exempt
from Federal income taxes as is consistent with prudent investing. The Portfolio
will invest primarily in obligations issued by the State of Florida and its
political subdivisions, agencies and instrumentalities. The Portfolio will seek
generally to select investments that will enable its shares to be exempt from
the Florida intangibles tax. The Portfolio may invest without limit in municipal
obligations whose interest is a tax-preference item for purposes of the Federal
alternative minimum tax.
    

      This Prospectus sets forth concisely certain information about the Fund
and the Portfolio, including sales charges, distribution and service fees and
expenses, that prospective investors will find helpful in making an investment
decision. Investors are encouraged to read this Prospectus carefully and retain
it for future reference.

   
      Additional information about the Portfolio is contained in a Statement of
Addi-tional Information dated July 29, 1998, as amended or supplemented from
time to time (the "SAI"), which is available upon request and without charge by
calling or writing the Fund at the telephone number or address set forth above
or by contacting a Smith Barney Financial Consultant. The Statement of
Additional Information has been filed with the Securities and Exchange
Commission (the "SEC") and is incorporated by reference into this Prospectus in
its entirety.
    

Smith BARNEY INC.
Distributor

   
MUTUAL MANAGEMENT CORP.
Investment Manager

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


                                                                               1
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Table of Contents
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Prospectus Summary                                                             3
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Financial Highlights                                                           9
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Investment Objective and Management Policies                                  11
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Valuation of Shares                                                           17
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Dividends, Distributions and Taxes                                            18
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Purchase of Shares                                                            21
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Exchange Privilege                                                            27
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Redemption of Shares                                                          30
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Minimum Account Size                                                          33
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Performance                                                                   33
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Management of the Fund                                                        34
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Distribution                                                                  36
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Additional Information                                                        37
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================================================================================
      No person has been authorized to give any information or to make any
representations in connection with this offering other than those contained in
this Prospectus and, if given or made, such other information and
representations must not be relied upon as having been authorized by the
Portfolio or Smith Barney Inc. (the "Distributor"). This Prospectus does not
constitute an offer by the Portfolio or the Distributor to sell or a
solicitation of an offer to buy any of the securities offered hereby in any
jurisdiction to any person to whom it is unlawful to make such offer or
solicitation in such jurisdiction.
================================================================================
    

2
<PAGE>

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

   
      The following summary is qualified in its entirety by detailed information
appearing elsewhere in this Prospectus and in the SAI. Cross references in this
summary are to headings in the Prospectus. See "Table of Contents." 
    

INVESTMENT OBJECTIVE The Portfolio seeks to pay its shareholders as high a level
of monthly income exempt from Federal income taxes as is consistent with prudent
investing. The Portfolio will invest primarily in obligations issued by the
State of Florida and its political subdivisions, agencies and instrumentalities.
The Portfolio will seek generally to select investments that will enable its
shares to be exempt from the Florida intangibles tax. The Portfolio may invest
without limit in municipal obligations whose interest is a tax-preference item
for purposes of the Federal alternative minimum tax. See "Investment Objective
and Management Policies."

   
ALTERNATIVE PURCHASE ARRANGEMENTS The Portfolio offers several classes of shares
("Classes") to investors designed to provide them with the flexibility of
selecting an investment best suited to their needs. The general public is
offered three Classes of shares: Class A shares, Class B shares and Class L
shares, which differ principally in terms of sales charges and rate of expenses
to which they are subject. A fourth Class of shares, Class Y shares, is offered
only to investors meeting an initial investment of at least $15,000,000. See
"Purchase of Shares" and "Redemption of Shares."
    

      Class A Shares. Class A shares are sold at net asset value plus an initial
sales charge of up to 4.00% and are subject to an annual service fee of 0.15% of
the average daily net assets of the Class. The initial sales charge may be
reduced or waived for certain purchases. Purchases of Class A shares of $500,000
or more will be made at net asset value with no initial sales charge, but will
be subject to a contingent deferred sales charge ("CDSC") of 1.00% on
redemptions made within 12 months of purchase. See "Prospectus Summary --
Alternative Purchase Arrangements -- Reduced or No Initial Sales Charge."

      Class B Shares. Class B shares are offered at net asset value subject to a
maximum CDSC of 4.50% of redemption proceeds, declining by 0.50% the first year
after purchase and by 1.00% each year thereafter to zero. This CDSC may be
waived for certain redemptions. Class B shares are subject to an annual service
fee of 0.15% and an annual distribution fee of 0.50% of the average daily net
assets of the Class. The Class B shares' distribution fee may cause that Class
to have higher expenses and pay lower dividends than Class A shares.

      Class B Shares Conversion Feature. Class B shares will convert
automatically to Class A shares, based on relative net asset value, eight years
after the date of the original purchase. Upon conversion, these shares will no
longer be subject to an annual distribution fee. In addition, a certain portion
of Class B shares that have been acquired through the reinvestment of dividends
and distributions ("Class B Dividend Shares") will be converted at that time.
See "Purchase of Shares -- Deferred Sales Charge Alternatives."


                                                                               3
<PAGE>

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

   
      Class L Shares. Class L shares are sold at net asset value plus an initial
sales charge of 1.00% of the purchase price. They are subject to an annual
service fee of 0.15% and an annual distribution fee of 0.55% of the average
daily net assets of the Class, and investors pay a CDSC of 1.00% if they redeem
Class L shares within 12 months of purchase. The CDSC may be waived for certain
redemptions. The Class L shares' distribution fee may cause that Class to have
higher expenses and pay lower dividends than Class A shares. Purchases of
Portfolio shares, which when combined with current holdings of Class L shares of
the Portfolio equal or exceed $500,000 in the aggregate, should be made in Class
A shares at net asset value with no sales charge, which would be subject to a
CDSC of 1.00% on redemptions made within 12 months of purchase.

      Class Y Shares. Class Y shares are available only to investors meeting an
initial investment minimum of $15,000,000. Class Y shares are sold at net asset
value with no initial sales charge or CDSC. They are not subject to any service
or distribution fees.
    

      In deciding which Class of Portfolio shares to purchase, investors should
consider the following factors, as well as any other relevant facts and
circumstances:

   
      Intended Holding Period. The decision as to which Class of shares is more
beneficial to an investor depends on the amount and intended duration of his or
her investment. Shareholders who are planning to establish a program of regular
investment may wish to consider Class A shares; as the investment accumulates
shareholders may qualify for reduced sales charges and the shares are subject to
lower ongoing expenses over the term of the investment. As an alternative, Class
B shares are sold without any initial sales charge so the entire purchase price
is immediately invested in the Portfolio. Any investment return on these
additional invested amounts may partially or wholly offset the higher annual
expenses of this Class. Because the Portfolio's future return cannot be
predicted, however, there can be no assurance that this would be the case.
Finally, Class L shares, which have a lower upfront sales charge but are subject
to higher distribution fees than Class A shares, are suitable for investors who
are not investing or intending to invest an amount which would receive a sales
charge discount and who have a short-term or undetermined time frame.

      Finally, investors should consider the effect of the CDSC period and any
conversion rights of the Classes in the context of their own investment time
frame. For example, while Class L shares have a shorter CDSC period than Class B
shares, they do not have a conversion feature and therefore are subject to an
ongoing distribution fee. Thus, Class B shares may be more attractive than Class
L shares to investors with longer-term investment outlooks.
    

      Reduced or No Initial Sales Charge. The initial sales charge on Class A
shares may be waived for certain eligible purchasers and the entire purchase
price would


4
<PAGE>

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

   
be immediately invested in the Portfolio. In addition, Class A share purchases
of $500,000 or more will be made at net asset value with no initial sales
charge, but will be subject to a CDSC of 1.00% on redemptions made within 12
months of purchase. The $500,000 investment may be met by adding the purchase to
the net asset value of all Class A shares offered with a sales charge held in
funds sponsored by Smith Barney Inc. ("Smith Barney") listed under "Exchange
Privilege." Class A share purchases may also be eligible for a reduced initial
sales charge. See "Purchase of Shares." Because the ongoing expenses of Class A
shares may be lower than those for Class B and Class L shares, purchasers
eligible to purchase Class A shares at net asset value or at a reduced sales
charge should consider doing so.

      Smith Barney Financial Consultants may receive different compensation for
selling different Classes of shares. Investors should understand that the
purpose of the CDSC on the Class B and Class L shares is the same as that of an
initial sales charge.
    

      See "Purchase of Shares" and "Management of the Fund" for a complete
description of the sales charges and service and distribution fees for each
Class of shares and "Valuation of Shares," "Dividends, Distributions and Taxes"
and "Exchange Privilege" for other differences between the Classes of shares.

PURCHASE OF SHARES Shares may be purchased through a brokerage account
maintained with Smith Barney. Shares may also be purchased through a broker that
clears securities transactions through Smith Barney on a fully disclosed basis
(an "Introducing Broker") or an investment dealer in the selling group. See
"Purchase of Shares."

   
INVESTMENT MINIMUMS investors in Class A, Class B and Class L shares may open an
account by making an initial investment of at least $1,000 for each account.
Investors in Class Y shares may open an account for an initial investment of
$15,000,000. Subsequent investments of at least $50 may be made for all Classes.
The minimum investment requirements for purchases of Portfolio shares through
the Systematic Investment Plan are described below. There is no minimum
investment requirement in Class A shares for unitholders who invest
distributions from a unit investment trust ("UIT") sponsored by Smith Barney. It
is not recommended that the Portfolio be used as an investment for Keogh, IRA or
other qualified retirement plans. See "Purchase of Shares." 

SYSTEMATIC INVESTMENT PLAN The Portfolio offers shareholders a Systematic
Investment Plan under which they may authorize the automatic placement of a
purchase order each month or quarter for Portfolio shares. The minimum initial
investment requirement for Class A, Class B and Class L shares and the
subsequent investment requirement for all Classes for shareholders purchasing
shares through the Systematic Investment Plan on a monthly basis is $25, and on
a quarterly basis is $50. See "Purchase of Shares."
    


                                                                               5
<PAGE>

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

REDEMPTION OF SHARES Shares may be redeemed on each day the New York Stock
Exchange, Inc. ("NYSE") is open for business. See "Purchase of Shares" and
"Redemption of Shares."

   
MANAGEMENT OF THE PORTFOLIO Mutual Management Corp. ("MMC" or the "Manager"),
formerly known as Smith Barney Mutual Funds Management, Inc., serves as the
Portfolio's investment manager. MMC provides investment advisory and management
services to various investment companies comprising the Smith Barney Mutual
Funds. MMC is a wholly owned subsidiary of Salomon Smith Barney Holdings Inc.
("Holdings"). Holdings is 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 Insurance Services. See "Management of the Fund."
    

EXCHANGE PRIVILEGE Shares of a Class may be exchanged for shares of the same
Class of certain other funds of the Smith Barney Mutual Funds at the respective
net asset values next determined. See "Exchange Privilege."

VALUATION OF SHARES Net asset value of the Portfolio for the prior day generally
is quoted daily in the financial section of most newspapers and is also
available from a Smith Barney Financial Consultant. See "Valuation of Shares."

   
DIVIDENDS AND DISTRIBUTIONS Dividends from net investment income are paid
monthly. Distributions of net realized capital gains, if any, are paid at least
annually. See "Dividends, Distributions and Taxes."
    

REINVESTMENT OF DIVIDENDS Dividends and distributions paid on shares of a Class
will be reinvested automatically, unless otherwise specified by an investor, in
additional shares of the same Class at current net asset value. Shares acquired
by dividend and distribution reinvestments will not be subject to any sales
charge or CDSC. Class B shares acquired through dividend and distribution
reinvestments will become eligible for conversion to Class A shares on a pro
rata basis. See "Dividends, Distributions and Taxes."

   
RISK FACTORS AND SPECIAL CONSIDERATIONS There can be no assurance that the
Portfolio's investment objective will be achieved. The Portfolio's concentration
in Florida obligations involves certain additional risks that should be
considered carefully by investors. Additionally, the value of the Portfolio's
investments, and thus the net asset value of the Portfolio's shares, will
fluctuate in response to changes in market and economic conditions, as well as
the financial condition and prospects of issuers of municipal obligations
purchased by the Portfolio. The market value of municipal bonds may be adversely
affected during periods of rising interest rates. Additionally, changes in
Federal income tax laws affecting the tax exemption for interest on municipal
obligations could affect the availability of tax-exempt obligations for purchase
and the value of the Portfolio's securities would be affected. See "Investment
Objective and Management Policies."
    


6
<PAGE>

--------------------------------------------------------------------------------
Prospectus Summary (continued)
--------------------------------------------------------------------------------
   
THE PORTFOLIO'S EXPENSES The following expense table lists the costs and
expenses an investor will incur either directly or indirectly as a shareholder
of the Portfolio, based on the maximum sales charge or maximum CDSC that may be
incurred at the time of purchase or redemption and, unless otherwise noted, the
Portfolio's operating expenses for its most recent fiscal year:

<TABLE>
<CAPTION>

Florida Portfolio                              Class A   Class B   Class L*   Class Y
----------------------------------------------------------------------------------------
<S>                                             <C>        <C>       <C>        <C>
Shareholder Transaction Expenses
  Maximum sales charge imposed on purchases
    (as a percentage of offering price)........ 4.00%      None      1.00%*     None
  Maximum CDSC (as a percentage of original
    cost or redemption proceeds, whichever
    is lower).................................. None**     4.50%     1.00%      None
Annual Portfolio Operating Expenses
(as a percentage of average net assets)
  Management Fees..............................  0.50%     0.50%     0.50%      0.50%
  12b-1 Fees***................................  0.15      0.65      0.70       --
  Other Expenses...............................  0.11      0.13      0.13       0.11****
Total Portfolio Operating Expenses.............  0.76%     1.28%     1.33%      0.61%
----------------------------------------------------------------------------------------
</TABLE>

      *Class L shares were previously named Class C shares. For shareholders who
owned Class C shares of the Portfolio, Class L shares may be purchased without
incurring the 1% initial sales charge until June 25, 1999.

      **Purchases of Class A shares of $500,000 or more will be made at net
asset value with no sales charge, but will be subject to a CDSC of 1.00% on
redemptions made within 12 months of purchase.

      ***Upon conversion of Class B shares to Class A shares such shares will no
longer be subject to a distribution fee. Class L shares do not have a conversion
feature and, therefore, are subject to an ongoing distribution fee. As a result,
long-term shareholders of Class L shares may pay more than the economic
equivalent of the maximum front-end sales charge permitted by the National
Association of Securities Dealers, Inc.

      ****For Class Y shares, "Other expenses" have been estimated because no
Class Y shares were outstanding for the period ended March 31, 1998.
    

       

      Class A shares of the Portfolio purchased through the Smith Barney
AssetOne Program will be subject to an annual asset-based fee, payable
quarterly, in lieu of the initial sales charge. The fee will vary to a maximum
of 1.50%, depending on the amount of assets held through the Program. For more
information, please call your Smith Barney Financial Consultant.

   
      The sales charge and CDSC set forth in the above table are the maximum
charges imposed on purchases or redemptions of Portfolio shares and investors
may actually pay lower or no charges, depending on the amount purchased and, in
the case of Class B, Class L and certain Class A shares, the length of time the
shares are held. See "Purchase of Shares" and "Redemption of Shares." Smith
Barney receives an annual 12b-1 service fee of 0.15% of the value of average
daily net assets of Class A
    


                                                                               7
<PAGE>

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

   
shares. Smith Barney also receives with respect to Class B shares an annual
12b-1 fee of 0.65% of the value of average daily net assets of that Class,
consisting of a 0.50% distribution fee and a 0.15% service fee. With respect to
Class L shares, Smith Barney also receives an annual 12b-1 fee of 0.70% of the
value of average daily net assets of that Class, consisting of a 0.55%
distribution fee and a 0.15% service fee. "Other expenses" in the above table
include fees for shareholder services, custodial fees, legal and accounting
fees, printing costs and registration fees.
    

EXAMPLE

      The following example is intended to assist an investor in understanding
the various costs that an investor in the Portfolio will bear directly or
indirectly. The example assumes payment by the Portfolio of operating expenses
at the levels set forth in the table above. See "Purchase of Shares,"
"Redemption of Shares" and "Management of the Fund."

   
<TABLE>
<CAPTION>

Florida Portfolio                                              1 Year  3 Years    5 Years  10 Years*
----------------------------------------------------------------------------------------------------
<S>                                                               <C>      <C>        <C>    <C> 
An investor would pay the following expenses on a $1,000
  investment, assuming (1) 5.00% annual return and
  (2) redemption at the end of each time period:
    Class A....................................................   $47      $63        $81    $130 
    Class B....................................................    58       71         80     140 
    Class L....................................................    33       52         82     169 
    Class Y....................................................     6       20         34      76 
                                                                                     
An investor would pay the following expenses on the same
  investment, assuming the same annual return and no
  redemption:
    Class A....................................................   $47      $63        $81    $130
    Class B....................................................    13       41         70     140
    Class L....................................................    23       52         82     169
    Class Y....................................................     6       20         34      76
----------------------------------------------------------------------------------------------------
</TABLE>
    

      * Ten-year figures assume conversion of Class B shares to Class A shares
at the end of the eighth year following the date of purchase.

      The example also provides a means for the investor to compare expense
levels of funds with different fee structures over varying investment periods.
To facilitate such comparison, all funds are required to utilize a 5.00% annual
return assumption. However, the Portfolio's actual return will vary and may be
greater or less than 5.00%. This example should not be considered a
representation of past or future expenses. 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 for the five-year period ended March
31, 1998 appears in the Portfolio's annual report dated March 31, 1998. The
information set out below should be read in conjunction with the financial
statements and related notes that also appear in the Portfolio's Annual Report
to Shareholders, which is incorporated by reference into the SAI. As of March
31, 1998, no Class Y shares were outstanding and, accordingly, no comparable
information is available at this time for that class.
    

For a share of beneficial interest outstanding throughout each year:

   
<TABLE>
<CAPTION>

Florida Portfolio                                 Class A Shares
-------------------------------------------------------------------------------------------

Year Ended March 31,            1998    1997   1996(1)    1995(2)   1994     1993   1992(3)
-------------------------------------------------------------------------------------------
<S>                            <C>     <C>     <C>        <C>      <C>      <C>     <C>
Net Asset Value,
Beginning of Year              $13.16  $13.24  $12.89     $12.82   $13.21   $12.32  $12.00
-------------------------------------------------------------------------------------------
  Net investment income (4)      0.72    0.73    0.74       0.75     0.77     0.79    0.73
  Net realized and
   unrealized gain (loss)        0.72   (0.03)   0.35       0.08#   (0.39)    0.91    0.29
-------------------------------------------------------------------------------------------
Total Income from Operations     1.44    0.70    1.09       0.83     0.38     1.70    1.02
===========================================================================================
Less Distributions From:
  Net investment income         (0.73)  (0.73)  (0.74)     (0.76)   (0.77)   (0.80)  (0.70)
  Net realized gains            (0.13)  (0.05)     --         --       --    (0.01)     --
------------------------------------------------------------------------------------------
Total Distributions             (0.86)  (0.78)  (0.74)     (0.76)   (0.77)   (0.81)  (0.70)
------------------------------------------------------------------------------------------
Net Asset Value,
  End of Year                  $13.74  $13.16  $13.24     $12.89   $12.82   $13.21  $12.32
==========================================================================================
Total Return (P)                11.15%   5.44%   8.65%      6.77%    2.75%   14.21%   8.70%++
------------------------------------------------------------------------------------------
Net Assets,
  End of Year (millions)         $143    $127    $117       $108     $105     $102    $68
------------------------------------------------------------------------------------------
Ratios to Average
  Net Assets:
    Expenses (4) (5)             0.76%   0.85%   0.70%      0.61%    0.54%    0.46%   0.23%+
    Net investment income        5.28    5.56    5.62       5.97     5.71     6.15    6.70+
------------------------------------------------------------------------------------------
Portfolio Turnover Rate            59%     62%     47%        43%      20%      26%     42%
==========================================================================================
</TABLE>
    

(1)   Per share amounts have been calculated using the monthly average share
      method rather than the undistributed net investment income method because
      it more accurately reflects the per share data for the year.
(2)   On October 10, 1994, the former Class C shares were exchanged into Class A
      shares.
(3)   For the period from April 2, 1991 (inception date) to March 31, 1992.

   
(4)   The Manager waived all or part of its fees for the year ended March 31,
      1993. If such fees were not waived, the decrease in net investment income
      and the expense ratio would have been $0.01 and 0.56%, respectively.
(5)   As a result of voluntary expense limitations, the ratio of expenses to
      average net assets would not exceed 0.85%.
    

#     Includes the net per share effect of shareholder sales and redemptions
      activity during the period, most of which occurred at a net asset value at
      the beginning of the period.
(P)   Total returns do not reflect sales loads or contingent deferred sales
      charges.
++    Total returns are not annualized as it may not be representative of the
      total return for the year.
+     Annualized.


                                                                               9
<PAGE>

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

For a share of beneficial interest outstanding throughout each year:

   
<TABLE>
<CAPTION>

Florida Portfolio                Class B Shares                         Class L Shares(3)
-------------------------------------------------------------------------------------------------------------
Year Ended
 March 31,             1998     1997     1996(1)  1995(2)    1998    1997    1996(1)  1995    1994   1993(4)
-------------------------------------------------------------------------------------------------------------
<S>                   <C>      <C>       <C>      <C>       <C>     <C>      <C>     <C>     <C>     <C>    
Net Asset Value,                                                                                          
Beginning of Year     $13.14   $13.23    $12.89   $11.91    $13.14  $13.22   $12.89  $12.81  $13.20  $12.86 
-------------------------------------------------------------------------------------------------------------
Income from                                                                                               
 Operations:                                                                                              
  Net investment                                                                                          
   income               0.65     0.65      0.68     0.30      0.64    0.65     0.66    0.67    0.68    0.19 
  Net realized and                                                                                        
    unrealized gain                                                                                       
    (loss)              0.72     0.01      0.35     0.97      0.72   (0.01)    0.35    0.08   (0.39)   0.33 
-------------------------------------------------------------------------------------------------------------
Total from                                                                                                
 Operations             1.37     0.64      1.03     1.27      1.36    0.64     1.01    0.75    0.29    0.52 
=============================================================================================================
Less Distributions                                                                                        
 From:                                                                                                    
  Net investment                                                                                          
   income              (0.65)   (0.68)    (0.69)   (0.29)    (0.63)  (0.67)   (0.68)  (0.67)  (0.68)  (0.18)
  Net realized gains   (0.13)   (0.05)       --       --     (0.13)  (0.13)      --      --      --      -- 
-------------------------------------------------------------------------------------------------------------
Total
 Distributions         (0.78    (0.73)    (0.69)   (0.29)    (0.76)  (0.72)   (0.68)  (0.67)  (0.68)  (0.18)
-------------------------------------------------------------------------------------------------------------
Net Asset Value,
  End of Year         $13.73   $13.14    $13.23   $12.89    $13.74  $13.14   $13.22  $12.89  $12.81  $13.20
=============================================================================================================
Total Return(P)        10.59%    4.91%     8.09%   10.77%++  10.51%  4.94%    7.96%   6.12%   2.05%   4.05%++
-------------------------------------------------------------------------------------------------------------
Net Assets,
  End of Year
   (millions)            $59      $51       $46       $2        $9     $7       $3      $3      $2      $1
-------------------------------------------------------------------------------------------------------------
Ratios to Average
  Net Assets:
  Expenses (5)          1.28%    1.35%     1.20%    1.20%+    1.33%  1.40%    1.28%   1.25%  1.24%    1.24%+
  Net investment
   income               4.76     4.93      5.00     5.57+     4.71   4.84     5.04    5.40   4.95     5.21+
-------------------------------------------------------------------------------------------------------------
Portfolio Turnover
 Rate                     59%      62%       47%      43%      59%     62%     47%      43%    20%      26%
=============================================================================================================
</TABLE>
    

(1)   Per share amounts have been calculated using the monthly average share
      method rather than the undistributed net investment income method because
      it more accurately reflects the per share data for the year.
(2)   For the period from November 16, 1994 (inception date) to March 31, 1995.

   
(3)   On November 7, 1994 the former Class B shares were renamed Class C shares.
      On June 12, 1998, the Class C shares were renamed Class L shares.
    

(4)   For the period from January 5, 1993 (inception date) to March 31, 1993.
(5)   As a result of voluntary expense limitations, the ratio of expenses to
      average net assets will not exceed 1.35% and 1.40%, respectively.
#     Includes the net per share effect of shareholder sales and redemptions
      activity during the period, most of which occurred at a net asset value
      less than the net asset value at the beginning of the period.
(P)   Total returns do not reflect sales loads or contingent deferred sales
      charges.
++    Total return is not annualized as the result may not be representative of
      the total return for the year.
+     Annualized.


10
<PAGE>

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

   
      The Florida Portfolio seeks as high a level of income exempt from Federal
income taxes as is consistent with prudent investing. The Portfolio invests
primarily in obligations that are issued by the State of Florida and its
political subdivisions, agencies and instrumentalities, the interest from which
is, in the opinion of bond counsel for the various issuers, exempt from Federal
income taxes at the time of their issuance. For certain shareholders, a portion
of the Portfolio's income may be subject to the alternative minimum tax ("AMT")
on tax-exempt income discussed below. Such obligations often are issued to raise
money for public projects that enhance the quality of life, including health
facilities, housing, airports, schools, highways and bridges. The Portfolio will
seek generally to select investments which will enable its shares to be exempt
from the Florida intangibles tax.

      The two principal classifications of municipal obligations are "general
obligation" and "revenue." General obligations are secured by a municipal
issuer's pledge of its full faith, credit and taxing power for the payment of
principal and interest. Revenue obligations are payable only from the revenues
derived from a particular facility or class of facilities or, in some cases,
from the proceeds of a special excise tax or other specific revenue source.
Please see the SAI for a more detailed discussion about the different types of
municipal obligations.
    

      Under the Tax Reform Act of 1986, interest income from municipal
obligations issued to finance certain "private activities" ("AMT-Subject Bonds")
becomes an item of "tax preference" which is subject to the AMT when received by
a person in a tax year during which he is subject to that tax. Such private
activity bonds include bonds issued to finance such projects as certain solid
waste disposal facilities, student loan programs and water and sewage projects.
Because interest income on AMT-Subject Bonds is taxable to certain investors, it
is expected, although there can be no guarantee, that such municipal obligations
generally will provide some-what higher yields than other municipal obligations
of comparable quality and maturity. There is no limitation on the percent or
amount of the Portfolio's assets that may be invested in AMT-Subject Bonds.

   
      Municipal bonds purchased for the Portfolio must, at the time of purchase,
be investment-grade municipal bonds, and at least two-thirds of the Portfolio's
municipal bonds must be rated within the three highest ratings categories by a
nationally recognized statistical rating organization ("NRSRO").
Investment-grade bonds are those rated within the four highest categories by an
NRSRO, such as rated Aaa, Aa, A and Baa by Moody's Investors Service, Inc.
("Moody's") or AAA, AA, A and BBB by Standard & Poor's Ratings Group ("S&P") or,
if unrated, determined to be of comparable quality by MMC; pre-refunded bonds
escrowed by U.S. Treasury obligations are considered AAA-rated (the highest
rating) even though the issuer does not obtain a new rating. Up to one-third of
the assets of the Portfolio may be invested in municipal bonds rated in the
fourth
    


                                                                              11
<PAGE>

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

   
highest category (this grade, while regarded as having an adequate capacity to
pay interest and repay principal, is considered to be of medium quality and has
speculative characteristics; in addition, changes in economic conditions or
other circumstances are more likely to lead to a weakened capacity to make
principal and interest payments than is the case with higher grade bonds) or in
unrated municipal bonds if, based upon credit analysis by the Manager, it is
believed that such securities are at least of comparable quality to those
securities in which the Portfolio may invest. In determining the suitability of
an investment in an unrated municipal bond, the Manager will take into
consideration debt service coverage, the purpose of the financing, history of
the issuer, existence of other rated securities of the issuer and other general
conditions as may be relevant, including comparability to other issues. After
the Portfolio purchases a municipal bond, the issue may cease to be rated or its
rating may be reduced below the minimum required for purchase. Such an event
would not require the elimination of the issue from the Portfolio but the
Manager will consider such an event in determining whether the Portfolio should
continue to hold the security.

      The Portfolio's short-term municipal obligations will be limited to
high-grade obligations (obligations that are secured by the full faith and
credit of the United States or are rated MIG 1 or MIG 2, VMIG 1 or VMIG 2 or
Prime-1 or Aa or better by Moody's or SP-1 +, SP-1, SP-2, or A-1 or AA or better
by S&P or have a rating within comparable categories by any other NRSRO, or
obligations that are unrated but determined by the Manager to be comparable).
Among the types of short-term instruments in which the Portfolio may invest are
floating- or variable-rate demand instruments, tax-exempt commercial paper
(generally having a maturity of less than nine months), and other types of notes
generally having maturities of less than three years, such as Tax Anticipation
Notes, Revenue Anticipation Notes, Tax and Revenue Anticipation Notes and Bond
Anticipation Notes. Demand instruments usually have an indicated maturity of
over one year, but contain a demand feature that enables the holder to liquidate
the investment on no more than 30 days' notice; variable-rate demand instruments
provide for automatic establishment of a new interest rate on set dates;
floating-rate demand instruments provide for automatic adjustment of their
interest rates whenever some other specified interest rate changes (e.g., the
prime rate). The Portfolio may purchase participation interests in variable-rate
tax-exempt securities (such as industrial development bonds) owned by banks.
Participations are frequently backed by an irrevocable letter of credit or
guarantee of a bank that the Manager has determined meets the prescribed quality
standards for the Portfolio. Participation interests will be purchased only if
management believes interest income on such interests will be tax exempt when
distributed as dividends to shareholders.

      The Portfolio will not invest more than 15% of the value of its net assets
in illiquid securities, including those for which there is no established
market.
    


12
<PAGE>

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

   
      The Portfolio may purchase new issues of municipal obligations on a
when-issued basis, i.e., delivery and payment normally take place 15 to 45 days
after the purchase date. The payment obligation and the interest rate to be
received are each fixed on the purchase date, although no interest accrues with
respect to a when-issued security prior to its stated delivery date. During the
period between purchase and settlement, assets consisting of cash or debt
securities of any grade having a value equal to or greater than the Portfolio's
purchase commitments, provided such securities have been determined by the
Manager to be liquid and unencumbered and are marked to market daily pursuant to
guidelines established by the Board of Trustees, will be segregated at the
custodian bank. Interest rates at settlement may be lower or higher than on the
purchase date, which would result in appreciation or depreciation, respectively.
Although the Portfolio will only purchase municipal obligations on a when-issued
basis with the intention of actually acquiring the securities, the Portfolio may
sell these securities before the settlement date if it is deemed advisable.
    

      Portfolio transactions will be undertaken primarily to accomplish the
Portfolio's objective in relation to anticipated movements in the general level
of interest rates, but the Portfolio may also engage in short-term trading
consistent with its objective.

   
      The Portfolio may borrow on a short-term basis in amounts of up to 5% of
its assets in order to facilitate the settlement of portfolio securities
transactions.

      The Portfolio may invest in municipal bond index futures contracts
(currently traded on the Chicago Board of Trade) or in listed contracts based on
U.S. government securities as a hedging policy in pursuit of its investment
objective, provided that immediately thereafter not more than 331/3% of its net
assets would be hedged or the amount of margin deposits on the Portfolio's
existing futures would not exceed 5% of the value of its total assets. Since any
income would be taxable, it is anticipated that such investments will be made
only in those circumstances when the Manager anticipates the possibility of an
extreme change in interest rates or market conditions but does not wish to
liquidate the Portfolio's securities. A further discussion of futures contracts
and their associated risks is contained in the SAI.
    

      The Portfolio 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 distributions 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.


                                                                              13
<PAGE>

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

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

      The liquidity of municipal lease obligations varies. Municipal leases held
by the Portfolio will be considered illiquid securities unless the Board of
Trustees determines that the leases are readily marketable. Certain municipal
lease obligations contain "non-appropriation" clauses which provide that the
municipality has no obligation to make lease or installment purchase payments in
future years unless money is appropriated for such purpose on a yearly basis. In
the case of a "non-appropriation" lease, the Portfolio's ability to recover
under the lease in the event of non-appropriation or default will be limited
solely to the repossession of the leased property, without recourse to the
general credit of the lessee, and disposition of the property in the event of
foreclosure might be difficult. The Portfolio will not invest more than 5% of
its assets in such "non-appropriation" municipal lease obligations.
    

      It is a fundamental policy that, under normal market conditions, the
Portfolio will seek to invest 100% of its assets -- and the Portfolio will
invest not less than 80% of its assets -- in municipal obligations the interest
on which is exempt from Federal income taxes (other than the AMT). It is also a
fundamental policy that under normal market conditions the Portfolio will invest
at least 65% of its net assets in municipal obligations issued by the State of
Florida, its political subdivisions and their agencies and instrumentalities and
in other municipal obligations which are exempt from the Florida intangibles
tax. The Portfolio may invest up to 20% of its assets in taxable fixed-income
securities, but only in obligations issued or guaranteed by the full faith and
credit of the United States, and may invest more than 20% of its assets in U.S.
government securities during periods when in the Manager's opinion a temporary
defensive posture is warranted, including any period when the Portfolio's monies
available for investment exceed the municipal obligations available for purchase
that meet the Portfolio's rating, maturity and other investment criteria.

   
      Year 2000. The investment management services provided to the Fund by the
Manager and the services provided to shareholders by Smith Barney depend on the
    

14
<PAGE>

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

   
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. The Manager 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, the Manager 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 the Manager, Smith Barney or any other service provider will be successful,
or that interaction with other non-complying computer systems will not impair
Fund or shareholder services at that time.

      In addition, the ability of issuers to make timely payments of interest
and principal or to continue their operations or services may be impaired by the
inadequate preparation of their computer systems for the year 2000. This may
adversely affect the market values of securities of specific issuers or of
securities generally if the inadequacy of preparation is perceived as widespread
or as affecting trading markets.
    

      RISK FACTORS AFFECTING FLORIDA

   
      Investors should be aware that Florida municipal obligations may be
adversely affected by political and economic conditions and developments within
the State of Florida. Manufacturing, primarily high technology, electrical and
electronic equipment industries and financial services are rapidly growing and
diversifying elements of Florida's economy. Agriculture, once sharing with
tourism the role of dominant economic sector, is now only one of several
important elements.
    

      Florida's rapid growth is straining resources, but is also having some
positive results. In many cases, the expansion of local governments is creating
greater economic depth and diversity. For example, numerous insurance companies
have located in Jacksonville over the past ten years, making the city a leading
insurance center. During the same period, Miami's financial services sector has
expanded significantly, primarily in international banking and international
trade. Many other Florida cities and counties have also succeeded in their
economic development efforts, as evidenced by the significant business
investment throughout the state.

      Florida has taken the lead among U.S. states with a long-term
comprehensive growth management plan for local governments. The plan should
enhance economic development by keeping growth in line with developing resources
and costs. The growth initiative affects population, infrastructure, employment,
education, transportation, and water supply -- all vital elements of economic
stability.


                                                                              15
<PAGE>

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

   
      Additional information regarding Florida is included in an Appendix to the
SAI.
    

      RISK AND INVESTMENT CONSIDERATIONS

      The ability of the Portfolio to achieve its investment objective is
dependent on a number of factors, including the skills of the Manager in
purchasing municipal obligations whose issuers have the continuing ability to
meet their obligations for the payment of interest and principal when due. The
ability to achieve a high level of income is dependent on the yields of the
securities in the portfolio. Yields on municipal obligations are the product of
a variety of factors, including the general conditions of the municipal bond
markets, the size of a particular offering, the maturity of the obligations and
the rating of the issue. In general, the longer the maturity of a municipal
obligation, the higher the rate of interest it pays. However, a longer average
maturity is generally associated with a higher level of volatility in the market
value of a municipal obligation. During periods of falling interest rates, the
values of long-term municipal obligations generally rise. Conversely, during
periods of rising interest rates, the values of such securities generally
decline. Changes in the value of Portfolio securities will not affect interest
income derived from those securities but will affect the Portfolio's net asset
value. Since the Portfolio's objective is to provide high current income, it
will invest in municipal obligations with an emphasis on income rather than
stability of net asset values.

   
      The Portfolio is registered as a "non-diversified" company under the
Investment Company Act of 1940, as amended (the "1940 Act") in order for the
Portfolio to have the ability to invest more than 5% of its assets in the
securities of any issuer. The Portfolio intends to comply with Subchapter M of
the Internal Revenue Code of 1986, as amended (the "Code") which limits the
aggregate value of all holdings (except U.S. government and cash items, as
defined in the Code) that exceed 5% of the Portfolio's total assets to an
aggregate amount of 50% of such assets. Also, holdings of a single issuer (with
the same exceptions) may not exceed 25% of the Portfolio's total assets. These
limits are measured at the end of each quarter. Under the Subchapter M limits,
up to 50% of the Portfolio's total assets may be invested in as few as two
single issuers. In the event of a decline in the creditworthiness of, or default
upon, the obligations of one or more such issuers exceeding 5%, an investment in
the Portfolio may entail greater risk than in a portfolio having a policy of
diversification because a high percentage of the Portfolio's assets may be
invested in municipal obligations of one or two issuers. Furthermore, a high
percentage of investments among few issuers may result in a greater degree of
fluctuation in the market value of the assets of the Portfolio, and
consequently a greater degree of fluctuation of the Portfolio's net asset
value, because the Portfolio will be more susceptible to economic, political, or
regulatory
    

16
<PAGE>

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

developments affecting these securities than would be the case with a portfolio
composed of varied obligations of more issuers.

      PORTFOLIO TRANSACTIONS AND TURNOVER
   
   
      The Portfolio's securities ordinarily are purchased from and sold to
parties acting as either principal or agent. Newly issued securities ordinarily
are purchased directly from the issuer or from an underwriter; other purchases
and sales usually are placed with those dealers from which it appears that the
best price or execution will be obtained. Usually, no brokerage commissions, as
such, are paid by the Portfolio, since purchases and sales of municipal bonds
and other debt securities are traded through broker-dealers in principal
transactions, although the price paid usually includes a compensation to the
dealer.
    

      The Portfolio cannot accurately predict its portfolio turnover rate, but
anticipates that the annual turnover will not exceed 100%. An annual turnover
rate of 100% would occur when all of the securities held by the Portfolio are
replaced one time during a period of one year. The Manager will not consider
turnover rate a limiting factor in making investment decisions consistent with
the investment objective and policies of the Portfolio. See "Financial
Highlights" for the Portfolio's annual turnover rate during each year since
inception.

--------------------------------------------------------------------------------
Valuation of Shares
--------------------------------------------------------------------------------

   
      The Portfolio's net asset value per share is determined as of the close of
regular trading on the NYSE, which is currently 4:00 p.m. (New York City time)
on each day that the NYSE is open, by dividing the Portfolio's net asset values
attributable to each Class by the total number of shares of the Class
outstanding.

      When, in the judgment of the pricing service, quoted bid prices for
investments are readily available and are representative of the bid side of the
market, these investments are valued at the mean between the quoted bid and
asked prices. Investments for which, in the judgment of the pricing service,
there are no readily obtainable market quotations (which may constitute a
majority of the portfolio securities) are carried at fair value of securities of
similar type, yield and maturity. Pricing services generally determine value by
reference to transactions in municipal obligations, quotations from municipal
bond dealers, market transactions in comparable securities and various
relationships between securities. Short-term instruments maturing within 60 days
will be valued at cost plus (minus) amortized discount (premium), if any, when
amortized cost approximates 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 Trustees.
    

                                                                              17
<PAGE>

--------------------------------------------------------------------------------
Dividends, Distributions and Taxes
--------------------------------------------------------------------------------

      DIVIDENDS AND DISTRIBUTIONS

   
      Dividends from the Portfolio's net investment income are paid monthly, and
any net realized capital gains are declared and distributed at least annually.
    

      If a shareholder does not otherwise instruct, dividends and capital gains
distributions will be reinvested automatically in additional shares of the same
Class at net asset value, subject to no sales charge or CDSC.

      Income dividends and capital gains distributions that are invested are
credited to shareholders' accounts in additional shares at the net asset value
as of the close of business on the payment date. A shareholder may change the
option at any time by notifying his or her Smith Barney Financial Consultant.
Accounts held directly by the Fund's transfer agent, First Data Investor
Services Group, Inc. ("First Data") should notify First Data in writing at least
five business days prior to the payment date to permit the change to be entered
in the shareholder's account.

   
      The per share dividends on Class B and Class L shares of the Portfolio may
be lower than the per share dividends on Class A and Class Y shares principally
as a result of the distribution fee applicable to Class B and Class L shares.
The per share dividends on Class A shares of the Portfolio may be lower than the
per share dividends on Class Y shares principally as a result of the service fee
applicable to Class A shares. Distributions of capital gains, if any, will be in
the same amount for Class A, Class B, Class L and Class Y shares.
    

      TAXES

   
      The following is a summary of the material tax considerations
affecting the Portfolio and its shareholders. Please refer to the SAI for
further discussion. In addition to the considerations described below and in the
SAI, there may be other federal, state, local, or foreign tax implications to
consider. Because taxes are a complex matter, prospective shareholders are urged
to consult their tax advisors for more detailed information with respect to the
tax consequences of an investment.

      The Portfolio intends to qualify, as it has in prior years, under
Subchapter M of the Internal Revenue Code (the "Code") for tax treatment as a
separate regulated investment company. In each taxable year that the Portfolio
qualifies, so long as such qualification is in the best interests of its
shareholders, the Portfolio will pay no federal income tax on its net investment
income and long-term capital gain that is distributed to shareholders, provided
the Portfolio distributes at least 90% of its net investment income and net
short-term capital gains for the taxable year. The Portfolio also intends to
satisfy conditions that will enable it to pay "exempt-interest dividends" to
shareholders. Exempt-interest dividends are generally not
    


18
<PAGE>

--------------------------------------------------------------------------------
Dividends, Distributions and Taxes (continued)
--------------------------------------------------------------------------------

   
subject to regular federal income taxes, although they may be considered taxable
for certain state and local income (or intangible) tax purposes.

      Exempt-interest dividends attributable to interest received by the
Portfolio on certain "private-activity" bonds will be treated as a specific tax
preference item to be included in a shareholder's alternative minimum tax
computation. All exempt-interest dividends will be a component of the "current
earnings" adjustment item for purposes of the federal corporate alternative
minimum tax. Exempt-interest dividends derived from the interest earned on
private activity bonds will not be exempt from federal income tax for those
shareholders who are "substantial users" (or persons related to "substantial
users") of the facilities financed by these bonds.

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

      The interest expense incurred by a shareholder on borrowing made to
purchase or carry Portfolio shares is not deductible for federal income tax
purposes to the extent related to the exempt-interest dividends received on such
shares.

      Dividends paid by the Portfolio from interest income on taxable
investments, net realized short-term securities gains and all or a portion of
any gains realized from the sale or other disposition of certain market discount
bonds are subject to federal income tax as ordinary income. Distributions, if
any, from net realized long-term securities gains derived from the sale of bonds
held by the Portfolio for more than one year are taxable as long-term capital
gains regardless of the length of time a shareholder has owned Portfolio shares.

      Shareholders are required to pay tax on all taxable distributions even if
those distributions are automatically reinvested in additional shares. None of
the dividends paid by the Portfolio will qualify for the corporate dividends
received deduction. The Fund will inform shareholders of the source and tax
status of all distributions promptly after the close of each calendar year.

      A shareholder's gain or loss on the disposition of shares (whether by
redemption, sale or exchange) generally will be a long-term or short-term gain
or loss depending on whether the shares had been owned for more than 12 months,
or 12 months or less, respectively. Losses realized by a shareholder on the
disposition of shares owned for six months or less will be treated as a
long-term capital loss to the extent a capital gain dividend had been
distributed on such shares.

      The Fund is required to withhold ("backup withholding") 31% of all taxable
dividends, capital gain distributions, and the proceeds of any redemption,
regardless of whether gain or loss is realized upon the redemption, for
shareholders who do not provide the Fund with a correct taxpayer identification
number (social security
    


                                                                              19
<PAGE>

--------------------------------------------------------------------------------
Dividends, Distributions and Taxes (continued)
--------------------------------------------------------------------------------

   
or employer identification number). Withholding from taxable dividends and
capital gain distributions also is required for shareholders who otherwise are
subject to backup withholding. Any tax withheld as a result of backup
withholding does not constitute an additional tax, and may be claimed as a
credit on the shareholders' federal income tax return.

      Florida Taxes

      Florida currently does not impose a personal income tax on individuals.
Thus, individual shareholders of the Portfolio will not be subject to any
Florida state income tax on distributions received from the Portfolio. However,
certain distributions will be taxable to corporate shareholders that are subject
to Florida corporate income tax.
    

      Florida currently imposes an "intangibles tax" on certain securities and
other intangible assets owned by Florida residents. Certain types of municipal
obligations of Florida issuers, U.S. Treasury securities and municipal
obligations issued by certain U.S. territories and possessions are exempt from
this intangibles tax. Consistent with its fundamental policy to invest not less
than 80% of its assets in municipal obligations the interest on which is exempt
from Federal income taxes (other than the alternative minimum tax), the
Portfolio will seek generally to select investments that will enable its shares
to be exempt from the Florida intangibles tax and will attempt to ensure that
all of its assets held on the annual assessment date are exempt from this tax.
The Fund also has received a ruling from the Florida Department of Revenue that,
if on the annual assessment date of any year the Portfolio consists solely of
such exempt assets, then the Portfolio's shares will be exempt from the Florida
intangibles tax. The Portfolio intends to provide shareholders annually with
information relating to its assets necessary to permit shareholders to determine
whether the value of Portfolio shares held is exempt from the Florida
intangibles tax.

      Investors purchasing municipal obligations of their state of residence, or
a fund comprised of such obligations, should recognize that the benefits of the
exemption from local taxes, in addition to the exemption from Federal taxes,
necessarily limits the fund's ability to diversify geographically. The Portfolio
will make available annually to its shareholders information concerning the tax
status of its distributions, including the amount of its dividends designated as
exempt-interest dividends and as capital gain dividends.

   
      The foregoing is only a brief summary of the tax considerations generally
affecting the Portfolio and its shareholders who are Florida residents.
Investors are urged to consult their tax advisers with specific reference to
their own tax situation.
    


20
<PAGE>

--------------------------------------------------------------------------------
Purchase of Shares
--------------------------------------------------------------------------------

      GENERAL

   
      The Portfolio offers four Classes of shares. Class A and Class L shares
are sold to investors with an initial sales charge; Class B shares are sold
without an initial sales charge; Class B and Class L shares are subject to a
CDSC payable upon certain redemptions. Class Y shares are sold without an
initial sales charge or CDSC and are available only to investors investing a
minimum of $15,000,000 (except for purchases of Class Y shares by Smith Barney
Concert Allocation Series Inc., for which there is no minimum purchase amount).
Until June 25, 1999, purchases of Class L shares by investors who were holders
of Class C shares of the Portfolio on June 12, 1998 will not be subject to the
1% initial sales charge. See "Prospectus Summary -- Alternative Purchase
Arrangements" for a discussion of factors to consider in selecting which Class
of shares to purchase.

      Purchases of Portfolio shares must be made through a brokerage account
maintained with Smith Barney, an Introducing Broker or an investment dealer in
the selling group. When purchasing shares of the Portfolio, investors must
specify whether the purchase is for Class A, Class B, Class L or Class Y shares.
Smith Barney and other broker-dealers may charge their customers an annual
account maintenance fee in connection with a brokerage account through which an
investor purchases or holds shares. Accounts held directly at First Data are not
subject to a maintenance fee.

      Investors in Class A, Class B and Class L shares may open an account by
making an initial investment of at least $1,000 for each account in the
Portfolio. Investors in Class Y shares may open an account by making an initial
investment of at least $15,000,000. Subsequent investments of at least $50 may
be made for all Classes. For shareholders purchasing shares of the Portfolio
through the Portfolio's Systematic Investment Plan on a monthly basis, the
minimum initial investment requirement for Class A, Class B and Class L shares
and the subsequent investment requirement for all Classes is $25. For
shareholders purchasing shares of the Portfolio through the Systematic
Investment Plan on a quarterly basis, the minimum initial investment requirement
for Class A, Class B and Class L shares and the subsequent investment
requirement for all Classes is $50. There are no minimum investment requirements
in Class A for employees of Travelers and its subsidiaries, including Smith
Barney, and their spouses and children, a unitholder who invests distributions
from a UIT sponsored by Smith Barney, and Trustees or Directors of any
Travelers-affiliated funds, including the Smith Barney Mutual Funds, and their
spouses and children. The Fund reserves the right to waive or change minimums,
to decline any order to purchase its shares and to suspend the offering of
shares from time to time. Shares purchased will be held in the shareholder's
account by the Fund's transfer agent, First Data. Share certificates are issued
only upon a shareholder's written request to First Data. It is not recommended
that the Portfolio be used as an investment for Keogh, IRA or other qualified
retirement plans.
    


                                                                              21
<PAGE>

--------------------------------------------------------------------------------
Purchase of Shares (continued)
--------------------------------------------------------------------------------

   
      Purchase orders received by the Fund or Smith Barney prior to the close of
regular trading on the NYSE on any day the Portfolio calculates its net asset
value are priced according to the net asset value determined on that day (the
"trade date"). Orders received by dealers or introducing brokers prior to the
close of regular trading on the NYSE on any day the Portfolio calculates its net
asset value are priced according to the net asset value determined on that day,
provided the order is received by the Fund or Smith Barney prior to Smith
Barney's close of business. For shares purchased through Smith Barney or
Introducing Brokers purchasing through the Distributor, payment for Portfolio
shares is due on the third business day after the trade date. In all other
cases, payment must be made with the purchase order.
    

      SYSTEMATIC INVESTMENT PLAN

      Shareholders may make additions to their accounts at any time by
purchasing shares through a service known as the Systematic Investment Plan.
Under the Systematic Investment Plan, Smith Barney or First Data is authorized
through preauthorized transfers of at least $25 on a monthly basis or at least
$50 on a quarterly basis to charge the regular bank account or other financial
institution indicated by the shareholder to provide systematic additions to the
shareholder's Portfolio account. A shareholder who has insufficient funds to
complete the transfer will be charged a fee of up to $25 by Smith Barney or
First Data. The Systematic Investment Plan also authorizes Smith Barney to apply
cash held in the shareholder's Smith Barney brokerage account or redeem the
shareholder's shares of a Smith Barney money market fund to make additions to
the account. Additional information is available from the Fund or a Smith Barney
Financial Consultant.

      INITIAL SALES CHARGE ALTERNATIVE - CLASS A SHARES

      The sales charges applicable to purchases of Class A shares of the
Portfolio are as follows:

   
<TABLE>
<CAPTION>
===========================================================================================
                                                 Sales Charge              Dealer's
                                             % of      % of Amount    Reallowance as % of
  Amount of Investment                Offering Price     Invested       Offering Price
------------------------------------------------------------------------------------------
<S>          <C>                            <C>             <C>                <C> 
  Less than   $25,000                       4.00%           4.17%              3.60%
    $25,000 -  49,999                       3.50            3.63               3.15
    $50,000 -  99,999                       3.00            3.09               2.70
   $100,000 - 249,999                       2.50            2.56               2.25
   $250,000 - 499,999                       1.50            1.52               1.35
   $500,000 and over                          *               *                  *
===========================================================================================
</TABLE>

      * Purchases of Class A shares of $500,000 or more will be made at net
asset value without any initial sales charge, but will be subject to a CDSC of
1.00% on redemptions made within 12 months of purchase. The CDSC on Class A
shares is payable to Smith Barney, which compensates Smith Barney Financial
Consultants and other dealers whose clients make purchases of $500,000 or more.
The CDSC is waived in the same circumstances in which the CDSC applicable to
Class B and Class L shares is waived. See "Deferred Sales Charge Alternatives"
and "Waivers of CDSC."
    


22
<PAGE>

--------------------------------------------------------------------------------
Purchase of Shares (continued)
--------------------------------------------------------------------------------

      Members of the selling group may receive up to 90% of the sales charge and
may be deemed to be underwriters of the Fund as defined in the Securities Act of
1933, as amended.

      The reduced sales charges shown above apply to the aggregate of purchases
of Class A shares of the Portfolio made at one time by "any person," which
includes an individual and his or her immediate family, or a trustee or other
fiduciary of a single trust estate or single fiduciary account.

   
      INITIAL SALES CHARGE WAIVERS - CLASS A SHARES

      Purchases of Class A shares may be made at net asset value without a sales
charge in the following circumstances: (a) sales to (i) Board members and
employees of Travelers and its subsidiaries and of any Travelers-affiliated
funds, including the Smith Barney Mutual Funds (including retired Board members
and employees); the immediate families of such persons (including the surviving
spouse of a deceased Board member or employee); and to a pension, profit-sharing
or other benefit plan for such persons and (ii) employees of members of the
National Association of Securities Dealers, Inc., provided such sales are made
upon the assurance of the purchaser that the purchase is made for investment
purposes and that the securities will not be resold except through redemption or
repurchase; (b) offers of Class A shares to any other investment company to
effect the combination of such company with the Portfolio by merger, acquisition
of assets or otherwise; (c) purchases of Class A shares by any client of a newly
employed Smith Barney Financial Consultant (for a period up to 90 days from the
commencement of the Financial Consultant's employment with Smith Barney), on the
condition the purchase of Class A shares is made with the proceeds of the
redemption of shares of a mutual fund which (i) was sponsored by the Financial
Consultant's prior employer, (ii) was sold to the client by the Financial
Consultant and (iii) was subject to a sales charge; (d) purchases by
shareholders who have redeemed Class A shares in the Portfolio (or Class A
shares of another fund of the Smith Barney Mutual Funds that are offered with a
sales charge) and who wish to reinvest their redemption proceeds in the
Portfolio, provided the reinvestment is made within 60 calendar days of the
redemption; (e) purchases by accounts managed by registered investment advisory
subsidiaries of Travelers; (f) investments of distributions from a UIT sponsored
by Smith Barney; and (g) purchases by investors participating in a Smith Barney
fee-based arrangement. In order to obtain such discounts, the purchaser must
provide sufficient information at the time of purchase to permit verification
that the purchase would qualify for the elimination of the sales charge.
    

      RIGHT OF ACCUMULATION
   
      Class A shares of the Portfolio may be purchased by "any person" (as
defined above) at a reduced sales charge or at net asset value determined by
aggregating the dollar amount of the new purchase and the total net asset value
of all Class A shares
    


                                                                              23
<PAGE>

--------------------------------------------------------------------------------
Purchase of Shares (continued)
--------------------------------------------------------------------------------

   
of the Portfolio and other Smith Barney Mutual Funds offered with a sales
charge, as currently listed under "Exchange Privilege", then held by such person
and applying the sales charge applicable to such aggregate. In order to obtain
such discount, the purchaser must provide sufficient information at the time of
purchase to permit verification that the purchase qualifies for the reduced
sales charge. The right of accumulation is subject to modification or
discontinuance at any time with respect to all shares purchased thereafter.
    

      GROUP PURCHASES
   
      Upon completion of certain automated systems, a reduced sales charge or
purchase at net asset value will also be available to employees (and partners)
of the same employer purchasing as a group, provided each participant makes the
minimum initial investment required. The sales charge applicable to purchases by
each member of such a group will be determined by the table set forth above
under "Initial Sales Charge Alternative -- Class A Shares," and will be based
upon the aggregate sales of Class A shares of Smith Barney Mutual Funds offered
with a sales charge to, and share holdings of, all members of the group. To be
eligible for such reduced sales charges or to purchase at net asset value, all
purchases must be made pursuant to an employer- or partnership-sanctioned plan
meeting certain requirements. One such requirement is that the plan must be open
to specified partners or employees of the employer and its subsidiaries, if any.
Such plan may, but is not required to, provide for payroll deductions. The
Distributor may also offer a reduced sales charge or net asset value purchase
for aggregating related fiduciary accounts under such conditions that it will
realize economies of sales efforts and sales-related expenses. An individual who
is a member of a qualified group may also purchase Class A shares at the reduced
sales charge applicable to the group as a whole. The sales charge is based upon
the aggregate dollar value of Class A shares offered with a sales charge that
have been previously purchased and are still owned by the group, plus the amount
of the current purchase. A "qualified group" is one which (a) has been in
existence for more than six months, (b) has a purpose other than acquiring
Portfolio shares at a discount and (c) satisfies uniform criteria which enable
Smith Barney to realize economies of scale in its costs of distributing shares.
A qualified group must have more than 10 members, must be available to arrange
for group meetings between representatives of the Portfolio and the members and
must agree to include sales and other materials related to the Portfolio in its
publications and mailings to members at no cost to the Distributor. In order to
obtain such reduced sales charge or to purchase at net asset value, the
purchaser must provide sufficient information at the time of purchase to permit
verification that the purchase qualifies for the reduced sales charge. Approval
of group purchase reduced sales charge plans is subject to the discretion of the
Distributor.
    


24
<PAGE>

--------------------------------------------------------------------------------
Purchase of Shares (continued)
--------------------------------------------------------------------------------

      LETTER OF INTENT

      Class A Shares. A Letter of Intent for amounts of $50,000 or more provides
an opportunity for an investor to obtain a reduced sales charge by aggregating
investments over a 13-month period, provided that the investor refers to such
Letter when placing orders. For purposes of a Letter of Intent, the "Amount of
Investment" as referred to in the preceding sales charge table includes
purchases of all Class A shares of the Portfolio and other funds of the Smith
Barney Mutual Funds offered with a sales charge over the 13-month period based
on the total amount of intended purchases plus the value of all Class A shares
previously purchased and still owned. An alternative is to compute the 13-month
period starting up to 90 days before the date of execution of a Letter of
Intent. Each investment made during the period receives the reduced sales charge
applicable to the total amount of the investment goal. If the goal is not
achieved within the period, the investor must pay the difference between the
sales charges applicable to the purchases made and the charges previously paid,
or an appropriate number of escrowed shares will be redeemed. Please contact a
Smith Barney Financial Consultant or First Data to obtain a Letter of Intent
application.

   
      Class Y Shares. A Letter of Intent may also be used as a way for investors
to meet the minimum investment requirement for Class Y shares. Such investors
must make an initial minimum purchase of $5,000,000 in Class Y shares of the
Portfolio and agree to purchase a total of $15,000,000 of Class Y shares of the
Portfolio within six months from the date of the Letter. If a total investment
of $15,000,000 is not made within the six-month period, all Class Y shares
purchased to date will be transferred to Class A shares, where they will be
subject to all fees (including a service fee of 0.15%) and expenses applicable
to the Portfolio's Class A shares, which may include a CDSC of 1.00%. Please
contact a Smith Barney Financial Consultant or First Data for further
information.

      INITIAL SALES CHARGE ALTERNATIVE -- CLASS L SHARES

      The sales charge applicable to purchases of Class L shares is 1.00% of the
public offering price, which is 1.01% of the amount invested, and all of this
amount is reallowed to dealers who sell Class L shares.

      The initial sales charge on Class L shares is paid to the Distributor.
Members of the selling group may be deemed to be underwriters of the Fund as
defined in the Securities Act of 1933, as amended.
    

      DEFERRED SALES CHARGE ALTERNATIVES
   
      "CDSC Shares" include any shares for which a CDSC may be imposed on
certain redemptions. "CDSC Shares" are: (a) Class B shares; (b) Class L shares;
and (c) Class A shares that were purchased without an initial sales charge but
subject to a CDSC.
    


                                                                              25
<PAGE>

--------------------------------------------------------------------------------
Purchase of Shares (continued)
--------------------------------------------------------------------------------

   
      Any applicable CDSC will be assessed on an amount equal to the lesser of
the original investment in the shares being redeemed or their account value at
the time of redemption. CDSC Shares that are redeemed will not be subject to a
CDSC to the extent that the value of such shares represents: (a) capital
appreciation of Portfolio assets; (b) reinvestment of dividends or capital gain
distributions; (c) with respect to Class B shares, shares redeemed more than
five years after their purchase; or (d) with respect to Class L shares and Class
A shares that are CDSC Shares, shares redeemed more than 12 months after their
purchase.

      Class L shares and Class A shares that are CDSC Shares are subject to a
1.00% CDSC if redeemed within 12 months of purchase. In circumstances in which
the CDSC is imposed on Class B shares, the amount of the charge will depend on
the number of years since the shareholder made the purchase payment from which
the amount is being redeemed. Solely for purposes of determining the number of
years since a purchase payment, all purchase payments made during a month will
be aggregated and deemed to have been made on the last day of the preceding
Smith Barney statement month. The following table sets forth the CDSC for
redemptions of Class B shares by shareholders of the Portfolio:
    

<TABLE>
<CAPTION>
      Year Since Purchase                                 
      Payment Was Made                            CDSC
      ---------------------------------------------------
      <S>                                         <C> 
      First                                       4.50%
      Second                                      4.00
      Third                                       3.00
      Fourth                                      2.00
      Fifth                                       1.00
      Sixth and thereafter                        0.00
      ---------------------------------------------------
</TABLE>

      Class B shares will convert automatically to Class A shares eight years
after the date on which they were purchased and thereafter will no longer be
subject to any distribution fees. There will also be converted at that time such
proportion of Class B Dividend Shares owned by the shareholder as the total
number of his or her Class B shares converting at the time bears to the total of
number of outstanding Class B shares (other than Class B Dividend Shares) owned
by the shareholder. See "Prospectus Summary -- Alternative Purchase Arrangements
-- Class B Shares Conversion Feature."

      In determining the applicability of any CDSC, it will be assumed that a
redemption is made first of shares representing capital appreciation, next of
shares representing the reinvestment of dividends and capital gain distributions
and finally of other shares held by the shareholder for the longest period of
time. The length of time that CDSC Shares acquired through an exchange have been
held will be calculated from the date that the shares exchanged were initially
acquired in one of the other Smith Barney Mutual Funds, and Portfolio shares
being redeemed will be considered to represent, as applicable, capital
appreciation or dividend and capital gain distribution reinvestments in such
other funds. For Federal income tax pur-


26
<PAGE>

--------------------------------------------------------------------------------
Purchase of Shares (continued)
--------------------------------------------------------------------------------

poses, the amount of the CDSC will reduce the gain or increase the loss, as the
case may be, on the amount realized on redemption. The amount of any CDSC will
be paid to Smith Barney.

      To provide an example, assume an investor purchased 100 Class B shares at
$10 per share for a cost of $1,000. Subsequently, the investor acquired five
additional shares through dividend reinvestment. During the fifteenth month
after the purchase, the investor decided to redeem $500 of his or her
investment. Assuming at the time of the redemption the net asset value had
appreciated to $12 per share, the value of the investor's shares would be $1,260
(105 shares at $12 per share). The CDSC would not be applied to the amount which
represents appreciation ($200) and the value of the reinvested dividend shares
($60). Therefore, $240 of the $500 redemption proceeds ($500 minus $260) would
be charged at a rate of 4.00% (the applicable rate for Class B shares) for a
total deferred sales charge of $9.60.

      WAIVERS OF CDSC

      The CDSC will be waived on:(a) exchanges (see "Exchange Privilege"); (b)
automatic cash withdrawals in amounts equal to or less than 1.00% per month of
the value of the shareholder's shares at the time the withdrawal plan commences
(see "Automatic Cash Withdrawal Plan") provided, however, that automatic cash
withdrawals in amounts equal to or less than 2.00% per month of the value of the
shareholder's shares will be permitted for withdrawal plans that were
established prior to November 7, 1994; (c) redemptions of shares within 12
months following the death or disability of the shareholder; (d) involuntary
redemptions; and (e) redemptions of shares to effect a combination of the
Portfolio with any investment company by merger, acquisition of assets or
otherwise. In addition, a shareholder who has redeemed shares from other funds
of the Smith Barney Mutual Funds may, under certain circumstances, reinvest all
or part of the redemption proceeds within 60 days and receive pro rata credit
for any CDSC imposed on the prior redemption.

      CDSC waivers will be granted subject to confirmation (by Smith Barney in
the case of shareholders who are also Smith Barney clients or by First Data in
the case of all other shareholders) of the shareholder's status or holdings, as
the case may be.

--------------------------------------------------------------------------------
Exchange Privilege
--------------------------------------------------------------------------------

      Except as otherwise noted below, shares of each Class may be exchanged for
shares of the same Class in the following funds of the Smith Barney Mutual
Funds, to the extent shares are offered for sale in the shareholder's state of
residence. Exchanges of Class A, Class B and Class L shares are subject to
minimum investment requirements and all shares are subject to the other
requirements of the fund into which exchanges are made.


                                                                              27
<PAGE>

--------------------------------------------------------------------------------
Exchange Privilege (continued)
--------------------------------------------------------------------------------

Fund Name
--------------------------------------------------------------------------------
Growth Funds
   
    Concert Peachtree Growth Fund
    Concert Social Awareness Fund
    Smith Barney Aggressive Growth Fund Inc.
    Smith Barney Appreciation Fund Inc.
    Smith Barney Balanced Fund
    Smith Barney Contrarian Fund
    Smith Barney Convertible Fund
    Smith Barney Fundamental Value Fund Inc.
    Smith Barney Funds, Inc. -- Large Cap Value Fund
    Smith Barney Large Cap Blend Fund
    Smith Barney Large Capitalization Growth Fund
    Smith Barney Natural Resources Fund Inc.
    Smith Barney Premium Total Return Fund
    Smith Barney Small Cap Blend Fund, Inc.
    Smith Barney Special Equities Fund

Taxable Fixed-Income Funds
 ** Smith Barney Adjustable Rate Government Income Fund
    Smith Barney Diversified Strategic Income Fund
*** Smith Barney Funds, Inc. -- Short-Term High Grade Bond Fund
    Smith Barney Funds, Inc. -- U.S. Government Securities Fund
    Smith Barney Government Securities Fund
    Smith Barney High Income Fund
    Smith Barney Investment Grade Bond Fund
    Smith Barney Managed Governments Fund Inc.
    Smith Barney Total Return Bond Fund

Tax-Exempt Funds
    Smith Barney Arizona Municipals Fund Inc.
    Smith Barney California Municipals Fund Inc.
  * Smith Barney Intermediate Maturity California Municipals Fund
  * Smith Barney Intermediate Maturity New York Municipals Fund
    Smith Barney Managed Municipals Fund Inc.
    Smith Barney Massachusetts Municipals Fund
    Smith Barney Municipal High Income Fund
    Smith Barney Muni Funds -- Georgia Portfolio
  * Smith Barney Muni Funds -- Limited Term Portfolio
    Smith Barney Muni Funds -- National Portfolio
    Smith Barney Muni Funds -- New York Portfolio
    Smith Barney Muni Funds -- Pennsylvania Portfolio
    Smith Barney New Jersey Municipals Fund Inc.
    Smith Barney Oregon Municipals Fund
    


28
<PAGE>

--------------------------------------------------------------------------------
Exchange Privilege (continued)
--------------------------------------------------------------------------------

   
Global-International Funds
    Smith Barney Hansberger Global Small Cap Value Fund
    Smith Barney Hansberger Global Value Fund
    Smith Barney World Funds, Inc. -- Emerging Markets Portfolio
    Smith Barney World Funds, Inc. -- European Portfolio
    Smith Barney World Funds, Inc. -- Global Government Bond Portfolio
    Smith Barney World Funds, Inc. -- International Balanced Portfolio
    Smith Barney World Funds, Inc. -- International Equity Portfolio
    Smith Barney World Funds, Inc. -- Pacific Portfolio

Smith Barney Concert Allocation Series Inc.
    Smith Barney Allocation Concert Series Inc. -- Balanced Portfolio
    Smith Barney Allocation Concert Series Inc. -- Conservative Portfolio
    Smith Barney Allocation Concert Series Inc. -- Growth Portfolio
    Smith Barney Concert Allocation Series Inc. -- Global Portfolio
    Smith Barney Allocation Concert Series Inc. -- High Growth Portfolio
    Smith Barney Allocation Concert Series Inc. -- Income Portfolio
    

Money Market Funds
  + Smith Barney Exchange Reserve Fund
*** Smith Barney Money Funds, Inc. -- Cash Portfolio
*** Smith Barney Money Funds, Inc. -- Government Portfolio
 ++ Smith Barney Money Funds, Inc. -- Retirement Portfolio
*** Smith Barney Municipal Money Market Fund, Inc.
*** Smith Barney Muni Funds -- California Money Market Portfolio
*** Smith Barney Muni Funds -- New York Money Market Portfolio
------------
   
  * Available for exchange with Class A, Class L and Class Y shares of the
    Portfolio. 
    

 ** Available for exchange with Class A and Class B shares of the Portfolio.
*** Available for exchange with Class A and Class Y shares of the Portfolio.

   
  + Available for exchange with Class B and Class L shares of the Portfolio.
    

 ++ Available for exchange with Class A shares of the Portfolio.
   
      Class B Exchanges. In the event a Class B shareholder wishes to exchange
all or a portion of his or her shares in any of the funds imposing a higher CDSC
than that imposed by the Portfolio, the exchanged Class B shares will be subject
to the higher applicable CDSC. Upon an exchange, the new Class B shares will be
deemed to have been purchased on the same date as the Class B shares of the
Portfolio that have been exchanged.

   
      Class L Exchanges. Upon an exchange, the new Class L shares will be deemed
to have been purchased on the same date as the Class L shares of the Portfolio
that have been exchanged.
    

      Class A and Class Y Exchanges. Class A and Class Y shareholders of the
Portfolio who wish to exchange all or a portion of their shares for shares of
the respective class in any of the funds identified above may do so without
imposition of any charge.


                                                                              29
<PAGE>

--------------------------------------------------------------------------------
Exchange Privilege (continued)
--------------------------------------------------------------------------------

   
      Additional Information Regarding the Exchange Privilege. Excessive
exchange transactions can be detrimental to the Portfolio's performance and its
shareholders. The Manager may determine that a pattern of frequent exchanges is
excessive and contrary to the best interests of the Portfolio's other
shareholders. In this event, the Fund may, at its discretion, decide to limit
additional purchases and/or exchanges by the shareholder. Upon such a
determination, the Fund will provide notice in writing or by telephone to the
shareholder at least 15 days prior to suspending the exchange privilege and
during the 15-day period the shareholder will be required to (a) redeem his or
her shares in the Portfolio or (b) remain invested in the Portfolio or exchange
into any of the funds of the Smith Barney Mutual Funds ordinarily available,
which position the shareholder would be expected to maintain for a significant
period of time. All relevant factors will be considered in determining what
constitutes an abusive pattern of exchanges.
    

      Certain shareholders may be able to exchange shares by telephone. See
"Redemption of Shares -- Telephone Redemption and Exchange Program." Exchanges
will be processed at the net asset value next determined. Redemption procedures
discussed below are also applicable for exchanging shares, and exchanges will be
made upon receipt of all supporting documents in proper form. If the account
registration of the shares of the fund being acquired is identical to the
registration of the shares of the fund exchanged, no signature guarantee is
required. A capital gain or loss for tax purposes will be realized upon the
exchange, depending upon the cost or other basis of shares redeemed. Before
exchanging shares, investors should read the current prospectus describing the
shares to be acquired. The Portfolio reserves the right to modify or discontinue
exchange privileges upon 60 days' prior notice to shareholders.

--------------------------------------------------------------------------------
Redemption of Shares
--------------------------------------------------------------------------------

      The Fund is required to redeem the shares of the Portfolio tendered to it,
as described below, at a redemption price equal to their net asset value per
share next determined after receipt of a written request in proper form at no
charge other than any applicable CDSC. Redemption requests received after the
close of regular trading on the NYSE are priced at the net asset value next
determined.

      If a shareholder holds shares in more than one Class, any request for
redemption must specify the Class being redeemed. In the event of a failure to
specify which Class, or if the investor owns fewer shares of the Class than
specified, the redemption request will be delayed until the Fund's transfer
agent receives further instructions from Smith Barney, or if the shareholder's
account is not with Smith Barney, from the shareholder directly. The redemption
proceeds will be remitted on or before the third business day following receipt
of proper tender,


30
<PAGE>

--------------------------------------------------------------------------------
Redemption of Shares (continued)
--------------------------------------------------------------------------------

except on any days on which the NYSE is closed or as permitted under the 1940
Act in extraordinary circumstances. Generally, if the redemption proceeds are
remitted to a Smith Barney brokerage account, these funds will not be invested
for the shareholder's benefit without specific instruction and Smith Barney will
benefit from the use of temporarily uninvested funds. Redemption proceeds for
shares purchased by check, other than a certified or official bank check, will
be remitted upon clearance of the check, which may take up to 10 days or more.

      Shares held by Smith Barney as custodian must be redeemed by submitting a
written request to a Smith Barney Financial Consultant. Shares other than those
held by Smith Barney as custodian may be redeemed through an investor's
Financial Consultant, Introducing Broker or dealer in the selling group, or by
submitting a written request for redemption to:

   
      Smith Barney Muni Funds/Florida Portfolio
      Class A, B, L or Y (please specify)
      c/o First Data Investor Services Group, Inc.
      P.O. Box 5128
      Westborough, Massachusetts 01581-5128

   A written redemption request must (a) state the Class and number or dollar
amount of shares to be redeemed, (b) identify the shareholder's account number
and (c) be signed by each registered owner exactly as the shares are registered.
If the shares to be redeemed were issued in certificate form, the certificates
must be endorsed for transfer (or be accompanied by an endorsed stock power) and
must be submitted to First Data together with the redemption request. Any
signature appearing on a share certificate, stock power or written redemption
request in excess of $10,000 must be guaranteed by an eligible guarantor
institution such as a domestic bank, savings and loan institution, domestic
credit union, member bank of the Federal Reserve System or member firm of a
national securities exchange. Written redemption requests of $10,000 or less do
not require a signature guarantee unless more than one such redemption request
is made in any 10-day period. Redemption proceeds will be mailed to an
investor's address of record. First Data may require additional supporting
documents for redemptions made by corporations, executors, administrators,
trustees or guardians. A redemption request will not be deemed properly received
until First Data receives all required documents in proper form.
    

      AUTOMATIC CASH WITHDRAWAL PLAN

      The Portfolio offers shareholders an automatic cash withdrawal plan, under
which shareholders who own shares with a value of at least $10,000 may elect to
receive cash payments of at least $50 monthly or quarterly. The withdrawal plan
will be carried over on exchanges between funds or Classes of the Portfolio. Any
applicable CDSC will not be waived on amounts withdrawn by a shareholder that


                                                                              31
<PAGE>

--------------------------------------------------------------------------------
Redemption of Shares (continued)
--------------------------------------------------------------------------------

exceed 1.00% per month of the value of the shareholder's shares subject to the
CDSC at the time the withdrawal plan commences. With respect to withdrawal plans
in effect prior to November 7, 1994, any applicable CDSC will be waived on
amounts withdrawn that do not exceed 2.00% per month of the value of the
shareholder's shares subject to the CDSC. For further information regarding the
automatic cash withdrawal plan, shareholders should contact a Smith Barney
Financial Consultant.

      TELEPHONE REDEMPTION AND EXCHANGE PROGRAM

      Shareholders who do not have a Smith Barney brokerage account may be
eligible to redeem and exchange Portfolio shares by telephone. To determine if a
shareholder is entitled to participate in this program, he or she should contact
First Data at 1-800-451-2010. Once eligibility is confirmed, the shareholder
must complete and return a Telephone/Wire Authorization Form, along with a
signature guarantee, that will be provided by First Data upon request.
Alternatively, an investor may authorize telephone redemptions on the new
account application with the applicant's signature guarantee when making his or
her initial investment in the Portfolio.

   
      Redemptions. Redemption requests of up to $10,000 of any class or classes
of the Portfolio's shares may be made by eligible shareholders by calling First
Data at 1-800-451-2010. Such requests may be made between 9:00 a.m. and 4:00
p.m. (New York City time) on any day the NYSE is open. Redemption requests
received after the close of regular trading on the NYSE are priced at the net
asset value next determined. Redemptions of shares (i) by retirement plans or
(ii) for which certificates have been issued are not permitted under this
program.
    

      A shareholder will have the option of having the redemption proceeds
mailed to his or her address of record or wired to a bank account predesignated
by the shareholder. Generally, redemption proceeds will be mailed or wired, as
the case may be, on the next business day following the redemption request. In
order to use the wire procedures, the bank receiving the proceeds must be a
member of the Federal Reserve System or have a correspondent relationship with a
member bank. The Fund reserves the right to charge shareholders a nominal fee
for each wire redemption. Such charges, if any, will be assessed against the
shareholder's account from which shares were redeemed. In order to change the
bank account designated to receive redemption proceeds, a shareholder must
complete a new Telephone/Wire Authorization Form and, for the protection of the
shareholder's assets, will be required to provide a signature guarantee and
certain other documentation.

   
      Exchanges. Eligible shareholders may make exchanges by telephone if the
account registration of the shares of the fund being acquired is identical to
the registration of the shares of the fund exchanged. Such exchange requests may
be made by calling First Data at 1-800-451-2010 between 9:00 a.m. and 4:00 p.m.
    


32
<PAGE>

--------------------------------------------------------------------------------
Redemption of Shares (continued)
--------------------------------------------------------------------------------

New York City time) on any day on which the NYSE is open. Exchange requests
received after the close of regular trading on the NYSE are processed at the net
asset value next determined.

      Additional Information regarding Telephone Redemption and Exchange
Program. Neither the Fund nor its agents will be liable for following
instructions communicated by telephone that are reasonably believed to be
genuine. The Fund and its agents will employ procedures designed to verify the
identity of the caller and legitimacy of instructions (for example, a
shareholder's name and account number will be required and phone calls may be
recorded). The Fund reserves the right to suspend, modify or discontinue the
telephone redemption and exchange program or to impose a charge for this service
at any time following at least seven days' prior notice to shareholders.

--------------------------------------------------------------------------------
Minimum Account Size
--------------------------------------------------------------------------------

      The Fund reserves the right to redeem involuntarily any shareholder's
account if the aggregate value of the shares held in a Portfolio account is less
than $500. If a shareholder has more than one account in this Portfolio, each
account must satisfy the minimum account size. The Fund, however, will not
redeem shares based solely on market reductions in net asset value. Before the
Fund exercises such right, shareholders will receive written notice and will be
permitted 60 days to bring the account up to the minimum to avoid involuntary
liquidation.

--------------------------------------------------------------------------------
Performance
--------------------------------------------------------------------------------

   
      From time to time the Portfolio may include its yield, taxable equivalent
yield, total return and average annual total return in advertisements. In
addition, in other types of sales literature the Portfolio may also include its
distribution rate. These figures are computed separately for Class A, Class B,
Class L and Class Y shares of the Portfolio. These figures are based on
historical earnings and are not intended to indicate future performance. The
yield of a Portfolio class refers to the net income earned by an investment in
the Class over a 30-day period ending at month end. This net income is then
annualized, i.e., the amount of income earned by the investment during that
30-day period is assumed to be earned each 30-day period for 12 periods and is
expressed as a percentage of the investment. The net income earned on the
investment for six periods is also assumed to be reinvested at the end of the
sixth 30-day period. The taxable equivalent yield is calculated similarly to the
yield, except that a stated income tax rate is used to demonstrate the taxable
yield necessary to produce an after-tax yield equivalent to the tax-exempt yield
of
    


                                                                              33
<PAGE>

--------------------------------------------------------------------------------
Performance (continued)
--------------------------------------------------------------------------------

   
the Class. The yield and taxable equivalent yield quotations are calculated
according to a formula prescribed by the SEC to facilitate comparison with
yields quoted by other investment companies. The distribution rate is calculated
by annualizing the latest monthly distribution and dividing the result by the
maximum offering price per share as of the end of the period to which the
distribution relates. The distribution rate is not computed in the same manner
as, and therefore can be significantly different from, the above-described
yield. Total return is computed for a specific period of time assuming deduction
of the maximum sales charge, if any, from the initial amount invested and
reinvestment of all income dividends and capital gains distributions on the
reinvestment dates at prices calculated as stated in this Prospectus, then
dividing the value of the investment at the end of the period so calculated by
the initial amount invested and subtracting 100%. The standard average annual
total return, as prescribed by the SEC, is derived from this total return, which
provides the ending redeemable value. Such standard total return information may
also be accompanied with nonstandard total return information for differing
periods computed in the same manner but without annualizing the total return or
taking sales charges into account. The Portfolio may also include comparative
performance information in advertising or marketing its shares. Such performance
information may include data from Lipper Analytical Services, Inc. and other
financial publications.
    

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

   
      BOARD OF TRUSTEES

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

      MANAGER

      The Manager manages the day-to-day operations of the Portfolio pursuant to
a management agreement entered into by the Fund on behalf of the Portfolio.

   
      MMC was incorporated in 1968 under the laws of Delaware. MMC, Holdings and
Smith Barney are each located at 388 Greenwich Street, New York, New York 10013.
As of March 31, 1998, MMC had aggregate assets under management of approximately
$100.5 billion.
    
      MMC provides the Fund with investment management services and executive


34
<PAGE>

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

   
and other personnel, pays the remuneration of Fund officers, provides the Fund
with office space and equipment, furnishes the Fund with bookkeeping,
accounting, administrative services and services relating to research,
statistical work and supervision of the Portfolio. The management agreement
provides for an annual management fee at the rate of 0.50% of the Portfolio's
average daily net assets. MMC has voluntarily agreed to waive its fee if in any
fiscal year the aggregate expenses of any Class of the Portfolio exclusive of
12b-1 fees, taxes, brokerage, interest and extraordinary expenses, such as
litigation costs, exceed 0.70% of such Class' average net asset value for that
fiscal year. This voluntary expense limitation will remain in effect until
terminated by notice to shareholders and by supplement to the then-current
prospectus. The management fee and expense limitation became effective on
December 18, 1995.

      For the fiscal year ended March 31, 1998, total expenses were 0.76% of the
average daily net asset value for Class A shares; 1.28% of the average daily net
asset value for Class B shares; and 1.33% of the average daily net asset value
for Class L shares.

      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 has been
approved by the stockholders of each of Travelers and Citicorp. Travelers has
filed an application to become a bank holding company so that, 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 BHCA, the Glass-Steagall Act and certain other laws and
regulations will then be applicable to Travelers and its subsidiaries.

      The Manager 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. Smith Barney and the
Manager believe that the Manager's services under the Management Agreement and
the shareholder service activities performed by Smith Barney are not
underwriting and would be consistent with the Glass-Steagall Act and other
relevant federal and state laws. However, there is little controlling precedent
regarding the performance of the combination of investment advisory, shareholder
servicing and administrative activities by subsidiaries of bank holding
companies. If Smith Barney and the Manager, or their affiliates, were to be
prevented from acting as the manager or a shareholder service agent, the Fund
would seek alternative means for obtaining these services. The Fund does not
expect that shareholders would suffer any adverse financial consequences as a
result of any such occurrence.
    


                                                                              35
<PAGE>

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

      PORTFOLIO MANAGEMENT

   
      Peter M. Coffey, a Managing Director of Smith Barney, has served as Vice
President of the Fund and portfolio manager of the Portfolio since its inception
(April 2, 1991) and manages the day-to-day investment operations of the
Portfolio, including making all investment decisions. Mr. Coffey serves as the
portfolio manager for five of the Fund's non-money market portfolios.

      Management's discussion and analysis, and additional performance
information regarding the Portfolio during the fiscal year ended March 31, 1998
is included in the Annual Report dated March 31, 1998. A copy of the Annual
Report may be obtained upon request and without charge from a Smith Barney
Financial Consultant or by writing or calling the Fund at the address or phone
number listed on page one of this Prospectus.
    

--------------------------------------------------------------------------------
Distribution
--------------------------------------------------------------------------------

   
      Smith Barney distributes shares of the Portfolio as principal underwriter
and as such conducts a continuous offering pursuant to a "best efforts"
arrangement requiring Smith Barney to take and pay for only such securities as
may be sold to the public. Pursuant to a plan of distribution adopted by the
Portfolio under Rule 12b-1 under the 1940 Act (the "Plan"), Smith Barney is paid
a service fee with respect to Class A, Class B and Class L shares of the
Portfolio at the annual rate of 0.15% of the average daily net asset values
attributable to these Classes. Smith Barney is also paid a distribution fee with
respect to Class B and Class L shares at the annual rate of 0.50% and 0.55%,
respectively, of the average daily net asset values attributable to these
Classes. Class B shares will no longer be subject to a distribution fee after
conversion to Class A shares, eight years after the date of original purchase.
The fees are used by Smith Barney to pay its Financial Consultants for servicing
shareholder accounts and, in the case of Class B and Class L shares, to cover
expenses primarily intended to result in the sale of those shares. These
expenses include: advertising expenses; the cost of printing and mailing
prospectuses to potential investors; payments to and expenses of Smith Barney
Financial Consultants and other persons who provide support services in
connection with the distribution of shares; interest and/or carrying charges;
and indirect and overhead costs of Smith Barney associated with the sale of
Portfolio shares, including lease, utility, communications and sales promotion
expenses.
    

      The payments to Smith Barney Financial Consultants for selling shares of a
Class include a commission or fee paid by the investor or Smith Barney at the
time of sale and, with respect to Class A, Class B and Class L shares, a
continuing fee for servicing shareholder accounts for as long as a shareholder
remains a holder of


36
<PAGE>

--------------------------------------------------------------------------------
Distribution (continued)
--------------------------------------------------------------------------------

that Class. Smith Barney Financial Consultants may receive different levels of
compensation for selling the different Classes of shares.

   
      Payments under the Plan with respect to Class B and Class L shares are not
tied exclusively to the distribution and shareholder services expenses actually
incurred by Smith Barney, and the payments may exceed distribution expenses
actually incurred. The Fund's Board of Trustees will evaluate the
appropriateness of the Plan and its payment terms on a continuing basis and in
so doing will consider all relevant factors, including expenses borne by Smith
Barney, amounts received under the Plan and proceeds of the CDSC.

      The Glass-Steagall Act currently prohibits certain financial institutions
from underwriting securities of open-end investment companies, such as the Fund.
Therefore, in connection with the anticipated merger of Travelers and Citicorp
and as a consequence of the anticipated applicability of the BHCA and the
Glass-Steagall Act, the Fund plans to retain the services of a new entity (which
is not otherwise affiliated with Travelers) to act as distributor of the
Portfolio's shares.
    

--------------------------------------------------------------------------------
Additional Information
--------------------------------------------------------------------------------

   
      The Fund, an open-end management investment company, is organized as a
"Massachusetts business trust" pursuant to a Declaration of Trust dated August
14, 1985. Pursuant to the Declaration of Trust, the Board of Trustees has
authorized the issuance of different series of shares, each representing shares
in one of the separate portfolios. The assets of each portfolio are segregated
and separately managed and a shareholder's interest is in the assets of the
portfolio in which he or she holds shares. Class A, Class B, Class L and Class Y
shares of the Portfolio represent interests in the assets of the Portfolio and
have identical voting, dividend, liquidation and other rights on the same terms
and conditions except that expenses related to the shareholder service and
distribution of Class A, Class B and Class L shares are borne solely by the
respective Class and each such Class of shares has exclusive voting rights with
respect to provisions of the Portfolio's Rule 12b-1 distribution plan which
pertain to that particular Class. It is the intention of the Fund not to hold
annual meetings of shareholders. The Board of Trustees may call meetings of
shareholders for action by shareholder vote as may be required by the 1940 Act
or the Declaration of Trust, and shareholders are entitled to call a meeting of
shareholders upon a vote of 10% of the Fund's outstanding shares for purposes of
voting on removal of a Trustee or Trustees. Shareholders will receive assistance
in communicating with other shareholders in connection with the removal of
Trustees as required by Section 16(c) of the 1940 Act. Shares do not have
cumulative voting rights or preemptive rights and have only such conversion or
exchange
    


                                                                              37
<PAGE>

--------------------------------------------------------------------------------
Additional Information (continued)
--------------------------------------------------------------------------------

   
rights as the Board of Trustees may grant in its discretion. When issued for
payment as described in this Prospectus, the Fund's shares will be fully paid
and transferrable (subject to the Portfolio's minimum account size). Shares are
redeemable as set forth under "Redemption of Shares" and are subject to
involuntary redemption as set forth under "Minimum Account Size."
    

      PNC Bank, National Association, located at 17th and Chestnut Streets,
Philadelphia, PA 19103, serves as custodian of the Portfolio's investments.

      First Data, located at Exchange Place, Boston, Massachusetts 02109, serves
as the Fund's transfer agent.

      The Fund sends its shareholders a semi-annual report and an audited annual
report, which include listings of the investment securities held by the
Portfolio at the end of the period covered. In an effort to reduce the Fund's
printing and mailing costs, the Fund plans to consolidate the mailing of its
semi-annual and annual reports by household. This consolidation means that a
household having multiple accounts with the identical address of record will
receive a single copy of each report. Shareholders who do not want this
consolidation to apply to their account should contact their Smith Barney
Financial Consultant or the Fund's transfer agent.


38
<PAGE>

                                                                     SMITHBARNEY

                                                A Member of TravelersGroup[Logo]


                                                                    Smith Barney
                                                                      Muni Funds
                                                               Florida Portfolio


                                                            388 Greenwich Street
                                                        New York, New York 10013

   
                                                                    FD 0605 7/98
    



PROSPECTUS

                                                                    SMITH BARNEY
                                                                      MUNI FUNDS


                                                                        National
                                                                       Portfolio


   
                                                                   July 29, 1998
    


                                                   Prospectus begins on page one


[LOGO] Smith Barney Mutual Funds
       Investing for your future.
       Every day.
<PAGE>

   
--------------------------------------------------------------------------------
Prospectus                                                         July 29, 1998
--------------------------------------------------------------------------------
    

      Smith Barney Muni Funds
      National Portfolio
      388 Greenwich Street
      New York, New York 10013
      (800) 451-2010

   
      The National Portfolio (the "Portfolio") is one of eight investment
portfolios that currently comprise Smith Barney Muni Funds (the "Fund"). The
Portfolio seeks to pay its shareholders as high a level of monthly income exempt
from Federal income taxes as is consistent with prudent investing. The Portfolio
seeks to achieve its objective by investing its assets in securities of varying
maturities, without limitation, depending on market conditions. Typically, the
remaining maturity of municipal bonds will range between 5 and 30 years. The
Portfolio may invest without limit in municipal obligations whose interest is a
tax-preference item for purposes of the Federal alternative minimum tax.
    

      This Prospectus sets forth concisely certain information about the Fund
and the Portfolio, including sales charges, distribution and service fees and
expenses, that prospective investors will find helpful in making an investment
decision. Investors are encouraged to read this Prospectus carefully and retain
it for future reference.

   
      Additional information about the Portfolio is contained in a Statement of
Additional Information dated July 29, 1998, as amended or supplemented from time
to time (the "SAI"), which is available upon request and without charge by
calling or writing the Fund at the telephone number or address set forth above
or by contacting a Smith Barney Financial Consultant. The SAI has been filed
with the Securities and Exchange Commission (the "SEC") and is incorporated by
reference into this Prospectus in its entirety.

SMITH BARNEY INC.
Distributor

MUTUAL MANAGEMENT CORP.
Investment Manager

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

                                                                               1
<PAGE>

--------------------------------------------------------------------------------
Table of Contents
--------------------------------------------------------------------------------
Prospectus Summary                                                             3
--------------------------------------------------------------------------------
Financial Highlights                                                           9
--------------------------------------------------------------------------------
Investment Objective and Management Policies                                  11
--------------------------------------------------------------------------------
   
Valuation of Shares                                                           16
--------------------------------------------------------------------------------
Dividends, Distributions and Taxes                                            17
--------------------------------------------------------------------------------
Purchase of Shares                                                            19
--------------------------------------------------------------------------------
Exchange Privilege                                                            26
--------------------------------------------------------------------------------
Redemption of Shares                                                          29
--------------------------------------------------------------------------------
Minimum Account Size                                                          31
--------------------------------------------------------------------------------
Performance                                                                   31
--------------------------------------------------------------------------------
Management of the Fund                                                        32
--------------------------------------------------------------------------------
Distribution                                                                  34
--------------------------------------------------------------------------------
Additional Information                                                        35
--------------------------------------------------------------------------------

================================================================================
      No person has been authorized to give any information or to make any
representations in connection with this offering other than those contained in
this Prospectus and, if given or made, such other information and
representations must not be relied upon as having been authorized by the
Portfolio or Smith Barney Inc. ("Smith Barney" or the "Distributor"). This
Prospectus does not constitute an offer by the Portfolio or the Distributor to
sell or a solicitation of an offer to buy any of the securities offered hereby
in any jurisdiction to any person to whom it is unlawful to make such offer or
solicitation in such jurisdiction.
================================================================================
    


2
<PAGE>

--------------------------------------------------------------------------------
Propectus Summary
--------------------------------------------------------------------------------

   
The following summary is qualified in its entirety by detailed information
appearing elsewhere in this Prospectus and in the SAI. Cross references in this
summary are to headings in the Prospectus. See "Table of Contents."
    

      INVESTMENT OBJECTIVE The Portfolio seeks to pay its shareholders as high a
level of monthly income exempt from Federal income taxes as is consistent with
prudent investing. The Portfolio seeks to achieve its objective by investing its
assets in securities of varying maturities, without limitation, depending on
market conditions. Typically, the remaining maturity of municipal bonds will
range between 5 and 30 years. The Portfolio may invest without limit in
municipal obligations whose interest is a tax-preference item for purposes of
the Federal alternative minimum tax. See "Investment Objective and Management
Policies."

   
      ALTERNATIVE PURCHASE ARRANGEMENTS The Portfolio offers several classes of
shares ("Classes") to investors designed to provide them with the flexibility of
selecting an investment best suited to their needs. The general public is
offered three Classes of shares: Class A shares, Class B shares and Class L
shares, which differ principally in terms of sales charges and rate of expenses
to which they are subject. A fourth Class of shares, Class Y shares, is offered
only to investors meeting an initial investment of at least $15,000,000. See
"Purchase of Shares" and "Redemption of Shares."
    

      Class A Shares. Class A shares are sold at net asset value plus an initial
sales charge of up to 4.00% and are subject to an annual service fee of 0.15% of
the average daily net assets of the Class. The initial sales charge may be
reduced or waived for certain purchases. Purchases of Class A shares of $500,000
or more will be made at net asset value with no initial sales charge, but will
be subject to a contingent deferred sales charge ("CDSC") of 1.00% on
redemptions made within 12 months of purchase. See "Prospectus Summary --
Alternative Purchase Arrangements -- Reduced or No Initial Sales Charge."

      Class B Shares. Class B shares are offered at net asset value subject to a
maximum CDSC of 4.50% of redemption proceeds, declining by 0.50% the first year
after purchase and by 1.00% each year thereafter to zero. This CDSC may be
waived for certain redemptions. Class B shares are subject to an annual service
fee of 0.15% and an annual distribution fee of 0.50% of the average daily net
assets of the Class. The Class B shares' distribution fee may cause that Class
to have higher expenses and pay lower dividends than Class A shares.

      Class B Shares Conversion Feature. Class B shares will convert
automatically to Class A shares, based on relative net asset value, eight years
after the date of the original purchase. Upon conversion, these shares will no
longer be subject to an annual distribution fee. In addition, a certain portion
of Class B shares that have been acquired through the reinvestment of dividends
and distributions ("Class B Dividend Shares") will be converted at that time.
See "Purchase of Shares -- 


                                                                               3
<PAGE>

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

Deferred Sales Charge Alternatives."

   
      Class L Shares. Class L shares are sold at net asset value plus an initial
sales charge of 1.00% of the purchase price. They are subject to an annual
service fee of 0.15% and an annual distribution fee of 0.55% of the average
daily net assets of the Class, and investors pay a CDSC of 1.00% if they redeem
Class L shares within 12 months of purchase. The CDSC may be waived for certain
redemptions. The Class L shares' distribution fee may cause that Class to have
higher expenses and pay lower dividends than Class A shares. Purchases of
Portfolio shares, which when combined with current holdings of Class L shares of
the Portfolio equal or exceed $500,000 in the aggregate, should be made in Class
A shares at net asset value with no sales charge, which would be subject to a
CDSC of 1.00% on redemptions made within 12 months of purchase.

      Class Y Shares. Class Y shares are available only to investors meeting an
initial investment minimum of $15,000,000. Class Y shares are sold at net asset
value with no initial sales charge or CDSC. They are not subject to any service
or distribution fees.
    

      In deciding which Class of Portfolio shares to purchase, investors should
consider the following factors, as well as any other relevant facts and
circumstances:

   
      Intended Holding Period. The decision as to which Class of shares is more
beneficial to an investor depends on the amount and intended duration of his or
her investment. Shareholders who are planning to establish a program of regular
investment may wish to consider Class A shares; as the investment accumulates
shareholders may qualify for reduced sales charges and the shares are subject to
lower ongoing expenses over the term of the investment. As an alternative, Class
B shares are sold without any initial sales charge so the entire purchase price
is immediately invested in the Portfolio. Any investment return on these
additional invested amounts may partially or wholly offset the higher annual
expenses of this Class. Because the Portfolio's future return cannot be
predicted, however, there can be no assurance that this would be the case.
Finally, Class L shares, which have a lower upfront sales charge but are subject
to higher distribution fees than Class A shares, are suitable for investors who
are not investing or intending to invest an amount which would receive a
substantive sales charge discount and who have a short-term or undetermined time
frame.

      Finally, investors should consider the effect of the CDSC period and any
conversion rights of the Classes in the context of their own investment time
frame. For example, while Class L shares have a shorter CDSC period than Class B
shares, they do not have a conversion feature and therefore are subject to an
ongoing distribution fee. Thus, Class B shares may be more attractive than Class
L shares to investors with longer-term investment outlooks.
    

      Reduced or No Initial Sales Charge. The initial sales charge on Class A
shares 


4
<PAGE>

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

   
may be waived for certain eligible purchasers and the entire purchase price
would be immediately invested in the Portfolio. In addition, Class A share
purchases of $500,000 or more will be made at net asset value with no initial
sales charge, but will be subject to a CDSC of 1.00% on redemptions made within
12 months of purchase. The $500,000 investment may be met by adding the purchase
to the net asset value of all Class A shares offered with a sales charge held in
funds listed under "Exchange Privilege." Class A share purchases may also be
eligible for a reduced initial sales charge. See "Purchase of Shares." Because
the ongoing expenses of Class A shares may be lower than those for Class B and
Class L shares, purchasers eligible to purchase Class A shares at net asset
value or at a reduced sales charge should consider doing so.

      Financial Consultants of Smith Barney Inc. ("Smith Barney" or the
"Distributor") may receive different compensation for selling different Classes
of shares. Investors should understand that the purpose of the CDSC on the Class
B and Class L shares is the same as that of an initial sales charge.
    

      See "Purchase of Shares" and "Management of the Fund" for a complete
description of the sales charges and service and distribution fees for each
Class of shares and "Valuation of Shares," "Dividends, Distributions and Taxes"
and "Exchange Privilege" for other differences between the Classes of shares.

      PURCHASE OF SHARES Shares may be purchased through a brokerage account
maintained with Smith Barney. Shares may also be purchased through a broker that
clears securities transactions through Smith Barney on a fully disclosed basis
(an "Introducing Broker") or an investment dealer in the selling group. See
"Purchase of Shares."

   
      INVESTMENT MINIMUMS Investors in Class A, Class B and Class L shares may
open an account by making an initial investment of at least $1,000 for each
account. Investors in Class Y shares may open an account for an initial
investment of $15,000,000. Subsequent investments of at least $50 may be made
for all Classes. The minimum investment requirements for purchases of Portfolio
shares through the Systematic Investment Plan are described below. There is no
minimum investment requirement in Class A shares for unit holders who invest
distributions from a unit investment trust ("UIT") sponsored by Smith Barney. It
is not recommended that the Portfolio be used as a vehicle for Keogh, IRA or
other qualified retirement plans. See "Purchase of Shares."

      SYSTEMATIC INVESTMENT PLAN The Portfolio offers shareholders a Systematic
Investment Plan under which they may authorize the automatic placement of a
purchase order each month or quarter for Portfolio shares. The minimum initial
investment requirement for Class A, Class B and Class L shares and the
subsequent investment requirement for all Classes for shareholders purchasing
shares through the Systematic Investment Plan on a monthly basis is $25, and on
a quarterly basis is $50. See "Purchase of Shares."
    


                                                                               5
<PAGE>

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

      REDEMPTION OF SHARES Shares may be redeemed on each day the New York Stock
Exchange, Inc. ("NYSE") is open for business. See "Purchase of Shares" and
"Redemption of Shares."

   
      MANAGEMENT OF THE FUND Mutual Management Corp. ("MMC" or the "Manager"),
formerly known as Smith Barney Mutual Funds Management Inc., serves as the
Portfolio's investment manager. MMC provides investment advisory and management
services to various investment companies comprising the Smith Barney Mutual
Funds. MMC is a wholly owned subsidiary of Salomon Smith Barney Holdings Inc.
("Holdings"). Holdings is 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 Insurance Services. See "Management of the Fund."
    

      EXCHANGE PRIVILEGE Shares of a Class may be exchanged for shares of the
same Class of certain other funds of the Smith Barney Mutual Funds at the
respective net asset values next determined. See "Exchange Privilege."

      VALUATION OF SHARES Net asset value of the Portfolio for the prior day
generally is quoted daily in the financial section of most newspapers and is
also available from a Smith Barney Financial Consultant. See "Valuation of
Shares."

   
      DIVIDENDS AND DISTRIBUTIONS Dividends from net investment income are paid
monthly. Distributions of net realized capital gains, if any, are paid at least
annually. See "Dividends, Distributions and Taxes."
    

      REINVESTMENT OF DIVIDENDS Dividends and distributions paid on shares of a
Class will be reinvested automatically, unless otherwise specified by an
investor, in additional shares of the same Class at current net asset value.
Shares acquired by dividend and distribution reinvestments will not be subject
to any sales charge or CDSC. Class B shares acquired through dividend and
distribution reinvestments will become eligible for conversion to Class A
shares on a pro rata basis. See "Dividends, Distributions and Taxes."

   
      RISK FACTORS AND SPECIAL CONSIDERATIONS There can be no assurance that
the Portfolio's investment objective will be achieved. The value of the
Portfolio's investments, and thus the net asset value of the Portfolio's shares,
will fluctuate in response to changes in market and economic conditions, as well
as the financial condition and prospects of issuers of municipal obligations
purchased by the Portfolio. The market value of municipal bonds may be adversely
affected during periods of rising interest rates. Additionally, changes in
Federal income tax laws affecting the tax exemption for interest on municipal
obligations could affect the availability of tax exempt obligations for purchase
and the value of the Portfolio's securities would be affected. See "Investment
Objective and Management Policies."
    


6
<PAGE>

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

   
      THE PORTFOLIO'S EXPENSES The following expense table lists the costs and
expenses an investor will incur either directly or indirectly as a shareholder
of the Portfolio, based on the maximum sales charge or maximum CDSC that may be
incurred at the time of purchase or redemption and, unless otherwise noted, the
Portfolio's operating expenses for its most recent fiscal year:

<TABLE>
<CAPTION>
National Portfolio                             Class A   Class B   Class L*    Class Y
----------------------------------------------------------------------------------------
<S>                                             <C>       <C>       <C>         <C>  
Shareholder Transaction Expenses
  Maximum sales charge imposed on purchases
    (as a percentage of offering price) ....... 4.00%     None      1.00%*      None
  Maximum CDSC
    (as a percentage of original cost or
    redemption proceeds, whichever is lower) .. None**    4.50%     1.00%       None

Annual Portfolio Operating Expenses
  (as a percentage of average net assets)
    Management fees .........................   0.45%     0.45%     0.45%       0.45%
    12b-1 fees*** ...........................   0.15      0.65      0.70        --
    Other expenses ..........................   0.06      0.19      0.20        0.10****
    Total Portfolio Operating Expenses ......   0.66%     1.29%     1.35%       0.55%
----------------------------------------------------------------------------------------
</TABLE>

      * Class L shares were previously named Class C shares. For shareholders
who owned Class C shares of the Portfolio, Class L shares may be purchased
without incurring the 1% initial sales charge until June 25, 1999.

      ** Purchases of Class A shares of $500,000 or more will be made at net
asset value with no sales charge, but will be subject to a CDSC of 1.00% on
redemptions made within 12 months of purchase.

      *** Upon conversion of Class B shares to Class A shares, such shares will
no longer be subject to a distribution fee. Class L shares do not have a
conversion feature and, therefore, are subject to an ongoing distribution fee.
As a result, long-term shareholders of Class L shares may pay more than the
economic equivalent of the maximum front-end sales charge permitted by the
National Association of Securities Dealers, Inc.

      **** "Other expenses" for Class Y shares have been estimated because no
Class Y shares were outstanding during the fiscal year ended March 31, 1998.
    

      Class A shares of the Portfolio purchased through the Smith Barney
AssetOne Program will be subject to an annual asset-based fee, payable
quarterly, in lieu of the initial sales charge. The fee will vary to a maximum
of 1.50%, depending on the amount of assets held through the Program. For more
information, please call your Smith Barney Financial Consultant.

   
      The sales charge and CDSC set forth in the above table are the maximum
charges imposed on purchases or redemptions of Portfolio shares and investors
may actually pay lower or no changes, depending on the amount purchased and, in
the case of Class B, Class L and certain Class A shares, the length of time the
shares are held. See "Purchase of Shares" and "Redemption of Shares." Smith
Barney receives an annual 12b-1 service fee of 0.15% of the value of average
daily net assets of Class A shares. Smith Barney also receives with respect to
Class B shares an annual 12b-1 fee of 0.65% of the value of average daily net
assets of that Class, 
    


                                                                               7
<PAGE>

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

   
consisting of a 0.50% distribution fee and a 0.15% service fee. With respect to
Class L shares, Smith Barney also receives an annual 12b-1 fee of 0.70% of the
value of average daily net assets of that Class, consisting of a 0.55%
distribution fee and a 0.15% service fee. "Other expenses" in the above table
include fees for shareholder services, custodial fees, legal and accounting
fees, printing costs and registration fees.
    

      EXAMPLE

      The following example is intended to assist an investor in understanding
the various costs that an investor in the Portfolio will bear directly or
indirectly. The example assumes payment by the Portfolio of operating expenses
at the levels set forth in the table above. See "Purchase of Shares,"
"Redemption of Shares" and "Management of the Fund."

   
<TABLE>
<CAPTION>
National Portfolio                                             1 Year   3 Years   5 Years   10 Years*
-----------------------------------------------------------------------------------------------------
<S>                                                              <C>      <C>       <C>         <C> 
An investor would pay the following expenses on a $1,000 
  investment, assuming (1) 5.00% annual return and 
  (2) redemption at the end of each time period:
    Class A .................................................    $46      $60       $75         $119
    Class B .................................................     58       71        81          138
    Class L .................................................     34       52        83          171
    Class Y .................................................      6       18        31           69

An investor would pay the following expenses on the same 
  investment, assuming the same annual return and no redemption:
    Class A .................................................    $46      $60       $75         $119
    Class B .................................................     13       41        71          138
    Class L .................................................     24       52        83          171
    Class Y .................................................      6       18        31           69
----------------------------------------------------------------------------------------------------
</TABLE>
    

      * Ten-year figures assume conversion of Class B shares to Class A shares
at the end of the eighth year following the date of purchase.

      The example also provides a means for the investor to compare expense
levels of funds with different fee structures over varying investment periods.
To facilitate such comparison, all funds are required to utilize a 5.00% annual
return assumption. However, the Portfolio's actual return will vary and may be
greater or less than 5.00%. This example should not be considered a
representation of past or future expenses 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 for the five-year period ended March
31, 1998 appears in the Portfolio's annual report dated March 31, 1998. The
information set out below should be read in conjunction with the financial
statements and related notes that also appear in the Portfolio's Annual Report
to Shareholders, which is incorporated by reference into the SAI.
    

For a share of beneficial interest outstanding throughout each year:

   
<TABLE>
<CAPTION>
National Portfolio                                          Class A Shares
-----------------------------------------------------------------------------------------------
Year Ended
  March 31,                         1998         1997         1996         1995         1994(1)
-----------------------------------------------------------------------------------------------
<S>                               <C>          <C>          <C>          <C>          <C>     
Net Asset Value,
  Beginning of
  Year                            $13.60       $13.67       $13.32       $13.35       $13.81
-----------------------------------------------------------------------------------------------
Net investment
  income(2)                         0.79         0.81         0.81         0.82         0.85
Net realized and
  unrealized
  gain (loss)                       0.73        (0.09)        0.35        (0.01)       (0.39)
-----------------------------------------------------------------------------------------------
Total Income from
  Operations                        1.52         0.72         1.16         0.81         0.46
===============================================================================================
Less Distributions From:
  Net investment
    income                         (0.80)       (0.79)       (0.81)       (0.84)       (0.86)
  Net realized gains               (0.16)          --           --           --        (0.06)
-----------------------------------------------------------------------------------------------
Total Distributions                (0.96)       (0.79)       (0.81)       (0.84)       (0.92)
-----------------------------------------------------------------------------------------------
Net Asset Value,
  End of Year                     $14.16       $13.60       $13.67       $13.32       $13.35
===============================================================================================
Total Return(P.)                   11.47%        5.41%        8.83%        6.38%        3.17%
-----------------------------------------------------------------------------------------------
Net Assets,
  End of Year
  (millions)                        $371         $351         $378         $401         $413
-----------------------------------------------------------------------------------------------
Ratios to Average Net Assets:
  Expenses(2)                       0.66%        0.70%        0.70%        0.60%        0.52%
  Net investment
    income                          5.61         5.92         5.88         6.30         6.05
-----------------------------------------------------------------------------------------------
Portfolio Turnover
  Rate                                87%          31%          27%          54%          42%
===============================================================================================

<CAPTION>
National Portfolio                                          Class A Shares
-----------------------------------------------------------------------------------------------
Year Ended  
  March 31,                         1993         1992         1991         1990         1989
-----------------------------------------------------------------------------------------------
<S>                               <C>          <C>          <C>          <C>          <C>     
Net Asset Value,
  Beginning of
  Year                            $12.95       $12.49       $12.24       $12.11       $11.82
-----------------------------------------------------------------------------------------------
Net investment
  income(2)                         0.88         0.90         0.91         0.92         0.95
Net realized and
  unrealized
  gain (loss)                       0.87         0.46         0.17         0.19         0.30
-----------------------------------------------------------------------------------------------
Total Income from
 Operations                         1.75         1.36         1.08         1.11         1.25
===============================================================================================
Less Distributions From:
  Net investment
    income                         (0.89)       (0.90)       (0.83)       (0.98)       (0.96)
  Net realized gains                  --           --           --           --           --
-----------------------------------------------------------------------------------------------
Total Distributions                (0.89)       (0.90)       (0.83)       (0.98)       (0.96)
-----------------------------------------------------------------------------------------------
Net Asset Value,
  End of Year                     $13.81       $12.95       $12.49       $12.24       $12.11
===============================================================================================
Total Return(P.)                   13.96%       11.21%        9.13%        9.60%       10.93%
-----------------------------------------------------------------------------------------------
Net Assets,
  End of Year
  (millions)                        $383         $261         $200         $160         $109
-----------------------------------------------------------------------------------------------
Ratios to Average Net Assets:
  Expenses(2)                       0.53%        0.50%        0.39%        0.35%        0.30%
  Net investment
    income                          6.58         6.88         7.40         7.43         7.92
-----------------------------------------------------------------------------------------------
Portfolio Turnover
  Rate                                53%          95%         103%          56%          82%
===============================================================================================
</TABLE>
    

(1)   On October 10, 1994, the former Class C shares were exchanged into Class A
      shares.

   
(2)   The Manager has waived all or a part of its fees for each of the years in
      the four-year period ended March 31, 1992. If such fees were not waived,
      the per share decrease of net investment income and the ratios of expenses
      to average net assets would have been:

<TABLE>
<CAPTION>
                          Net Investment Income                                   Expense Ratios
                           Per Share Decrease                                   Without Fee Waivers
              -------------------------------------------          -------------------------------------------
              1992          1991         1990        1989          1992          1991        1990        1989
--------------------------------------------------------------------------------------------------------------
<S>          <C>           <C>          <C>         <C>            <C>           <C>         <C>         <C>  
Class A      $.002         $.013        $.019       $.032          0.52%         0.49%       0.50%       0.54%
--------------------------------------------------------------------------------------------------------------
</TABLE>
    

(P.) Total returns do not reflect sales loads or contingent deferred sales
     charges.


                                                                               9
<PAGE>

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

For a share of beneficial interest outstanding throughout the year:

   
<TABLE>
<CAPTION>
National Portfolio                          Class B Shares                            Class L Shares*
-----------------------------------------------------------------------------------------------------
Year Ended March 31,                1998         1997         1996         1995 (1)       1998 
-----------------------------------------------------------------------------------------------------
<S>                             <C>          <C>          <C>          <C>            <C>     
Net Asset Value,
  Beginning of Year             $  13.61     $  13.67     $  13.33     $  12.41       $  13.59
-----------------------------------------------------------------------------------------------------
Income from Operations:
  Net investment income             0.70         0.74         0.73         0.33           0.69
  Net realized and unrealized
    gain (loss)                     0.74        (0.08)        0.35         0.91           0.74
-----------------------------------------------------------------------------------------------------
Total Income from Operations        1.44         0.66         1.08         1.24           1.43
=====================================================================================================
Less Distributions From:
  Net Investment Income            (0.73)       (0.72)       (0.74)       (0.32)         (0.70)
  Net Realized Gains               (0.16)          --           --           --          (0.16)
-----------------------------------------------------------------------------------------------------
Total Distributions                (0.89)       (0.72)       (0.74)       (0.32)         (0.86)
-----------------------------------------------------------------------------------------------------
Net Asset Value,
  End of Year                   $  14.16     $  13.61     $  13.67     $  13.33       $  14.16
=====================================================================================================
Total Return(P.)                   10.80%        4.95%        8.26%       10.11%++       10.71%
-----------------------------------------------------------------------------------------------------
Net Assets,
  End of Year (millions)        $     20     $     13     $     12     $      7       $     16
-----------------------------------------------------------------------------------------------------
Ratios to Average Net Assets:
  Expenses                          1.29%        1.20%        1.19%        1.19%+         1.35%
  Net Investment Income             4.95         5.42         5.37         5.75+          4.91
-----------------------------------------------------------------------------------------------------
Portfolio Turnover Rate               87%          31%          27%          54%            87%
=====================================================================================================

<CAPTION>
National Portfolio                                       Class L Shares*
-----------------------------------------------------------------------------------------------
Year Ended March 31,                1997         1996         1995         1994         1993(2)
-----------------------------------------------------------------------------------------------
<S>                             <C>          <C>          <C>          <C>            <C>     
Net Asset Value,
  Beginning of Year             $  13.65     $  13.32     $  13.33     $  13.80     $  13.47
-----------------------------------------------------------------------------------------------
Income from Operations:
  Net investment income             0.73         0.73         0.74         0.76         0.22
  Net realized and unrealized
   gain (loss)                     (0.08)        0.34        (0.01)       (0.40)        0.31
-----------------------------------------------------------------------------------------------
Total Income from Operations        0.65         1.07         0.73         0.36         0.53
===============================================================================================
Less Distributions From:
  Net Investment Income            (0.71)       (0.74)       (0.74)       (0.77)       (0.20)
  Net Realized Gains                  --           --           --        (0.06)          --
-----------------------------------------------------------------------------------------------
Total Distributions                (0.71)       (0.74)       (0.74)       (0.83)       (0.20)
-----------------------------------------------------------------------------------------------
Net Asset Value,
  End of Year                   $  13.59     $  13.65     $  13.32     $  13.33     $  13.80
===============================================================================================
Total Return(P.)                    4.90%        8.13%        5.80%        2.40%        3.98%++
-----------------------------------------------------------------------------------------------
Net Assets,
  End of Year (millions)        $     15     $     17     $     19     $     18     $      6
-----------------------------------------------------------------------------------------------
Ratios to Average Net Assets:
  Expenses                          1.27%        1.27%        1.23%        1.22%        1.20%+
  Net Investment Income             5.35         5.31         5.69         5.29         5.68+
-----------------------------------------------------------------------------------------------
Portfolio Turnover Rate               31%          27%          54%          42%          53%
===============================================================================================
</TABLE>
    

(1)  For the period from November 7, 1994 (inception date) to March 31, 1995.

   
(2)  For the period from January 5, 1993 (inception date) to March 31, 1993.
    

(P.) Total returns do not reflect sales loads or contingent deferred sales
     charges.
++   Total return is not annualized, as it may not be representative of the
     total return for the year.
+    Annualized.

   
*    On November 7, 1994 the former Class B shares were renamed Class C shares.
     On June 12, 1998, Class C shares were renamed Class L shares.
    


10
<PAGE>

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

      The Portfolio seeks as high a level of income exempt from Federal income
taxes as is consistent with prudent investing. The Portfolio invests its assets
in a diversified portfolio of municipal securities of varying maturities,
without limitation, depending on market conditions. Typically, the remaining
maturity of municipal bonds will range between 5 and 30 years.

   
      The two principal classifications of municipal obligations are "general
obligation" and "revenue." General obligations are secured by a municipal
issuer's pledge of its full faith, credit and taxing power for the payment of
principal and interest. Revenue obligations are payable only from the revenues
derived from a particular facility or class of facilities or, in some cases,
from the proceeds of a special excise tax or other specific revenue source. Such
obligations are often issued to raise money for public projects that enhance the
quality of life including health facilities, housing, airports, schools,
highways and bridges. Please see the SAI for a more detailed discussion about
the different types of municipal obligations.

      The Portfolio will seek to be fully invested in obligations that are
issued by or on behalf of states, territories and possessions of the United
States and their political subdivisions, agencies and instrumentalities that
were, in the opinion of bond counsel to the issuer, exempt from Federal income
taxes at the time of their issuance. For certain shareholders, a portion of the
Portfolio's income may be subject to the alternative minimum tax ("AMT") on
tax-exempt income discussed below.
    

      Under the Tax Reform Act of 1986, interest income from municipal
obligations issued to finance certain "private activities" ("AMT-Subject Bonds")
becomes an item of "tax preference" which is subject to the AMT when received by
a person in a tax year during which he or she is subject to that tax. Such
private activity bonds include bonds issued to finance such projects as certain
solid waste disposal facilities, student loan programs and water and sewage
projects. Because interest income on AMT-Subject Bonds is taxable to certain
investors, it is expected, although there can be no guarantee, that such
municipal obligations generally will provide somewhat higher yields than other
municipal obligations of comparable quality and maturity. There is no limitation
on the percent or amount of the Portfolio's assets that may be invested in
AMT-Subject Bonds.

   
      Municipal bonds purchased for the Portfolio must, at the time of purchase,
be investment-grade municipal bonds, and at least two-thirds of the Portfolio's
municipal bonds must be rated within the three highest ratings categories by a
nationally recognized statistical rating organization ("NRSRO").
Investment-grade bonds are rated within the four highest ratings categories by
an NRSRO, such as those rated Aaa, Aa, A and Baa by Moody's Investors Service,
Inc. ("Moody's") or AAA, AA, A and BBB by Standard & Poor's Ratings Group
("S&P"); pre-refunded bonds escrowed by U.S. Treasury obligations are considered
AAA rated (the highest 
    


                                                                              11
<PAGE>

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

   
credit rating) even though the issuer does not obtain a new rating. Up to one
third of the assets of the Portfolio may be invested in municipal bonds rated in
the fourth highest category (this grade, while regarded as having an adequate
capacity to pay interest and repay principal, is considered to be of medium
quality and has speculative characteristics; in addition, changes in economic
conditions or other circumstances are more likely to lead to a weakened
capacity to make principal and interest payments than is the case with higher
grade bonds) or in unrated municipal bonds if, based upon credit analysis by the
Manager, it is believed that such securities are at least of comparable quality
to those securities in which the Portfolio may invest. In determining the
suitability of an investment in an unrated municipal bond, the Manager will take
into consideration debt service coverage, the purpose of the financing, history
of the issuer, existence of other rated securities of the issuer and other
general conditions as may be relevant, including comparability to other issues.
After the Portfolio purchases a municipal bond, the issue may cease to be rated
or its rating may be reduced below the minimum required for purchase. Such an
event would not require the elimination of the issue from the Portfolio but the
Manager will consider such an event in determining whether the Portfolio should
continue to hold the security.

      The Portfolio's short-term municipal obligations will be limited to
high-grade obligations (obligations that are secured by the full faith and
credit of the United States or are rated MIG I or MIG 2, VMIG I or VMIG 2 or
Prime-1 or Aa or better by Moody's or SP-I +, SP-I, SP-2, or A-1 or AA or better
by S&P, or have a rating within comparable categories by any other NRSRO, or
obligations that are unrated but determined by the Manager to be comparable).
Among the types of short-term instruments in which the Portfolio may invest are
floating- or variable-rate demand instruments, tax-exempt commercial paper
(generally having a maturity of less than nine months), and other types of notes
generally having maturities of less than three years, such as Tax Anticipation
Notes, Revenue Anticipation Notes, Tax and Revenue Anticipation Notes and Bond
Anticipation Notes. Demand instruments usually have an indicated maturity of
more than one year, but contain a demand feature that enables the holder to
liquidate the investment on no more than 30 days' notice; variable-rate demand
instruments provide for automatic establishment of a new interest rate on set
dates; floating-rate demand instruments provide for automatic adjustment of
their interest rates whenever some other specified interest rate changes (e.g.,
the prime rate). The Portfolio may purchase participation interests in
variable-rate tax exempt securities (such as industrial development bonds) owned
by banks. Participations are frequently backed by an irrevocable letter of
credit or guarantee of a bank that the Manager has determined meets the
prescribed quality standards for the Portfolio. Participation interests will be
purchased only if management believes interest income on such interests will be
tax exempt when distributed as dividends to shareholders.
    


12
<PAGE>

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

   
      The Portfolio will not invest more than 15% of the value of its net assets
in illiquid securities, including those for which there is no established
market.

      The Portfolio may purchase new issues of municipal obligations on a
when-issued basis, i.e. delivery and payment normally take place 15 to 45 days
after the purchase date. The payment obligation and the interest rate to be
received are each fixed on the purchase date, although no interest accrues with
respect to a when-issued security prior to its stated delivery date. During the
period between purchase and settlement, assets consisting of cash or debt
securities of any grade having a value equal to or greater than the Portfolio's
purchase commitments, provided such securities have been determined by the
Manager to be liquid and unencumbered and are marked market daily pursuant to
guidelines established by the Board of Trustees, will be segregated at the
custodian bank. Interest rates at settlement may be lower or higher than on the
purchase date, which would result in appreciation or depreciation, respectively.
Although the Portfolio will only purchase a municipal obligation on a
when-issued basis with the intention of actually acquiring the securities, the
Portfolio may sell these securities before the settlement date if it is deemed
advisable.
    

      Portfolio transactions will be undertaken principally to accomplish the
Portfolio's objective in relation to anticipated movements in the general level
of interest rates, but the Portfolio may also engage in short-term trading
consistent with its objective.

   
      The Portfolio may borrow on a short-term basis in amounts of up to 5% of
its assets in order to facilitate the settlement of portfolio securities
transactions.

      The Portfolio may invest in municipal bond index futures contracts
(currently traded on the Chicago Board of Trade) or in listed contracts based on
U.S. government securities as a hedging policy in pursuit of its investment
objective, provided that immediately thereafter not more than 33 1/3% of its
net assets would be hedged or the amount of margin deposits on the Portfolio's
existing futures contracts would not exceed 5% of the value of its total assets.
Since any income would be taxable, it is anticipated that such investments will
be made only in those circumstances when the Manager anticipates the possibility
of an extreme change in interest rates or market conditions but does not wish to
liquidate the Portfolio's securities. A further discussion of futures contracts
and their associated risks is contained in the SAI.

      The Portfolio 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 
    


                                                                              13
<PAGE>

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

rates than debt obligations of comparable maturities which make periodic
distributions 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.

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

      The liquidity of municipal lease obligations varies. Municipal leases held
by the Portfolio will be considered illiquid securities unless the Board of
Trustees determines that the leases are readily marketable. Certain municipal
lease obligations contain "non-appropriation" clauses which provide that the
municipality has no obligation to make lease or installment purchase payments in
future years unless money is appropriated for such purpose on a yearly basis. In
the case of a "non-appropriation" lease, the Portfolio's ability to recover
under the lease in the event of non-appropriation or default will be limited
solely to the repossession of the leased property, without recourse to the
general credit of the lessee, and disposition of the property in the event of
foreclosure might be difficult. The Portfolio will not invest more than 5% of
its assets in such "non-appropriation" municipal lease obligations.

      In each of the Portfolio's prior fiscal years, 100% of the Portfolio's
dividends were exempt-interest dividends, excludable from gross income for
Federal income tax purposes. It is a fundamental policy that, under normal
market conditions, the Portfolio will seek to invest 100% of its assets -- and
the Portfolio will invest not less than 80% of its assets -- in municipal
obligations the interest on which is exempt from Federal income taxes (other
than the AMT.) The Portfolio may invest up to 20% of its assets in taxable
fixed-income securities issued or guaranteed by the full faith and credit of the
United States and may invest more than 20% of its assets in U.S. government
securities during periods when in the Manager's opinion a temporary defensive
posture is warranted, including any period when the Fund's monies available for
investment exceed the municipal obligations available for purchase that meet the
Fund's rating, maturity and other investment criteria.
    


14
<PAGE>

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

   
      Year 2000. The investment management services provided to the Fund by the
Manager and the services provided to share holders 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. The Manager 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, the Manager 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 the Manager, 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.

      In addition, the ability of issuers to make timely payments of interest
and principal or to continue their operations or services may be impaired by the
inadequate preparation of their computer systems for the year 2000. This may
adversely affect the market values of securities of specific issuers or of
securities generally if the inadequacy of preparation is perceived as widespread
or as affecting trading markets.
    

      RISK AND INVESTMENT CONSIDERATIONS

      The ability of the Portfolio to achieve its investment objective is
dependent on a number of factors, including the skills of the Manager in
purchasing municipal obligations whose issuers have the continuing ability to
meet their obligations for the payment of interest and principal when due. The
ability to achieve a high level of income is dependent on the yields of the
securities in the portfolio. Yields on municipal obligations are the product of
a variety of factors, including the general conditions of the municipal bond
markets, the size of a particular offering, the maturity of the obligation and
the rating of the issue. In general, the longer the maturity of a municipal
obligation, the higher the rate of interest it pays. However, a longer average
maturity is generally associated with a higher level of volatility in the market
value of a municipal obligation. During periods of falling interest rates, the
values of long-term municipal obligations generally rise. Conversely, during
periods of rising interest rates, the values of such securities generally
decline. Changes in the value of Portfolio securities will not affect interest
income derived from those securities but will affect the Portfolio's net asset
value. Since the Portfolio's objective is to provide high current income, it
will invest in municipal obligations with an emphasis on income rather than
stability of net asset values.

      From time to time, proposals have been introduced before Congress for the
purpose of restricting or eliminating the Federal income tax exemption for
interest on 


                                                                              15
<PAGE>

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

   
municipal obligations, and similar proposals may be introduced in the future. If
one of these proposals were enacted, the availability of tax exempt obligations
for investment by the Portfolio and the value of the portfolio securities would
be affected. The Board of Trustees would then reevaluate the Portfolio's
investment objective and management policies.
    

      PORTFOLIO TRANSACTIONS AND TURNOVER

   
      The Portfolio's portfolio securities ordinarily are purchased from and
sold to parties acting as either principal or agent. Newly issued securities
ordinarily are purchased directly from the issuer or from an underwriter; other
purchases and sales usually are placed with those dealers from which it appears
that the best price or execution will be obtained. Usually, no brokerage
commissions, as such, are paid by the Portfolio, since purchases and sales of
municipal bonds and other debt securities are traded through broker-dealers in
principal transactions, although the price usually includes a compensation to
the dealer.
    

      The Portfolio cannot accurately predict its portfolio turnover rate, but
anticipates that the annual turnover will not exceed 100%. An annual turnover
rate of 100% would occur when all of the securities held by the Portfolio are
replaced one time during a period of one year. The Manager will not consider
turnover rate a limiting factor in making investment decisions consistent with
the investment objective and policies of the Portfolio. See "Financial
Highlights" for the Portfolio's annual turnover rate during each year for the
last 10 years.

--------------------------------------------------------------------------------
Valuation of Shares
--------------------------------------------------------------------------------

   
      The Portfolio's net asset value per share is determined as of the close of
regular trading on the NYSE, which is currently 4:00 p.m. (New York City time),
on each day that the NYSE is open, by dividing the value of the Portfolio's net
asset values attributable to each Class by the total number of shares of the
Class outstanding.

      When, in the judgment of the pricing service, quoted bid prices for
investments are readily available and are representative of the bid side of the
market, these investments are valued at the mean between the quoted bid and
asked prices. Investments for which, in the judgment of the pricing service,
there are no readily obtain able market quotations (which may constitute a
majority of the portfolio securities) are carried at fair value of securities of
similar type, yield and maturity. Pricing services generally determine value by
reference to transactions in municipal obligations, quotations from municipal
bond dealers, market transactions in comparable securities and various
relationships between securities. Short-term instruments maturing within 60 days
will be valued at cost plus (minus) amortized discount (premium), if any, when
amortized cost approximates fair value. Securities and other 
    


16
<PAGE>

--------------------------------------------------------------------------------
Valuation of Shares (continued)
--------------------------------------------------------------------------------

   
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 Trustees.
    

--------------------------------------------------------------------------------
Dividends, Distributions and Taxes
--------------------------------------------------------------------------------

      DIVIDENDS AND DISTRIBUTIONS

   
      Dividends from the Portfolio's net investment income are paid monthly, and
any net realized capital gains are distributed at least annually.
    

      If a shareholder does not otherwise instruct, dividends and capital gains
distributions will be reinvested automatically in additional shares of the same
Class at net asset value, subject to no sales charge or CDSC.

      Income dividends and capital gains distributions that are invested are
credited to shareholders' accounts in additional shares at the net asset value
as of the close of business on the payment date. A shareholder may change the
option at any time by notifying his or her Smith Barney Financial Consultant.
Accounts held directly by the Fund's transfer agent, First Data Investor
Services Group, Inc. ("First Data"), should notify First Data in writing at
least five business days prior to the payment date to permit the change to be
entered in the shareholder's account.

   
      The per share dividends on Class B and Class L shares of the Portfolio may
be lower than the per share dividends on Class A and Class Y shares principally
as a result of the distribution fee applicable to Class B and Class L shares.
The per share dividends on Class A shares of the Portfolio may be lower than the
per share dividends on Class Y shares principally as a result of the service
fee applicable to Class A shares. Distributions of capital gains, if any, will
be in the same amount for Class A, Class B, Class L and Class Y shares.
    

      TAXES

   
      The following is a summary of the material federal tax considerations
affecting the Portfolio and its shareholders. Please refer to the SAI for
further discussion. In addition to the considerations described below and in the
SAI, there may be other federal, state, local, or foreign tax implications to
consider. Because taxes are a complex matter, prospective shareholders are urged
to consult their tax advisors for more detailed information with respect to the
tax consequences of an investment.

      The Portfolio intends to qualify, as it has in prior years, under
Subchapter M of the Internal Revenue Code (the "Code") for tax treatment as a
separate regulated investment company. In each taxable year that the Portfolio
qualifies, so long as such qualification is in the best interests of its
shareholders, the Portfolio will pay no federal 
    


                                                                              17
<PAGE>

--------------------------------------------------------------------------------
Dividends, Distributions and Taxes (continued)
--------------------------------------------------------------------------------

   
income tax on its net investment income and long-term capital gain that is
distributed to shareholders, provided the Portfolio distributes at least 90% of
its net investment income and net short-term capital gains for the taxable year.
The Portfolio also intends to satisfy conditions that will enable it to pay
"exempt-interest dividends" to shareholders. Exempt-interest dividends are
generally not subject to regular federal income taxes, although they may be
considered taxable for certain state and local income (or intangible) tax
purposes.

      Exempt-interest dividends attributable to interest received by the
Portfolio on certain "private-activity" bonds will be treated as a specific tax
preference item to be included in a shareholder's alternative minimum tax
computation. All exempt-interest dividends will be a component of the "current
earnings" adjustment item for purposes of the federal corporate alternative
minimum tax. Exempt-interest dividends derived from the interest earned on
private activity bonds will not be exempt from federal income tax for those
shareholders who are "substantial users" (or persons related to "substantial
users") of the facilities financed by these bonds.

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

      The interest expense incurred by a shareholder on borrowing made to
purchase or carry Portfolio shares is not deductible for federal income tax
purposes to the extent related to the exempt-interest dividends received on such
shares.

      Dividends paid by the Portfolio from interest income on taxable
investments, net realized short-term securities gains and all or a portion of
any gains realized from the sale or other disposition of certain market discount
bonds are subject to federal income tax as ordinary income. Distributions, if
any, from net realized long-term securities gains derived from the sale of bonds
held by the Portfolio for more than one year are taxable as long-term capital
gains regardless of the length of time a shareholder has owned Portfolio shares.

      Shareholders are required to pay tax on all taxable distributions even if
those distributions are automatically reinvested in additional shares. None of
the dividends paid by the Portfolio will qualify for the corporate dividends
received deduction. The Fund will inform shareholders of the source and tax
status of all distributions promptly after the close of each calendar year.

      A shareholder's gain or loss on the disposition of shares (whether by
redemption, sale or exchange), generally will be a long-term or short-term gain
or loss depending on whether the shares had been owned for more than 12 months,
or 12 months or less, respectively. Losses realized by a shareholder on the
disposition of shares owned for six months or less will be treated as a
long-term capital loss to the extent a capital gain dividend had been
distributed on such shares.
    


18
<PAGE>

--------------------------------------------------------------------------------
Dividends, Distributions and Taxes (continued)
--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------
Purchase of Shares
--------------------------------------------------------------------------------
    

      GENERAL

   
      The Portfolio offers four Classes of shares. Class A and Class L shares
are sold to investors with an initial sales charge; Class B shares are sold
without an initial sales charge; Class B and Class L shares are subject to a
CDSC, payable upon certain redemptions. Class Y shares are sold without an
initial sales charge or CDSC and are available only to investors investing a
minimum of $15,000,000 (except for purchases of Class Y shares by Smith Barney
Concert Allocation Series Inc., for which there is no minimum purchase amount).
Until June 25, 1999, purchases of Class L shares by investors who were holders
of Class C shares of the Portfolio on June 12, 1998 will not be subject to the
1% initial sales charge. See "Prospectus Summary -- Alternative Purchase
Arrangements" for a discussion of factors to consider in selecting which Class
of shares to purchase.

      Purchases of Portfolio shares must be made through a brokerage account
maintained with Smith Barney, an Introducing Broker or an investment dealer in
the selling group. When purchasing shares of the Portfolio, investors must
specify whether the purchase is for Class A, Class B, Class L or Class Y shares.
Smith Barney and other broker-dealers may charge their customers an annual
account maintenance fee in connection with a brokerage account through which an
investor purchases or holds shares. Accounts held directly at First Data are not
subject to a maintenance fee.

      Investors in Class A, Class B and Class L shares may open an account by
making an initial investment of at least $1,000 for each account in the
Portfolio. Investors in Class Y shares may open an account by making an initial
investment of at least $15,000,000. Subsequent investments of at least $50 may
be made for all Classes. For shareholders purchasing shares of the Portfolio
through the Systematic Investment Plan on a monthly basis, the minimum initial
investment requirement for Class A, Class B and Class L shares and the
subsequent investment requirement for all Classes is $25. For shareholders
purchasing shares of the
    


                                                                              19
<PAGE>

--------------------------------------------------------------------------------
Purchase of Shares (continued)
--------------------------------------------------------------------------------

   
Portfolio through the Systematic Investment Plan on a quarterly basis, the
minimum initial investment requirement for Class A, Class B and Class L shares
and the subsequent investment requirement for all Classes is $50. There are no
minimum investment requirements for Class A shares for employees of Travelers
and its subsidiaries, including Smith Barney, and their spouses and children, a
unitholder who invests distributions from a UIT sponsored by Smith Barney, and
Directors or Trustees of any Travelers-affiliated funds, including the Smith
Barney Mutual Funds, and their spouses and children. The Fund reserves the right
to waive or change minimums, to decline any order to purchase its shares and to
suspend the offering of shares from time to time. Shares purchased will be held
in the shareholder's account by the Fund's transfer agent, First Data. Share
certificates are issued only upon a shareholder's written request to First Data.
It is not recommended that the Portfolio be used as a vehicle for Keogh, IRA or
other qualified retirement plans.

      Purchase orders received by the Fund or Smith Barney prior to the close of
regular trading on the NYSE on any day the Portfolio calculates its net asset
value are priced according to the net asset value determined on that day (the
"trade date"). Orders received by dealers or Introducing Brokers prior to the
close of regular trading on the NYSE on any day the Portfolio calculates its net
asset value are priced according to the net asset value determined on that day,
provided the order is received by the Fund or Smith Barney prior to Smith
Barney's close of business. For shares purchased through Smith Barney or
Introducing Brokers purchasing through the Distributor, payment for Portfolio
shares is due on the third business day after the trade date. In all other
cases, payment must be made with the purchase order.
    

      SYSTEMATIC INVESTMENT PLAN

      Shareholders may make additions to their accounts at any time by
purchasing shares through a service known as the Systematic Investment Plan.
Under the Systematic Investment Plan, Smith Barney or First Data is authorized
through pre-authorized transfers of at least $25 on a monthly basis or at least
$50 on a quarterly basis to charge the regular bank account or other financial
institution indicated by the shareholder to provide systematic additions to the
shareholder's Portfolio account. A shareholder who has insufficient funds to
complete the transfer will be charged a fee of up to $25 by Smith Barney or
First Data. The Systematic Investment Plan also authorizes Smith Barney to
apply cash held in the shareholder's Smith Barney brokerage account or redeem
the shareholder's shares of a Smith Barney money market fund to make additions
to the account. Additional information is available from the Fund or a Smith
Barney Financial Consultant.

   
      INITIAL SALES CHARGE ALTERNATIVE -- CLASS A SHARES
    

      The sales charges applicable to purchases of Class A shares of the
Portfolio are as follows:


20
<PAGE>

--------------------------------------------------------------------------------
Purchase of Shares (continued)
--------------------------------------------------------------------------------

================================================================================
                                   Sales Charge                  Dealer's
                               % of         % of Amount      Reallowance as % of
Amount of Investment       Offering Price     Invested         Offering Price
--------------------------------------------------------------------------------
Less than    $25,000            4.00%           4.17%              3.60%
$25,000 -     49,999            3.50            3.63               3.15
 50,000 -     99,999            3.00            3.09               2.70
100,000 -    249,999            2.50            2.56               2.25
250,000 -    499,999            1.50            1.52               1.35
500,000 and over   *              *               *                  *
================================================================================

   
      * Purchases of Class A shares of $500,000 or more will be made at net
asset value without any initial sales charge, but will be subject to a CDSC of
1.00% on redemptions made within 12 months of purchase. The CDSC on Class A
shares is payable to Smith Barney, which compensate Smith Barney Financial
Consultants and other dealers whose clients make purchases of $500,000 or more.
The CDSC is waived in the same circumstances in which the CDSC applicable to
Class B and Class L shares is waived. See "Deferred Sales Charge Alternatives"
and "Waivers of CDSC."

      The reduced sales charges shown above apply to the aggregate of purchases
of Class A shares of the Portfolio made at one time by "any person," which
includes an individual and his or her immediate family, or a trustee or other
fiduciary of a single trust estate or single fiduciary account.

      INITIAL SALES CHARGE WAIVERS -- CLASS A SHARES

      Purchases of Class A shares may be made at net asset value without a sales
charge in the following circumstances: (a) sales to (i) Board members and
employees of Travelers and its subsidiaries and of any Travelers-affiliated
funds, including the Smith Barney Mutual Funds (including retired Board members
and employees); the immediate families of such persons (including the surviving
spouse of a deceased Board member or employee); and to a pension, profit-sharing
or other benefit plan for such persons and (ii) employees of members of the
National Association of Securities Dealers, Inc., provided such sales are made
upon the assurance of the purchaser that the purchase is made for investment
purposes and that the securities will not be resold except through redemption or
repurchase; (b) offers of Class A shares to any other investment company to
effect the combination of such company with the Portfolio by merger,
acquisition of assets or other wise; (c) purchases of Class A shares by any
client of a newly employed Smith Barney Financial Consultant (for a period up to
90 days from the commencement of the Financial Consultant's employment with
Smith Barney), on the condition the purchase of Class A shares is made with the
proceeds of the redemption of shares of a mutual fund which (i) was sponsored by
the Financial Consultant's prior employer, (ii) was sold to the client by the
Financial Consultant and (iii) was subject to a sales charge; (d) purchases by
shareholders who have redeemed Class A shares in the Portfolio (or Class A
shares of another fund of the Smith Barney 
    


                                                                              21
<PAGE>

--------------------------------------------------------------------------------
Purchase of Shares (continued)
--------------------------------------------------------------------------------

   
Mutual Funds that are sold with a sales charge) and who wish to reinvest their
redemption proceeds in the Portfolio, provided the reinvestment is made within
60 calendar days of the redemption; (e) purchases by accounts managed by
registered investment advisory subsidiaries of Travelers; (f) investments of
distributions from a UIT sponsored by Smith Barney; and (g) purchases by
investors participating in a Smith Barney fee-based arrangement. In order to
obtain such discounts, the purchaser must provide sufficient information at the
time of purchase to permit verification that the purchase would qualify for the
elimination of the sales charge.
    

      RIGHT OF ACCUMULATION

   
      Class A shares of the Portfolio may be purchased by "any person" (as
defined above) at a reduced sales charge or at net asset value determined by
aggregating the dollar amount of the new purchase and the total net asset value
of all Class A shares of the Portfolio and other Smith Barney Mutual Funds
offered with a sales charge, as currently listed under "Exchange Privilege,"
then held by such person and applying the sales charge applicable to such
aggregate. In order to obtain such discount, the purchaser must provide
sufficient information at the time of purchase to permit verification that the
purchase qualifies for the reduced sales charge. The right of accumulation is
subject to modification or discontinuance at any time with respect to all shares
purchased thereafter.
    

      GROUP PURCHASES

   
      Upon completion of certain automated systems, a reduced sales charge or
purchase at net asset value will also be available to employees (and partners)
of the same employer purchasing as a group, provided each participant makes the
minimum initial investment required. The sales charge applicable to purchases
by each member of such a group will be determined by the table set forth above
under "Initial Sales Charge Alternative -- Class A Shares", and will be based
upon the aggregate sales of Class A shares of Smith Barney Mutual Funds offered
with a sales charge to, and share holdings of, all members of the group. To be
eligible for such reduced sales charges or to purchase at net asset value, all
purchases must be made pursuant to an employer- or partnership-sanctioned plan
meeting certain requirements. One such requirement is that the plan must be
open to specified partners or employees of the employer and its subsidiaries, if
any. Such plan may, but is not required to, provide for payroll deductions. The
Distributor may also offer a reduced sales charge or net asset value purchase
for aggregating related fiduciary accounts under such conditions that it will
realize economies of sales efforts and sales-related expenses. An individual who
is a member of a qualified group may also purchase Class A shares at the reduced
sales charge applicable to the group as a whole. The sales charge is based upon
the aggregate dollar value of Class A shares offered with a sales charge that
have been previously purchased and are still 
    


22
<PAGE>

--------------------------------------------------------------------------------
Purchase of Shares (continued)
--------------------------------------------------------------------------------

   
owned by the group, plus the amount of the current purchase. A "qualified group"
is one which (a) has been in existence for more than six months, (b) has a
purpose other than acquiring Portfolio shares at a discount and (c) satisfies
uniform criteria which enable Smith Barney to realize economies of scale in its
costs of distributing shares. A qualified group must have more than 10 members,
must be available to arrange for group meetings between representatives of the
Portfolio and the members and must agree to include sales and other materials
related to the Portfolio in its publications and mailings to members at no cost
to the Distributor. In order to obtain such reduced sales charge or to purchase
at net asset value, the purchaser must provide sufficient information at the
time of purchase to permit verification that the purchase qualifies for the
reduced sales charge. Approval of group purchase reduced sales charge plans is
subject to the discretion of the Distributor.
    

      LETTER OF INTENT

      Class A Shares. A Letter of Intent for amounts of $50,000 or more provides
an opportunity for an investor to obtain a reduced sales charge by aggregating
investments over a 13-month period, provided that the investor refers to such
Letter when placing orders. For purposes of a Letter of Intent, the "Amount of
Investment" as referred to in the preceding sales charge table includes
purchases of all Class A shares of the Port folio and other funds of the Smith
Barney Mutual Funds offered with a sales charge over the 13-month period based
on the total amount of intended purchases plus the value of all Class A shares
previously purchased and still owned. An alternative is to compute the 13-month
period starting up to 90 days before the date of execution of a Letter of
Intent. Each investment made during the period receives the reduced sales
charge applicable to the total amount of the investment goal. If the goal is not
achieved within the period, the investor must pay the difference between the
sales charges applicable to the purchases made and the charges previously paid,
or an appropriate number of escrowed shares will be redeemed. Please contact a
Smith Barney Financial Consultant or First Data to obtain a Letter of Intent
application.

   
      Class Y Shares. A Letter of Intent may also be used as a way for investors
to meet the minimum investment requirement for Class Y shares. Such investors
must make an initial minimum purchase of $5,000,000 in Class Y shares of the
Portfolio and agree to purchase a total of $15,000,000 of Class Y shares of the
Portfolio within 13 months from the date of the Letter. If a total investment of
$15,000,000 is not made within the 13-month period, all Class Y shares purchased
to date will be transferred to Class A shares, where they will be subject to all
fees (including a service fee of 0.15%) and expenses applicable to the
Portfolio's Class A shares, which may include a CDSC of 1.00%. Please contact a
Smith Barney Financial Consultant or First Data for further information.
    


                                                                              23
<PAGE>

--------------------------------------------------------------------------------
Purchase of Shares (continued)
--------------------------------------------------------------------------------

   
      INITIAL SALES CHARGE ALTERNATIVE -- CLASS L SHARES

      The sales charge applicable to purchases of Class L shares is 1.00% of the
public offering price, which is 1.01% of the amount invested, and all of this
amount is reallowed to dealers who sell Class L shares.

      The initial sales charge on Class L shares is paid to the Distributor.
Members of the selling group may be deemed to be underwriters of the Fund as
defined in the Securities Act of 1933, as amended.
    

      DEFERRED SALES CHARGE ALTERNATIVES

   
      "CDSC Shares" include any shares for which a CDSC may be imposed on
certain redemptions. "CDSC Shares" are: (a) Class B shares; (b) Class L
shares; and (c) Class A shares that were purchased without an initial sales
charge but subject to a CDSC. 

      Any applicable CDSC will be assessed on an amount equal to the lesser of
the original investment in the shares being redeemed or their account value at
the time of redemption. CDSC Shares that are redeemed will not be subject to a
CDSC to the extent that the value of such shares represents: (a) capital
appreciation of Portfolio assets; (b) reinvestment of dividends or capital gain
distributions; (c) with respect to Class B shares, shares redeemed more than
five years after their purchase; or (d) with respect to Class L shares and Class
A shares that are CDSC Shares, shares redeemed more than 12 months after their
purchase.

      Class L shares and Class A shares that are CDSC Shares are subject to a
1.00% CDSC if redeemed within 12 months of purchase. In circumstances in which
the CDSC is imposed on Class B shares, the amount of the charge will depend on
the number of years since the shareholder made the purchase payment from which
the amount is being redeemed. Solely for purposes of determining the number of
years since a purchase payment, all purchase payments made during a month will
be aggregated and deemed to have been made on the last day of the preceding
Smith Barney statement month. The following table sets forth the rates of the
CDSC for redemptions of Class B shares by shareholders of the Portfolio: 
    

Year Since Purchase
Payment Was Made                                                           CDSC
--------------------------------------------------------------------------------
First                                                                      4.50%
Second                                                                     4.00
Third                                                                      3.00
Fourth                                                                     2.00
Fifth                                                                      1.00
Sixth and thereafter                                                       0.00
--------------------------------------------------------------------------------

      Class B shares will convert automatically to Class A shares eight years
after the date on which they were purchased and thereafter will no longer be
subject to any distribution fees. There will also be converted at that time such
proportion of 


24
<PAGE>

--------------------------------------------------------------------------------
Purchase of Shares (continued)
--------------------------------------------------------------------------------

Class B Dividend Shares owned by the shareholder as the ratio of the total
number of his or her Class B shares converting at the time bears to the total
number of outstanding Class B shares (other than Class B Dividend Shares) owned
by the shareholder. See "Prospectus Summary -- Alternative Purchase Arrangements
-- Class B Shares Conversion Feature."

   
      In determining the applicability of any CDSC, it will be assumed that a
redemption is made first of shares representing capital appreciation, next of
shares representing the reinvestment of dividends and capital gain distributions
and finally of other shares held by the shareholder for the longest period of
time. The length of time that CDSC Shares acquired through an exchange have been
held will be calculated from the date that the Class B and Class L shares
exchanged were initially acquired in one of the other applicable Smith Barney
Mutual Funds, and Portfolio shares being redeemed will be considered to
represent, as applicable, capital appreciation or dividend and capital gain
distribution reinvestments in such other funds. For Federal income tax purposes,
the amount of the CDSC will reduce the gain or increase the loss, as the case
may be, on the amount realized on redemption. The amount of any CDSC will be
paid to Smith Barney.
    

      To provide an example, assume an investor purchased 100 Class B shares at
$10 per share for a cost of $1,000. Subsequently, the investor acquired five
additional shares through dividend reinvestment. During the fifteenth month
after the purchase, the investor decided to redeem $500 of his or her
investment. Assuming at the time of the redemption the net asset value had
appreciated to $12 per share, the value of the investor's shares would be $1,260
(105 shares at $12 per share). The CDSC would not be applied to the amount which
represents appreciation ($200) and the value of the reinvested dividend shares
($60). Therefore, $240 of the $500 redemption proceeds ($500 minus $260) would
be charged at a rate of 4.00% (the applicable rate for Class B shares) for a
total deferred sales charge of $9.60.

      WAIVERS OF CDSC

      The CDSC will be waived on: (a) exchanges (see "Exchange Privilege"); (b)
automatic cash withdrawals in amounts equal to or less than 1.00% per month of
the value of the shareholder's shares at the time the withdrawal plan commences
(see "Automatic Cash Withdrawal Plan"), provided, however, that automatic cash
withdrawals in amounts equal to or less than 2.00% per month of the value of the
shareholder's shares will be permitted for withdrawal plans that were
established prior to November 7, 1994; (c) redemptions of shares within 12
months following the death or disability of the shareholder; (d) involuntary
redemptions; and (e) redemptions of shares to effect a combination of the
Portfolio with any investment company by merger, acquisition of assets or
otherwise. In addition, a shareholder who has redeemed shares from other funds
of the Smith Barney Mutual Funds may, under certain circumstances, reinvest all
or part of the redemption proceeds within 60 days and receive pro rata credit
for any CDSC imposed on the prior redemption.


                                                                              25
<PAGE>
--------------------------------------------------------------------------------
Purchase of Shares (continued)
--------------------------------------------------------------------------------

      CDSC waivers will be granted subject to confirmation (by Smith Barney in
the case of shareholders who are also Smith Barney clients or by First Data in
the case of all other shareholders) of the shareholder's status or holdings, as
the case may be.

--------------------------------------------------------------------------------
Exchange Privilege
--------------------------------------------------------------------------------

   
      Except as otherwise noted below, shares of each Class may be exchanged for
shares of the same Class in the following funds of the Smith Barney Mutual
Funds, to the extent shares are offered for sale in the shareholder's state of
residence. Exchanges of Class A, Class B and Class L shares are subject to the
minimum investment requirements and all shares are subject to other
requirements of the fund into which exchanges are made.
    

Fund Name
Growth Funds

   
        Concert Peachtree Growth Fund
        Concert Social Awareness Fund
        Smith Barney Aggressive Growth Fund Inc.
        Smith Barney Appreciation Fund Inc.
        Smith Barney Balanced Fund
        Smith Barney Contrarian Fund
        Smith Barney Convertible Fund
        Smith Barney Fundamental Value Fund Inc.
        Smith Barney Funds, Inc. -- Large Cap Value Fund
        Smith Barney Large Cap Blend Fund
        Smith Barney Large Capitalization Growth Fund
        Smith Barney Natural Resources Fund Inc.
        Smith Barney Premium Total Return Fund
        Smith Barney Small Cap Blend Fund, Inc.
        Smith Barney Special Equities Fund

Taxable Fixed-Income Funds

    **  Smith Barney Adjustable Rate Government Income Fund
        Smith Barney Diversified Strategic Income Fund
   ***  Smith Barney Funds, Inc. -- Short-Term High Grade Bond Fund
        Smith Barney Funds, Inc. -- U.S. Government Securities Fund
        Smith Barney Government Securities Fund
        Smith Barney High Income Fund
        Smith Barney Investment Grade Bond Fund
        Smith Barney Managed Governments Fund Inc.
        Smith Barney Total Return Bond Fund
    

Tax-Exempt Funds

        Smith Barney Arizona Municipals Fund Inc.
        Smith Barney California Municipals Fund Inc.


26
<PAGE>

--------------------------------------------------------------------------------
Exchange Privilege (continued)
--------------------------------------------------------------------------------

     *  Smith Barney Intermediate Maturity California Municipals Fund
     *  Smith Barney Intermediate Maturity New York Municipals Fund
        Smith Barney Managed Municipals Fund Inc.
        Smith Barney Massachusetts Municipals Fund
   
        Smith Barney Municipal High Income Fund
    
        Smith Barney Muni Funds -- Florida Portfolio
        Smith Barney Muni Funds -- Georgia Portfolio
     *  Smith Barney Muni Funds -- Limited Term Portfolio
        Smith Barney Muni Funds -- New York Portfolio
        Smith Barney Muni Funds -- Pennsylvania Portfolio
        Smith Barney New Jersey Municipals Fund Inc.
        Smith Barney Oregon Municipals Fund

   
Global-International Funds

        Smith Barney Hansberger Global Small Cap Value Fund
        Smith Barney Hansberger Global Value Fund
    
        Smith Barney World Funds, Inc. -- Emerging Markets Portfolio
        Smith Barney World Funds, Inc. -- European Portfolio
        Smith Barney World Funds, Inc. -- Global Government Bond Portfolio
        Smith Barney World Funds, Inc. -- International Balanced Portfolio
        Smith Barney World Funds, Inc. -- International Equity Portfolio
        Smith Barney World Funds, inc. -- Pacific Portfolio

Smith Barney Concert Allocation Series Inc.

        Smith Barney Concert Allocation Series Inc. -- Balanced Portfolio
        Smith Barney Concert Allocation Series Inc. -- Conservative Portfolio
   
        Smith Barney Concert Allocation Series Inc. -- Global Portfolio
    
        Smith Barney Concert Allocation Series Inc. -- Growth Portfolio
        Smith Barney Concert Allocation Series Inc. -- High Growth Portfolio
        Smith Barney Concert Allocation Series Inc. -- Income Portfolio

Money Market Funds

     +  Smith Barney Exchange Reserve Fund
   ***  Smith Barney Money Funds, Inc. -- Cash Portfolio
   ***  Smith Barney Money Funds, Inc. -- Government Portfolio
    ++  Smith Barney Money Funds, Inc. -- Retirement Portfolio
   ***  Smith Barney Municipal Money Market Fund, Inc.
   ***  Smith Barney Muni Funds -- California Money Market Portfolio
   ***  Smith Barney Muni Funds -- New York Money Market Portfolio

----------
   
 *    Available for exchange with Class A, Class L and Class Y shares of the
      Portfolio. 
    

 **   Available for exchange with Class A and Class B shares of the Portfolio.
***   Available for exchange with Class A and Class Y shares of the Portfolio.

   
  +   Available for exchange with Class B and Class L shares of the Portfolio.
    

 ++   Available for exchange with Class A shares of the Portfolio.

      Class B Exchanges. In the event a Class B shareholder wishes to exchange
all or a portion of his or her shares in any of the funds imposing a higher CDSC


                                                                              27
<PAGE>

--------------------------------------------------------------------------------
Exchange Privilege (continued)
--------------------------------------------------------------------------------

than that imposed by the Portfolio, the exchanged Class B shares will be subject
to the higher applicable CDSC. Upon an exchange, the new Class B shares will be
deemed to have been purchased on the same date as the Class B shares of the
Portfolio that have been exchanged.

   
      Class L Exchanges. Upon an exchange, the new Class L shares will be deemed
to have been purchased on the same date as the Class L shares of the Portfolio
that have been exchanged.
    

      Class A and Class Y Exchanges. Class A and Class Y shareholders of the
Portfolio who wish to exchange all or a portion of their shares for shares of
the respective Class in any of the funds identified above may do so without
imposition of any charge.

   
      Additional Information Regarding the Exchange Privilege. Excessive
exchange transactions may be detrimental to the Portfolio's performance and its
shareholders. The Manager may determine that a pattern of frequent exchanges is
excessive and contrary to the best interests of the Portfolio's other
shareholders. In this event, the Fund may, at its discretion, decide to limit
additional purchases and/or exchanges by the shareholder. Upon such a
determination, the Fund will provide notice in writing or by telephone to the
shareholder at least 15 days prior to suspending the exchange privilege and
during the 15 day period the shareholder will be required to (a) redeem his or
her shares in the Portfolio or (b) remain invested in the Portfolio or exchange
into any of the funds of the Smith Barney Mutual Funds ordinarily available,
which position the shareholder would be expected to maintain for a significant
period of time. All relevant factors will be considered in determining what
constitutes an abusive pattern of exchanges.
    

      Certain shareholders may be able to exchange shares by telephone. See
"Redemption of Shares -- Telephone Redemption and Exchange Program." Exchanges
will be processed at the net asset value next determined. Redemption procedures
discussed below are also applicable for exchanging shares, and ex changes will
be made upon receipt of all supporting documents in proper form. If the account
registration of the shares of the fund being acquired is identical to the
registration of the shares of the fund exchanged, no signature guarantee is
required. A capital gain or loss for tax purposes will be realized upon the
exchange, depending upon the cost or other basis of shares redeemed. Before
exchanging shares, investors should read the current prospectus describing the
shares to be acquired. The Portfolio reserves the right to modify or discontinue
exchange privileges upon 60 days' prior notice to shareholders.


28
<PAGE>

--------------------------------------------------------------------------------
Redemption of Shares
--------------------------------------------------------------------------------

      The Fund is required to redeem the shares of the Portfolio tendered to it,
as described below, at a redemption price equal to their net asset value per
share next determined after receipt of a written request in proper form at no
charge other than any applicable CDSC. Redemption requests received after the
close of regular trading on the NYSE are priced at the net asset value next
determined.

      If a share holder holds shares in more than one Class, any request for
redemption must specify the Class being redeemed. In the event of a failure to
specify which Class, or if the investor owns fewer shares of the Class than
specified, the redemption request will be delayed until the Fund's transfer
agent receives further instructions from Smith Barney, or if the shareholder's
account is not with Smith Barney, from the shareholder directly. The redemption
proceeds will be remitted on or before the third business day following receipt
of proper tender, except on any days on which the NYSE is closed or as permitted
under the 1940 Act in extraordinary circumstances. Generally, if the redemption
proceeds are remitted to a Smith Barney brokerage account, these funds will not
be invested for the shareholder's benefit without specific instruction and Smith
Barney will benefit from the use of temporarily uninvested funds. Redemption
proceeds for shares purchased by check, other than a certified or official bank
check, will be remitted upon clearance of the check, which may take up to ten
days or more.

      Shares held by Smith Barney as custodian must be redeemed by submitting a
written request to a Smith Barney Financial Consultant. Shares other than those
held by Smith Barney as custodian may be redeemed through an investor's
Financial Consultant, Introducing Broker or dealer in the selling group, or by
submitting a written request for redemption to:

   
      Smith Barney Muni Funds/National Portfolio 
      Class A, B, L or Y (please specify) 
      c/o First Data Investor Services Group, Inc.
      P.O. Box 5128
      Westborough, Massachusetts 01581-5128

      A written redemption request must (a) state the Class and number or dollar
amount of shares to be redeemed, (b) identify the shareholder's account number
and (c) be signed by each registered owner exactly as the shares are registered.
If the shares to be redeemed were issued in certificate form, the certificates
must be endorsed for transfer (or be accompanied by an endorsed stock power) and
must be submitted to First Data together with the redemption request. Any
signature appearing on a share certificate, stock power or written redemption
request in excess of $10,000 must be guaranteed by an eligible guarantor
institution such as a domestic bank, savings and loan institution, domestic
credit union, member bank of the Federal Reserve System or member firm of a
national securities exchange. Written redemption requests of $10,000 or less do
not require a signature guarantee unless
    


                                                                              29
<PAGE>

--------------------------------------------------------------------------------
Redemption of Shares (continued)
--------------------------------------------------------------------------------

more than one such redemption request is made in any 10-day period. Redemption
proceeds will be mailed to an investor's address of record. First Data may
require additional supporting documents for redemptions made by corporations,
executors, administrators, trustees or guardians. A redemption request will not
be deemed properly received until First Data receives all required documents in
proper form.

      AUTOMATIC CASH WITHDRAWAL PLAN

      The Portfolio offers shareholders an automatic cash withdrawal plan, under
which shareholders who own shares with a value of at least $10,000 may elect to
receive cash payments of at least $50 monthly or quarterly. The withdrawal plan
will be carried over on exchanges between funds or Classes of the Portfolio. Any
applicable CDSC will not be waived on amounts withdrawn by a shareholder that
exceed 1.00% per month of the value of the shareholder's shares subject to the
CDSC at the time the withdrawal plan commences. With respect to withdrawal plans
in effect prior to November 7, 1994, any applicable CDSC will be waived on
amounts withdrawn that do not exceed 2.00% per month of the value of the share
holder's shares subject to the CDSC. For further information regarding the
automatic cash withdrawal plan, shareholders should contact a Smith Barney
Financial Consultant.

      TELEPHONE REDEMPTION AND EXCHANGE PROGRAM

      Shareholders who do not have a Smith Barney brokerage account may be
eligible to redeem and exchange Portfolio shares by telephone. To determine if a
shareholder is entitled to participate in this program, he or she should contact
First Data at 1-800-451-2010. Once eligibility is confirmed, the shareholder
must complete and return a Telephone/Wire Authorization Form, along with a
signature guarantee, that will be provided by First Data upon request.
Alternatively, an investor may authorize telephone redemptions on the new
account application with the applicant's signature guarantee when making his or
her initial investment in the Portfolio.

   
      Redemptions. Redemption requests of up to $10,000 of any class or classes
of the Portfolio's shares may be made by eligible shareholders by calling First
Data at 1-800-451-2010. Such requests may be made between 9:00 a.m. and 4:00
p.m. (New York City time) on any day the NYSE is open. Redemption requests
received after the close of regular trading on the NYSE are priced at the net
asset value next determined. Redemption of shares (i) by retirement plans or
(ii) for which certificates have been issued are not permitted under this
program.
    

      A shareholder will have the option of having the redemption proceeds
mailed to his or her address of record or wired to a bank account predesignated
by the share holder. Generally, redemption proceeds will be mailed or wired, as
the case may be, on the next business day following the redemption request. In
order to use the wire procedures, the bank receiving the proceeds must be a
member of the 


30
<PAGE>

--------------------------------------------------------------------------------
Redemption of Shares (continued)
--------------------------------------------------------------------------------

Federal Reserve System or have a correspondent relationship with a member bank.
The Fund reserves the right to charge shareholders a nominal fee for each wire
redemption. Such charges, if any, will be assessed against the shareholder's
account from which shares were redeemed. In order to change the bank account
designated to receive redemption proceeds, a shareholder must complete a new
Telephone/Wire Authorization Form and, for the protection of the shareholder's
assets, will be required to provide a signature guarantee and certain other
documentation.

   
      Exchanges. Eligible shareholders may make exchanges by telephone if the
account registration of the shares of the fund being acquired is identical to
the registration of the shares of the fund exchanged. Such exchange requests may
be made by calling First Data at 1-800-451-2010 between 9:00 a.m. and 4:00 p.m.
(New York City time) on any day on which the NYSE is open. Exchange requests
received after the close of regular trading on the NYSE are processed at the net
asset value next determined.
    

      Additional Information regarding Telephone Redemption and Exchange
Program. Neither the Fund nor its agents will be liable for following
instructions communicated by telephone that are reasonably believed to be
genuine. The Fund and its agents will employ procedures designed to verify the
identity of the caller and legitimacy of instructions (for example, a
shareholder's name and account number will be required and phone calls may be
recorded). The Fund reserves the right to suspend, modify or discontinue the
telephone redemption and exchange program or to impose a charge for this service
at any time following at least seven days' prior notice to shareholders.

--------------------------------------------------------------------------------
Minimum Account Size
--------------------------------------------------------------------------------

      The Fund reserves the right to redeem involuntarily any shareholder's
account if the aggregate value of the shares held in the Portfolio account is
less than $500. If a shareholder has more than one account in this Portfolio,
each account must satisfy the minimum account size. The Fund, however, will not
redeem shares based solely on market reductions in net asset value. Before the
Fund exercises such right, shareholders will receive written notice and will be
permitted 60 days to bring the account up to the minimum to avoid involuntary
liquidation.

--------------------------------------------------------------------------------
Performance
--------------------------------------------------------------------------------

   
      From time to time the Portfolio may include its yield, taxable equivalent
yield, total return and average annual total return in advertisements. In
addition, in other types of sales literature, the Fund may also include the
Portfolio's distribution rate. These figures are computed separately for Class
A, Class B, Class L and Class Y 
    


                                                                              31
<PAGE>

--------------------------------------------------------------------------------
Performance (continued)
--------------------------------------------------------------------------------

   
shares of the Portfolio. These figures are based on historical earnings and are
not intended to indicate future performance. The yield of a Portfolio Class
refers to the net income earned by an investment in the Class over a 30-day
period ending at month end. This net income is then annualized, i.e., the
amount of income earned by the investment during that 30-day period is assumed
to be earned each 30-day period for 12 periods and is expressed as a percentage
of the investment. The net income earned on the investment for six periods is
also assumed to be reinvested at the end of the sixth 30-day period. The
taxable equivalent yield is calculated similarly to the yield, except that a
stated income tax rate is used to demonstrate the taxable yield necessary to
produce an after-tax yield equivalent to the tax-exempt yield of the Class. The
yield and taxable equivalent yield quotations are calculated according to a
formula prescribed by the SEC to facilitate comparison with yields quoted by
other investment companies. The distribution rate is calculated by annualizing
the latest monthly distribution and dividing the result by the maximum offering
price per share as of the end of the period to which the distribution relates.
The distribution rate is not computed in the same manner as, and therefore can
be significantly different from, the above-described yield. Total return is
computed for a specified period of time assuming deduction of the maximum sales
charge, if any, from the initial amount invested and reinvestment of all income
dividends and capital gains distributions on the reinvestment dates at prices
calculated as stated in this Prospectus, then dividing the value of the
investment at the end of the period so calculated by the initial amount invested
and subtracting 100%. The standard average annual total return, as prescribed by
the SEC, is derived from this total return, which provides the ending redeemable
value. Such standard total return information may also be accompanied with
nonstandard total return information for differing periods computed in the same
manner but without annualizing the total return or taking sales charges into
account. The Portfolio may also include comparative performance information in
advertising or marketing its shares. Such performance information may include
data from Lipper Analytical Services, Inc. and other financial publications.
    

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

   
BOARD OF TRUSTEES

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


32
<PAGE>

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

      MANAGER

      The Manager manages the day-to-day operations of the Portfolio pursuant to
a management agreement entered into by the Fund on behalf of the Portfolio.

   
      MMC was incorporated in 1968 under the laws of Delaware. MMC, Holdings and
Smith Barney are each located at 388 Greenwich Street, New York, New York 10013.
As of March 31, 1998, MMC had aggregate assets under management of approximately
$100.5 billion.

      MMC provides the Fund with investment management services and executive
and other personnel, pays the remuneration of Fund officers, provides the Fund
with office space and equipment, furnishes the Fund with bookkeeping,
accounting, administrative services and services relating to research,
statistical work and super vision of the Portfolio. For the services provided,
the management agreement provides that the Fund will pay MMC an annual
management fee of 0.45% of the Port folio's average net assets. For the last
fiscal year, total operating expenses were 0.66% of the average daily net assets
for Class A shares; 1.29% of the average daily net assets for Class B shares;
and 1.35% of the average daily net assets for Class L shares. MMC has
voluntarily agreed to waive its fee if in any fiscal year the aggregate expenses
of any Class of the Portfolio exclusive of 12b-1 fees, taxes, brokerage,
interest and extraordinary expenses, such as litigation costs, exceed 0.65% of
such Class' average net asset values for that fiscal year. This voluntary
expense limitation will remain in effect until terminated by notice to
shareholders and by supplement to the then-current prospectus.

      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 has been
approved by the stockholders of each of Travelers and Citicorp. Travelers has
filed an application to become a bank holding company so that, 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 BHCA, the Glass-Steagall Act and certain other laws and
regulations will then be applicable to Travelers and its subsidiaries.

      The Manager 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. Smith Barney and the
Manager believe that the Manager's services under the Management Agreement and
the shareholder service activities performed by Smith Barney are not
underwriting and would be consistent with the Glass-Steagall Act and other
relevant federal and state laws. However, there is little controlling precedent
regarding the performance of the combination of investment advisory, shareholder
servicing and administrative activities by sub-
    


                                                                              33
<PAGE>

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

   
sidiaries of bank holding companies. If Smith Barney and the Manager, or their
affiliates, were to be prevented from acting as the manager or a shareholder
service agent, the Fund would seek alternative means for obtaining these
services. The Fund does not expect that shareholders would suffer any adverse
financial consequences as a result of any such occurrence.
    

      PORTFOLIO MANAGEMENT

   
      Peter M. Coffey, a Managing Director of Smith Barney, serves as Vice
President of the Fund and portfolio manager of the Portfolio since its inception
(August 20, 1986) and manages the day-to-day operations of the Portfolio,
including making all investment decisions. Mr. Coffey serves as the portfolio
manager for five of the Fund's non-money market portfolios.

      Management's discussion and analysis, and additional performance
information regarding the Portfolio during the fiscal year ended March 31, 1998
is included in the Annual Report dated March 31, 1998. A copy of the Annual
Report may be obtained upon request and without charge from a Smith Barney
Financial Consultant or by writing or calling the Fund at the address or phone
number listed on page one of this Prospectus.
    

--------------------------------------------------------------------------------
Distribution
--------------------------------------------------------------------------------

   
      Smith Barney distributes shares of the Portfolio as principal underwriter
and as such conducts a continuous offering pursuant to a "best efforts"
arrangement requiring Smith Barney to take and pay for only such securities as
may be sold to the public. Pursuant to a plan of distribution adopted by the
Portfolio under Rule 12b-1 under the 1940 Act (the "Plan"), Smith Barney is paid
a service fee with respect to Class A, Class B and Class L shares of the
Portfolio at the annual rate of 0.15% of the average daily net assets
attributable to these Classes. Smith Barney is also paid a distribution fee with
respect to Class B and Class L shares at the annual rate of 0.50% and 0.55%,
respectively, of the average daily net asset values attributable to these
Classes. Class B shares will no longer be subject to a distribution fee after
conversion to Class A shares, eight years after the date of purchase. The fees
are used by Smith Barney to pay its Financial Consultants for servicing
shareholder accounts and, in the case of Class B and Class L shares, to cover
expenses primarily intended to result in the sale of those shares. These
expenses include: advertising expenses; the cost of printing and mailing
prospectuses to potential investors; payments to and expenses of Smith Barney
Financial Consultants and other persons who provide support services in
connection with the distribution of shares; interest and/or carrying charges;
and indirect and overhead costs of Smith Barney associated with the sale of
Portfolio shares, including lease,
    


34
<PAGE>

--------------------------------------------------------------------------------
Distribution (continued)
--------------------------------------------------------------------------------

utility, communications and sales promotion expenses.

   
      The payments to Smith Barney Financial Consultants for selling shares of a
Class include a commission or fee paid by the investor or Smith Barney at the
time of sale and, with respect to Class A, Class B and Class L shares, a
continuing fee for servicing shareholder accounts for as long as a shareholder
remains a holder of that Class. Smith Barney Financial Consultants may receive
different levels of compensation for selling the different Classes of shares.

      Payments under the Plan with respect to Class B and Class L shares are not
tied exclusively to the distribution and shareholder services expenses actually
incurred by Smith Barney, and the payments may exceed distribution expenses
actually incurred. The Fund's Board of Trustees will evaluate the
appropriateness of the Plan and its payment terms on a continuing basis and in
so doing will consider all relevant factors, including expenses borne by Smith
Barney, amounts received under the Plan and proceeds of the CDSC.

      The Glass-Steagall Act currently prohibits certain financial institutions
from underwriting securities of open-end investment companies, such as the
Fund. Therefore, in connection with the anticipated merger of Travelers and
Citicorp and as a consequence of the anticipated applicability of the BHCA and
the Glass-Steagall Act, the Fund plans to retain the services of a new entity
(which is not otherwise affiliated with Travelers) to act as distributor of the
Portfolio's shares.
    

--------------------------------------------------------------------------------
Additional Information
--------------------------------------------------------------------------------

    
      The Fund, an open-end management investment company, is organized as a
"Massachusetts business trust" pursuant to a Declaration of Trust dated August
14, 1985. Pursuant to the Declaration of Trust, the Board of Trustees has
authorized the issuance of different series of shares, each representing shares
in one of the separate portfolios. The assets of each portfolio are segregated
and separately managed. Class A, Class B, Class L and Class Y shares of the
Portfolio represent interests in the assets of the Portfolio and have identical
voting, dividend, liquidation and other rights on the same terms and conditions,
except that expenses related to the shareholder service and distribution of
Class A, Class B and Class L shares are borne solely by the respective Class and
each such Class of shares has exclusive voting rights with respect to provisions
of the Fund's Rule 12b-1 distribution plan which pertain to that Class. It is
the intention of the Fund not to hold annual meetings of shareholders. The Board
of Trustees may call meetings of shareholders for action by shareholder vote as
may be required by the 1940 Act or the Declaration of Trust, and shareholders
are entitled to call a meeting upon a vote of 10% of the Fund's outstanding
shares for purposes of voting on removal of a Trustee or Trustees and the Fund
will assist shareholders in calling such a meeting as required by Section
    


                                                                              35
<PAGE>

--------------------------------------------------------------------------------
Additional Information (continued)
--------------------------------------------------------------------------------

   
16(c) of the 1940 Act. Shares do not have cumulative voting rights or preemptive
rights and have only such conversion or exchange rights as the Board of Trustees
may grant in their discretion. When issued for payment as described in this
Prospectus, the Fund's shares will be fully paid and transferable (subject to
the Portfolio's minimum account size). Shares are redeemable as set forth under
"Redemption of Shares" and are subject to involuntary redemption as set forth
under "Minimum Account Size."
    

      PNC Bank, National Association, located at 17th and Chestnut Streets,
Philadelphia, PA 19103, serves as custodian of the Portfolio's investments.

      First Data, located at Exchange Place, Boston, Massachusetts 02109, serves
as the Fund's transfer agent.

      The Fund sends its shareholders a semi-annual report and an audited annual
report, which include listings of the investment securities held by the Fund at
the end of the period covered. In an effort to reduce the Fund's printing and
mailing costs, the Fund plans to consolidate the mailing of its semi-annual and
annual reports by household. This consolidation means that a household having
multiple accounts with the identical address of record will receive a single
copy of each report. Shareholders who do not want this consolidation to apply to
their account should contact their Smith Barney Financial Consultant or the
Fund's transfer agent.


36
<PAGE>

                                                                     SMITHBARNEY

                                                A Member of TravelersGroup[LOGO]



                                                                    Smith Barney
                                                                      Muni Funds
                                                              National Portfolio


                                                            388 Greenwich Street
                                                        New York, New York 10013


   
                                                                    FD 0663 7/98
    

PROSPECTUS

                                                                    SMITH BARNEY
                                                                      MUNI FUNDS

                                                                    Pennsylvania
                                                                       Portfolio

   
                                                                   JULY 29, 1998
    

                                                   Prospectus begins on page one

[LOGO]  Smith Barney Mutual Funds
        Investing for your future.
        Every day.
<PAGE>

   
--------------------------------------------------------------------------------
Prospectus                                                         July 29, 1998
--------------------------------------------------------------------------------
    

      Smith Barney Muni Funds
      Pennsylvania Portfolio
      388 Greenwich Street
      New York, New York 10013
      1 800-451-2010

   
      The Pennsylvania Portfolio (the "Portfolio") is one of eight investment
portfolios that currently comprise Smith Barney Muni Funds (the "Fund"). The
Portfolio seeks to pay its shareholders as high a level of income exempt from
Federal income taxes and Pennsylvania personal income taxes as is consistent
with prudent investing. The Portfolio will invest primarily in obligations
issued by the Commonwealth of Pennsylvania and its political subdivisions,
agencies and instrumentalities. The Portfolio may invest without limit in
municipal obligations whose interest is a tax-preference item for purposes of
the Federal alternative minimum tax.
    

      This Prospectus sets forth concisely certain information about the Fund
and the Portfolio, including sales charges, distribution and service fees and
expenses, that prospective investors will find helpful in making an investment
decision. Investors are encouraged to read this Prospectus carefully and retain
it for future reference.

   
      Additional information about the Portfolio is contained in a Statement of
Additional Information dated July 29, 1998, as amended or supplemented from time
to time (the "SAI"), which is available upon request and without charge by
calling or writing the Fund at the telephone number or address set forth above
or by contacting a Smith Barney Financial Consultant. The Statement of
Additional Information has been filed with the Securities and Exchange
Commission (the "SEC") and is incorporated by reference into this Prospectus in
its entirety.
    

SMITH BARNEY INC.
Distributor

   
MUTUAL MANAGEMENT CORP.
Investment Manager

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


                                                                               1
<PAGE>

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

   
Prospectus Summary                                                             3
--------------------------------------------------------------------------------
Financial Highlights                                                           9
--------------------------------------------------------------------------------
Investment Objective and Management Policies                                  11
--------------------------------------------------------------------------------
Valuation of Shares                                                           17
--------------------------------------------------------------------------------
Dividends, Distributions and Taxes                                            18
--------------------------------------------------------------------------------
Purchase of Shares                                                            20
--------------------------------------------------------------------------------
Exchange Privilege                                                            27
--------------------------------------------------------------------------------
Redemption of Shares                                                          30
--------------------------------------------------------------------------------
Minimum Account Size                                                          33
--------------------------------------------------------------------------------
Performance                                                                   33
--------------------------------------------------------------------------------
Management of the Fund                                                        34
--------------------------------------------------------------------------------
Distribution                                                                  35
--------------------------------------------------------------------------------
Additional Information                                                        36
--------------------------------------------------------------------------------

================================================================================
      No person has been authorized to give any information or to make any
representations in connection with this offering other than those contained in
this Prospectus and, if given or made, such other information and
representations must not be relied upon as having been authorized by the Fund or
Smith Barney Inc. (the "Distributor"). This Prospectus does not constitute an
offer by the Fund or the Distributor to sell or a solicitation of an offer to
buy any of the securities offered hereby in any jurisdiction to any person to
whom it is unlawful to make such offer or solicitation in such jurisdiction.
================================================================================
    


2
<PAGE>

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

   
      The following summary is qualified in its entirety by detailed information
appearing elsewhere in this Prospectus and in the SAI. Cross references in this
summary are to headings in the Prospectus. See "Table of Contents."
    

      INVESTMENT OBJECTIVE The Portfolio seeks to pay its shareholders as high a
level of income exempt from Federal income taxes and Pennsylvania personal
income taxes as is consistent with prudent investing. The Portfolio will invest
primarily in obligations issued by the Commonwealth of Pennsylvania and its
political subdivisions, agencies and instrumentalities. The Portfolio may invest
without limit in municipal obligations whose interest is a tax-preference item
for purposes of the Federal alternative minimum tax. The Portfolio may invest
without limit in municipal obligations whose interest is a tax preference for
purposes of the Federal alternative minimum tax. See "Investment Objective and
Management Policies."

   
      ALTERNATIVE PURCHASE ARRANGEMENTS The Portfolio offers several classes of
shares ("Classes") to investors designed to provide them with the flexibility of
selecting an investment best suited to their needs. The general public is
offered three Classes of shares: Class A shares, Class B shares and Class L
shares, which differ principally in terms of sales charges and rate of expenses
to which they are subject. A fourth Class of shares, Class Y shares, is offered
only to investors meeting an initial investment of at least $15,000,000. See
"Purchase of Shares" and "Redemption of Shares."
    

      Class A Shares. Class A shares are sold at net asset value plus an initial
sales charge of up to 4.00% and are subject to an annual service fee of 0.15% of
the average daily net assets of the Class. The initial sales charge may be
reduced or waived for certain purchases. Purchases of Class A shares of $500,000
or more will be made at net asset value with no initial sales charge, but will
be subject to a contingent deferred sales charge ("CDSC") of 1.00% on
redemptions made within 12 months of purchase. See "Prospectus Summary - Reduced
or No Initial Sales Charge."

      Class B Shares. Class B shares are offered at net asset value subject to a
maximum CDSC of 4.50% of redemption proceeds, declining by 0.50% the first year
after purchase and by 1.00% each year thereafter to zero. This CDSC may be
waived for certain redemptions. Class B shares are subject to an annual service
fee of 0.15% and an annual distribution fee of 0.50% of the average daily net
assets of the Class. The Class B shares' distribution fee may cause that Class
to have higher expenses and pay lower dividends than Class A shares.

      Class B Shares Conversion Feature. Class B shares will convert
automatically to Class A shares, based on relative net asset value, eight years
after the date of the original purchase. Upon conversion, these shares will no
longer be subject to an annual distribution fee. In addition, a certain portion
of Class B shares that have been acquired through the reinvestment of dividends
and distributions ("Class B Dividend Shares") will be converted at that time.
See "Purchase of Shares -- Deferred Sales Charge Alternatives."


                                                                               3
<PAGE>

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

   
      Class L Shares. Class L shares are sold at net asset value plus an initial
sales charge of 1% of the purchase price. They are subject to an annual service
fee of 0.15% and an annual distribution fee of 0.55% of the average daily net
assets of the Class, and investors pay a CDSC of 1.00% if they redeem Class L
shares within 12 months of purchase. The CDSC may be waived for certain
redemptions. The Class L shares' distribution fee may cause that Class to have
higher expenses and pay lower dividends than Class A shares. Purchases of
Portfolio shares, which when combined with current holdings of Class L shares of
the Portfolio equal or exceed $500,000 in the aggregate, should be made in Class
A shares at net asset value with no sales charge, which would be subject to a
CDSC of 1.00% on redemptions made within 12 months of purchase.

      Class Y Shares. Class Y shares are available only to investors meeting an
initial investment minimum of $15,000,000. Class Y shares are sold at net asset
value with no initial sales charge or CDSC. They are not subject to any service
or distribution fees.
    

      In deciding which Class of Portfolio shares to purchase, investors should
consider the following factors, as well as any other relevant facts and
circumstances:

   
      Intended Holding Period. The decision as to which Class of shares is more
beneficial to an investor depends on the amount and intended length of his or
her investment. Shareholders who are planning to establish a program of regular
investment may wish to consider Class A shares; as the investment accumulates
shareholders may qualify for reduced sales charges and the shares are subject to
lower ongoing expenses over the term of the investment. As an alternative, Class
B shares are sold without any initial sales charge so the entire purchase price
is immediately invested in the Portfolio. Any investment return on these
additional invested amounts may partially or wholly offset the higher annual
expenses of this Class. Because the Portfolio's future return cannot be
predicted, however, there can be no assurance that this would be the case.
Finally, Class L shares, which have a lower upfront sales charge but are subject
to higher distribution fees than Class A shares, are suitable for investors who
are not investing or intending to invest an amount which would receive a sales
charge discount and who have a short-term or undetermined time frame.

      Finally, investors should consider the effect of the CDSC period and any
conversion rights of the Classes in the context of their own investment time
frame. For example, while Class L shares have a shorter CDSC period than Class B
shares, they do not have a conversion feature, and therefore, are subject to an
ongoing distribution fee. Thus, Class B shares may be more attractive than Class
L shares to investors with longer term investment outlooks.
    

      Reduced or No Initial Sales Charge. The initial sales charge on Class A
shares may be waived for certain eligible purchasers and the entire purchase
price will be immediately invested in the Portfolio. In addition, Class A share
purchases of 


4
<PAGE>

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

   
$500,000 or more will be made at net asset value with no initial sales charge,
but will be subject to a CDSC of 1.00% on redemptions made within 12 months of
purchase. The $500,000 investment may be met by adding the purchase to the net
asset value of all Class A shares offered with a sales charge held in funds
sponsored by Smith Barney Inc. ("Smith Barney") listed under "Exchange
Privilege." Class A share purchases may also be eligible for a reduced initial
sales charge. See "Purchase of Shares." Because the ongoing expenses of Class A
shares may be lower than those for Class B and Class L shares, purchasers
eligible to purchase Class A shares at net asset value or at a reduced sales
charge should consider doing so.

      Smith Barney Financial Consultants may receive different compensation for
selling different Classes of shares. Investors should understand that the
purpose of the CDSC on the Class B and Class L shares is the same as that of an
initial sales charge.
    

      See "Purchase of Shares" and "Management of the Fund" for a complete
description of the sales charges and service and distribution fees for each
Class of shares and "Valuation of Shares," "Dividends, Distributions and Taxes"
and "Exchange Privilege" for other differences between the Classes of shares.

      PURCHASE OF SHARES Shares may be purchased through a brokerage account
maintained by Smith Barney. Shares may also be purchased through a broker that
clears securities transactions through Smith Barney on a fully disclosed basis
(an "Introducing Broker") or an investment dealer in the selling group. In
addition, certain investors, including certain institutional investors, may
purchase shares directly from the Fund through the Fund's transfer agent, First
Data Investor Services Group, Inc. ("First Data"). See "Purchase of Shares."

   
      INVESTMENT MINIMUMS Investors in Class A, Class B and Class L shares may
open an account by making an initial investment of at least $1,000 for each
account. Investors in Class Y shares may open an account for an initial
investment of $15,000,000. Subsequent investments of at least $50 may be made
for all Classes. The minimum investment requirements for purchases of Portfolio
shares through the Systematic Investment Plan are described below. It is not
recommended that the Portfolio be used as a vehicle for Keogh, IRA or other
qualified retirement plans. There is no minimum investment requirement for
unitholders who invest distributions from a unit investment trust ("UIT")
sponsored by Smith Barney.

      SYSTEMATIC INVESTMENT PLAN The Portfolio offers shareholders a Systematic
Investment Plan under which they may authorize the automatic placement of a
purchase order each month or quarter for Portfolio shares. The minimum initial
investment requirement for Class A, Class B and Class L shares and the
subsequent investment requirement for all Classes for shareholders purchasing
shares through the Systematic Investment Plan on a monthly basis is $25 and on a
quarterly basis is $50. See "Purchase of Shares."
    


                                                                               5
<PAGE>

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

      REDEMPTION OF SHARES Shares may be redeemed on each day the New York Stock
Exchange, Inc. ("NYSE") is open for business. See "Purchase of Shares" and
"Redemption of Shares."

   
      MANAGEMENT OF THE PORTFOLIO Mutual Management Corp. ("MMC" or the
"Manager") formerly known as Smith Barney Mutual Funds Management, Inc., serves
as the Portfolio's investment manager. MMC provides investment advisory and
management services to various investment companies comprising the Smith Barney
Mutual Funds. MMC is a wholly owned subsidiary of Smith Barney Holdings Inc.
("Holdings"). Holdings is 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 Insurance Services. See "Management of the Fund."
    

      EXCHANGE PRIVILEGE Shares of a Class may be exchanged for shares of the
same Class of certain other funds of the Smith Barney Mutual Funds at the
respective net asset values next determined. See "Exchange Privilege."

      VALUATION OF SHARES Net asset value of the Portfolio for the prior day
generally is quoted daily in the financial section of most newspapers and is
also available from a Smith Barney Financial Consultant. See "Valuation of
Shares."

   
      DIVIDENDS AND DISTRIBUTIONS Dividends from net investment income are paid
monthly. Distributions of net realized capital gains, if any, are paid at least
annually. See "Dividends, Distributions and Taxes."
    

      REINVESTMENT OF DIVIDENDS Dividends and distributions paid on shares of a
Class will be reinvested automatically, unless otherwise specified by an
investor, in additional shares of the same Class at current net asset value.
Shares acquired by dividend and distribution reinvestments will not be subject
to any sales charge or CDSC. Class B shares acquired through dividend and
distribution reinvestments will become eligible for conversion to Class A shares
on a pro rata basis. See "Dividends, Distributions and Taxes."

   
      RISK FACTORS AND SPECIAL CONSIDERATIONS There can be no assurance that the
Portfolio's investment objective will be achieved. The Portfolio's concentration
in Pennsylvania obligations involves certain additional risks that should be
considered carefully by an investor. Additionally, the value of the Portfolio's
investments, and thus the net asset value of the Portfolio's shares, will
fluctuate in response to changes in market and economic conditions, as well as
the financial condition and prospects of issuers of municipal obligations
purchased by the Portfolio. The market value of municipal bonds may be adversely
affected during periods of rising interest rates. Additionally, changes in
Federal income tax laws affecting the tax exemption for interest on municipal
obligations could affect the availability of tax exempt obligations for purchase
and the value of the Portfolio's securities would be affected. See "Investment
Objective and Management Policies."
    


6
<PAGE>

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

      THE PORTFOLIO'S EXPENSES The following expense table lists the costs and
expenses an investor will incur either directly or indirectly as a shareholder
of the Portfolio, based on the maximum sales charge or maximum CDSC that may be
incurred at the time of purchase or redemption and, unless otherwise noted, the
Portfolio's operating expenses for its most recent fiscal year:

   

<TABLE>
<CAPTION>
Pennsylvania Portfolio                                     Class A     Class B    Class L*   Class Y
----------------------------------------------------------------------------------------------------
<S>                                                         <C>         <C>        <C>        <C>  
Shareholder Transaction Expenses
   Maximum sales charge imposed on purchases
     (as a percentage of offering price) ................   4.00%       None       1.00%*     None
   Maximum CDSC (as a percentage of original cost
     or redemption proceeds, whichever is lower) ........   None**      4.50%      1.00%      None

Annual Portfolio Operating Expenses***
(as a percentage of average net assets)
   Management fees (after fee waiver) ...................   0.40%       0.40%      0.40%      0.40%
   12b-1 fees**** .......................................   0.15        0.65       0.70        --
   Other expenses .......................................   0.16        0.18       0.18       0.16*****
                                                            ----        ----       ----       ----     
Total Portfolio Operating Expenses ......................   0.71%       1.23%      1.20%      0.56%
                                                            ====        ====       ====       ==== 
</TABLE>

      *Class L shares were previously named Class C shares. For shareholders who
owned Class C shares of the Portfolio, Class L shares may be purchased without
incurring the 1% initial sales charge until June 25, 1999.

      **Purchases of Class A shares of $500,000 or more will be made at net
asset value with no sales charge, but will be subject to a CDSC of 1.00% on
redemptions made within 12 months of purchase.

      ***"Management fees" have been restated to reflect the management fee
waiver currently in effect for the Portfolio. Management fees were waived to a
greater extent during the last fiscal year. Absent the fee waiver, the
management fee would be incurred at the rate of 0.45% of each Class' average
daily net assets. Absent the fee waiver, total expenses would be incurred at the
rates of 0.76%, 1.28%, 1.25% and 0.61% for Class A, Class B, Class L and Class Y
shares, respectively.

      ****Upon conversion of Class B shares to Class A shares such shares will
no longer be subject to a distribution fee. Class L shares do not have a
conversion feature and, therefore, are subject to an ongoing distribution fee.
As a result, long-term shareholders of Class L shares may pay more than the
economic equivalent of the maximum front-end sales charge permitted by the
National Association of Securities Dealers, Inc.

      *****For Class Y shares, "Other expenses" have been estimated because no
Class Y shares were outstanding for the period ended March 31, 1998.
    

      Class A shares of the Portfolio purchased through the Smith Barney
AssetOne Program will be subject to an annual asset-based fee, payable
quarterly, in lieu of the initial sales charge. The fee will vary to a maximum
of 1.50%, depending on the amount of assets held through the Program. For more
information, please call your Smith Barney Financial Consultant.


                                                                               7
<PAGE>

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

   
      The sales charge and CDSC set forth in the above table are the maximum
charges imposed on purchases or redemptions of Portfolio shares and investors
may actually pay lower or no charges, depending on the amount purchased and, in
the case of Class B, Class L and certain Class A shares, the length of time the
shares are held. See "Purchase of Shares" and "Redemption of Shares." Smith
Barney receives an annual 12b-1 service fee of 0.15% of the value of average
daily net assets of Class A shares. Smith Barney also receives with respect to
Class B shares an annual 12b-1 fee of 0.65% of the value of average daily net
assets of that Class, consisting of a 0.50% distribution fee and a 0.15% service
fee. With respect to Class L shares, Smith Barney also receives an annual 12b-1
fee of 0.70% of the value of average daily net assets of that Class, consisting
of a 0.55% distribution fee and a 0.15% service fee. "Other expenses" in the
above table include fees for shareholder services, custodial fees, legal and
accounting fees, printing costs and registration fees.
    

      EXAMPLE

      The following example is intended to assist an investor in understanding
the various costs that an investor in the Portfolio will bear directly or
indirectly. The example assumes payment by the Portfolio of operating expenses
at the levels set forth in the table above. See "Purchase of Shares,"
"Redemption of Shares" and "Management of the Fund."

   
<TABLE>
<CAPTION>
Pennsylvania Portfolio                               1 Year    3 Years    5 Years    10 Years*
----------------------------------------------------------------------------------------------
<S>                                                    <C>       <C>        <C>         <C> 
An investor would pay the following expenses 
  on a $1,000 investment, assuming (1) 5.00% 
  annual return and (2) redemption at the 
  end of each time period:
          Class A...................................   $47       $62        $78         $125
          Class B...................................    58        69         78          134
          Class L...................................    32        48         75          154
          Class Y...................................     6        18         31           70

An investor would pay the following expenses 
  on the same investment, assuming the same
  annual return and no redemption:
          Class A...................................   $47       $62        $78         $125
          Class B...................................    13        39         68          134
          Class L...................................    22        48         75          154
          Class Y...................................     6        18         31           70
----------------------------------------------------------------------------------------------
</TABLE>
    

      *Ten-year figures assume conversion of Class B shares to Class A shares at
the end of the eighth year following the date of purchase.

      The example also provides a means for the investor to compare expense
levels of funds with different fee structures over varying investment periods.
To facilitate such comparison, all funds are required to utilize a 5.00% annual
return assumption. However, the Portfolio's actual return will vary and may be
greater or less than 5.00%. This example should not be considered a
representation of past or future expenses. 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 Portfolio's annual
report dated March 31, 1998. The information set forth below should be read in
conjunction with the financial statements and related notes that also appear in
the Portfolio's Annual Report to Shareholders, which is incorporated by
reference into the SAI. As of March 31, 1998, no Class Y shares were outstanding
and, accordingly, no comparable information is available at this time for that
Class.
    

For a share of beneficial interest outstanding throughout each year:

   
<TABLE>
<CAPTION>
                                                     Class A Shares                                 Class B Shares
                                     --------------------------------------------   ---------------------------------------------
Pennsylvania Portfolio                  1998      1997       1996(1)   1995(2)(3)      1998     1997       1996(1)   1995(4)(5)
=================================================================================================================================
<S>                                  <C>        <C>         <C>        <C>          <C>        <C>         <C>        <C>    
Net Asset Value,
  Beginning of Year                  $ 12.66    $ 12.62     $ 12.40    $ 12.00      $ 12.64    $ 12.61     $ 12.39    $ 12.35
---------------------------------------------------------------------------------------------------------------------------------
Income From Operations:
  Net investment income (6)             0.73       0.71        0.70       0.67         0.65       0.65        0.64       0.51
  Net realized and unrealized gain      0.95       0.04        0.29       0.35*        0.96       0.03        0.29       0.01*
---------------------------------------------------------------------------------------------------------------------------------
Total Income From Operations            1.68       0.75        0.99       1.02         1.61       0.68        0.93       0.52
---------------------------------------------------------------------------------------------------------------------------------
Less Distributions From:
  Net investment income                (0.69)     (0.71)      (0.72)     (0.62)       (0.62)     (0.65)      (0.66)     (0.48)
  Net realized gains                   (0.11)        --       (0.05)        --        (0.11)        --       (0.05)        --
---------------------------------------------------------------------------------------------------------------------------------
Total Distributions                    (0.80)     (0.71)      (0.77)     (0.62)       (0.73)     (0.65)      (0.71)     (0.48)
---------------------------------------------------------------------------------------------------------------------------------
Net Asset Value, End of Year         $ 13.54    $ 12.66     $ 12.62    $ 12.40      $ 13.52    $ 12.64     $ 12.61    $ 12.39
---------------------------------------------------------------------------------------------------------------------------------
Total Return                           13.52%      6.11%       8.08%      8.82%++     12.97%      5.56%       7.61%      4.48%++
---------------------------------------------------------------------------------------------------------------------------------
Net Assets,
  End of Year (millions)             $    16    $    15     $    12    $     8      $    19    $    16     $    13    $     5
---------------------------------------------------------------------------------------------------------------------------------
Ratios to Average Net Assets:
  Expenses (6)                          0.37%      0.37%       0.38%      0.29%+       0.89%      0.88%       0.88%      0.82%+
  Net investment income                 5.46       5.66        5.57       5.76+        4.94       5.15        5.07       5.31+
---------------------------------------------------------------------------------------------------------------------------------
Portfolio Turnover Rate                   81%       122%         88%        38%          81%       122%         88%        38%
=================================================================================================================================
</TABLE>
    

(1)   Per share amounts have been calculated using the monthly average shares
      method rather than the undistributed net investment income method because
      it more accurately reflects the per share data for the period.
(2)   On October 10, 1994, the former Class C shares were exchanged into Class A
      shares.
(3)   For the period from April 4, 1994 (inception date) to March 31, 1995.
(4)   On November 7, 1994, the former Class E shares were renamed Class B
      shares.
(5)   For the period from June 20, 1994 (inception date) to March 31, 1995.

   
(6)   The manager has waived all or a portion of its fees for the years ended
      March 31, 1998, 1997 and 1996 and the period ended March 31, 1995. In
      addition, the Manager reimbursed expenses of $23,433 and $32,063 for the
      year ended March 31, 1996 and the period ended March 31,1995,
      respectively. If such fees were not waived and expenses not reimbursed,
      the effect on net investment income and expense ratios would have been as
      follows:

                                                           Expense Ratios
                       Net Investment Income        Without Fee Waivers and/or
                       Per Share Decreases            Expense Reimbursements#
                 -----------------------------    -----------------------------
                 1998    1997    1996    1995     1998    1997    1996    1995
                 -----   -----   -----   -----    -----   -----   -----   -----
      Class A    $0.05   $0.06   $0.07   $0.09    0.79%   0.82%   0.93%   1.03%+
      Class B     0.05    0.06    0.07    0.08    1.31    1.33    1.44    1.58+

    

       

*     Includes the net per share effect of shareholder sales and redemptions
      activity during the period, most of which occurred at a net asset value
      less than the net asset value at the beginning of the period.
#     As a result of voluntary expense limitations, expense ratios would not
      exceed 0.80% and 1.30% for Class A and B shares, respectively. 
++    Total return is not annualized, as it may not be representative of the
      total return for the year. 
+     Annualized.


                                                                               9
<PAGE>

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

For a share of beneficial interest outstanding throughout each year:

   
<TABLE>
<CAPTION>

                                                   Class L Shares(2)
                                     -------------------------------------------
Pennsylvania Portfolio                  1998      1997      1996(1)    1995(3)
================================================================================
<S>                                  <C>        <C>        <C>        <C>    
Net Asset Value, Beginning of Year   $ 12.64    $ 12.61    $ 12.39    $ 12.00
--------------------------------------------------------------------------------
Income From Operations:
  Net investment income (4)             0.64       0.64       0.64       0.59
  Net realized and unrealized gain      0.96       0.04       0.29       0.36*
--------------------------------------------------------------------------------
Total Income From Operations            1.60       0.68       0.93       0.95
--------------------------------------------------------------------------------
Less Distributions From:
  Net investment income                (0.62)     (0.65)     (0.66)     (0.56)
  Net realized gains                   (0.11)        --      (0.05)        --
--------------------------------------------------------------------------------
Total Distributions                    (0.73)     (0.65)     (0.71)     (0.56)
--------------------------------------------------------------------------------
Net Asset Value, End of Year         $ 13.51    $ 12.64    $ 12.61    $ 12.39
--------------------------------------------------------------------------------
Total Return                           12.84%      5.51%      7.56%      8.14%++
--------------------------------------------------------------------------------
Net Assets, End of Year (millions)   $     8    $     6    $     5    $     3
--------------------------------------------------------------------------------
Ratios to Average Net Assets:
  Expenses (4)                          0.94%      0.94%      0.94%      0.86%+
  Net investment income                 4.89       5.09       5.00       5.04+
--------------------------------------------------------------------------------
Portfolio Turnover Rate                   81%       122%        88%        38%
================================================================================
</TABLE>
    

(1)   Per share amounts have been calculated using the monthly average shares
      method rather than the undistributed net investment income method, because
      it more accurately reflects the per share data for the period.

   
(2)   On November 7, 1994, the former Class B shares were renamed Class C
      shares. On June 12, 1998, the Class C shares were renamed Class L shares.
    

(3)   For the period from April 5, 1994 (inception date) to March 31, 1995. 

   
(4)   The manager has waived all or a portion of its fees for the years ended
      March 31, 1998, 1997 and 1996 and the period ended March 31, 1995. In
      addition, the Manager reimbursed expenses of $23,433 and $32,063 for the
      year ended March 31, 1996 and the period ended March 31,1995,
      respectively. If such fees were not waived and expenses not reimbursed,
      the effect on net investment income and expense ratios would have been as
      follows:

                                                         Expense Ratios
                     Net Investment Income         Without Fee Waivers and/or
                      Per Share Decreases             Expense Reimbursements#
                -----------------------------     -----------------------------
                1998    1997    1996    1995      1998    1997    1996    1995
                ----    ----    ----    ----      ----    ----    ----    ----
      Class L   $0.05   $0.06   $0.07   $0.09     1.36%   1.39%   1.49%   1.56%+
    

*     Includes the net per share effect of shareholder sales and redemptions
      activity during the period, most of which occurred at a net asset value
      less than the net asset value at the beginning of the period.
#     As a result of voluntary expense limitations, expense ratios would not
      exceed 1.35% for Class C shares.
++    Total return is not annualized, as it may not be representative of the
      total return for the year.
+     Annualized.


10
<PAGE>

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

   
      The Portfolio seeks as high a level of income exempt from Federal income
taxes and from the personal income taxes of the Commonwealth of Pennsylvania as
is consistent with prudent investing. The Portfolio will invest primarily in
obligations of the Commonwealth of Pennsylvania and its political subdivisions,
agencies and instrumentalities, the interest from which is, in the opinion of
bond counsel for the various issuers, exempt from the state's as well as Federal
income taxes at the time of their issuance. (For certain shareholders, a portion
of the Portfolio's income may be subject to the alternative minimum tax ("AMT")
on tax-exempt income discussed below.) Such obligations are often issued to
raise money for public projects that enhance the quality of life including
health facilities, housing, airports, schools, highways and bridges. The
Portfolio invests its assets in securities of ranging maturities, without
limitation, depending on market conditions. Typically, the remaining maturity of
municipal bonds will range between 5 and 30 years.

      The two principal classifications of municipal obligations are "general
obligation" and "revenue". General obligations are secured by a municipal
issuer's pledge of its full faith, credit, and taxing power for the payment of
principal and interest. Revenue obligations are payable only from the revenues
derived from a particular facility or class of facilities or, in some cases from
the proceeds of a special excise tax or other specific revenue source. Please
see the SAI for a more detailed discussion about the different types of
municipal obligations.

      Under the Tax Reform Act of 1986, interest income from municipal
obligations issued to finance certain "private activities" ("AMT-Subject Bonds")
becomes an item of "tax preference" which is subject to the AMT when received by
a person in a tax year during which he is subject to that tax. Such private
activity bonds include bonds issued to finance such projects as certain solid
waste disposal facilities, student loan programs, and water and sewage projects.
Because interest income on AMT-Subject Bonds is taxable to certain investors, it
is expected, although there can be no guarantee, that such municipal obligations
generally will provide somewhat higher yields than other municipal obligations
of comparable quality and maturity. There is no limitation on the percent or
amount of the Portfolio's assets that may be invested in AMT-Subject Bonds.

      Municipal bonds purchased for the Portfolio must, at the time of purchase,
be investment grade municipal bonds, and at least two-thirds of the Portfolio's
municipal bonds must be rated within the three highest ratings categories by a
nationally recognized statistical rating organization ("NRSRO"). Investment
grade bonds are rated within the four highest categories by an NRSRO, such as
those rated Aaa, Aa, A and Baa by Moody's Investors Service, Inc. ("Moody's")
and AAA, AA, A and BBB by Standard & Poor's Ratings Group ("S&P") or, if
unrated, determined to be comparable quality by MMC; pre-refunded bonds
    


                                                                              11
<PAGE>

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

   
escrowed by U.S. Treasury obligations are considered AAA rated (the highest
rating) even though the issuer does not obtain a new rating. Up to one-third of
the assets of the Portfolio may be invested in municipal bonds rated in the
fourth highest category (this grade, while regarded as having an adequate
capacity to pay interest and repay principal, is considered to be of medium
quality and has speculative characteristics) or in unrated municipal bonds if,
based upon credit analysis by the Manager, it is believed that such securities
are at least of comparable quality to those securities in which the Portfolio
may invest. In determining the suitability of an investment in an unrated
municipal bond, the Manager will take into consideration debt service coverage,
the purpose of the financing, history of the issuer, existence of other rated
securities of the issuer and other general conditions as may be relevant,
including comparability to other issues. After the Portfolio purchases a
municipal bond, the issue may cease to be rated or its rating may be reduced
below the minimum required for purchase. Such an event would not require the
elimination of the issue from the Portfolio but the Manager will consider such
an event in determining whether the Portfolio should continue to hold the
security.

      The Portfolio's short-term municipal obligations will be limited to high
grade obligations (obligations that are secured by U.S. Government Securities or
are rated MIG 1 or MIG 2, VMIG 1 or VMIG 2 or Prime-1 or Aa or better by Moody's
or SP-1+, SP-1, SP-2, or A-1 or AA or better by S&P or have a rating within
comparable categories by any other NRSRO, or obligations that are unrated but
determined by the Manager to be comparable). Among the types of short-term
instruments in which the Portfolio may invest are floating or variable rate
demand instruments, tax-exempt commercial paper (generally having a maturity of
less than nine months), and other types of notes generally having maturities of
less than three years, such as Tax Anticipation Notes, Revenue Anticipation
Notes, Tax and Revenue Anticipation Notes and Bond Anticipation Notes. Demand
instruments usually have an indicated maturity of over one year, but contain a
demand feature that enables the holder to liquidate the investment on no more
than 30 days' notice; variable rate demand instruments provide for automatic
establishment of a new interest rate on set dates; floating rate demand
instruments provide for automatic adjustment of their interest rates whenever
some other specified interest rate changes (e.g., the prime rate). The Portfolio
may purchase participation interests in variable rate tax-exempt securities
(such as Industrial Development Bonds) owned by banks. Participations are
frequently backed by an irrevocable letter of credit or guarantee of a bank that
the Manager has determined meets the prescribed quality standards for the
Portfolio. Participation interests will be purchased only if management believes
interest income on such interests will be tax-exempt when distributed as
dividends to shareholders.
    

      The Portfolio will not invest more than 15% of the value of its net assets
in


12
<PAGE>

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

   
illiquid securities, including those for which there is no established market.

      The Portfolio may purchase new issues of municipal obligations on a
when-issued basis, i.e. delivery and payment normally take place 15 to 45 days
after the purchase date. The payment obligation and the interest rate to be
received are each fixed on the purchase date, although no interest accrues with
respect to a when-issued security prior to its stated delivery date. During the
period between purchase and settlement, assets consisting of cash or debt
securities of any grade having a value equal to or greater than the Portfolio's
purchase commitments, provided such securities have been determined by the
Manager to be liquid and unencumbered and are marked to market daily pursuant to
guidelines established by the Board of Trustees, will be segregated at the
custodian bank. Interest rates at settlement may be lower or higher than on the
purchase date, which would result in appreciation or depreciation, respectively.
Although a Portfolio will only purchase municipal obligations on a when-issued
basis with the intention of actually acquiring the securities, the Portfolio may
sell these securities before the settlement date if it is deemed advisable.
    

      Portfolio transactions will be undertaken primarily to accomplish the
Portfolio's objective in relation to anticipated movements in the general level
of interest rates, but the Portfolio may also engage in short-term trading
consistent with its objective.

   
      The Portfolio may borrow on a short-term basis in amounts of up to 5% of
its assets in order to facilitate the settlement of Portfolio securities
transactions.

      The Portfolio may invest in municipal bond index futures contracts
(currently traded on the Chicago Board of Trade) or in listed contracts based on
U.S. Government securities as a hedging policy in pursuit of its investment
objective; provided that immediately thereafter not more than 33 1/3% of its net
assets would be hedged or the amount of margin deposits on the Portfolio's
existing futures contracts would not exceed 5% of the value of its total assets.
Since any income would be taxable, it is anticipated that such investments will
be made only in those circumstances when the Manager anticipates the possibility
of an extreme change in interest rates or market conditions but does not wish to
liquidate the Portfolio's securities. A further discussion of futures contracts
and their associated risks is contained in the SAI.
    

      The Portfolio 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


                                                                              13
<PAGE>

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

distributions 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.

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

      The liquidity of municipal lease obligations varies. Municipal leases held
by the Portfolio will be considered illiquid securities unless the Board of
Trustees determines that the leases are readily marketable. Certain municipal
lease obligations contain "non-appropriation" clauses which provide that the
municipality has no obligation to make lease or installment purchase payments in
future years unless money is appropriated for such purpose on a yearly basis. In
the case of a "non-appropriation" lease, the Portfolio's ability to recover
under the lease in the event of non-appropriation or default will be limited
solely to the repossession of the leased property, without recourse to the
general credit of the lessee, and disposition of the property in the event of
foreclosure might be difficult. The Portfolio will not invest more than 5% of
its assets in such "non-appropriation" municipal lease obligations.
    

      It is a fundamental policy that under normal market conditions, the
Portfolio will seek to invest 100% of its assets - and the Portfolio will invest
not less than 80% of its assets - in municipal obligations the interest on which
is exempt from Federal income taxes (other than the alternative minimum tax). It
is also a fundamental policy that under normal market conditions, the Portfolio
will invest at least 65% of its assets in municipal obligations the interest on
which is also exempt from the personal income taxes of the Commonwealth of
Pennsylvania in the opinion of bond counsel to the issuers. The Portfolio may
invest up to 20% of its assets in taxable fixed-income securities, but only in
obligations issued or guaranteed by the full faith and credit of the United
States, and may invest more than 20% of its assets in U.S. Government securities
during periods when in the Manager's opinion a temporary defensive posture is
warranted, including any period when the Portfolio's monies available for
investment exceed the municipal obligations available for purchase that meet the


14
<PAGE>

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

Portfolio's rating, maturity and other investment criteria. To the extent the
Portfolio is so invested, the investment objective may not be achieved.

   
      Year 2000. The investment management services provided to the Fund by the
Manager 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. The Manager 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, the Manager 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 the Manager, Smith Barney or any other service provider will be successful,
or that interaction with other non-complying computer systems will not impair
Fund or shareholder services at that time.

      In addition, the ability of issuers to make timely payments of interest
and principal or to continue their operations or services may be impaired by the
inadequate preparation of their computer systems for the year 2000. This may
adversely affect the market values of securities of specific issuers or of
securities generally if the inadequacy of preparation is perceived as widespread
or as affecting trading markets.
    

      RISK AND INVESTMENT CONSIDERATIONS

      Investors should realize that risk of loss is inherent in the ownership of
any securities and that the Portfolio's net asset value will fluctuate,
reflecting fluctuations in the market value of its portfolio positions. In
addition, the ability of the Portfolio to achieve its investment objective is
dependent on a number of factors, including the skills of the Manager in
purchasing municipal obligations whose issuers have the continuing ability to
meet their obligations for the payment of interest and principal when due. The
ability to achieve a high level of income is dependent on the yields of the
securities in the portfolio. Yields on municipal obligations are the product of
a variety of factors, including the general conditions of the municipal bond
markets, the size of a particular offering, the maturity of the obligation and
the rating of the issue. In general, the longer the maturity of a municipal
obligation, the higher the rate of interest it pays. However, a longer average
maturity is generally associated with a higher level of volatility in the market
value of a municipal obligation. During periods of falling interest rates, the
values of long-term, municipal obligations generally rise. Conversely, during
periods of rising interest rates, the values of such securities generally
decline. Changes in the value of portfolio securities will not affect interest
income derived


                                                                              15
<PAGE>

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

from those securities but will affect the Portfolio's net asset value. Since the
Portfolio's objective is to provide high current income, it will invest in
municipal obligations with an emphasis on income rather than stability of net
asset value.

   
      The Portfolio is registered as a "non-diversified" company under the
Investment Company Act of 1940 (the "1940 Act"), in order for the Portfolio to
have the ability to invest more than 5% of its assets in the securities of any
issuer. The Portfolio intends to comply with Subchapter M of the Internal
Revenue Code (the "Code") that limits the aggregate value of all holdings
(except U.S. Government and cash items, as defined in the Code) that exceed 5%
of the Portfolio's total assets to an aggregate amount of 50% of such assets.
Also, holdings of a single issuer (with the same exceptions) may not exceed 25%
of the Portfolio's total assets. These limits are measured at the end of each
quarter. Under the Subchapter M limits, up to 50% of the Portfolio's total
assets may be invested in as few as two single issuers. In the event of decline
of creditworthiness or default upon the obligations of one or more such issuers
exceeding 5%, an investment in the Portfolio may entail greater risk than in a
portfolio having a policy of "diversification" because a high percentage of the
Portfolio's assets may be invested in municipal obligations of one or two
issuers. Furthermore, a high percentage of investments among few issuers may
result in a greater degree of fluctuation in the market value of the assets of
the Portfolio, and consequently a greater degree of fluctuation of the
Portfolio's net asset value, because the Portfolio will be more susceptible to
economic, political, or regulatory developments affecting these securities than
would be the case with a portfolio composed of varied obligations of more
issuers.
    

      RISK FACTORS AFFECTING PENNSYLVANIA

   
      Potential purchasers of shares of the Portfolio should consider the fact
that the Portfolio consists primarily of securities issued by the Commonwealth
of Pennsylvania (the "Commonwealth"), its municipalities and authorities and
should realize the substantial risks associated with an investment in such
securities.
    

      Pennsylvania's economy historically has been dependent upon heavy
industry, but has diversified recently into various services, particularly into
medical and health services, education and financial services. Agricultural
industries continue to be an important part of the economy, including not only
the production of diversified food and livestock products, but substantial
economic activity in agribusiness and food-related industries. Service
industries currently employ the greatest share of non-agricultural workers,
followed by the categories of trade and manufacturing. Future economic
difficulties in any of these industries could have an adverse impact on the
finances of the Commonwealth or its municipalities, and could adversely affect
the market value of the municipal obligations in the Portfolio or the ability of
the respective obligors to make payments of interest and principal due on such
municipal obligations.


16
<PAGE>

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

   
      Additional information regarding the Commonwealth is included in the SAI.
    

      PORTFOLIO TRANSACTIONS AND TURNOVER

   
      The Portfolio securities ordinarily are purchased from and sold to parties
acting as either principal or agent. Newly issued securities ordinarily are
purchased directly from the issuer or from an underwriter; other purchases and
sales usually are placed with those dealers from which it appears that the best
price or execution will be obtained. Usually, no brokerage commissions, as such,
are paid by the Portfolio, since purchases and sales of municipal bonds and
other debt securities are traded through broker-dealers in principal
transactions, although the price paid usually includes a compensation to the
dealer.
    

      The Portfolio cannot accurately predict its portfolio turnover rate, but
anticipates that the annual turnover will not exceed 100%. An annual turnover
rate of 100% would occur when all of the securities held by the Portfolio are
replaced one time during a period of one year. The Manager will not consider
turnover rate a limiting factor in making investment decisions consistent with
the investment objective and policies of the Portfolio. See "Financial
Highlights" for the Portfolio's annual turnover rate during each year since
inception.

--------------------------------------------------------------------------------
Valuation of Shares
--------------------------------------------------------------------------------

   
      The Portfolio's net asset value per share is determined as of the close of
regular trading on the NYSE, which is currently 4:00 P.M. New York City time on
each day that the NYSE is open, by dividing the Portfolio's net asset values
attributable to each Class by the total number of shares of the Class
outstanding.

      When, in the judgment of the pricing service, quoted bid prices for
investments are readily available and are representative of the bid side of the
market, these investments are valued at the mean between the quoted bid and
asked prices. Investments for which, in the judgment of the pricing service,
there is no readily obtainable market quotation (which may constitute a majority
of the portfolio securities) are carried at fair value of securities of similar
type, yield and maturity. Pricing services generally determine value by
reference to transactions in municipal obligations, quotations from municipal
bond dealers, market transactions in comparable securities and various
relationships between securities. Short-term instruments maturing within 60 days
will be valued at cost plus (minus) amortized discount (premium), if any, when
amortized cost approximates 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 Trustees.
    


                                                                              17
<PAGE>

--------------------------------------------------------------------------------
Dividends, Distributions and Taxes
--------------------------------------------------------------------------------

   
      DIVIDENDS AND DISTRIBUTIONS

      Dividends from the Portfolio's net investment income are paid monthly, and
any net realized capital gain are declared and distributed at least annually.
    

      If a shareholder does not otherwise instruct, dividends and capital gain
distributions will be reinvested automatically in additional shares of the same
Class at net asset value, subject to no sales charge or CDSC.

      Income dividends and capital gains distributions that are invested are
credited to shareholders' accounts in additional shares at the net asset value
as of the close of business on the payment date. A shareholder may change the
option at any time by notifying his or her Smith Barney Financial Consultant.
Accounts held directly by the Fund's transfer agent, First Data Investor
Services Group, Inc. ("First Data") should notify First Data in writing at least
five business days prior to the payment date to permit the change to be entered
in the shareholder's account.

   
      The per share dividends on Class B and Class L shares of the Portfolio may
be lower than the per share dividends on Class A and Class Y shares principally
as a result of the distribution fee applicable with respect to Class B and Class
L shares. The per share dividends on Class A shares of the Portfolio may be
lower than the per share dividends on Class Y shares principally as a result of
the service fee applicable to Class A shares. Distributions of capital gains, if
any, will be in the same amount for Class A, Class B, Class L and Class Y
shares.

      TAXES

      The following is a summary of the material tax considerations affecting
the Portfolio and its shareholders. Please refer to the SAI for further
discussion. In addition to the considerations described below and in the SAI,
there may be other federal, state, local, or foreign tax implications to
consider. Because taxes are a complex matter, prospective shareholders are urged
to consult their tax advisors for more detailed information with respect to the
tax consequences of an investment.

      The Portfolio intends to qualify, as it has in prior years, under
Subchapter M of the Internal Revenue Code (the "Code") for tax treatment as a
separate regulated investment company. In each taxable year that the Portfolio
qualifies, so long as such qualification is in the best interests of its
shareholders, the Portfolio will pay no federal income tax on its net investment
income and long-term capital gain that is distributed to shareholders, provided
the Portfolio distributes at least 90% of its net investment income and net
short-term capital gains for the taxable year. The Portfolio also intends to
satisfy conditions that will enable it to pay "exempt-interest dividends" to
shareholders. Exempt-interest dividends are generally not subject to regular
federal income taxes, although they may be considered taxable for certain state
and local income (or intangible) tax purposes.

      Exempt-interest dividends attributable to interest received by the
Portfolio on 
    


18
<PAGE>

--------------------------------------------------------------------------------
Dividends, Distributions and Taxes (continued)
--------------------------------------------------------------------------------

   
certain "private-activity" bonds will be treated as a specific tax preference
item to be included in a shareholder's alternative minimum tax computation. All
exempt-interest dividends will be a component of the "current earnings"
adjustment item for purposes of the federal corporate alternative minimum tax.
Exempt-interest dividends derived from the interest earned on private activity
bonds will not be exempt from federal income tax for those shareholders who are
"substantial users" (or persons related to "substantial users") of the
facilities financed by these bonds.

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

      The interest expense incurred by a shareholder on borrowing made to
purchase or carry Portfolio shares is not deductible for federal income tax
purposes to the extent related to the exempt-interest dividends received on such
shares.

      Dividends paid by the Portfolio from interest income on taxable
investments, net realized short-term securities gains and all or a portion of
any gains realized from the sale or other disposition of certain market discount
bonds are subject to federal income tax as ordinary income. Distributions, if
any, from net realized long-term securities gains derived from the sale of bonds
held by the Portfolio for more than one year are taxable as long-term capital
gains regardless of the length of time a shareholder has owned Portfolio shares.

      Shareholders are required to pay tax on all taxable distributions even if
those distributions are automatically reinvested in additional shares. None of
the dividends paid by the Portfolio will qualify for the corporate dividends
received deduction. The Fund will inform shareholders of the source and tax
status of all distributions promptly after the close of each calendar year.

      A shareholder's gain or loss on the disposition of shares (whether by
redemption, sale or exchange) generally will be a long-term or short-term gain
or loss depending on whether the shares had been owned for more than 12 months,
or 12 months or less, respectively. Losses realized by a shareholder on the
disposition of shares owned for six months or less will be treated as a
long-term capital loss to the extent a capital gain dividend had been
distributed on such shares.

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


                                                                              19
<PAGE>

--------------------------------------------------------------------------------
Dividends, Distributions and Taxes (continued)
--------------------------------------------------------------------------------

   
      PENNSYLVANIA TAXES

      Exempt-interest dividends distributed by the Pennsylvania Portfolio will
not be subject to the Pennsylvania personal income tax, the corporate net income
tax or to the Philadelphia school district investment income tax to the extent
that the dividends are attributable to interest received by the Portfolio from
its investments in Pennsylvania municipal obligations and U.S. Government
obligations, including obligations issued by U.S. possessions. For Pennsylvania
personal income tax purposes, capital gain distributions are treated as ordinary
dividends and are taxed at ordinary income tax rates.
    

      Investors purchasing municipal obligations of their state of residence, or
a fund comprised of such obligations, should recognize that the benefits of the
exemption from local taxes, in addition to the exemption from Federal taxes,
necessarily limits the fund's ability to diversify geographically. Each
Portfolio will make available annually to its shareholders information
concerning the tax status of its distributions, including the amount of its
dividends designated as exempt-interest dividends and as capital gain dividends.

   
      The foregoing is only a brief summary of some of the tax considerations
generally affecting each Portfolio and its shareholders who are Pennsylvania
residents. Investors are urged to consult their tax advisors with specific
reference to their own tax situation.
    

--------------------------------------------------------------------------------
PURCHASE OF SHARES
--------------------------------------------------------------------------------

      GENERAL

   
      The Portfolio offers four Classes of shares. Class A and Class L shares
are sold to investors with an initial sales charge; Class B shares are sold
without an initial sales charge; Class B and Class L shares are subject to a
CDSC payable upon certain redemptions. Class Y shares are sold without an
initial sales charge or CDSC and are available only to investors investing a
minimum of $15,000,000 (except for purchases of Class Y shares by Smith Barney
Concert Allocation Series Inc., for which there is no minimum purchase amount).
Until June 25, 1999, purchases of Class L shares by investors who were holders
of Class C shares of the Portfolio on June 12, 1998 will not be subject to the
1% initial sales charge. See "Prospectus Summary - Alternative Purchase
Arrangements" for a discussion of factors to consider in selecting which Class
of shares to purchase.

      Purchases of Portfolio shares must be made through a brokerage account
maintained with Smith Barney, an Introducing Broker or an investment dealer in
the selling group. In addition, certain investors, including certain
institutional investors, may purchase shares directly from the Fund through
First Data. When purchasing shares of the Portfolio, investors must specify
whether the purchase is for Class A, Class B, Class L or Class Y shares. Smith
Barney and other broker/
    


20
<PAGE>

--------------------------------------------------------------------------------
PURCHASE OF SHARES (continued)
--------------------------------------------------------------------------------

dealers may charge their customers an annual account maintenance fee in
connection with a brokerage account through which an investor purchases or holds
shares. Accounts held directly at First Data are not subject to a maintenance
fee.

   
      Investors in Class A, Class B and Class L shares may open an account by
making an initial investment of at least $1,000 for each account. Investors in
Class Y shares may open an account by making an initial investment of at least
$15,000,000. Subsequent investments of at least $50 may be made for all Classes.
For shareholders purchasing shares of the Portfolio through the Systematic
Investment Plan on a monthly basis, the minimum initial investment requirement
for Class A, Class B and Class L shares and the subsequent investment
requirement for all Classes is $25. For shareholders purchasing shares of the
Portfolio through the Systematic Investment Plan on a quarterly basis, the
minimum initial investment requirement for Class A, Class B and Class L shares
and the subsequent investment requirement for all Classes is $50. There are no
minimum investment requirements in Class A shares for employees of Travelers and
its subsidiaries, including Smith Barney, a unitholder who invests distributions
from a UIT sponsored by Smith Barney, and Trustees or Directors of any
Travelers-affiliated funds, including the Smith Barney Mutual Funds, and their
spouses and children. The Fund reserves the right to waive or change minimums,
to decline any order to purchase its shares and to suspend the offering of
shares from time to time. Shares purchased will be held in the shareholder's
account by the Fund's transfer agent, First Data. Share certificates are issued
only upon a shareholder's written request to First Data. It is not recommended
that the Portfolio be used as an investment for Keogh, IRA or other qualified
retirement plans.

      Purchase orders received by the Fund or Smith Barney prior to the close of
regular trading on the NYSE, on any day the Portfolio calculates its net asset
value, are priced according to the net asset value determined on that day (the
"trade date"). Orders received by dealers or Introducing Brokers prior to the
close of regular trading on the NYSE on any day the Portfolio calculates its net
asset value, are priced according to the net asset value determined on that day,
provided the order is received by the Fund or Smith Barney prior to Smith
Barney's close of business. For shares purchased through Smith Barney or
Introducing Brokers purchasing through the Distributor, payment for Portfolio
shares is due on the third business day (the "settlement date") after the trade
date. In all other cases, payment must be made with the purchase order.
    

      SYSTEMATIC INVESTMENT PLAN

      Shareholders may make additions to their accounts at any time by
purchasing shares through a service known as the Systematic Investment Plan.
Under the Systematic Investment Plan, Smith Barney or First Data is authorized
through preauthorized transfers of at least $25 on a monthly basis or at least
$50 on a quarterly basis to charge the regular bank account or other financial
institution 


                                                                              21
<PAGE>

--------------------------------------------------------------------------------
PURCHASE OF SHARES (continued)
--------------------------------------------------------------------------------

indicated by the shareholder to provide systematic additions to the
shareholder's Portfolio account. A shareholder who has insufficient funds to
complete the transfer will be charged a fee of up to $25 by Smith Barney or
First Data. The Systematic Investment Plan also authorizes Smith Barney to apply
cash held in the shareholder's Smith Barney brokerage account or redeem the
shareholder's shares of a Smith Barney money market fund to make additions to
the account. Additional information is available from the Fund or a Smith Barney
Financial Consultant.

      INITIAL SALES CHARGE ALTERNATIVE - CLASS A SHARES

      The sales charges applicable to purchases of Class A shares of the
Portfolio are as follows:

   
================================================================================
                                                               Dealers'
                               Sales Charge                  Reallowance
                            % of             % of              as % of
Amount of Investment   Offering Price   Amount Invested     Offering Price
--------------------------------------------------------------------------------
Less than    $25,000         4.00%           4.17%             3.60%
$ 25,000 --   49,999         3.50            3.63              3.15
  50,000 --   99,999         3.00            3.09              2.70
 100,000 --  249,999         2.50            2.56              2.25
 250,000 --  499,999         1.50            1.52              1.35
 500,000    and over           *               *                 *
===============================================================================

      *Purchases of Class A shares of $500,000 or more will be made at net asset
value without any initial sales charge, but will be subject to a CDSC of 1.00%
on redemptions made within 12 months of purchase. The CDSC on Class A shares is
payable to Smith Barney, which compensates Smith Barney Financial Consultants
and other dealers whose clients make purchases of $500,000 or more. The CDSC is
waived in the same circumstances in which the CDSC applicable to Class B and
Class L shares is waived. See "Deferred Sales Charge Alternatives" and "Waivers
of CDSC."
    

      Members of the selling group may receive up to 90% of the sales charge and
may be deemed to be underwriters of the Fund as defined in the Securities Act of
1933, as amended.

      The reduced sales charges shown above apply to the aggregate of purchases
of Class A shares of the Portfolio made at one time by "any person," which
includes an individual and his or her immediate family, or a trustee or other
fiduciary of a single trust estate or single fiduciary account.

   
      INITIAL SALES CHARGE WAIVERS -- CLASS A SHARES

      Purchases of Class A shares may be made at net asset value without a sales
charge in the following circumstances: (a) sales to (i) Board members and
employees of Travelers and its subsidiaries and of any Travelers-affiliated
funds, including the Smith Barney Mutual Funds (including retired Board Members
and employees); the immediate families of such persons (including the surviving
spouse
    


22
<PAGE>

--------------------------------------------------------------------------------
PURCHASE OF SHARES (continued)
--------------------------------------------------------------------------------

of a deceased Board Member or employee); and to a pension, profit-sharing or
other benefit plan for such persons and (ii) employees of members of the
National Association of Securities Dealers, Inc., provided such sales are made
upon the assurance of the purchaser that the purchase is made for investment
purposes and that the securities will not be resold except through redemption or
repurchase; (b) offers of Class A shares to any other investment company to
effect the combination of such company with the Portfolio by merger, acquisition
of assets or otherwise; (c) purchases of Class A shares by any client of a newly
employed Smith Barney Financial Consultant (for a period up to 90 days from the
commencement of the Financial Consultant's employment with Smith Barney), on the
condition the purchase of Class A shares is made with the proceeds of the
redemption of shares of a mutual fund which (i) was sponsored by the Financial
Consultant's prior employer, (ii) was sold to the client by the Financial
Consultant and (iii) was subject to a sales charge; (d) purchases by
shareholders who have redeemed Class A shares in the Portfolio (or Class A
shares of another fund of the Smith Barney Mutual Funds that are sold with a
sales charge) and who wish to reinvest their redemption proceeds in the
Portfolio, provided the reinvestment is made within 60 calendar days of the
redemption; (e) purchases by accounts managed by registered investment advisory
subsidiaries of Travelers; (f) investments of distributions from a UIT sponsored
by Smith Barney; and (g) purchases by investors participating in a Smith Barney
fee-based arrangement. In order to obtain such discounts, the purchaser must
provide sufficient information at the time of purchase to permit verification
that the purchase would qualify for the elimination of the sales charge.

      RIGHT OF ACCUMULATION

   
      Class A shares of the Portfolio may be purchased by "any person" (as
defined above) at a reduced sales charge or at net asset value determined by
aggregating the dollar amount of the new purchase and the total net asset value
of all Class A shares of the Portfolio and other Smith Barney Mutual Funds
offered with a sales charge, as currently, listed under "Exchange Privilege,"
then held by such person and applying the sales charge applicable to such
aggregate. In order to obtain such discount, the purchaser must provide
sufficient information at the time of purchase to permit verification that the
purchase qualifies for the reduced sales charge. The right of accumulation is
subject to modification or discontinuance at any time with respect to all shares
purchased thereafter.
    

      GROUP PURCHASES

      Upon completion of certain automated systems, a reduced sales charge or
purchase at net asset value will also be available to employees (and partners)
of the same employer purchasing as a group, provided each participant makes the
minimum initial investment required. The sales charge applicable to purchases by
each member of such a group will be determined by the table set forth above


                                                                              23
<PAGE>

--------------------------------------------------------------------------------
PURCHASE OF SHARES (continued)
--------------------------------------------------------------------------------

   
under "Initial Sales Charge Alternative -- Class A Shares," and will be based
upon the aggregate sales of Class A shares of Smith Barney Mutual Funds offered
with a sales charge to, and share holdings of, all members of the group. To be
eligible for such reduced sales charges or to purchase at net asset value, all
purchases must be pursuant to an employer- or partnership-sanctioned plan
meeting certain requirements. One such requirement is that the plan must be open
to specified partners or employees of the employer and its subsidiaries, if any.
Such plan may, but is not required to, provide for payroll deductions. The
Distributor may also offer a reduced sales charge or net asset value purchase
for aggregating related fiduciary accounts under such conditions that it will
realize economies of sales efforts and sales related expenses. An individual who
is a member of a qualified group may also purchase Class A shares at the reduced
sales charge applicable to the group as a whole. The sales charge is based upon
the aggregate dollar value of Class A shares offered with a sales charge that
have been previously purchased and are still owned by the group, plus the amount
of the current purchase. A "qualified group" is one which (a) has been in
existence for more than six months, (b) has a purpose other than acquiring
Portfolio shares at a discount and (c) satisfies uniform criteria which enable
Smith Barney to realize economies of scale in its costs of distributing shares.
A qualified group must have more than 10 members, must be available to arrange
for group meetings between representatives of the Portfolio and the members, and
must agree to include sales and other materials related to the Portfolio in its
publications and mailings to members at no cost to the Distributor. In order to
obtain such reduced sales charge or to purchase at net asset value, the
purchaser must provide sufficient information at the time of purchase to permit
verification that the purchase qualifies for the reduced sales charge. Approval
of group purchase reduced sales charge plans is subject to the discretion of the
Distributor.
    

      LETTER OF INTENT

      Class A Shares. A Letter of Intent for amounts of $50,000 or more provides
an opportunity for an investor to obtain a reduced sales charge by aggregating
investments over a 13 month period, provided that the investor refers to such
Letter when placing orders. For purposes of a Letter of Intent, the "Amount of
Investment" as referred to in the preceding sales charge table includes
purchases of all Class A shares of the Portfolio and other funds of the Smith
Barney Mutual Funds offered with a sales charge over the 13 month period based
on the total amount of intended purchases plus the value of all Class A shares
previously purchased and still owned. An alternative is to compute the 13 month
period starting up to 90 days before the date of execution of a Letter of
Intent. Each investment made during the period receives the reduced sales charge
applicable to the total amount of the investment goal. If the goal is not
achieved within the period, the investor must pay the difference between the
sales charges applicable to the purchases made and the 


24
<PAGE>

--------------------------------------------------------------------------------
PURCHASE OF SHARES (continued)
--------------------------------------------------------------------------------

charges previously paid, or an appropriate number of escrowed shares will be
redeemed. Please contact a Smith Barney Financial Consultant or First Data to
obtain a Letter of Intent application.

   
      Class Y Shares. A Letter of Intent may also be used as a way for investors
to meet the minimum investment requirement for Class Y shares. Such investors
must make an initial minimum purchase of $5,000,000 in Class Y shares of the
Portfolio and agree to purchase a total of $15,000,000 of Class Y shares of the
Portfolio within six months from the date of the Letter. If a total investment
of $15,000,000 is not made within the six-month period, all Class Y shares
purchased to date will be transferred to Class A shares, where they will be
subject to all fees (including a service fee of 0.15%) and expenses applicable
to the Portfolio's Class A shares, which may include a CDSC of 1.00%. Please
contact a Smith Barney Financial Consultant or First Data for further
information.

      INITIAL SALES CHARGE ALTERNATIVE -- CLASS L SHARES

      The sales charge applicable to purchases of Class L shares is 1.00% of the
public offering price, which is 1.01% of the amount invested, and all of this
amount is reallowed to dealers who sell Class L shares.

      The initial sales charge on Class L shares is paid to the Distributor.
Members of the selling group may be deemed to be underwriters of the Fund as
defined in the Securities Act of 1933, as amended.
    

      DEFERRED SALES CHARGE ALTERNATIVES

   
      "CDSC Shares" including any shares for which a CDSC may be imposed on
certain redemptions. "CDSC Shares" are: (a) Class B shares; (b) Class L shares;
and (c) Class A shares that were purchased without an initial sales charge but
subject to a CDSC.

      Any applicable CDSC will be assessed on an amount equal to the lesser of
the original investment in the shares being redeemed or their account value at 
the time of redemption. CDSC Shares that are redeemed will not be subject to
 a CDSC to the extent that the value of such shares represents: (a) capital
 appreciation of Portfolio assets; (b) reinvestment of dividends or capital gain
distributions; (c) with respect to Class B shares, shares redeemed more than
five years after their purchase; or (d) with respect to Class L shares and Class
A shares that are CDSC Shares, shares redeemed more than 12 months after their
purchase.

      Class L shares and Class A shares that are CDSC Shares are subject to a
1.00% CDSC if redeemed within 12 months of purchase. In circumstances in which
the CDSC is imposed on Class B shares, the amount of the charge will depend on
the number of years since the shareholder made the purchase payment from which
the amount is being redeemed. Solely for purposes of determining the number of
years
    


                                                                              25
<PAGE>

--------------------------------------------------------------------------------
PURCHASE OF SHARES (continued)
--------------------------------------------------------------------------------

   
since a purchase payment, all purchase payments made during a month will be
aggregated and deemed to have been made on the last day of the preceding Smith
Barney statement month. The following table sets forth the CDSC for redemptions
of Class B shares by shareholde of the Portfolio:
    

      Year Since Purchase
      Payment Was Made                      CDSC
      ----------------------------------------------
      First                                 4.50%
      Second                                4.00
      Third                                 3.00
      Fourth                                2.00
      Fifth                                 1.00
      Sixth and thereafter                  0.00
      ----------------------------------------------

      Class B shares will convert automatically to Class A shares eight years
after the date on which they were purchased and thereafter will no longer be
subject to any distribution fees. There will be converted at that time such
proportion of his or her Class B Dividend Shares owned by the shareholder as the
total number of his or her Class B shares converting at the time bears to the
total number of outstanding Class B shares (other than Class B Dividend Shares)
owned by the shareholder. See "Prospectus Summary -- Alternative Purchase
Arrangements -- Class B Shares Conversion Feature."

      In determining the applicability of any CDSC, it will be assumed that a
redemption is made first of shares representing capital appreciation, next of
shares representing the reinvestment of dividends and capital gain distributions
and finally of other shares held by the shareholder for the longest period of
time. The length of time that CDSC Shares acquired through an exchange have been
held will be calculated from the date that the shares exchanged were initially
acquired in one of the other Smith Barney Mutual Funds, and Portfolio shares
being redeemed will be considered to represent, as applicable, capital
appreciation or dividend and capital gain distribution reinvestments in such
other funds. For Federal income tax purposes, the amount of the CDSC will reduce
the gain or increase the loss, as the case may be, on the amount realized on
redemption. The amount of any CDSC will be paid to Smith Barney.

      To provide an example, assume an investor purchased 100 Class B shares at
$10 per share for a cost of $1,000. Subsequently, the investor acquired 5
additional shares through dividend reinvestment. During the fifteenth month
after the purchase, the investor decided to redeem $500 of his or her
investment. Assuming at the time of the redemption the net asset value had
appreciated to $12 per share, the value of the investor's shares would be $1,260
(105 shares at $12 per share). The CDSC would not be applied to the amount which
represents appreciation ($200) and the value of the reinvested dividend shares
($60). Therefore, $240 of the $500


26
<PAGE>

--------------------------------------------------------------------------------
PURCHASE OF SHARES (continued)
--------------------------------------------------------------------------------

redemption proceeds ($500 minus $260) would be charged at a rate of 4.00% (the
applicable rate for Class B shares) for a total deferred sales charge of $9.60.

      WAIVERS OF CDSC

      The CDSC will be waived on: (a) exchanges (see "Exchange Privilege"); (b)
automatic cash withdrawals in amounts equal to or less than 1.00% per month of
the value of the shareholder's shares at the time the withdrawal plan commences
(see "Automatic Cash Withdrawal Plan") (provided, however, that automatic cash
withdrawals in amounts equal to or less than 2.00% per month of the value of the
shareholder's shares will be permitted for withdrawal plans that were
established prior to November 7, 1994); (c) redemptions of shares within twelve
months following the death or disability of the shareholder; (d) involuntary
redemptions; and (e) redemptions of shares to effect a combination of the
Portfolio with any investment company by merger, acquisition of assets or
otherwise. In addition, a shareholder who has redeemed shares from other funds
of the Smith Barney Mutual Funds may, under certain circumstances, reinvest all
or part of the redemption proceeds within 60 days and receive pro rata credit
for any CDSC imposed on the prior redemption.

      CDSC waivers will be granted subject to confirmation (by Smith Barney in
the case of shareholders who are also Smith Barney clients or by First Data in
the case of all other shareholders) of the shareholder's status or holdings, as
the case may be.

--------------------------------------------------------------------------------
Exchange Privilege
--------------------------------------------------------------------------------

   
      Except as otherwise noted below, shares of each Class may be exchanged for
shares of the same Class in the following funds of the Smith Barney Mutual
Funds, to the extent shares are offered for sale in the shareholder's state of
residence. Exchanges of Class A, Class B and Class L shares are subject to
minimum investment requirements and all shares are subject to the other
requirements of the fund into which exchanges are made. 
    

Fund Name
--------------------------------------------------------------------------------

Growth Funds

   
    Concert Peachtree Growth Fund
    Concert Social Awareness Fund
    Smith Barney Aggressive Growth Fund Inc.
    Smith Barney Appreciation Fund Inc.
    Smith Barney Balanced Fund
    Smith Barney Contrarian Fund
    Smith Barney Convertible Fund
    Smith Barney Fundamental Value Fund Inc.
    


                                                                              27
<PAGE>

--------------------------------------------------------------------------------
Exchange Privilege (continued)
--------------------------------------------------------------------------------

   
    Smith Barney Funds, Inc. -- Large Cap Value Fund
    Smith Barney Large Cap Blend Fund
    Smith Barney Large Capitalization Growth Fund
    Smith Barney Natural Resources Fund Inc.
    Smith Barney Premium Total Return Fund
    Smith Barney Small Cap Blend Fund, Inc.
    Smith Barney Special Equities Fund

Taxable Fixed-Income Funds

 ** Smith Barney Adjustable Rate Government Income Fund
    Smith Barney Diversified Strategic Income Fund
*** Smith Barney Funds, Inc. -- Short-Term High Grade Bond Fund
    Smith Barney Funds, Inc. -- U.S. Government Securities Fund
    Smith Barney Government Securities Fund
    Smith Barney High Income Fund
    Smith Barney Investment Grade Bond Fund
    Smith Barney Managed Governments Fund Inc.
    Smith Barney Total Return Bond Fund
    

Tax-Exempt Funds

   
    Smith Barney Arizona Municipals Fund Inc.
    Smith Barney California Municipals Fund Inc.
  * Smith Barney Intermediate Maturity California Municipals Fund
  * Smith Barney Intermediate Maturity New York Municipals Fund
    Smith Barney Managed Municipals Fund Inc.
    Smith Barney Massachusetts Municipals Fund
    Smith Barney Municipal High Income Fund
    Smith Barney Muni Funds -- Florida Portfolio
    Smith Barney Muni Funds -- Georgia Portfolio
  * Smith Barney Muni Funds -- Limited Term Portfolio
    Smith Barney Muni Funds -- National Portfolio
    Smith Barney Muni Funds -- New York Portfolio
    Smith Barney New Jersey Municipals Fund Inc.
    Smith Barney Oregon Municipals Fund

Global International Funds

    Smith Barney Hansberger Global Small Cap Value Fund
    Smith Barney Hansberger Global Value Fund
    Smith Barney World Funds, Inc. -- Emerging Markets Portfolio
    Smith Barney World Funds, Inc. -- European Portfolio
    Smith Barney World Funds, Inc. -- Global Government Bond Portfolio
    Smith Barney World Funds, Inc. -- International Balanced Portfolio
    Smith Barney World Funds, Inc. -- International Equity Portfolio
    Smith Barney World Funds, inc. -- Pacific Portfolio
    


28
<PAGE>

--------------------------------------------------------------------------------
Exchange Privilege (continued)
--------------------------------------------------------------------------------

Smith Barney Concert Allocation Series Inc.

   
    Smith Barney Concert Allocation Series Inc. -- Balanced Portfolio
    Smith Barney Concert Allocation Series Inc. -- Conservative Portfolio
    Smith Barney Concert Allocation Series Inc. -- Global Portfolio
    Smith Barney Concert Allocation Series Inc. -- Growth Portfolio
    Smith Barney Concert Allocation Series Inc. -- High Growth Portfolio
    Smith Barney Concert Allocation Series Inc. -- Income Portfolio
    

Money Market Funds

   
  + Smith Barney Exchange Reserve Fund
*** Smith Barney Money Funds, Inc. -- Cash Portfolio
*** Smith Barney Money Funds, Inc. -- Government Portfolio
 ++ Smith Barney Money Funds, Inc. -- Retirement Portfolio
*** Smith Barney Municipal Money Market Fund, Inc.
*** Smith Barney Muni Funds -- California Money Market Portfolio
*** Smith Barney Muni Funds -- New York Money Market Portfolio

------------
*   Available for exchange with Class A, Class L and Class Y shares of the
    Portfolio. 
    

**  Available for exchange with Class A and Class B shares of the Portfolio.

*** Available for exchange with Class A and Class Y shares of the Portfolio. 

   
+   Available for exchange with Class B and Class L shares of the Portfolio.
    

++  Available for exchange with Class A shares of the Portfolio.

      Class B Exchanges. In the event a Class B shareholder wishes to exchange
all or a portion of his or her shares in any of the funds imposing a higher CDSC
than that imposed by the Portfolio, the exchanged Class B shares will be subject
to the higher applicable CDSC. Upon an exchange, the new Class B shares will be
deemed to have been purchased on the same date as the Class B shares of the
Portfolio that have been exchanged.

   
      Class L Exchanges. Upon an exchange, the new Class L shares will be deemed
to have been purchased on the same date as the Class L shares of the Portfolio
that have been exchanged.
    

      Class A and Class Y Exchanges. Class A and Class Y shareholders of the
Portfolio who wish to exchange all or a portion of their shares for shares of
the respective Class in any of the funds identified above may do so without
imposition of any charge.

   
      Additional Information Regarding the Exchange Privilege. Excessive
exchange transactions can be detrimental to the Portfolio's performance and its
shareholders. The investment manager may determine that a pattern of frequent
exchanges is excessive and contrary to the best interests of the Portfolio's
other shareholders. In this event, the Fund may, at its discretion, decide to
limit additional purchases and/or exchanges by the shareholder. Upon such a
determination, the Fund will provide notice in writing or by telephone to the
shareholder at least 15 
    


                                                                              29
<PAGE>

--------------------------------------------------------------------------------
Exchange Privilege (continued)
--------------------------------------------------------------------------------

days prior to suspending the exchange privilege and during the 15 day period the
shareholder will be required to (a) redeem his or her shares in the Portfolio or
(b) remain invested in the Portfolio or exchange into any of the funds of the
Smith Barney Mutual Funds ordinarily available, which position the shareholder
would be expected to maintain for a significant period of time. All relevant
factors will be considered in determining what constitutes an abusive pattern of
exchanges.

      Certain shareholders may be able to exchange shares by telephone. See
"Redemption of Shares -- Telephone Redemption and Exchange Program." Exchanges
will be processed at the net asset value next determined. Redemption procedures
discussed below are also applicable for exchanging shares, and exchanges will be
made upon receipt of all supporting documents in proper form. If the account
registration of the shares of the fund being acquired is identical to the
registration of the shares of the fund exchanged, no signature guarantee is
required. A capital gain or loss for tax purposes will be realized upon the
exchange, depending upon the cost or other basis of shares redeemed. Before
exchanging shares, investors should read the current prospectus describing the
shares to be acquired. The Portfolio reserves the right to modify or discontinue
exchange privileges upon 60 days' prior notice to shareholders.

--------------------------------------------------------------------------------
Redemption of Shares
--------------------------------------------------------------------------------

      The Fund is required to redeem the shares of the Portfolio tendered to it,
as described below, at a redemption price equal to their net asset value per
share next determined after receipt of a written request in proper form at no
charge other than any applicable CDSC. Redemption requests received after the
close of regular trading on the NYSE are priced at the net asset value next
determined. If a shareholder holds shares in more than one Class, any request
for redemption must specify the Class being redeemed. In the event of a failure
to specify which Class, or if the investor owns fewer shares of the Class than
specified, the redemption request will be delayed until the Fund's transfer
agent receives further instructions from Smith Barney, or if the shareholder's
account is not with Smith Barney, from the shareholder directly. The redemption
proceeds will be remitted on or before the third business day following receipt
of proper tender, except on any days on which the NYSE is closed or as permitted
under the 1940 Act in extraordinary circumstances. Generally, if the redemption
proceeds are remitted to a Smith Barney brokerage account, these funds will not
be invested for the shareholder's benefit without specific instruction and Smith
Barney will benefit from the use of temporarily uninvested funds. Redemption
proceeds for shares purchased by check, other than a certified or official bank
check, will be remitted upon clearance of the check, which may take up to ten
days or more.

      Shares held by Smith Barney as custodian must be redeemed by submitting a
written request to a Smith Barney Financial Consultant. Shares other than those


30
<PAGE>

--------------------------------------------------------------------------------
Redemption of Shares (continued)
--------------------------------------------------------------------------------

held by Smith Barney as custodian may be redeemed through an investor's
Financial Consultant, Introducing Broker or dealer in the selling group or by
submitting a written request for redemption to:

   
      Smith Barney Muni Funds/Pennsylvania Portfolio 
      Class A, B, L or Y (please specify) 
      c/o First Data Investor Services Group, Inc.
      P.O. Box 5128
      Boston, Massachusetts 01581-5128

      A written redemption request must (a) state the Class and number or dollar
amount of shares to be redeemed, (b) identify the shareholder's account number
and (c) be signed by each registered owner exactly as the shares are registered.
If the shares to be redeemed were issued in certificate form, the certificates
must be endorsed for transfer (or be accompanied by an endorsed stock power) and
must be submitted to First Data together with the redemption request. Any
signature appearing on a share certificate, stock power or written redemption
request in excess of $10,000 must be guaranteed by an eligible guarantor
institution such as a domestic bank, savings and loan institution, domestic
credit union, member bank of the Federal Reserve System or member firm of a
national securities exchange. Written redemption requests of $10,000 or less do
not require a signature guarantee unless more than one such redemption request
is made in any 10-day period. Redemption proceeds will be mailed to an
investor's address of record. First Data may require additional supporting
documents for redemptions made by corporations, executors, administrators,
trustees or guardians. A redemption request will not be deemed properly received
until First Data receives all required documents in proper form.
    

      TELEPHONE REDEMPTION AND EXCHANGE PROGRAM

   
      Shareholders who do not have a Smith Barney brokerage account may be
eligible to redeem and exchange portfolio shares by telephone. To determine if a
shareholder is entitled to participate in this program, he or she should contact
First Data at 1-800-451-2010. Once eligibility is confirmed, the shareholder
must complete and return a Telephone/Wire Authorization Form, including a
signature guarantee, that will be provided by First Data upon request.
Alternatively, an investor may authorize telephone redemptions on the new
account application with the applicant's signature guarantee when making his/her
initial investment in the Portfolio.

      Redemptions. Redemption requests of up to $10,000 of any class or classes
of the Portfolio's shares, may be made by eligible shareholders by calling First
Data at 1-800-451-2010. Such requests may be made between 9:00 a.m. and 4:00
p.m. (New York City time) on any day the NYSE is open. Redemption requests
received after the close of regular trading on the NYSE are priced at the net
asset value next determined. Redemptions of shares (i) by retirement plans or
(ii) for which certificates have been issued are not permitted under this
program.
    


                                                                              31
<PAGE>

--------------------------------------------------------------------------------
Redemption of Shares (continued)
--------------------------------------------------------------------------------

      A shareholder will have the option of having the redemption proceeds
mailed to his/her address of record or wired to a bank account predesignated by
the shareholder. Generally, redemption proceeds will be mailed or wired, as the
case may be, on the next business day following the redemption request. In order
to use the wire procedures, the bank receiving the proceeds must be a member of
the Federal Reserve System or have a correspondent relationship with a member
bank. The Fund reserves the right to charge shareholders a nominal fee for each
wire redemption. Such charges, if any, will be assessed against the
shareholder's account from which shares were redeemed. In order to change the
bank account designated to receive redemption proceeds, a shareholder must
complete a new Telephone/Wire Authorization Form and, for the protection of the
shareholder's assets, will be required to provide a signature guarantee and
certain other documentation.

   
      Exchanges. Eligible shareholders may make exchanges by telephone if the
account registration of the shares of the fund being acquired is identical to
the registration of the shares of the fund exchanged. Such exchange requests may
be made by calling First Data at 1-800-451-2010 between 9:00 a.m. and 4:00 p.m.
(New York City time) on any day on which the NYSE is open.
    

      Additional Information regarding Telephone Redemption and Exchange
Program. Neither the Fund nor its agents will be liable for following
instructions communicated by telephone that are reasonably believed to be
genuine. The Fund and its agents will employ procedures designed to verify the
identity of the caller and legitimacy of instructions (for example, a
shareholder's name and account number will be required and phone calls may be
recorded). The Fund reserves the right to suspend, modify or discontinue the
telephone redemption and exchange program or to impose a charge for this service
at any time following at least seven (7) days' prior notice to shareholders.

      AUTOMATIC CASH WITHDRAWAL PLAN

      The Portfolio offers shareholders an automatic cash withdrawal plan, under
which shareholders who own shares with a value of at least $10,000 may elect to
receive cash payments of at least $50 monthly or quarterly. The withdrawal plan
will be carried over on exchanges between funds or Classes of the Portfolio. Any
applicable CDSC will not be waived on amounts withdrawn by a shareholder that
exceed 1.00% per month of the value of the shareholder's shares subject to the
CDSC at the time the withdrawal plan commences. (With respect to withdrawal
plans in effect prior to November 7, 1994, any applicable CDSC will be waived on
amounts withdrawn that do not exceed 2.00% per month of the value of the
shareholder's shares subject to the CDSC). For further information regarding the
automatic cash withdrawal plan, shareholders should contact a Smith Barney
Financial Consultant. 


32
<PAGE>

--------------------------------------------------------------------------------
Minimum Account Size
--------------------------------------------------------------------------------

      The Fund reserves the right to involuntarily liquidate any shareholder's
account if the aggregate value of the shares held in a Portfolio account is less
than $500. (If a shareholder has more than one account in this Portfolio, each
account must satisfy the minimum account size.) The Fund, however, will not
redeem shares based solely on market reductions in net asset value. Before the
Fund exercises such right, shareholders will receive written notice and will be
permitted 60 days to bring the account up to the minimum to avoid involuntary
liquidation.

--------------------------------------------------------------------------------
Performance
--------------------------------------------------------------------------------

   
      From time to time the Portfolio may advertise its yield, taxable
equivalent yield, total return and average annual total return in
advertisements. In addition, in other types of sales literature the Portfolio
may also include its distribution rate. These figures are computed separately
for Class A, Class B, Class L and Class Y shares of the Portfolio. These figures
are based on historical earnings and are not intended to indicate future
performance. The yield of a Portfolio Class refers to the net income earned by
investments in the Class over a thirty-day period ending at month end. This net
income is then annualized, i.e., the amount of income earned by the investments
during that 30-day period is assumed to be earned each 30-day period for twelve
periods and is expressed as a percentage of the investments. The taxable
equivalent yield is calculated similarly to the yield, except that a stated
income tax rate is used to demonstrate the taxable yield necessary to produce an
after-tax yield equivalent to the tax-exempt yield of the Class. The yield and
taxable equivalent yield quotations are calculated according to a formula
prescribed by the SEC to facilitate comparison with yields quoted by other
investment companies. The distribution rate is calculated by annualizing the
latest monthly distribution and dividing the result by the maximum offering
price per share as of the end of the period to which the distribution relates.
The distribution rate is not computed in the same manner as, and therefore can
be significantly different from, the above described yield. Total return is
computed for a specified period of time assuming deduction of the maximum sales
charge, if any, from the initial amount invested and reinvestment of all income
dividends and capital gain distributions on the reinvestment dates at prices
calculated as stated in this Prospectus, then dividing the value of the
investment at the end of the period so calculated by the initial amount invested
and subtracting 100%. The standard average annual total return, as prescribed by
the SEC is derived from this total return, which provides the ending redeemable
value. Such standard total return information may also be accompanied with
nonstandard total return information for differing periods computed in the same
manner but without analyzing the total return or taking sales charges into
account. The Portfolio may also include comparative performance information in
advertising or marketing its shares. Such performance information may include
data from Lipper Analytical Services, Inc. and other financial publications.
    


                                                                              33
<PAGE>

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

      BOARD OF TRUSTEES

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

      MANAGER

   
      Mutual Management Corp. ("MMC" or the "Manager"), manages the day-to-day
operations of the Portfolio pursuant to a management agreement entered into by
the Fund on behalf of the Portfolio.

      MMC was incorporated in 1968 under the laws of Delaware. MMC, Holdings and
Smith Barney are each located at 388 Greenwich Street, New York, New York 10013.
As of March 31, 1998, MMC had aggregate assets under management of approximately
$100.5 billion.

      MMC provides the Fund with investment management services and executive
and other personnel, pays the remuneration of Fund officers, provides the Fund
with office space and equipment, furnishes the Fund with bookkeeping,
accounting, administrative services and services relating to research,
statistical work and supervision of the Portfolio. For the services provided,
the management agreement provides that the Fund will pay MMC an annual fee
calculated at the rate of 0.45% of the Portfolio's average daily net assets. MMC
waived a portion of its management fee for the Portfolio for the fiscal year
March 31, 1998, and the effective rate of the management fee was 0.04%. For the
past fiscal year, total operating expenses were 0.37% of the average daily
assets for Class A shares; 0.89% of the average daily net assets for Class B
shares; and 0.94% of the average daily net assets for Class L shares. MMC has
voluntarily agreed to waive its fee if in any fiscal year the aggregate expenses
of any Class of the Portfolio exclusive of 12b-1 fees, taxes, brokerage,
interest and extraordinary expenses, such as litigation costs, exceed 0.65% of
such Class' average net asset values for that fiscal year. This voluntary
expense limitation will remain in effect until terminated by notice to
shareholders and by supplement to the then-current prospectus. In addition, as
noted above, the Manager has waived its fees on a voluntary basis in amounts
greater than that required under the foregoing voluntary expense limitation.

      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 has been
approved by the stockholders of each of Travelers and Citicorp. Travelers has
filed an application
    


34
<PAGE>

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

   
to become a bank holding company so that, 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
BHCA, the Glass-Steagall Act and certain other laws and regulations will then be
applicable to Travelers and its subsidiaries.
    

      The Manager 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. Smith Barney and the
Manager believe that the Manager's services under the Management Agreement and
the shareholder service activities performed by Smith Barney are not
underwriting and would be consistent with the Glass-Steagall Act and other
relevant federal and state laws. However, there is little controlling precedent
regarding the performance of the combination of investment advisory, shareholder
servicing and administrative activities by subsidiaries of bank holding
companies. If Smith Barney and the Manager, or their affiliates, were to be
prevented from acting as the manager or a shareholder service agent, the Fund
would seek alternative means for obtaining these services. The Fund does not
expect that shareholders would suffer any adverse financial consequences as a
result of any such occurrence.

   
      PORTFOLIO MANAGEMENT

      Peter M. Coffey, a Managing Director of Smith Barney, has served as Vice
President of the Fund and portfolio manager of the Portfolio since it commenced
operations (April 4, 1994) and manages the day-to-day investment operations of
the Portfolio including making all investment decisions. Mr. Coffey serves as
the portfolio manager for five of the Fund's non-money market portfolios.
    

      Management's discussion and analysis, and additional performance
information regarding the Portfolio during the fiscal year ended March 31, 1998
is included in the Annual Report dated March 31, 1998. A copy of the Annual
Report may be obtained upon request and without charge from a Smith Barney
Financial Consultant or by writing or calling the Fund at the address or phone
number listed on page one of this Prospectus.

--------------------------------------------------------------------------------
Distribution
--------------------------------------------------------------------------------

      Smith Barney distributes shares of the Portfolio as principal underwriter
and as such conducts a continuous offering pursuant to a "best efforts"
arrangement requiring Smith Barney to take and pay for only such securities as
may be sold to the public. Pursuant to a plan of distribution adopted by the
Portfolio under Rule 12b-1 under the 1940 Act (the "Plan"), Smith Barney is paid
a service fee with respect to Class A, Class B and Class L shares of the
Portfolio at the annual rate 


                                                                              35
<PAGE>

--------------------------------------------------------------------------------
Distribution (continued)
--------------------------------------------------------------------------------

   
of 0.15% of the average daily net asset values attributable to these Classes.
Smith Barney is also paid a distribution fee with respect to Class B and Class L
shares at the annual rate of 0.50% and 0.55%, respectively, of the average daily
net asset values attributable to these Classes. Class B shares will no longer be
subject to a distribution fee after conversion to Class A shares eight years
after the date of purchase. The fees are used by Smith Barney to pay its
Financial Consultants for servicing shareholder accounts and, in the case of
Class B and Class L shares, to cover expenses primarily intended to result in
the sale of those shares. These expenses include: advertising expenses; the cost
of printing and mailing prospectuses to potential investors; payments to and
expenses of Smith Barney Financial Consultants and other persons who provide
support services in connection with the distribution of shares; interest and/or
carrying charges; and indirect and overhead costs of Smith Barney associated
with the sale of Portfolio shares, including lease, utility, communications and
sales promotion expenses.

      The payments to Smith Barney Financial Consultants for selling shares of a
Class include a commission or fee paid by the investor or Smith Barney at the
time of sale and, with respect to Class A, Class B and Class L shares, a
continuing fee for servicing shareholder accounts for as long as a shareholder
remains a holder of that Class. Smith Barney Financial Consultants may receive
different levels of compensation for selling the different Classes of Shares.

      Payments under the Plan with respect to Class B and Class L shares are not
tied exclusively to the distribution and shareholder services expenses actually
incurred by Smith Barney, and the payments may exceed distribution expenses
actually incurred. The Fund's Board of Trustees will evaluate the
appropriateness of the Plan and its payment terms on a continuing basis and in
so doing will consider all relevant factors, including expenses borne by Smith
Barney, amounts received under the Plan and proceeds of the CDSC.

      The Glass-Steagall Act currently prohibits certain financial institutions
from underwriting securities of open-end investment companies, such as the Fund.
Therefore, in connection with the anticipated merger of Travelers and Citicorp
and as a consequence of the anticipated applicability of the BHCA and the
Glass-Steagall Act, the Fund plans to retain the services of a new entity (which
is not otherwise affiliated with Travelers) to act as distributor of the
Portfolio's shares.

--------------------------------------------------------------------------------
Additional Information
--------------------------------------------------------------------------------

      The Fund, an open-end management investment company, is organized as a
"Massachusetts business trust" pursuant to a Declaration of Trust dated August
14, 1985. Pursuant to the Declaration of Trust, the Trustees have authorized the
issuance of different series of shares, each representing shares in one of the
separate
    


36
<PAGE>

--------------------------------------------------------------------------------
Additional Information (continued)
--------------------------------------------------------------------------------

   
portfolios. The assets of each Portfolio are segregated and separately managed.
Class A, Class B, Class L and Class Y shares of each Portfolio represent
interests in the assets of that Portfolio and have identical voting, dividend,
liquidation and other rights on the same terms and conditions, except that
expenses related to the shareholder service and distribution of Class A, Class B
and Class L shares are borne solely by the respective class and each such class
of shares has exclusive voting rights with respect to provisions of the Fund's
Rule 12b-1 distribution plan which pertains to that class. It is the intention
of the Fund not to hold annual meetings of shareholders. The Board of Trustees
may call meetings of shareholders for action by shareholder vote as may be
required by the 1940 Act or the Declaration of Trust, and shareholders are
entitled to call a meeting of shareholders upon a vote of 10% of the Fund's
outstanding shares for purposes of voting on removal of a Trustee or Trustees.
Shareholders will receive assistance in communicating with other shareholders in
connection with the removal of Trustees as required by Section 16(c) of the 1940
Act. Shares do not have cumulative voting rights or preemptive rights and have
only such conversion or exchange rights as the Board of Trustees may grant in
its discretion. When issued for payment as described in this Prospectus, the
Fund's shares will be fully paid and transferrable (subject to the Portfolio's
minimum account size). Shares are redeemable as set forth under "Redemption of
Shares" and are subject to involuntary redemption as set forth under "Minimum
Account Size."
    

      PNC Bank, National Association, located at 17th and Chestnut Streets,
Philadelphia, PA 19103 serves as custodian of the Portfolio's investments.

      First Data, located at Exchange Place, Boston, Massachusetts 02109, serves
as the Fund's transfer agent.

      The Fund sends its shareholders a semi-annual report and an audited annual
report, which include listings of the investment securities held by the
Portfolio at the end of the period covered. In an effort to reduce the Fund's
printing and mailing costs, the Fund plans to consolidate the mailing of its
semi-annual and annual reports by household. This consolidation means that a
household having multiple accounts with the identical address of record will
receive a single copy of each report. Shareholders who do not want this
consolidation to apply to their account should contact their Smith Barney
Financial Consultant or the Fund's transfer agent.


                                                                              37
<PAGE>

                                                                    SMITH BARNEY
                                               A Member of Travelers Group[LOGO]


                                                                    Smith Barney
                                                                      Muni Funds
                                                                    Pennsylvania
                                                                       Portfolio


                                                            388 Greenwich Street
                                                        New York, New York 10013


   
                                                                     FD0772 7/98
    

PROSPECTUS

                                                                    SMITH BARNEY

                                                                      MUNI FUNDS

                                                                        New York

                                                                       Portfolio

   
                                                                   JULY 29, 1998
    

                                                   Prospectus begins on page one

[LOGO] Smith Barney Mutual Funds 
       Investing for your future. 
       Every day.
<PAGE>

   
--------------------------------------------------------------------------------
Prospectus                                                         July 29, 1998
--------------------------------------------------------------------------------
    

      Smith Barney Muni Funds
      New York Portfolio
      388 Greenwich Street
      New York, New York 10013
      1 800-451-2010

   
      The New York Portfolio (the "Portfolio") is one of eight investment
portfolios that currently comprise Smith Barney Muni Funds (the "Fund").
    

      The New York Portfolio seeks to pay its shareholders as high a level of
monthly income exempt from Federal income taxes and from New York State and City
personal income taxes as is consistent with prudent investing.

      The Portfolio may invest without limit in municipal obligations whose
interest is a tax-preference for purposes of the Federal alternative minimum
tax.

      This Prospectus sets forth concisely certain information about the Fund
and the Portfolio, including sales charges, distribution and service fees and
expenses, that prospective investors will find helpful in making an investment
decision. Investors are encouraged to read this Prospectus carefully and retain
it for future reference.

   
      Additional information about the Portfolio is contained in a Statement of
Additional Information dated July 29, 1998, as amended or supplemented from time
to time (the "SAI"), which is available upon request and without charge by
calling or writing the Fund at the telephone number or address set forth above
or by contacting a Smith Barney Financial Consultant. The Statement of
Additional Information has been filed with the Securities and Exchange
Commission (the "SEC") and is incorporated by reference into this Prospectus in
its entirety.
    

SMITH BARNEY INC.
Distributor

   
MUTUAL MANAGEMENT CORP.
    

Investment Manager

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


                                                                               1
<PAGE>

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

   
Prospectus Summary                                                            3
--------------------------------------------------------------------------------
Financial Highlights                                                          9
--------------------------------------------------------------------------------
Investment Objective and Management Policies                                 12
--------------------------------------------------------------------------------
Valuation of Shares                                                          18
--------------------------------------------------------------------------------
Dividends, Distributions and Taxes                                           19
--------------------------------------------------------------------------------
Purchase of Shares                                                           21
--------------------------------------------------------------------------------
Exchange Privilege                                                           28
--------------------------------------------------------------------------------
Redemption of Shares                                                         31
--------------------------------------------------------------------------------
Minimum Account Size                                                         34
--------------------------------------------------------------------------------
Performance                                                                  34
--------------------------------------------------------------------------------
Management of the Fund                                                       35
--------------------------------------------------------------------------------
Distribution                                                                 37
--------------------------------------------------------------------------------
Additional Information                                                       38
--------------------------------------------------------------------------------

================================================================================
      No person has been authorized to give any information or to make any
representations in connection with this offering other than those contained in
this Prospectus and, if given or made, such other information and
representations must not be relied upon as having been authorized by the Fund or
Smith Barney Inc. (the "Distributor"). This Prospectus does not constitute an
offer by the Fund or the Distributor to sell or a solicitation of an offer to
buy any of the securities offered hereby in any jurisdiction to any person to
whom it is unlawful to make such offer or solicitation in such jurisdiction.
    
================================================================================


2
<PAGE>

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

   
      The following summary is qualified in its entirety by detailed information
appearing elsewhere in this Prospectus and in the SAI. Cross references in this
summary are to headings in the Prospectus. See "Table of Contents."
    

      INVESTMENT OBJECTIVE The New York Portfolio seeks to pay its shareholders
as high a level of monthly income exempt from Federal income taxes and from New
York State and City personal income taxes as is consistent with prudent
investing. The Portfolio may invest without limit in municipal obligations whose
interest is a tax preference for purposes of the Federal alternative minimum
tax. See "Investment Objective and Management Policies."

   
      ALTERNATIVE PURCHASE ARRANGEMENTS The Portfolio offers several classes of
shares ("Classes") to investors designed to provide them with the flexibility of
selecting an investment best suited to their needs. The general public is
offered three Classes of shares: Class A shares, Class B shares and Class L
shares, which differ principally in terms of sales charges and rate of expenses
to which they are subject. A fourth Class of shares, Class Y shares, is offered
only to investors meeting an initial investment of at least $15,000,000. See
"Purchase of Shares" and "Redemption of Shares."
    

      Class A Shares. Class A shares are sold at net asset value plus an initial
sales charge of up to 4.00% and are subject to an annual service fee of 0.15% of
the average daily net assets of the Class. The initial sales charge may be
reduced or waived for certain purchases. Purchases of Class A shares of $500,000
or more will be made at net asset value with no initial sales charge, but will
be subject to a contingent deferred sales charge ("CDSC") of 1.00% on
redemptions made within 12 months of purchase. See "Prospectus Summary --
Reduced or No Initial Sales Charge."

      Class B Shares. Class B shares are offered at net asset value subject to a
maximum CDSC of 4.50% of redemption proceeds, declining by 0.50% the first year
after purchase and by 1.00% each year thereafter to zero. This CDSC may be
waived for certain redemptions. Class B shares are subject to an annual service
fee of 0.15% and an annual distribution fee of 0.50% of the average daily net
assets of the Class. The Class B shares' distribution fee may cause that Class
to have higher expenses and pay lower dividends than Class A shares.

      Class B Shares Conversion Feature. Class B shares will convert
automatically to Class A shares, based on relative net asset value, eight years
after the date of the original purchase. Upon conversion, these shares will no
longer be subject to an annual distribution fee. In addition, a certain portion
of Class B shares that have been acquired through the reinvestment of dividends
and distributions ("Class B Dividend Shares") will be converted at that time.
See "Purchase of Shares -- Deferred Sales Charge Alternatives."

   
      Class L Shares. Class L shares are sold at net asset value plus an initial
sales charge of 1.00% of the purchase price. They are subject to an annual
service fee of
    


                                                                               3
<PAGE>

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

   
0.15% and an annual distribution fee of 0.55% of the average daily net assets
of the Class, and investors pay a CDSC of 1.00% if they redeem Class L shares
within 12 months of purchase. The CDSC may be waived for certain redemptions.
The Class L shares' distribution fee may cause that Class to have higher
expenses and pay lower dividends than Class A shares. Purchases of Portfolio
shares, which when combined with current holdings of Class L shares of the
Portfolio equal or exceed $500,000 in the aggregate, should be made in Class A
shares at net asset value with no sales charge, which would be subject to a CDSC
of 1.00% on redemptions made within 12 months of purchase.

      Class Y Shares. Class Y shares are available only to investors meeting an
initial investment minimum of $15,000,000. Class Y shares are sold at net asset
value with no initial sales charge or CDSC. They are not subject to any service
or distribution fees.
    

      In deciding which class of Portfolio shares to purchase, investors should
consider the following factors, as well as any other relevant facts and
circumstances:

   
      Intended Holding Period. The decision as to which Class of shares is more
beneficial to an investor depends on the amount and intended length of his or
her investment. Shareholders who are planning to establish a program of regular
in vestment may wish to consider Class A shares; as the investment accumulates
shareholders may qualify for reduced sales charges and the shares are subject to
lower ongoing expenses over the term of the investment. As an alternative, Class
B shares are sold without any initial sales charge so the entire purchase price
is immediately invested in the Portfolio. Any investment return on these
additional invested amounts may partially or wholly offset the higher annual
expenses of this Class. Because the Portfolio's future return cannot be
predicted, however, there can be no assurance that this would be the case.
Finally, Class L shares, which have a lower upfront sales charge but are subject
to higher distribution fees than Class A shares, are suitable for investors who
are not investing or intending to invest an amount which would receive a sales
charge discount and who have a short-term or undetermined time frame.

      Finally, investors should consider the effect of the CDSC period and any
conversion rights of the Classes in the context of their own investment time
frame. For example, while Class L shares have a shorter CDSC period than Class B
shares, they do not have a conversion feature, and therefore, are subject to an
ongoing distribution fee. Thus, Class B shares may be more attractive than Class
L shares to investors with longer term investment outlooks.
    

      Reduced or No Initial Sales Charge. The initial sales charge on Class A
shares may be waived for certain eligible purchasers and the entire purchase
price will be immediately invested in the Portfolio. In addition, Class A share
purchases of $500,000 or more will be made at net asset value with no initial
sales charge, but


4
<PAGE>

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

   
will be subject to a CDSC of 1.00% on redemptions made within 12 months of
purchase. The $500,000 investment may be met by adding the purchase to the net
asset value of all Class A shares offered with a sales charge held in funds
sponsored by Smith Barney Inc. ("Smith Barney") listed under "Exchange
Privilege." Class A share purchases may also be eligible for a reduced initial
sales charge. See "Purchase of Shares." Because the ongoing expenses of Class A
shares may be lower than those for Class B and Class L shares, purchasers
eligible to purchase Class A shares at net asset value or at a reduced sales
charge should consider doing so.

      Smith Barney Financial Consultants may receive different compensation for
selling different Classes of shares. Investors should understand that the
purpose of the CDSC on the Class B and Class L shares is the same as that of an
initial sales charge.
    

      See "Purchase of Shares" and "Management of the Fund" for a complete
description of the sales charges and service and distribution fees for each
Class of shares and "Valuation of Shares," "Dividends, Distributions and Taxes"
and "Exchange Privilege" for other differences between the Classes of shares.

      PURCHASE OF SHARES Shares may be purchased through a brokerage account
maintained by Smith Barney. Shares may also be purchased through a broker that
clears securities transactions through Smith Barney on a fully disclosed basis
(an "Introducing Broker") or an investment dealer in the selling group. In
addition, certain investors, including certain institutional investors, may
purchase shares directly from the Fund through the Fund's transfer agent, First
Data Investor Services Group, Inc. ("First Data"). See "Purchase of Shares."

   
      INVESTMENT MINIMUMS Investors in Class A, Class B and Class L shares may
open an account by making an initial investment of at least $1,000 for each
account. Investors in Class Y shares may open an account for an initial
investment of $15,000,000. Subsequent investments of at least $50 may be made
for all Classes. The mini mum investment requirements for purchases of Portfolio
shares through the Systematic Investment Plan are described below. It is not
recommended that the Portfolio be used as a vehicle for Keogh, IRA or other
qualified retirement plans. There is no minimum investment requirement in Class
A for unitholders who invest distributions from a unit investment trust ("UIT")
sponsored by Smith Barney. It is not recommended that the Portfolio be used as
an investment for Keogh, IRA or other qualified retirement plans. See "Purchase
of Shares."

      SYSTEMATIC INVESTMENT PLAN The Portfolio offers shareholders a Systematic
Investment Plan under which they may authorize the automatic placement of a
purchase order each month or quarter for Portfolio shares. The minimum initial
investment requirement for Class A, Class B and Class L shares and the
subsequent investment requirement for all Classes for shareholders purchasing
shares through the Systematic Investment Plan on a monthly basis is $25 and on a
    


                                                                               5
<PAGE>

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

quarterly basis is $50. See "Purchase of Shares."

      REDEMPTION OF SHARES Shares may be redeemed on each day the New York Stock
Exchange, Inc. ("NYSE") is open for business. See "Purchase of Shares" and
"Redemption of Shares."

   
      MANAGEMENT OF THE PORTFOLIO Mutual Management Corp. ("MMC" or the
"Manager"), formerly known as Smith Barney Mutual Funds Management, Inc., serves
as the Portfolio's investment manager. MMC provides investment advisory and
management services to various investment companies comprising the Smith Barney
Mutual Funds. MMC is a wholly owned subsidiary of Salomon Smith Barney Holdings
Inc. ("Holdings"). Holdings is 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 Insurance Services. See "Management of the Fund."
    

      EXCHANGE PRIVILEGE Shares of a Class may be exchanged for shares of the
same Class of certain other funds of the Smith Barney Mutual Funds at the
respective net asset values next determined. See "Exchange Privilege."

      VALUATION OF SHARES Net asset value of the Portfolio for the prior day
generally is quoted daily in the financial section of most newspapers and is
also available from a Smith Barney Financial Consultant. See "Valuation of
Shares."

   
      DIVIDENDS AND DISTRIBUTIONS Dividends from net investment income are paid
monthly. Distributions of net realized capital gains, if any, are paid at least
annually. See "Dividends, Distributions and Taxes."
    

      REINVESTMENT OF DIVIDENDS Dividends and distributions paid on shares of a
Class will be reinvested automatically, unless otherwise specified by an
investor, in additional shares of the same Class at current net asset value.
Shares acquired by dividend and distribution reinvestments will not be subject
to any sales charge or CDSC. Class B shares acquired through dividend and
distribution rein vestments will become eligible for conversion to Class A
shares on a pro rata basis. See "Dividends, Distributions and Taxes."

   
      RISK FACTORS AND SPECIAL CONSIDERATIONS There can be no assurance that the
Portfolio's investment objective will be achieved. The concentration of New
York Portfolio in municipal obligations involves certain additional risks that
should be considered carefully by investors. Additionally, the value of the
Portfolio's investments, and thus the net asset value of the Portfolio's shares,
will fluctuate in response to changes in market and economic conditions, as well
as the financial condition and prospects of issuers of municipal obligations
purchased by the Portfolio. The market value of municipal bonds may be adversely
affected during periods of rising interest rates. Additionally, changes in
Federal income tax
    


6
<PAGE>

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

laws affecting the tax exemption for interest on municipal obligations could
affect the availability of tax exempt obligations for purchase and the value of
the Portfolio's securities would be affected. See "Investment Objectives and
Management Policies."

      THE PORTFOLIO'S EXPENSES The following expense table lists the costs and
expenses an investor will incur either directly or indirectly as a shareholder
of the Portfolio, based on the maximum sales charge or maximum CDSC that may be
incurred at the time of purchase or redemption and, unless otherwise noted, the
Portfolio's operating expenses for its most recent fiscal year:

   
<TABLE>
<CAPTION>
New York Portfolio                                     Class A    Class B    Class L*    Class Y
-------------------------------------------------------------------------------------------------
<S>                                                    <C>        <C>        <C>         <C> 
Shareholder Transaction Expenses
Maximum sales charge imposed on purchases
  (as a percentage of offering price) ...........      4.00%      None       1.00%*      None
Maximum CDSC (as a percentage of original cost or
  redemption proceeds, whichever is lower) ......      None**     4.50%      1.00%       None

Annual Portfolio Operating Expenses
(as a percentage of average net assets)
    Management fees .............................      0.50%      0.50%      0.50%       0.50%
    12b-1 fees*** ...............................      0.15       0.65       0.70          --
    Other expenses ..............................      0.06       0.08       0.08        0.06****
                                                       ----       ----       ----        ----
Total Portfolio Operating Expenses ..............      0.71%      1.23%      1.28%       0.56%
                                                       ====       ====       ====        ====
-------------------------------------------------------------------------------------------------
</TABLE>

      *Class L shares were previously named Class C shares. For shareholders who
owned Class C shares of the Portfolio, Class L shares may be purchased without
incurring the 1% initial sales charge until June 25, 1999.

      **Purchases of Class A shares of $500,000 or more will be made at net
asset value with no sales charge, but will be subject to a CDSC of 1.00% on
redemptions made within 12 months of purchase.

      ***Upon conversion of Class B shares to Class A shares, such shares will
no longer be subject to a distribution fee. Class L shares do not have a
conversion feature and, therefore, are subject to an ongoing distribution fee.
As a result, long-term shareholders of Class L shares may pay more than the
economic equivalent of the maximum front-end sales charge permitted by the
National Association of Securities Dealers, Inc.

      ****"Other expenses" for Class Y shares have been estimated because no
Class Y shares were outstanding for the fiscal year ended March 31, 1998.
    

      Class A shares of the Portfolio purchased through the Smith Barney Asset
One Program will be subject to an annual asset-based fee, payable quarterly, in
lieu of the initial sales charge. The fee will vary to a maximum of 1.50%,
depending on the amount of assets held through the Program. For more
information, please call your Smith Barney Financial Consultant.

      The sales charge and CDSC set forth in the above table are the maximum
charges imposed on purchases or redemptions of Portfolio shares and investors
may 


                                                                               7
<PAGE>

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

   
actually pay lower or no charges, depending on the amount purchased and, in the
case of Class B, Class L and certain Class A shares, the length of time the
shares are held. See "Purchase of Shares" and "Redemption of Shares." Smith
Barney receives an annual 12b-1 service fee of 0.15% of the value of average
daily net assets of Class A shares. Smith Barney also receives with respect to
Class B shares an annual 12b-1 fee of 0.65% of the value of average daily net
assets of that Class, consisting of a 0.50% distribution fee and a 0.15% service
fee. With respect to Class L shares, Smith Barney also receives an annual 12b-1
fee of 0.70% of the value of average daily net assets of that Class, consisting
of a 0.55% distribution fee and a 0.15% service fee. "Other expenses" in the
above table include fees for shareholder services, custodial fees, legal and
accounting fees, printing costs and registration fees.
    

      EXAMPLE

      The following example is intended to assist an investor in understanding
the various costs that an investor in the Portfolio will bear directly or
indirectly. The example assumes payment by the Portfolio of operating expenses
at the levels set forth in the table above. See "Purchase of Shares,"
"Redemption of Shares" and "Management of the Fund."

   
New York Portfolio             1 Year        3 Years       5 Years     10 Years*
--------------------------------------------------------------------------------
An investor would pay the following expenses on a $1,000 
 investment, assuming (1) 5.00% annual return and 
 (2) redemption at the end of each time period:

      Class A ..........       $47           $62           $78          $125
      Class B ..........        58            69            78           134
      Class L ..........        33            50            80           163
      Class Y ..........         6            18            31            70
--------------------------------------------------------------------------------
An investor would pay the following expenses on the same 
 investment, assuming the same annual return and no redemption:

                               1 Year        3 Years       5 Years     10 Years*
--------------------------------------------------------------------------------
      Class A ..........        $47           $62           $78          $125
      Class B ..........         13            39            68           134
      Class L ..........         23            50            80           163
      Class Y ..........          6            18            31            70
--------------------------------------------------------------------------------
    

*Ten-year figures assume conversion of Class B shares to Class A shares at the
end of the eighth year following the date of purchase.

      The example also provides a means for the investor to compare expense
levels of funds with different fee structures over varying investment periods.
To facilitate such comparison, all funds are required to utilize a 5.00% annual
return assumption. However, each Portfolio's actual return will vary and may be
greater or less than 5.00%. This example should not be considered a
representation of past or future expenses 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 for the five-year period ended March
31, 1998 appears in the Portfolio's annual report dated March 31, 1998. The
information set forth below should be read in conjunction with the financial
statements and related notes that also appear in the Portfolio's Annual Report
to Shareholders, which is incorporated by reference into the SAI. As of March
31, 1998, no Class Y shares were outstanding and, accordingly, no comparable
information is available at this time for that class.
    

For a share of beneficial interest outstanding throughout each year:

   
<TABLE>
<CAPTION>
New York Portfolio                                               Class A Shares
-----------------------------------------------------------------------------------------------------------------------------
Year Ended
  March 31,                1998      1997      1996      1995(1)     1994      1993      1992      1991      1990      1989
-----------------------------------------------------------------------------------------------------------------------------
<S>                        <C>       <C>       <C>       <C>         <C>       <C>       <C>       <C>       <C>       <C>   
Net Asset Value,
  Beginning of
  Year                     $13.16    $13.19    $12.83    $12.83      $13.25    $12.33    $11.80    $11.67    $11.48    $11.25
-----------------------------------------------------------------------------------------------------------------------------
  Net investment
    income                   0.72      0.74      0.75      0.76        0.78      0.81      0.83      0.85      0.86      0.86
  Net realized and
  unrealized
  gain (loss)                0.81     (0.03)     0.35      0.01*      (0.41)     0.92      0.51      0.13      0.20      0.23
-----------------------------------------------------------------------------------------------------------------------------
Total Income from
  Operations                 1.53      0.71      1.10      0.77        0.37      1.73      1.34      0.98      1.06      1.09
=============================================================================================================================
Less Distributions From:
  Net investment
    income                  (0.73)    (0.74)    (0.74)    (0.77)      (0.79)    (0.81)    (0.81)    (0.85)    (0.87)    (0.86)
  Net realized gains        (0.05)       --        --        --          --        --        --        --        --        --
-----------------------------------------------------------------------------------------------------------------------------
Total Distributions         (0.78)    (0.74)    (0.74)    (0.77)      (0.79)    (0.81)    (0.81)    (0.85)    (0.87)    (0.86)
-----------------------------------------------------------------------------------------------------------------------------
Net Asset Value,
  End of Year              $13.91    $13.16    $13.19    $12.83      $12.83    $13.25    $12.33    $11.80    $11.67    $11.48
=============================================================================================================================
Total Return(P)             11.83%     5.48%     8.71%     6.32%       2.66%    14.48%    11.98%     8.74%     9.28%    10.04%
-----------------------------------------------------------------------------------------------------------------------------
Net Assets, End of
  Year (millions)            $554      $531      $558       $83         $70       $62       $40       $33       $28       $12
-----------------------------------------------------------------------------------------------------------------------------
Ratios to Average
  Net Assets:
  Expenses (2)               0.71%     0.75%     0.72%     0.63%       0.55%     0.55%     0.48%     0.28%     0.25%     0.24%
  Net investment
  income                     5.28      5.58      5.84      6.00        5.79      6.32      6.86      7.31      7.10      7.48
-----------------------------------------------------------------------------------------------------------------------------
Portfolio Turnover
  Rate                         71%       53%       36%       30%         20%       22%       24%       70%       25%       56%
=============================================================================================================================
</TABLE>
    

(1)   On October 10, 1994, the former Class C shares were exchanged into Class A
      shares.
(2)   As a result of voluntary expense limitations, the expense ratio will not
      exceed 0.85% for Class A Shares.
*     Includes the net per share effect of shareholder sales and redemptions
      activity during the period, most of which occurred at a net asset value
      less than the net asset value at the beginning of the period.
(P)   Total returns do not reflect any sales loads or contingent deferred sales
      charges.


                                                                               9
<PAGE>

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

For a share of beneficial interest outstanding throughout each year:

   
<TABLE>
<CAPTION>
New York Portfolio                                                     Class B Shares
--------------------------------------------------------------------------------------------------------------
Year Ended March 31,                               1998             1997             1996            1995(2)
--------------------------------------------------------------------------------------------------------------
<S>                                               <C>              <C>              <C>              <C>   
Net Asset Value,
Beginning of Year                                 $13.15           $13.18           $12.84           $11.96
--------------------------------------------------------------------------------------------------------------
Income from Operations:
  Net investment income                             0.65             0.67             0.67             0.31
  Net realized and unrealized gain (loss)           0.80            (0.03)            0.35             0.86*
--------------------------------------------------------------------------------------------------------------
Total Income from Operations                        1.45             0.64             1.02             1.17
==============================================================================================================
Less Distributions From:
  Net investment income                            (0.66)           (0.67)           (0.68)           (0.29)
  Net realized gains                               (0.05)              --               --               --
--------------------------------------------------------------------------------------------------------------
Total Distributions                                (0.71)           (0.67)           (0.68)           (0.29)
------------------------------------------------------------------------------------------------------------
Net Asset Value, End of Year                      $13.89           $13.15           $13.18           $12.84
==============================================================================================================
Total Return(P)                                    11.19%            4.96%            8.05%            9.92%++
--------------------------------------------------------------------------------------------------------------
Net Assets, End of Year (millions)                  $195             $185             $181               $4
--------------------------------------------------------------------------------------------------------------
Ratios to Average Net Assets:
  Expenses(1)                                       1.23%            1.27%            1.25%            1.27%+
  Net investment income                             4.76             5.06             5.45             5.76+
--------------------------------------------------------------------------------------------------------------
Portfolio Turnover Rate                               71%              53%              36%              30%
==============================================================================================================
</TABLE>
    

(1)   As a result of voluntary expense limitations, the ratio of expenses to
      average net assets will not exceed 1.35% for Class B shares.
(2)   For the period from November 11, 1994 (inception date) to March 31, 1995.
*     Includes the net per share effect of shareholder sales and redemptions
      activity during the period, most of which occurred at a net asset value
      less than the net asset value at the beginning of the period.
(P)   Total returns do not reflect any sales loads or contingent deferred sales
      charges.
+     Annualized.
++    Total return is not annualized, as it may not be representative of the
      total return for the year.


10
<PAGE>

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

For a share of beneficial interest outstanding throughout each year:

   
<TABLE>
<CAPTION>
New York Portfolio                                                 Class L Shares(1)
------------------------------------------------------------------------------------------------------------
Year Ended March 31,                         1998       1997       1996       1995       1994       1993(2)
------------------------------------------------------------------------------------------------------------
<S>                                         <C>        <C>        <C>        <C>        <C>        <C>   
Net Asset Value,
Beginning of Year                           $13.14     $13.17     $12.83     $12.82     $13.24     $12.84
------------------------------------------------------------------------------------------------------------
Income from Operations:
  Net investment income                       0.64       0.66       0.66       0.68       0.68       0.15
  Net realized and unrealized gain (loss)     0.80      (0.02)      0.36       0.01*     (0.40)      0.37
------------------------------------------------------------------------------------------------------------
Total Income from Operations                  1.44       0.64       1.02       0.69       0.28       0.52
============================================================================================================
Less Distributions From:
  Net investment income                      (0.65)     (0.67)     (0.68)     (0.68)     (0.70)     (0.12)
  Net realized gains                         (0.05)        --         --         --         --         --
------------------------------------------------------------------------------------------------------------
Total Distributions                          (0.70)     (0.67)     (0.68)     (0.68)     (0.70)     (0.12)
------------------------------------------------------------------------------------------------------------
Net Asset Value, End of Year                $13.88     $13.14     $13.17     $12.83     $12.82     $13.24
============================================================================================================
Total Return(P)                              11.13%      4.91%      8.07%      5.66%      1.96%      4.04%++
------------------------------------------------------------------------------------------------------------
Net Assets, End of Year (millions)             $11        $10         $9         $6         $5         $1
------------------------------------------------------------------------------------------------------------
Ratios to Average Net Assets:
  Expenses(3)                                 1.28%      1.32%      1.28%      1.28%      1.23%      1.23%+
  Net investment income                       4.71       5.01       5.02       5.38       4.98       5.37+
------------------------------------------------------------------------------------------------------------
Portfolio Turnover Rate                         71%        53%        36%        30%        20%        22%
============================================================================================================
</TABLE>

(1)   On November 7, 1994, the former Class B shares were renamed Class C
      shares. On June 12, 1998, the Class C shares were renamed Class L shares.
    

(2)   For the period from January 8, 1993 (inception date) to March 31, 1993.
(3)   As a result of voluntary expense limitations, the expense ratio will not
      exceed 1.40% for Class C Shares.
+     Annualized.
++    Total return is not annualized, as it may not be representative of the
      total return for the year.

   
*     Includes the per share effect of shareholder sales and redemptions
      activity during the period, most of which occurred at net asset value less
      than the net asset value at the beginning of the period.
    

(P)   Total returns do not reflect any sales loads or contingent deferred sales
      charges.


                                                                              11
<PAGE>

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

   
      The Portfolio seeks as high a level of income exempt from Federal income
taxes and from New York State and City personal income taxes as is consistent
with prudent investing. The Portfolio will seek to be fully invested in
obligations of New York and its political subdivisions, agencies and
instrumentalities that were, in the opinion of bond counsel to the issuer,
exempt from such state's personal income taxes as well as Federal income taxes
at the time of their issuance. (For certain shareholders, a portion of the
Portfolio's income may be subject to the alternative minimum tax ("AMT") on
tax-exempt income discussed below.) Such obligations are often issued to raise
money for public projects that enhance the quality of life including health
facilities, housing, airports, schools, highways and bridges. The Portfolio
invests its assets in securities of ranging maturities, without limitation,
depending on market conditions. Typically, the remaining maturity of municipal
bonds will range between 5 and 30 years.
    

      The two principal classifications of municipal obligations are "general
obligation" and "revenue". General obligations are secured by a municipal
issuer's pledge of its full faith, credit, and taxing power for the payment of
principal and interest. Revenue obligations are payable only from the revenues
derived from a particular facility or class of facilities or, in some cases,
from the proceeds of a special excise tax or other specific revenue source.
Please see the Statement of Additional Information for a more detailed
discussion about the different types of municipal obligations.

      Under the Tax Reform Act of 1986, interest income from municipal
obligations issued to finance certain "private activities" ("AMT-Subject Bonds")
becomes an item of "tax preference" which is subject to the AMT when received by
a person in a tax year during which he or she is subject to that tax. Such
private activity bonds include bonds issued to finance such projects as certain
solid waste disposal facilities, student loan programs, and water and sewage
projects. Because interest income on AMT-Subject Bonds is taxable to certain
investors, it is expected, although there can be no guarantee, that such
municipal obligations generally will provide somewhat higher yields than other
municipal obligations of comparable quality and maturity. There is no limitation
on the percent or amount of each Portfolio's assets that may be invested in
AMT-Subject Bonds.

   
      Municipal bonds purchased for the Portfolio must, at the time of purchase,
be investment grade municipal bonds, and at least two-thirds of the Portfolio's
municipal bonds must be rated within the three highest ratings categories by a
nationally recognized statistical rating organization ("NRSRO"). Investment
grade bonds are rated within the four highest categories by an NRSRO, such as
those rated Aaa, Aa, A and Baa by Moody's Investors Service, Inc. ("Moody's") or
AAA, AA, A and BBB by Standard & Poor's Ratings Group ("S&P") or, if unrated,
determined to be of comparable quality by MMC; pre-refunded bonds escrowed by
U.S. Treasury obligations are considered AAA-rated (the highest
    


12
<PAGE>

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

   
rating) even though the issuer does not obtain a new rating. Up to one third of
the assets of the Portfolio may be invested in municipal bonds rated in the
fourth highest category (this grade, while regarded as having an adequate
capacity to pay interest and repay principal, is considered to be of medium
quality and has speculative characteristics; in addition, changes in economic
conditions or other circumstances are more likely to lead to a weakened
capacity to make principal and interest payments than is the case with higher
grade bonds) or in unrated municipal bonds if, based upon credit analysis by the
Manager, it is believed that such securities are at least of comparable
quality to those securities in which the Portfolio may invest. In determining
the suitability of an investment in an unrated municipal bond, the Manager will
take into consideration debt service coverage, the purpose of the financing,
history of the issuer, existence of other rated securities of the issuer and
other general conditions as may be relevant, including comparability to other
issues. After the Portfolio purchases a municipal bond, the issue may cease to
be rated or its rating may be reduced below the minimum required for purchase.
Such an event would not require the elimination of the issue from the Portfolio
but the Manager will consider such an event in determining whether the Portfolio
should continue to hold the security.

      The Portfolio's short-term municipal obligations will be limited to high
grade obligations (obligations that are secured by the full faith and credit of
the United States or are rated MIG 1 or MIG 2, VMIG 1 or VMIG 2 or Prime-1 or Aa
or better by Moody's or SP-1+, SP-1, SP-2, or A-1 or AA or better by S&P or have
a rating within comparable categories by any other NRSRO, or obligations that
are unrated but determined by the Manager to be comparable). Among the types of
short-term instruments in which the Portfolio may invest are floating or
variable rate demand instruments, tax-exempt commercial paper (generally having
a maturity of less than nine months), and other types of notes generally having
maturities of less than three years, such as Tax Anticipation Notes, Revenue
Anticipation Notes, Tax and Revenue Anticipation Notes and Bond Anticipation
Notes. Demand instruments usually have an indicated maturity of more than one
year, but contain a demand feature that enables the holder to liquidate the
investment on no more than 30 days' notice; variable rate demand instruments
provide for automatic establishment of a new interest rate on set dates;
floating rate demand instruments provide for automatic adjustment of their
interest rates whenever some other specified interest rate changes (e.g., the
prime rate). The Portfolio may purchase participation interests in variable
rate tax-exempt securities (such as Industrial Development Bonds) owned by
banks. Participations are frequently backed by an irrevocable letter of credit
or guarantee of a bank that the Manager has determined meets the prescribed
quality standards for the Portfolio. Participation interests will be purchased
only if management believes interest income on such interests will be
tax-exempt when distributed as dividends to shareholders.
    


                                                                              13
<PAGE>

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

   
      The Portfolio will not invest more than 15% of the value of its net assets
in illiquid securities, including those for which there is no established
market.

      The Portfolio may purchase new issues of municipal obligations on a
when-issued basis, i.e., delivery and payment normally take place 15 to 45 days
after the purchase date. The payment obligation and the interest rate to be
received are each fixed on the purchase date, although no interest accrues with
respect to a when-issued security prior to its stated delivery date. During the
period between purchase and settlement, assets consisting of cash or liquid high
grade debt securities, marked-to-market daily pursuant to guidelines established
by the Board of Trustees, of a dollar amount sufficient to make payment at
settlement will be segregated at the custodian bank. Interest rates at
settlement may be lower or higher than on the purchase date, which would result
in appreciation or depreciation, respectively. Although the Portfolio will only
purchase a municipal obligation on a when-issued basis with the intention of
actually acquiring the securities, the Portfolio may sell these securities
before the settlement date if it is deemed advisable.
    

      Portfolio transactions will be undertaken principally to accomplish each
Portfolio's objective in relation to anticipated movements in the general level
of interest rates, but a Portfolio may also engage in short-term trading
consistent with its objective.

   
      The Portfolio may borrow on a short-term basis in amounts of up to 5% of
its assets in order to facilitate the settlement of portfolio securities
transactions.

      The Portfolio may invest in municipal bond index futures contracts
(currently traded on the Chicago Board of Trade) or in listed contracts based on
U.S. Government securities as a hedging policy in pursuit of its investment
objective; provided that immediately thereafter not more than 33 1/3% of its net
assets would be hedged or the amount of margin deposits on the Portfolio's
existing futures contracts would not exceed 5% of the value of its total assets.
Since any income would be taxable, it is anticipated that such investments will
be made only in those circumstances when the Manager anticipates the possibility
of an extreme change in interest rates or market conditions but does not wish to
liquidate the Portfolio's securities. A further discussion of futures contracts
and their associated risks is contained in the SAI.
    

      The Portfolio 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 distributions of interest. On the other hand,
because there are no periodic interest


14
<PAGE>

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

payments to be reinvested prior to maturity, zero coupon securities eliminate
the reinvestment risk and lock in a rate of return to maturity.

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

      The liquidity of municipal lease obligations varies. Municipal leases held
by the Portfolio will be considered illiquid securities unless the Board of
Trustees determines that the leases are readily marketable. Certain municipal
lease obligations contain "non-appropriation" clauses which provide that the
municipality has no obligation to make lease or installment purchase payments in
future years unless money is appropriated for such purpose on a yearly basis. In
the case of a "non-appropriation" lease, the Portfolio's ability to recover
under the lease in the event of non-appropriation or default will be limited
solely to the repossession of the leased property, without recourse to the
general credit of the lessee, and disposition of the property in the event of
foreclosure might be difficult. The Portfolio will not invest more than 5% of
its assets in such "non-appropriation" municipal lease obligations.

      In each of the Fund's prior fiscal years, 100% of the Portfolio's
dividends were exempt-interest dividends, excludable from gross income for
Federal income tax purposes. It is a fundamental policy that under normal market
conditions, the Portfolio will seek to invest 100% of its assets -- and the
Portfolio will invest not less than 80% of its assets -- in municipal
obligations the interest on which is exempt from Federal income taxes (other
than the alternative minimum tax) and not less than 65% of its assets in
municipal obligations the interest on which is also exempt from the personal
income taxes of New York State in the opinion of bond counsel to the issuers.
The Portfolio may invest up to 20% of its assets in taxable fixed-income
securities, but only in obligations issued or guaranteed by the full faith and
credit of the United States, and may invest more than 20% of its assets in U.S.
Government securities during periods when in the Manager's opinion a temporary
defensive posture is warranted, including any period when the Portfolio's monies
available for investment exceed such New York municipal
    


                                                                              15
<PAGE>

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

obligations available for purchase that meet the Fund's rating, maturity and
other investment criteria.

   
      Year 2000. The investment management services provided to the Fund by the
Manager 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. The Manager 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, the Manager 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 the Manager, Smith Barney or any other service provider will be successful,
or that interaction with other non-complying computer systems will not impair
Fund or shareholder services at that time.

      In addition, the ability of issuers to make timely payments of interest
and principal or to continue their operations or services may be impaired by
the inadequate preparation of their computer systems for the year 2000. This
may adversely affect the market values of securities of specific issuers or of
securities generally if the inadequacy of preparation is perceived as widespread
or as affecting trading markets.

      FACTORS AFFECTING NEW YORK
    

      The Portfolio's ability to achieve its investment objective is dependent
upon the ability of the issuers of New York obligations to meet their continuing
obligations for the payment of principal and interest. New York State and New
York City face long-term economic problems that could seriously affect their
ability and that of other issuers of New York obligations to meet their
financial obligations.

   
      Certain substantial issuers of New York obligations (including issuers
whose obligations may be acquired by the Portfolio) have experienced serious
financial difficulties. These difficulties have at times jeopardized the credit
standing and impaired the borrowing abilities of all New York issuers and have
generally contributed to higher interest costs for their borrowings and fewer
markets for their outstanding debt obligations. In recent years, several
different issues of municipal securities of New York State and its agencies and
instrumentalities and of New York City have been downgraded by S&P and Moody's.
On the other hand, strong demand for New York obligations has more recently had
the effect of permitting New York obligations to be issued with yields
relatively lower, and after issuance, to trade in the market at prices
relatively higher, than comparably rated municipal
    


16
<PAGE>

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

obligations issued by other jurisdictions. A recurrence of the financial
difficulties previously experienced by certain issuers of New York obligations
could result in defaults or declines in the market values of those issuers'
existing obligations and, possibly, in the obligations of other issuers of New
York obligations. Although as of the date of this Prospectus, no issuers of New
York obligations are in default with respect to the payment of the municipal
obligations, the occurrence of any such default could affect adversely the
market values and marketability of all New York obligations and, consequently,
the net asset value of the New York Portfolio.

   
      The City was required to close substantial budget gaps in recent years in
order to maintain balanced operating results, as required by laws of the State.
The City's ability to maintain balanced budgets in the future is subject to
numerous contingencies; therefore, even though the City has managed to close
substantial budget gaps in recent years in order to maintain balanced operating
results, there can be no assurance that the City will continue to maintain a
balanced budget as required by State law without additional tax or other revenue
increases or reduction in City services, which could adversely affect the City's
economic base. (An appendix to the SAI provides additional details about New
York.)

      RISK AND INVESTMENT CONSIDERATIONS
    

      Investors should realize that risk of loss is inherent in the ownership of
any securities and that the Portfolio's net asset value will fluctuate,
reflecting fluctuations in the market value of its portfolio positions. In
addition, the ability of the Portfolio to achieve its investment objective is
dependent on a number of factors, including the skills of the Manager in
purchasing municipal obligations whose issuers have the continuing ability to
meet their obligations for the payment of interest and principal when due. The
ability to achieve a high level of income is dependent on the yields of the
securities in the portfolio. Yields on municipal obligations are the product of
a variety of factors, including the general conditions of the municipal bond
markets, the size of a particular offering, the maturity of the obligations and
the rating of the issue. In general, the longer the maturity of a municipal
obligation, the higher the rate of interest it pays. However, a longer average
maturity is generally associated with a higher level of volatility in the market
value of a municipal obligation. During periods of falling interest rates, the
values of long-term municipal obligations generally rise. Conversely, during
periods of rising interest rates, the values of such securities generally
decline. Changes in the value of portfolio securities will not affect interest
income derived from those securities but will affect the Portfolio's net asset
value. Since the Portfolio's objective is to provide high current income, they
will invest in municipal obligations with an emphasis on income rather than
stability of net asset values.

   
      The Portfolio is registered as a "non-diversified" company under the
Investment Company Act of 1940 (the "1940 Act"), in order for New York
Portfolio to 
    


                                                                              17
<PAGE>

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

   
have the ability to invest more than 5% of its assets in the securities of any
issuer. The Portfolio intends to comply with Subchapter M of the Internal
Revenue Code (the "Code") that limits the aggregate value of all holdings
(except U.S. Government and cash items, as defined in the Code) that exceed 5%
of the Portfolio's total assets to an aggregate amount of 50% of such assets.
Also, holdings of a single issuer (with the same exceptions) may not exceed 25%
of the Portfolio's total assets. These limits are measured at the end of each
quarter. Under the Subchapter M limits, up to 50% of the Portfolio's total
assets may be invested in as few as two single issuers. In the event of decline
of creditworthiness or default upon the obligations of one or more such issuers
exceeding 5%, an investment in either Portfolio will entail greater risk than in
a portfolio having a policy of "diversification" because a high percentage of
the Portfolio's assets may be invested in municipal obligations of one or two
issuers. Furthermore, a high percentage of investments among few issuers may
result in a greater degree of fluctuation in the market value of the assets of
the Portfolio, and consequently a greater degree of fluctuation of the
Portfolio's net asset value, because the Portfolio will be more susceptible to
economic, political, or regulatory developments affecting these securities than
would be the case with a portfolio composed of varied obligations of more
issuers.
    

      PORTFOLIO TRANSACTIONS AND TURNOVER

   
      Portfolio securities ordinarily are purchased from and sold to parties
acting as either principal or agent. Newly issued securities ordinarily are
purchased directly from the issuer or from an underwriter; other purchases and
sales usually are placed with those dealers from which it appears that the best
price or execution will be obtained. Usually, no brokerage commissions, as such,
are paid by the Portfolio, since purchases and sales of municipal bonds and
other debt securities are traded through broker-dealers in principal
transactions, although the price paid usually includes a compensation to the
dealer.
    

      The Portfolio cannot accurately predict its portfolio turnover rate, but
anticipates that the annual turnover will not exceed 100%. An annual turnover
rate of 100% would occur when all of the securities held by the Portfolio are
replaced one time during a period of one year. The Manager will not consider
turnover rate a limiting factor in making investment decisions consistent with
the investment objective and policies of the Portfolio. See "Financial
Highlights" for the Portfolio's annual turnover rate during each year for each
of the last ten years.

--------------------------------------------------------------------------------
Valuation of Shares
--------------------------------------------------------------------------------

      The Portfolio's net asset value per share is determined as of the close of
regular trading on the NYSE, which is currently 4:00 P.M. New York City time on
each


18
<PAGE>

--------------------------------------------------------------------------------
Valuation of Shares (continued)
--------------------------------------------------------------------------------

   
day that the NYSE is open, by dividing the value of the Portfolio's net asset
values attributable to each Class by the total number of shares of the Class
outstanding.

      When, in the judgment of the pricing service, quoted bid prices for
investments are readily available and are representative of the bid side of the
market, these in vestments are valued at the mean between the quoted bid and
asked prices. Investments for which, in the judgment of the pricing service,
there is no readily obtainable market quotation (which may constitute a
majority of the portfolio securities) are carried at fair value of securities of
similar type, yield and maturity. Pricing services generally determine value by
reference to transactions in municipal obligations, quotations from municipal
bond dealers, market transactions in comparable securities and various
relationships between securities. Short-term instruments maturing within 60 days
will be valued at cost plus (minus) amortized discount (premium), if any, when
amortized cost approximates 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 Trustees.
    

--------------------------------------------------------------------------------
Dividends, Distributions and Taxes
--------------------------------------------------------------------------------

      DIVIDENDS AND DISTRIBUTIONS

   
      Dividends from the Portfolio's net investment income are paid monthly, and
any net realized capital gains are declared and distributed at least annually.
    

      If a shareholder does not otherwise instruct, dividends and capital gain
distributions will be reinvested automatically in additional shares of the same
Class at net asset value, subject to no sales charge or CDSC.

      Income dividends and capital gain distributions that are invested are
credited to shareholders' accounts in additional shares at the net asset value
as of the close of business on the payment date. A shareholder may change the
option at any time by notifying his or her Smith Barney Financial Consultant.
Accounts held directly by the Fund's transfer agent, First Data Investor
Services Group, Inc. ("First Data"), should notify First Data in writing at
least five business days prior to the payment date to permit the change to be
entered in the shareholder's account.

   
      The per share dividends on Class B and Class L shares of the Portfolio may
be lower than the per share dividends on Class A and Class Y shares principally
as a result of the distribution fee applicable to Class B and Class L shares.
The per share dividends on Class A shares of the Portfolio may be lower than the
per share dividends on Class Y shares principally as a result of the service
fee applicable to Class A shares. Distributions of capital gains, if any, will
be in the same amount for Class A, Class B, Class L and Class Y shares.
    


                                                                              19
<PAGE>

--------------------------------------------------------------------------------
Dividends, Distributions and Taxes (continued)
--------------------------------------------------------------------------------

   
      TAXES

      The following is a summary of the material tax considerations affecting
the Portfolio and its shareholders. Please refer to the SAI for further
discussion. In addition to the considerations described below and in the SAI,
there may be other federal, state, local, or foreign tax implications to
consider. Because taxes are a complex matter, prospective shareholders are urged
to consult their tax advisors for more detailed information with respect to the
tax consequences of an investment.

      The Portfolio intends to qualify, as it has in prior years, under
Subchapter M of the Internal Revenue Code (the "Code") for tax treatment as a
separate regulated investment company. In each taxable year that the Portfolio
qualifies, so long as such qualification is in the best interests of its
shareholders, the Portfolio will pay no federal income tax on its net investment
income and long-term capital gain that is distributed to shareholders, provided
the Portfolio distributes at least 90% of its net investment income and net
short-term capital gains for the taxable year. The Portfolio also intends to
satisfy conditions that will enable it to pay "exempt-interest dividends" to
shareholders. Exempt-interest dividends are generally not subject to regular
federal income taxes, although they may be considered taxable for certain state
and local income (or intangible) tax purposes.

      Exempt-interest dividends attributable to interest received by the
Portfolio on certain "private-activity" bonds will be treated as a specific tax
preference item to be included in a shareholder's alternative minimum tax
computation. All exempt- interest dividends will be a component of the "current
earnings" adjustment item for purposes of the federal corporate alternative
minimum tax. Exempt-interest dividends derived from the interest earned on
private activity bonds will not be exempt from federal income tax for those
shareholders who are "substantial users" (or persons related to "substantial
users") of the facilities financed by these bonds.

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

      The interest expense incurred by a shareholder on borrowing made to
purchase or carry Portfolio shares is not deductible for federal income tax
purposes to the extent related to the exempt-interest dividends received on such
shares.

      Dividends paid by the Portfolio from interest income on taxable
investments, net realized short-term securities gains and all or a portion of
any gains realized from the sale or other disposition of certain market discount
bonds are subject to federal income tax as ordinary income. Distributions, if
any, from net realized long-term securities gains derived from the sale of bonds
held by the Portfolio for more than one year are taxable as long-term capital
gains regardless of the length of time a shareholder has owned Portfolio shares.
    


20
<PAGE>

--------------------------------------------------------------------------------
Dividends, Distributions and Taxes (continued)
--------------------------------------------------------------------------------

   
      Shareholders are required to pay tax on all taxable distributions even if
those distributions are automatically reinvested in additional shares. None of
the dividends paid by the Portfolio will qualify for the corporate dividends
received deduction. The Fund will inform shareholders of the source and tax
status of all distributions promptly after the close of each calendar year.

      A shareholder's gain or loss on the disposition of shares (whether by
redemption, sale or exchange) generally will be a long-term or short-term gain
or loss depending on whether the shares had been owned for more than 12 months,
or 12 months or less, respectively. Losses realized by a shareholder on the
disposition of shares owned for six months or less will be treated as a
long-term capital loss to the extent a capital gain dividend had been
distributed on such shares.

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

      NEW YORK STATE AND CITY TAXES

      New York resident shareholders will not be subject to New York State and
City personal income tax on exempt-interest dividends attributable to tax-exempt
obligations of the State of New York and its political subdivisions, as well as
certain other Federal obligations considered exempt for New York State and City
purposes. Exempt-interest dividends are not excluded in determining New York
State franchise or New York City business taxes on corporations and financial
institutions.

      The foregoing is only a brief summary of some of the tax considerations
generally affecting the Portfolio and its shareholders who are New York
residents. Investors are urged to consult their tax advisors with specific
reference to their own tax situation.
    

--------------------------------------------------------------------------------
Purchase of Shares
--------------------------------------------------------------------------------

      GENERAL

   
      The Portfolio offers four Classes of shares. Class A and Class L shares
are sold to investors with an initial sales charge; Class B shares are sold
without an initial sales charge; Class B and Class L shares are subject to a
CDSC payable upon
    


                                                                              21
<PAGE>

--------------------------------------------------------------------------------
Purchase of Shares (continued)
--------------------------------------------------------------------------------

   
certain redemptions. Class Y shares are sold without an initial sales charge or
CDSC and are available only to investors investing a minimum of $15,000,000
(except for purchases of Class Y shares by Smith Barney Concert Allocation
Series Inc., for which there is no minimum purchase amount). Until June 25,
1999, purchases of Class L shares by investors who were holders of Class C
shares of the Portfolio on June 12, 1998 will not be subject to the 1% initial
sales charge. See "Prospectus Summary -- Alternative Purchase Arrangements" for
a discussion of factors to consider in selecting which Class of shares to
purchase.

      Purchases of Portfolio shares must be made through a brokerage account
maintained with Smith Barney, an Introducing Broker or an investment dealer in
the selling group. In addition, certain investors, including certain
institutional investors, may purchase shares directly from the Fund through
First Data. When purchasing shares of the Portfolio, investors must specify
whether the purchase is for Class A, Class B, Class L or Class Y shares. Smith
Barney and other broker/dealers may charge their customers an annual account
maintenance fee in connection with a brokerage account through which an investor
purchases or holds shares. Accounts held directly at First Data are not subject
to a maintenance fee.

      Investors in Class A, Class B and Class L shares may open an account by
making an initial investment of at least $1,000 for each account. Investors in
Class Y shares may open an account by making an initial investment of at least
$15,000,000. Subsequent investments of at least $50 may be made for all Classes.
For share holders purchasing shares of the Portfolio through the Systematic
Investment Plan on a monthly basis, the minimum initial investment requirement
for Class A, Class B and Class L shares and the subsequent investment
requirement for all Classes is $25. For shareholders purchasing shares of the
Portfolio through the Systematic Investment Plan on a quarterly basis, the
minimum initial investment requirement for Class A, Class B and Class L shares
and the subsequent investment requirement for all Classes is $50. There are no
minimum investment requirements in Class A shares for employees of Travelers and
its subsidiaries, including Smith Barney, and their spouses and children, a
unitholder who invests distributions from a UIT sponsored by Smith Barney, and
Trustees or Directors of any Travelers-affiliated funds, including the Smith
Barney Mutual Funds, and their spouses and children. The Fund reserves the right
to waive or change minimums, to decline any order to purchase its shares and to
suspend the offering of shares from time to time. Shares purchased will be held
in the share holder's account by the Fund's transfer agent, First Data. Share
certificates are issued only upon a shareholder's written request to First Data.
It is not recommended that the Portfolio be used as an investment for Keogh, IRA
or other qualified plans.
    

      Purchase orders received by the Fund or Smith Barney prior to the close of
regular trading on the NYSE, on any day the Portfolio calculates its net asset
value, are priced according to the net asset value determined on that day (the
"trade date"). Orders received by dealers or introducing brokers prior to the
close of regular trading on the NYSE on any day the Portfolio calculates its net
asset value, are priced according to


22
<PAGE>

--------------------------------------------------------------------------------
Purchase of Shares (continued)
--------------------------------------------------------------------------------

   
the net asset value determined on that day, provided the order is received by
the Fund or Smith Barney prior to Smith Barney's close of business. For shares
purchased through Smith Barney or Introducing Brokers purchasing through the
Distributor, payment for Portfolio shares is due on the third business day
("settlement date") after the trade date. In all other cases, payment must be
made with the purchase order.
    

      SYSTEMATIC INVESTMENT PLAN

      Shareholders may make additions to their accounts at any time by
purchasing shares through a service known as the Systematic Investment Plan.
Under the Systematic Investment Plan, Smith Barney or First Data is authorized
through preauthorized transfers of at least $25 on a monthly basis or at least
$50 on a quarterly basis to charge the regular bank account or other financial
institution indicated by the shareholder to provide systematic additions to the
shareholder's Portfolio account. A shareholder who has insufficient funds to
complete the transfer will be charged a fee of up to $25 by Smith Barney or
First Data. The Systematic Investment Plan also authorizes Smith Barney to apply
cash held in the share holder's Smith Barney brokerage account or redeem the
shareholder's shares of a Smith Barney money market fund to make additions to
the account. Additional information is available from the Fund or a Smith Barney
Financial Consultant.

      INITIAL SALES CHARGE ALTERNATIVE -- CLASS A SHARES

      The sales charges applicable to purchases of Class A shares of the
Portfolio are as follows:

   
================================================================================
                                        Sales Charge               Dealer's
                                    % of        % of Amount  Reallowance as % of
  Amount of Investment         Offering Price     Invested     Offering Price
--------------------------------------------------------------------------------

  Less than - $25,000              4.00%            4.17%          3.60%
   $ 25,000 -  49,999              3.50             3.63           3.15
     50,000 -  99,999              3.00             3.09           2.70
    100,000 - 249,999              2.50             2.56           2.25
    250,000 - 499,999              1.50             1.52           1.35
    500,000 and over                 *                *              * 
================================================================================

      *Purchases of Class A shares of $500,000 or more will be made at net asset
value without any initial sales charge, but will be subject to a CDSC of 1.00%
on redemptions made within 12 months of purchase. The CDSC on Class A shares is
payable to Smith Barney, which compensates Smith Barney Financial Consultants
and other dealers whose clients make purchases of $500,000 or more. The CDSC is
waived in the same circumstances in which the CDSC applicable to Class B and
Class L shares is waived. See "Deferred Sales Charge Alternatives" and "Waivers
of CDSC."
    

      Members of the selling group may receive up to 90% of the sales charge and
may be deemed to be underwriters of the Fund as defined in the Securities Act of
1933, as amended.


                                                                              23
<PAGE>

--------------------------------------------------------------------------------
Purchase of Shares (continued)
--------------------------------------------------------------------------------

      The reduced sales charges shown above apply to the aggregate of purchases
of Class A shares of the Portfolio made at one time by "any person," which
includes an individual and his or her immediate family, or a trustee or other
fiduciary of a single trust estate or single fiduciary account.

   
      INITIAL SALES CHARGE WAIVERS -- CLASS A SHARES

      Purchases of Class A shares may be made at net asset value without a sales
charge in the following circumstances: (a) sales to (i) Board Members and
employees of Travelers and its subsidiaries and of any Travelers-affiliated
funds, including the Smith Barney Mutual Funds (including retired Board Members
and employees); the immediate families of such persons (including the surviving
spouse of a deceased Board Member or employee); and to a pension, profit-sharing
or other benefit plan for such persons and (ii) employees of members of the
National Association of Securities Dealers, Inc., provided such sales are made
upon the assurance of the purchaser that the purchase is made for investment
purposes and that the securities will not be resold except through redemption or
repurchase; (b) offers of Class A shares to any other investment company to
effect the combination of such company with the Portfolio by merger,
acquisition of assets or other wise; (c) purchases of Class A shares by any
client of a newly employed Smith Barney Financial Consultant (for a period up to
90 days from the commencement of the Financial Consultant's employment with
Smith Barney), on the condition the purchase of Class A shares is made with the
proceeds of the redemption of shares of a mutual fund which (i) was sponsored by
the Financial Consultant's prior employer, (ii) was sold to the client by the
Financial Consultant and (iii) was subject to a sales charge; (d) purchases by
shareholders who have redeemed Class A shares in a Portfolio (or Class A shares
of another fund of the Smith Barney Mutual Funds that are offered with a sales
charge) and who wish to reinvest their redemption proceeds in the Portfolio,
provided the reinvesment is made within 60 calendar days of the redemption; (e)
purchases by accounts managed by registered investment advisory subsidiaries of
Travelers; (f) investments of distributions from a UIT sponsored by Smith
Barney; and (g) purchases by investors participating in a Smith Barney fee based
arrangement. In order to obtain such discounts, the purchaser must provide
sufficient information at the time of purchase to permit verification that the
purchase would qualify for the elimination of the sales charge.
    

      RIGHT OF ACCUMULATION

   
      Class A shares of the Portfolio may be purchased by "any person" (as
defined above) at a reduced sales charge or at net asset value determined by
aggregating the dollar amount of the new purchase and the total net asset value
of all Class A shares of the Portfolio and other Smith Barney Mutual Funds
offered with a sales charge, as currently listed under "Exchange Privilege,"
then held by such person and applying the sales charge applicable to such
aggregate. In order to obtain such discount,
    

24
<PAGE>

--------------------------------------------------------------------------------
Purchase of Shares (continued)
--------------------------------------------------------------------------------

the purchaser must provide sufficient information at the time of purchase to
permit verification that the purchase qualifies for the reduced sales charge.
The right of accumulation is subject to modification or discontinuance at any
time with respect to all shares purchased thereafter.

      GROUP PURCHASES

   
      Upon completion of certain automated systems, a reduced sales charge or
purchase at net asset value will also be available to employees (and partners)
of the same employer purchasing as a group, provided each participant makes the
mini mum initial investment required. The sales charge applicable to purchases
by each member of such a group will be determined by the table set forth above
under "Initial Sales Charge Alternative -- Class A Shares," and will be based
upon the aggregate sales of Class A shares of Smith Barney Mutual Funds offered
with a sales charge to, and share holdings of, all members of the group. To be
eligible for such reduced sales charges or to purchase at net asset value, all
purchases must be pursuant to an employer- or partnership-sanctioned plan
meeting certain requirements. One such requirement is that the plan must be open
to specified partners or employees of the employer and its subsidiaries, if any.
Such plan may, but is not required to, provide for payroll deductions. The
Distributor may also offer a reduced sales charge or net asset value purchase
for aggregating related fiduciary accounts under such conditions that it will
realize economies of sales efforts and sales related expenses. An individual who
is a member of a qualified group may also purchase Class A shares at the reduced
sales charge applicable to the group as a whole. The sales charge is based upon
the aggregate dollar value of Class A shares offered with a sales charge that
have been previously purchased and are still owned by the group, plus the amount
of the current purchase. A "qualified group" is one which (a) has been in
existence for more than six months, (b) has a purpose other than acquiring
Portfolio shares at a discount and (c) satisfies uniform criteria which enable
Smith Barney to realize economies of scale in its costs of distributing shares.
A qualified group must have more than 10 members, must be available to arrange
for group meetings between representatives of the Portfolio and the members,
and must agree to include sales and other materials related to the Portfolio in
its publications and mailings to members at no cost to the Distributor. In order
to obtain such reduced sales charge or to purchase at net asset value, the
purchaser must provide sufficient information at the time of purchase to permit
verification that the purchase qualifies for the reduced sales charge. Approval
of group purchase reduced sales charge plans is subject to the discretion of the
Distributor.
    

      LETTER OF INTENT

      Class A Shares. A Letter of Intent for amounts of $50,000 or more provides
an opportunity for an investor to obtain a reduced sales charge by aggregating
investments over a 13 month period, provided that the investor refers to such
Letter when placing


                                                                              25
<PAGE>

--------------------------------------------------------------------------------
Purchase of Shares (continued)
--------------------------------------------------------------------------------

orders. For purposes of a Letter of Intent, the "Amount of Investment" as
referred to in the preceding sales charge table includes purchases of all Class
A shares of the Portfolio and other funds of the Smith Barney Mutual Funds
offered with a sales charge over the 13 month period based on the total amount
of intended purchases plus the value of all Class A shares previously purchased
and still owned. An alternative is to compute the 13 month period starting up to
90 days before the date of execution of a Letter of Intent. Each investment made
during the period receives the reduced sales charge applicable to the total
amount of the investment goal. If the goal is not achieved within the period,
the investor must pay the difference between the sales charges applicable to
the purchases made and the charges previously paid, or an appropriate number of
escrowed shares will be redeemed. Please contact a Smith Barney Financial
Consultant or First Data to obtain a Letter of Intent application.

   
      Class Y Shares. A Letter of Intent may also be used as a way for investors
to meet the minimum investment requirement for Class Y shares. Such investors
must make an initial minimum purchase of $5,000,000 in Class Y shares of the
Portfolio and agree to purchase a total of $15,000,000 of Class Y shares of the
Portfolio within six months from the date of the Letter. If a total investment
of $15,000,000 is not made within the six-month period, all Class Y shares
purchased to date will be transferred to Class A shares, where they will be
subject to all fees (including a service fee of 0.15%) and expenses applicable
to the Portfolio's Class A shares, which may include a CDSC of 1.00%. Please
contact a Smith Barney Financial Consultant or First Data for further
information.

      INITIAL SALES CHARGE ALTERNATIVE -- CLASS L SHARES

      The sales charge applicable to purchases of Class L shares is 1.00% of the
public offering price, which is 1.01% of the amount invested, and all of this
amount is re allowed to dealers who sell Class L shares.

      The initial sales charge on Class L shares is paid to the Distributor.
Members of the selling group may be deemed to be underwriters of the Fund as
defined in the Securities Act of 1933, as amended.

      DEFERRED SALES CHARGE ALTERNATIVES

      "CDSC Shares" include any shares for which a CDSC may be imposed on
certain redemptions. "CDSC Shares" are: (a) Class B shares; (b) Class L shares;
and (c) Class A shares that were purchased without an initial sales charge but
subject to a CDSC.

      Any applicable CDSC will be assessed on an amount equal to the lesser of
the original investment in the shares being redeemed or their account value at 
the time of redemption. CDSC Shares that are redeemed will not be subject to
 a CDSC to the extent that the value of such shares represents: (a) capital
appreciation of Portfolio assets; (b) rein vestment of dividends or capital gain
distributions; (c) with respect
    


26
<PAGE>

--------------------------------------------------------------------------------
Purchase of Shares (continued)
--------------------------------------------------------------------------------

   
to Class B shares, shares redeemed more than five years after their purchase; or
(d) with respect to Class L shares and Class A shares that are CDSC Shares,
shares redeemed more than 12 months after their purchase.

      Class L shares and Class A shares that are CDSC Shares are subject to a
1.00% CDSC if redeemed within 12 months of purchase. In circumstances in which
the CDSC is imposed on Class B shares, the amount of the charge will depend on
the number of years since the shareholder made the purchase payment from which
the amount is being redeemed. Solely for purposes of determining the number of
years since a purchase payment, all purchase payments made during a month will
be aggregated and deemed to have been made on the last day of the preceding
Smith Barney statement month. The following table sets forth the CDSC for
redemptions of Class B shares by shareholders of the Portfolio:
    

                  Year Since Purchase
                  Payment Was Made                CDSC
                  --------------------------------------

                  First                           4.50%
                  Second                          4.00
                  Third                           3.00
                  Fourth                          2.00
                  Fifth                           1.00
                  Sixth and thereafter            0.00

      Class B shares will convert automatically to Class A shares eight years
after the date on which they were purchased and thereafter will no longer be
subject to any distribution fees. There will also be converted at that time such
proportion of Class B Dividend Shares owned by the shareholder as the total
number of his or her Class B shares converting at the time bears to the total
number of outstanding Class B shares (other than Class B Dividend Shares) owned
by the shareholder. See "Prospectus Summary -- Alternative Purchase Arrangements
-- Class B Shares Conversion Feature."

      In determining the applicability of any CDSC, it will be assumed that a
redemption is made first of shares representing capital appreciation, next of
shares representing the reinvestment of dividends and capital gain distributions
and finally of other shares held by the shareholder for the longest period of
time. The length of time that CDSC Shares acquired through an exchange have been
held will be calculated from the date that the shares exchanged were initially
acquired in one of the other Smith Barney Mutual Funds, and Portfolio shares
being redeemed will be considered to represent, as applicable, capital
appreciation or dividend and capital gain distribution reinvestments in such
other funds. For Federal income tax purposes, the amount of the CDSC will reduce
the gain or increase the loss, as the case may be, on the amount realized on
redemption. The amount of any CDSC will be paid to Smith Barney.


                                                                              27
<PAGE>

--------------------------------------------------------------------------------
Purchase of Shares (continued)
--------------------------------------------------------------------------------

      To provide an example, assume an investor purchased 100 Class B shares at
$10 per share for a cost of $1,000. Subsequently, the investor acquired 5
additional shares through dividend reinvestment. During the fifteenth month
after the purchase, the investor decided to redeem $500 of his or her
investment. Assuming at the time of the redemption the net asset value had
appreciated to $12 per share, the value of the investor's shares would be $1,260
(105 shares at $12 per share). The CDSC would not be applied to the amount which
represents appreciation ($200) and the value of the reinvested dividend shares
($60). Therefore, $240 of the $500 redemption proceeds ($500 minus $260) would
be charged at a rate of 4.00% (the applicable rate for Class B shares) for a
total deferred sales charge of $9.60.

      WAIVERS OF CDSC

      The CDSC will be waived on: (a) exchanges (see "Exchange Privilege"); (b)
automatic cash withdrawals in amounts equal to or less than 1.00% per month of
the value of the shareholder's shares at the time the withdrawal plan commences
(see "Automatic Cash Withdrawal Plan") (provided, however, that automatic cash
withdrawals in amounts equal to or less than 2.00% per month of the value of the
shareholder's shares will be permitted for withdrawal plans that were
established prior to November 7, 1994); (c) redemptions of shares within twelve
months following the death or disability of the shareholder; (d) involuntary
redemptions; and (e) redemptions of shares to effect a combination of the
Portfolio with any investment company by merger, acquisition of assets or
otherwise. In addition, a shareholder who has redeemed shares from other funds
of the Smith Barney Mutual Funds may, under certain circumstances, reinvest all
or part of the redemption proceeds within 60 days and receive pro rata credit
for any CDSC imposed on the prior redemption.

      CDSC waivers will be granted subject to confirmation (by Smith Barney in
the case of shareholders who are also Smith Barney clients or by First Data in
the case of all other shareholders) of the shareholder's status or holdings, as
the case may be.

--------------------------------------------------------------------------------
Exchange Privilege
--------------------------------------------------------------------------------

   
      Except as otherwise noted below, shares of each Class may be exchanged for
shares of the same Class in the following funds of the Smith Barney Mutual
Funds, to the extent shares are offered for sale in the shareholder's state of
residence. Ex changes of Class A, Class B and Class L shares are subject to
minimum investment
    


28
<PAGE>

--------------------------------------------------------------------------------
Exchange Privilege (continued)
--------------------------------------------------------------------------------

requirements and all shares are subject to the other requirements of the fund
into which exchanges are made.

Fund Name
--------------------------------------------------------------------------------

Growth Funds

   
      Concert Peachtree Growth Fund
      Concert Social Awareness Fund
      Smith Barney Aggressive Growth Fund Inc.
      Smith Barney Appreciation Fund Inc.
      Smith Barney Balanced Fund
      Smith Barney Contrarian Fund
      Smith Barney Convertible Fund
      Smith Barney Fundamental Value Fund Inc.
      Smith Barney Funds, Inc. -- Large Cap Value Fund
      Smith Barney Large Cap Blend Fund
      Smith Barney Large Capitalization Growth Fund
      Smith Barney Natural Resources Fund Inc.
      Smith Barney Premium Total Return Fund
      Smith Barney Small Cap Blend Fund, Inc.
      Smith Barney Special Equities Fund
    

Taxable Fixed-Income Funds

   ** Smith Barney Adjustable Rate Government Income Fund
      Smith Barney Diversified Strategic Income Fund

   
  *** Smith Barney Funds, Inc. -- Short-Term High Grade Bond Fund
      Smith Barney Funds, Inc. -- U.S. Government Securities Fund
      Smith Barney Government Securities Fund
      Smith Barney High Income Fund
      Smith Barney Investment Grade Bond Fund
      Smith Barney Managed Governments Fund Inc.
      Smith Barney Total Return Bond Fund
    

Tax-Exempt Funds

      Smith Barney Arizona Municipals Fund Inc.
      Smith Barney California Municipals Fund Inc.
    * Smith Barney Intermediate Maturity California Municipals Fund
    * Smith Barney Intermediate Maturity New York Municipals Fund
      Smith Barney Managed Municipals Fund Inc.
      Smith Barney Massachusetts Municipals Fund

   
      Smith Barney Municipal High Income Fund
      Smith Barney Muni Funds -- Florida Portfolio
      Smith Barney Muni Funds -- Georgia Portfolio
    * Smith Barney Muni Funds -- Limited Term Portfolio
      Smith Barney Muni Funds -- National Portfolio
    


                                                                              29
<PAGE>

--------------------------------------------------------------------------------
Exchange Privilege (continued)
--------------------------------------------------------------------------------

      Smith Barney Muni Funds -- Pennsylvania Portfolio
      Smith Barney New Jersey Municipals Fund Inc.
      Smith Barney Oregon Municipals Fund
   

Global-International Funds

      Smith Barney Hansberger Global Small Cap Value Fund
      Smith Barney Hansberger Global Value Fund
    

      Smith Barney World Funds, Inc. -- Emerging Markets Portfolio
      Smith Barney World Funds, Inc. -- European Portfolio
      Smith Barney World Funds, Inc. -- Global Government Bond Portfolio
      Smith Barney World Funds, Inc. -- International Balanced Portfolio
      Smith Barney World Funds, Inc. -- International Equity Portfolio
      Smith Barney World Funds, Inc. -- Pacific Portfolio

Smith Barney Concert Allocation Series Inc.

      Smith Barney Concert Allocation Series Inc. -- Balanced Portfolio
      Smith Barney Concert Allocation Series Inc. -- Conservative Portfolio

   
      Smith Barney Concert Allocation Series Inc. -- Global Portfolio
    

      Smith Barney Concert Allocation Series Inc. -- Growth Portfolio
      Smith Barney Concert Allocation Series Inc. -- High Growth Portfolio
      Smith Barney Concert Allocation Series Inc. -- Income Portfolio

Money Market Funds

  +   Smith Barney Exchange Reserve Fund
***   Smith Barney Money Funds, Inc. -- Cash Portfolio
***   Smith Barney Money Funds, Inc. -- Government Portfolio
 ++   Smith Barney Money Funds, Inc. -- Retirement Portfolio
***   Smith Barney Municipal Money Market Fund, Inc.
***   Smith Barney Muni Funds -- California Money Market Portfolio
***   Smith Barney Muni Funds -- New York Money Market Portfolio

----------
   
  *   Available for exchange with Class A, Class L and Class Y shares of the
      Portfolio.
    

  **  Available for exchange with Class A and Class B shares of the Portfolio.
  *** Available for exchange with Class A and Class Y shares of the Portfolio.

   
  +   Available for exchange with Class B and Class L shares of the Portfolio.
    

  ++  Available for exchange with Class A shares of the Portfolio.

      Class B Exchanges. In the event a Class B shareholder wishes to exchange
all or a portion of his or her shares in any of the funds imposing a higher CDSC
than that imposed by the Portfolio, the exchanged Class B shares will be subject
to the higher applicable CDSC. Upon an exchange, the new Class B shares will be
deemed to have been purchased on the same date as the Class B shares of the
Portfolio that have been exchanged.

   
      Class L Exchanges. Upon an exchange, the new Class L shares will be deemed
    


30
<PAGE>

--------------------------------------------------------------------------------
Exchange Privilege (continued)
--------------------------------------------------------------------------------

   
to have been purchased on the same date as the Class L shares of the Portfolio
that have been exchanged.
    

      Class A and Class Y Exchanges. Class A and Class Y shareholders of the
Portfolio who wish to ex change all or a portion of their shares for shares of
the respective Class in any of the funds identified above may do so without
imposition of any charge.

   
      Additional Information Regarding the Exchange Privilege. Excessive
exchange transactions can be detrimental to a Portfolio's performance and its
shareholders. The investment manager may determine that a pattern of frequent
exchanges is excessive and contrary to the best interests of the Portfolio's
other shareholders. In this event, the Fund may, at its discretion, decide to
limit additional purchases and/or exchanges by the share holder. Upon such a
determination, the Fund will provide notice in writing or by telephone to the
shareholder at least 15 days prior to suspending the exchange privilege and
during the 15 day period the shareholder will be required to (a) redeem his or
her shares in the Portfolio or (b) remain invested in the Portfolio or exchange
into any of the funds of the Smith Barney Mutual Funds ordinarily available,
which position the shareholder would be expected to maintain for a significant
period of time. All relevant factors will be considered in determining what
constitutes an abusive pattern of exchanges.
    

      Certain shareholders may be able to exchange shares by telephone. See
"Redemption of Shares -- Telephone Redemption and Exchange Program". Exchanges
will be processed at the net asset value next determined. Redemption procedures
discussed below are also applicable for exchanging shares, and ex changes will
be made upon receipt of all supporting documents in proper form. If the account
registration of the shares of the fund being acquired is identical to the
registration of the shares of the fund exchanged, no signature guarantee is
required. A capital gain or loss for tax purposes will be realized upon the
exchange, depending upon the cost or other basis of shares redeemed. Before
exchanging shares, investors should read the current prospectus describing the
shares to be acquired. The Portfolio reserves the right to modify or discontinue
exchange privileges upon 60 days' prior notice to shareholders.

--------------------------------------------------------------------------------
Redemption of Shares
--------------------------------------------------------------------------------

   
      The Fund is required to redeem the shares of the Portfolio tendered to it,
as described below, at a redemption price equal to their net asset value per
share next determined after receipt of a written request in proper form at no
charge other than any applicable CDSC. Redemption requests received after the
close of regular trading on the NYSE are priced at the net asset value next
determined.
    


                                                                              31
<PAGE>

--------------------------------------------------------------------------------
Redemption of Shares (continued)
--------------------------------------------------------------------------------

      If a share holder holds shares in more than one Class, any request for
redemption must specify the Class being redeemed. In the event of a failure to
specify which Class, or if the investor owns fewer shares of the Class than
specified, the redemption request will be delayed until the Fund's transfer
agent receives further instructions from Smith Barney, or if the shareholder's
account is not with Smith Barney, from the shareholder directly. The redemption
proceeds will be remitted on or before the third business day following receipt
of proper tender, except on any days on which the NYSE is closed or as permitted
under the 1940 Act in extraordinary circumstances. Generally, if the redemption
proceeds are remitted to a Smith Barney brokerage account, these funds will not
be invested for the share holder's benefit without specific instruction and
Smith Barney will benefit from the use of temporarily uninvested funds.
Redemption proceeds for shares purchased by check, other than a certified or
official bank check, will be remitted upon clearance of the check, which may
take up to ten days or more.

      Shares held by Smith Barney as custodian must be redeemed by submitting a
written request to a Smith Barney Financial Consultant. Shares other than those
held by Smith Barney as custodian may be redeemed through an investor's
Financial Consultant, Introducing Broker or dealer in the selling group or by
submitting a written request for redemption to:

   
      Smith Barney Muni Funds/New York Portfolio 
      Class A, B, L or Y (please specify) 
      c/o First Data Investor Services Group, Inc.
      P.O. Box 5128
      Boston, Massachusetts 01581-5128

      A written redemption request must (a) state the Class and number or dollar
amount of shares to be redeemed, (b) identify the shareholder's account number
and (c) be signed by each registered owner exactly as the shares are registered.
If the shares to be redeemed were issued in certificate form, the certificates
must be endorsed for transfer (or be accompanied by an endorsed stock power) and
must be submitted to First Data together with the redemption request. Any
signature appearing on a share certificate, stock power or written redemption
request in excess of $10,000 must be guaranteed by an eligible guarantor
institution such as a domestic bank, savings and loan institution, domestic
credit union, member bank of the Federal Reserve System or member firm of a
national securities exchange. Written redemption requests of $10,000 or less do
not require a signature guarantee unless more than one such redemption request
is made in any 10-day period. Redemption proceeds will be mailed to an
investor's address of record. First Data may require additional supporting
documents for redemptions made by corporations, executors, administrators,
trustees or guardians. A redemption request will not be deemed properly received
until First Data receives all required documents in proper form.
    


32
<PAGE>

--------------------------------------------------------------------------------
Redemption of Shares (continued)
--------------------------------------------------------------------------------

      TELEPHONE REDEMPTION AND EXCHANGE PROGRAM

      Shareholders who do not have a Smith Barney brokerage account may be
eligible to redeem and exchange Portfolio shares by telephone. To determine if a
share holder is entitled to participate in this program, he or she should
contact First Data at 1-800-451-2010. Once eligibility is confirmed, the
shareholder must complete and return a Telephone/Wire Authorization Form,
including a signature guarantee, that will be provided by First Data upon
request. (Alternatively, an investor may authorize telephone redemptions on the
new account application with the applicant's signature guarantee when making
his/her initial investment in the Portfolio.)

   
      Redemptions. Redemption requests of up to $10,000 of any class or classes
of the Portfolio's shares may be made by eligible shareholders by calling First
Data at 1-800-451-2010. Such requests may be made between 9:00 a.m. and 4:00
p.m. (New York City time) on any day the NYSE is open. Redemption requests
received after the close of regular trading on the NYSE are priced at the net
asset value next determined. Redemptions of shares (i) by retirement plans or
(ii) for which certificates have been issued are not permitted under this
program.
    

      A shareholder will have the option of having the redemption proceeds
mailed to his/her address of record or wired to a bank account predesignated by
the share holder. Generally, redemption proceeds will be mailed or wired, as the
case may be, on the next business day following the redemption request. In order
to use the wire procedures, the bank receiving the proceeds must be a member of
the Federal Reserve System or have a correspondent relationship with a member
bank. The Fund reserves the right to charge shareholders a nominal fee for each
wire redemption. Such charges, if any, will be assessed against the
shareholder's account from which shares were redeemed. In order to change the
bank account designated to receive redemption proceeds, a shareholder must
complete a new Telephone/Wire Authorization Form and, for the protection of the
shareholder's assets, will be required to provide a signature guarantee and
certain other documentation.

   
      Exchanges. Eligible shareholders may make exchanges by telephone if the
account registration of the shares of the fund being acquired is identical to
the registration of the shares of the fund exchanged. Such exchange requests may
be made by calling First Data at 1-800-451-2010 between 9:00 a.m. and 4:00 p.m.
(New York City time) on any day on which the NYSE is open. Exchange requests
received after the close of regular trading on the NYSE are processed at the net
asset value next determined.
    

      Additional Information regarding Telephone Redemption and Exchange
Program. Neither the Fund nor its agents will be liable for following
instructions communicated by telephone that are reasonably believed to be
genuine. The Fund and its agents will employ procedures designed to verify the
identity of the caller and legitimacy of instructions (for example, a
shareholder's name and account


                                                                              33
<PAGE>

--------------------------------------------------------------------------------
Redemption of Shares (continued)
--------------------------------------------------------------------------------

number will be required and phone calls may be recorded). The Fund reserves the
right to suspend, modify or discontinue the telephone redemption and exchange
program or to impose a charge for this service at any time following at least
seven (7) days prior notice to shareholders.

      AUTOMATIC CASH WITHDRAWAL PLAN

      The Portfolio offers shareholders an automatic cash withdrawal plan, under
which shareholders who own shares with a value of at least $10,000 may elect to
receive cash payments of at least $50 monthly or quarterly. The withdrawal plan
will be carried over on exchanges between funds or Classes of the Portfolio. Any
applicable CDSC will not be waived on amounts withdrawn by a shareholder that
exceed 1.00% per month of the value of the shareholder's shares subject to the
CDSC at the time the withdrawal plan commences. (With respect to withdrawal
plans in effect prior to November 7, 1994, any applicable CDSC will be waived on
amounts withdrawn that do not exceed 2.00% per month of the value of the
shareholder's shares subject to the CDSC.) For further information regarding the
automatic cash withdrawal plan, shareholders should contact a Smith Barney
Financial Consultant.

--------------------------------------------------------------------------------
Minimum Account Size
--------------------------------------------------------------------------------

      The Fund reserves the right to involuntarily liquidate any shareholder's
account if the aggregate value of the shares held in a Portfolio account is less
than $500. (If a shareholder has more than one account in the Portfolio, each
account must satisfy the minimum account size.) The Fund, however, will not
redeem shares based solely on market reductions in net asset value. Before the
Fund exercises such right, shareholders will receive written notice and will be
permitted 60 days to bring the account up to the minimum to avoid involuntary
liquidation.

--------------------------------------------------------------------------------
Performance
--------------------------------------------------------------------------------

   
      From time to time the Portfolio may advertise its yield, taxable
equivalent yield, total return and average annual total return in
advertisements. In addition, in other types of sales literature the Portfolio
may include its distribution rate. These figures are computed separately for
Class A, Class B, Class L and Class Y shares of the Portfolio. These figures are
based on historical earnings and are not intended to indicate future
performance. The yield of a Portfolio Class refers to the net income earned by
an investment in the Class over a thirty-day period ending at month end. This
net income is then annualized, i.e., the amount of income earned by the
investments during that 30-day period is assumed to be earned each 30-day period
for
    


34
<PAGE>

--------------------------------------------------------------------------------
Performance (continued)
--------------------------------------------------------------------------------

   
twelve periods and is expressed as a percentage of the investment. The taxable
equivalent yield is calculated similarly to the yield, except that a stated
income tax rate is used to demonstrate the taxable yield necessary to produce an
after-tax yield equivalent to the tax-exempt yield of the Class. The yield and
taxable equivalent yield quotations are calculated according to a formula
prescribed by the SEC to facilitate comparison with yields quoted by other
investment companies. The distribution rate is calculated by annualizing the
latest monthly distribution and dividing the result by the maximum offering
price per share as of the end of the period to which the distribution relates.
The distribution rate is not computed in the same manner as, and therefore can
be significantly different from, the above described yield. Total return is
computed for a specified period of time assuming deduction of the maximum sales
charge, if any, from the initial amount invested and reinvestment of all income
dividends and capital gain distributions on the reinvestment dates at prices
calculated as stated in this Prospectus, then dividing the value of the
investment at the end of the period so calculated by the initial amount invested
and subtracting 100%. The standard average annual total return, as prescribed by
the SEC, is derived from this total return, which provides the ending redeemable
value. Such standard total return information may also be accompanied with
nonstandard total return information for differing periods computed in the same
manner but without annualizing the total return or taking sales charges into
account. The Portfolio may also include comparative performance information in
advertising or marketing its shares. Such performance information may include
data from Lipper Analytical Services, Inc. and other financial publications.
    

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

   
      BOARD OF TRUSTEES

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

      MANAGER

   
      The Manager manages the day-to-day operations of the Portfolio pursuant to
a management agreement entered into by the Fund on behalf of the Portfolio. MMC
was incorporated in 1968 under the laws of Delaware. MMC, Holdings and Smith
Barney are each located at 388 Greenwich Street, New York, New York 10013. As
    


                                                                              35
<PAGE>

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

   
of March 31, 1998, MMC had aggregate assets under management of approximately
$100.5 billion.

      MMC provides the Portfolio with investment management services and
executive and other personnel, pays the remuneration of Fund officers, provides
the Fund with office space and equipment, furnishes the Fund with bookkeeping,
accounting, administrative services and services relating to research,
statistical work and supervision of the Portfolio. The management agreement
provides for an annual management fee at the rate of 0.50% of the Portfolio's
average daily net assets. MMC has voluntarily agreed to waive its fee if in any
fiscal year the aggregate expenses of any Class of the Portfolio exclusive of
12b-1 fees, taxes, brokerage, interest and extraordinary expenses, such as
litigation costs, exceed 0.70% of such Class' average net asset values for that
fiscal year. This voluntary expense limitation will remain in effect until
terminated by notice to shareholders and by supplement to the then-current
prospectus. The management fee and expense limitation became effective on
December 18, 1995.

      Total expenses for the Portfolio's average net assets for the last fiscal
year were: 0.71%, 1.23% and 1.28% for Class A, Class B and Class L shares,
respectively.

      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 has been
approved by the stockholders of each of Travelers and Citicorp. Travelers has
filed an application to become a bank holding company so that, 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 BHCA, the Glass-Steagall Act and certain other laws and
regulations will then be applicable to Travelers and its subsidiaries.

      The Manager 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. Smith Barney and the
Manager believe that the Manager's services under the Management Agreement and
the shareholder service activities performed by Smith Barney are not
underwriting and would be consistent with the Glass-Steagall Act and other
relevant federal and state laws. However, there is little controlling precedent
regarding the performance of the combination of investment advisory, shareholder
servicing and administrative activities by subsidiaries of bank holding
companies. If Smith Barney and the Manager, or their affiliates, were to be
prevented from acting as the manager or a shareholder service agent, the Fund
would seek alternative means for obtaining these services. The Fund does not
expect that shareholders would suffer any adverse financial consequences as a
result of any such occurrence.
    


36
<PAGE>

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

   
      PORTFOLIO MANAGEMENT

      Peter M. Coffey, a Managing Director of Smith Barney has served as Vice
President of the Fund and portfolio manager of the New York Portfolio since
their inception (January 16, 1987) and manages the day to day investment
operations of the Portfolio, including making all investment decisions. Mr.
Coffey serves as the portfolio manager for five of the Fund's non-money market
portfolios.

      Management's discussion and analysis, and additional performance
information regarding the Portfolio during the fiscal year ended March 31, 1998
is included in the Annual Report dated March 31, 1998. A copy of the Annual
Report may be obtained upon request and without charge from a Smith Barney
Financial Consultant or by writing or calling the Fund at the address or phone
number listed on page one of this Prospectus.
    

--------------------------------------------------------------------------------
Distribution
--------------------------------------------------------------------------------

   
      Smith Barney distributes shares of the Portfolio as principal underwriter
and as such conducts a continuous offering pursuant to a "best efforts"
arrangement requiring Smith Barney to take and pay for only such securities as
may be sold to the public. Pursuant to a plan of distribution adopted by the
Portfolio under Rule 12b-1 under the 1940 Act (the "Plan"), Smith Barney is paid
a service fee with respect to Class A, Class B and Class L shares of the
Portfolio at the annual rate of 0.15% of the average daily net asset values
attributable to these Classes. Smith Barney is also paid a distribution fee with
respect to Class B and Class L shares at the annual rate of 0.50% and 0.55%,
respectively, of the average daily net asset values attributable to these
Classes. Class B shares will no longer be subject to a distribution fee after
conversion to Class A shares, eight years after the date of purchase. The fees
are used by Smith Barney to pay its Financial Consultants for servicing share
holder accounts and, in the case of Class B and Class L shares, to cover
expenses primarily intended to result in the sale of those shares. These
expenses include: advertising expenses; the cost of printing and mailing
prospectuses to potential investors; payments to and expenses of Smith Barney
Financial Consultants and other persons who provide support services in
connection with the distribution of shares; interest and/or carrying charges;
and indirect and overhead costs of Smith Barney associated with the sale of
Portfolio shares, including lease, utility, communications and sales promotion
expenses.

      The payments to Smith Barney Financial Consultants for selling shares of a
Class include a commission or fee paid by the investor or Smith Barney at the
time of sale and, with respect to Class A, Class B and Class L shares, a
continuing fee for servicing shareholder accounts for as long as a shareholder
remains a holder of that Class. Smith Barney Financial Consultants may receive
different levels of compensation for selling the different Classes of shares.
    


                                                                              37
<PAGE>

--------------------------------------------------------------------------------
Distribution (continued)
--------------------------------------------------------------------------------

   
      Payments under the Plan with respect to Class B and Class L shares are not
tied exclusively to the distribution and shareholder services expenses actually
incurred by Smith Barney, and the payments may exceed distribution expenses
actually incurred. The Fund's Board of Trustees will evaluate the
appropriateness of the Plan and its payment terms on a continuing basis and in
so doing will consider all relevant factors, including expenses borne by Smith
Barney, amounts received under the Plan and proceeds of the CDSC.

      The Glass-Steagall Act currently prohibits certain financial institutions
from underwriting securities of open-end investment companies, such as the Fund.
Therefore, in connection with the anticipated merger of Travelers and Citicorp
and as a consequence of the anticipated applicability of the BHCA and the
Glass-Steagall Act, the Fund plans to retain the services of a new entity (which
is not otherwise affiliated with Travelers) to act as distributor of the
Portfolio's shares.
    

--------------------------------------------------------------------------------
Additional Information
--------------------------------------------------------------------------------

   
      The Fund, an open-end management investment company, is organized as a
"Massachusetts business trust" pursuant to a Declaration of Trust dated August
14, 1985. Pursuant to the Declaration of Trust, the Board of Trustees has
authorized the issuance of different series of shares, each representing shares
in one of the separate portfolios. The assets of each portfolio are segregated
and separately managed. Class A, Class B, Class L and Class Y shares of the
Portfolio represent interests in the assets of the Portfolio and have identical
voting, dividend, liquidation and other rights on the same terms and conditions
except that expenses related to the share holder service and distribution of
Class A, Class B and Class L shares are borne solely by the respective Class and
each such Class of shares has exclusive voting rights with respect to provisions
of the Fund's Rule 12b-1 distribution plan which pertain to that Class. It is
the intention of the Fund not to hold annual meetings of shareholders. The Board
of Trustees may call meetings of shareholders for action by shareholder vote as
may be required by the 1940 Act or the Declaration of Trust, and shareholders
are entitled to call a meeting upon a vote of 10% of the Fund's outstanding
shares for purposes of voting on removal of a Trustee or Trustee and the Fund
will assist shareholders in calling such a meeting as required by the 1940 Act.
Shares do not have cumulative voting rights or preemptive rights and have only
such conversion or exchange rights as the Board of Trustees may grant in its
discretion. When issued for payment as described in this Prospectus, the Fund's
shares will be fully paid and transferable (subject to the Portfolio's minimum
account size). Shares are redeemable as set forth under "Redemption of Shares"
and are subject to involuntary redemption as set forth under "Minimum Account
Size."
    


38
<PAGE>

--------------------------------------------------------------------------------
Additional Information (continued)
--------------------------------------------------------------------------------

      PNCBank, National Association, located at 17th and Chestnut Streets,
Philadelphia, PA 19103, serves as custodian of each Portfolio's investments.

      First Data, located at Exchange Place, Boston, Massachusetts 02109, serves
as the Fund's transfer agent.

      The Fund sends its shareholders a semi-annual report and an audited annual
report, which include listings of the investment securities held by the Fund at
the end of the period covered. In an effort to reduce the Fund's printing and
mailing costs, the Fund plans to consolidate the mailing of its semi-annual and
annual reports by household. This consolidation means that a household having
multiple accounts with the identical address of record will receive a single
copy of each report. Shareholders who do not want this consolidation to apply to
their account should contact their Smith Barney Financial Consultant or the
Fund's transfer agent.


                                                                              39
<PAGE>

                                                                    SMITH BARNEY

                                                A Member of TravelersGroup[LOGO]



                                                                    Smith Barney
                                                                      Muni Funds
                                                              New York Portfolio


                                                            388 Greenwich Street
                                                        New York, New York 10013

   
                                                                     FD0604 7/98
    


PROSPECTUS

                                                                    SMITH BARNEY
                                                                      MUNI FUNDS

                                                                         Georgia
                                                                       Portfolio

   
                                                                   JULY 29, 1998
    

                                                   Prospectus begins on page one

[LOGO] Smith Barney Mutual Funds 
       Investing for your future. 
       Every day.
<PAGE>

   
--------------------------------------------------------------------------------
Prospectus                                                         July 29, 1998
--------------------------------------------------------------------------------
    

      Smith Barney Muni Funds
      Georgia Portfolio
      388 Greenwich Street
      New York, New York 10013
      (800) 451-2010

   
      The Georgia Portfolio (the "Portfolio") is one of eight investment
portfolios that currently comprise Smith Barney Muni Funds (the "Fund"). The
Portfolio seeks to pay its shareholders as high a level of income exempt from
Federal income taxes and Georgia personal income taxes as is consistent with
prudent investing. The Portfolio will invest primarily in obligations issued by
the State of Georgia and its political subdivisions, agencies and
instrumentalities. The Portfolio may invest without limit in municipal
obligations whose interest is a tax-preference item for purposes of the Federal
alternative minimum tax.
    

      This Prospectus sets forth concisely certain information about the Fund
and the Portfolio, including sales charges, distribution and service fees and
expenses, that prospective investors will find helpful in making an investment
decision. Investors are encouraged to read this Prospectus carefully and retain
it for future reference.

   
      Additional information about the Portfolio is contained in a Statement of
Additional Information dated July 29, 1998, as amended or supplemented from time
to time (the "SAI"), which is available upon request and without charge by
calling or writing the Fund at the telephone number or address set forth above
or by contacting a Smith Barney Financial Consultant. The Statement of
Additional Information has been filed with the Securities and Exchange
Commission (the "SEC") and is incorporated by reference into this Prospectus in
its entirety.
    

SMITH BARNEY INC.
Distributor

   
MUTUAL MANAGEMENT CORP.
Investment Manager

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


                                                                               1
<PAGE>

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

   
Prospectus Summary                                                            3
--------------------------------------------------------------------------------
Financial Highlights                                                          9
--------------------------------------------------------------------------------
Investment Objective and Management Policies                                 11
--------------------------------------------------------------------------------
Valuation of Shares                                                          17
--------------------------------------------------------------------------------
Dividends, Distributions and Taxes                                           17
--------------------------------------------------------------------------------
Purchase of Shares                                                           20
--------------------------------------------------------------------------------
Exchange Privilege                                                           27
--------------------------------------------------------------------------------
Redemption of Shares                                                         30
--------------------------------------------------------------------------------
Minimum Account Size                                                         33
--------------------------------------------------------------------------------
Performance                                                                  33
--------------------------------------------------------------------------------
Management of the Fund                                                       34
--------------------------------------------------------------------------------
Distribution                                                                 35
--------------------------------------------------------------------------------
Additional Information                                                       36
--------------------------------------------------------------------------------

================================================================================
      No person has been authorized to give any information or to make any
representations in connection with this offering other than those contained in
this Prospectus and, if given or made, such other information and
representations must not be relied upon as having been authorized by the
Portfolio or Smith Barney Inc. (the "Distributor"). This Prospectus does not
constitute an offer by the Portfolio or the Distributor to sell or a
solicitation of an offer to buy any of the securities offered hereby in any
jurisdiction to any person to whom it is unlawful to make such offer or
solicitation in such jurisdiction.
================================================================================
    


2
<PAGE>

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

   
      The following summary is qualified in its entirety by detailed information
appearing elsewhere in this Prospectus and in the SAI. Cross references in this
summary are to headings in the Prospectus. See "Table of Contents."
    

      INVESTMENT OBJECTIVE The Portfolio seeks to pay its shareholders as high a
level of income exempt from Federal income taxes and Georgia personal income
taxes as is consistent with prudent investing. The Portfolio will invest
primarily in obligations issued by the State of Georgia and its political
subdivisions, agencies and instrumentalities. The Portfolio may invest without
limit in municipal obligations whose interest is a tax-preference item for
purposes of the Federal alternative minimum tax. See "Investment Objective and
Management Policies."

   
      ALTERNATIVE PURCHASE ARRANGEMENTS The Portfolio offers several classes of
shares ("Classes") to investors designed to provide them with the flexibility
of selecting an investment best suited to their needs. The general public is
offered three Classes of shares: Class A shares, Class B shares and Class L
shares, which differ principally in terms of sales charges and rate of expenses
to which they are subject. A fourth Class of shares, Class Y shares, is offered
only to investors meeting an initial investment of at least $15,000,000. See
"Purchase of Shares" and "Redemption of Shares."
    

      Class A Shares. Class A shares are sold at net asset value plus an initial
sales charge of up to 4.00% and are subject to an annual service fee of 0.15% of
the average daily net assets of the Class. The initial sales charge may be
reduced or waived for certain purchases. Purchases of Class A shares of $500,000
or more will be made at net asset value with no initial sales charge, but will
be subject to a contingent deferred sales charge ("CDSC") of 1.00% on
redemptions made within 12 months of purchase. See "Prospectus Summary --
Alternative Purchase Arrangements -- Reduced or No Initial Sales Charge."

      Class B Shares. Class B shares are offered at net asset value subject to a
maximum CDSC of 4.50% of redemption proceeds, declining by 0.50% the first year
after purchase and by 1.00% each year thereafter to zero. This CDSC may be
waived for certain redemptions. Class B shares are subject to an annual service
fee of 0.15% and an annual distribution fee of 0.50% of the average daily net
assets of the Class. The Class B shares' distribution fee may cause that Class
to have higher expenses and pay lower dividends than Class A shares.

      Class B Shares Conversion Feature. Class B shares will convert
automatically to Class A shares, based on relative net asset value, eight years
after the date of the original purchase. Upon conversion, these shares will no
longer be subject to an annual distribution fee. In addition, a certain portion
of Class B shares that have been acquired through the reinvestment of dividends
and distributions ("Class B Dividend Shares") will be converted at that time.
See "Purchase of Shares -- Deferred Sales Charge Alternatives."


                                                                               3
<PAGE>

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

   
      Class L Shares. Class L shares are sold at net asset value plus an initial
sales charge of 1.00% of the purchase price. They are subject to an annual
service fee of 0.15% and an annual distribution fee of 0.55% of the average
daily net assets of the Class and investors pay a CDSC of 1.00% if they redeem
Class L shares within 12 months of purchase. The CDSC may be waived for certain
redemptions. The Class L shares' distribution fee may cause that Class to have
higher expenses and pay lower dividends than Class A shares. Purchases of
Portfolio shares, which when combined with current holdings of Class L shares of
the Portfolio equal or exceed $500,000 in the aggregate, should be made in
Class A shares at net asset value with no sales charge, which would be subject
to a CDSC of 1.00% on redemptions made within 12 months of purchase.

      Class Y Shares. Class Y shares are available only to investors meeting an
initial investment minimum of $15,000,000. Class Y shares are sold at net asset
value with no initial sales charge or CDSC. They are not subject to any service
or distribution fees.
    

      In deciding which class of Portfolio shares to purchase, investors should
consider the following factors, as well as any other relevant facts and
circumstances:

   
      Intended Holding Period. The decision as to which Class of shares is more
beneficial to an investor depends on the amount and intended duration of his or
her investment. Shareholders who are planning to establish a program of regular
investment may wish to consider Class A shares; as the investment accumulates
share holders may qualify for reduced sales charges and the shares are subject
to lower ongoing expenses over the term of the investment. As an alternative,
Class B shares are sold without any initial sales charge so the entire purchase
price is immediately invested in the Portfolio. Any investment return on these
additional invested amounts may partially or wholly offset the higher annual
expenses of this Class. Because the Portfolio's future return cannot be
predicted, however, there can be no assurance that this would be the case.
Finally, Class L shares, which have a lower upfront sales charge but are subject
to higher distribution fees than Class A shares, are suitable for investors who
are not investing or intending to invest an amount which would receive a sales
charge discount and who have a short-term or undetermined time frame.

      Finally, investors should consider the effect of the CDSC period and any
conversion rights of the Classes in the context of their own investment time
frame. For example, while Class L shares have a shorter CDSC period than Class B
shares, they do not have a conversion feature and therefore are subject to an
ongoing distribution fee. Thus, Class B shares may be more attractive than Class
L shares to investors with longer-term investment outlooks.
    

      Reduced or No Initial Sales Charge. The initial sales charge on Class A
shares may be waived for certain eligible purchasers and the entire purchase
price would be immediately invested in the Portfolio. In addition, Class A share
purchases of


4
<PAGE>

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

   
$500,000 or more will be made at net asset value with no initial sales charge,
but will be subject to a CDSC of 1.00% on redemptions made within 12 months of
purchase. The $500,000 investment may be met by adding the purchase to the net
asset value of all Class A shares offered with a sales charge held in funds
sponsored by Smith Barney Inc. ("Smith Barney") listed under "Exchange
Privilege." Class A share purchases may also be eligible for a reduced initial
sales charge. See "Purchase of Shares." Because the ongoing expenses of Class A
shares may be lower than those for Class B and Class L shares, purchasers
eligible to purchase Class A shares at net asset value or at a reduced sales
charge should consider doing so.

      Smith Barney Financial Consultants may receive different compensation for
selling different Classes of shares. Investors should understand that the
purpose of the CDSC on the Class B and Class L shares is the same as that of an
initial sales charge.
    

      See "Purchase of Shares" and "Management of the Fund" for a complete
description of the sales charges and service and distribution fees for each
Class of shares and "Valuation of Shares," "Dividends, Distributions and Taxes"
and "Exchange Privilege" for other differences between the classes of shares.

      PURCHASE OF SHARES Shares may be purchased through a brokerage account
maintained with Smith Barney. Shares may also be purchased through a broker that
clears securities transactions through Smith Barney on a fully disclosed basis
(an "Introducing Broker") or an investment dealer in the selling group. See
"Purchase of Shares."

   
      INVESTMENT MINIMUMS Investors in Class A, Class B and Class L shares may
open an account by making an initial investment of at least $1,000 for each
account. Investors in Class Y shares may open an account for an initial
investment of $15,000,000. Subsequent investments of at least $50 may be made
for all Classes. The minimum initial investment requirement for purchases of
Portfolio shares through the Systematic Investment Plan are described below. It
is not recommended that the Portfolio be used as an investment for Keogh, IRA
or other qualified retirement plans. There is no minimum investment requirement
in Class A for unitholders who invest distributions from a unit investment trust
("UIT") sponsored by Smith Barney. See "Purchase of Shares."

      SYSTEMATIC INVESTMENT PLAN The Portfolio offers shareholders a Systematic
Investment Plan under which they may authorize the automatic placement of a
purchase order each month or quarter for Portfolio shares. The minimum
investment requirement for Class A, Class B and Class L shares and the
subsequent investment requirement for all Classes for shareholders purchasing
shares through the Systematic Investment Plan on a monthly basis is $25, and on
a quarterly basis is $50. See "Purchase of Shares"
    

      REDEMPTION OF SHARES Shares may be redeemed on each day the New


                                                                               5
<PAGE>

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

York Stock Exchange, Inc. ("NYSE") is open for business. See "Purchase of
Shares" and "Redemption of Shares."

   
      MANAGEMENT OF THE PORTFOLIO Mutual Management Corp. ("MMC" or the
"Manager"), formerly known as Smith Barney Mutual Funds Management, Inc., serves
as the Portfolio's investment manager. MMC provides investment advisory and
management services to various investment companies comprising the Smith Barney
Mutual Funds. MMC is a wholly owned subsidiary of Salomon Smith Barney Holdings
Inc. ("Holdings"). Holdings is 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 insurance Services. See "Management of the
Fund."
    

      EXCHANGE PRIVILEGE Shares of a Class may be exchanged for shares of the
same Class of certain other funds of the Smith Barney Mutual Funds at the
respective net asset values next determined. See "Exchange Privilege."

      VALUATION OF SHARES Net asset value of the Portfolio for the prior day
generally is quoted daily in the financial section of most newspapers and is
also available from a Smith Barney Financial Consultant. See "Valuation of
Shares."

   
      DIVIDENDS AND DISTRIBUTIONS Dividends from net investment income are
paid monthly. Distributions of net realized capital gains, if any, are paid at
least annually. See "Dividends, Distributions and Taxes."
    

      REINVESTMENT OF DIVIDENDS Dividends and distributions paid on shares of a
Class will be reinvested automatically, unless otherwise specified by an
investor, in additional shares of the same Class at current net asset value.
Shares acquired by dividend and distribution reinvestments will not be subject
to any sales charge or CDSC. Class B shares acquired through dividend and
distribution rein vestments will become eligible for conversion to Class A
shares on a pro rata basis. See "Dividends, Distributions and Taxes."

   
      RISK FACTORS AND SPECIAL CONSIDERATIONS There can be no assurance that the
Portfolio's investment objective will be achieved. The Portfolio's concentration
in Georgia obligations involves certain additional risks that should be care
fully considered by an investor. Additionally, the value of the Portfolio's
investments, and thus the net asset value of the Portfolio's shares, will
fluctuate in response to changes in market and economic conditions, as well as
the financial condition and prospects of issuers of municipal obligations
purchased by the Portfolio. The market value of municipal bonds may be adversely
affected during periods of rising interest rates. Additionally, changes in
Federal income tax laws affecting the tax exemption for interest on municipal
obligations could affect the availability of tax-exempt obligations for purchase
and the value of the Portfolio's securities would be affected. See "Investment
Objective and Management Policies."
    


6
<PAGE>

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

      THE PORTFOLIO'S EXPENSES The following expense table lists the costs and
expenses an investor will incur either directly or indirectly as a shareholder
of the Portfolio, based on the maximum sales charge or maximum CDSC that may be
incurred at the time of purchase or redemption and, unless otherwise noted, the
Portfolio's operating expenses for its most recent fiscal year:

   
<TABLE>
<CAPTION>
Georgia Portfolio                                 Class A    Class B    Class L*    Class Y
---------------------------------------------------------------------------------------------
<S>                                               <C>        <C>        <C>         <C>  
Shareholder Transaction Expenses
   Maximum sales charge imposed on purchases
     (as a percentage of offering price) ...      4.00%      None       1.00%*      None
   Maximum CDSC
     (as a percentage of original cost or
     redemption proceeds,
     whichever is lower) ...................      None**     4.50%      1.00%       None

Annual Portfolio Operating Expenses***
   (as a percentage of average net assets)
     Management fees (after fee waiver) ....      0.40%      0.40%      0.40%       0.40%
     12b-1 fees**** ........................      0.15       0.65       0.70          --
     Other expenses ........................      0.23       0.25       0.24        0.23*****
                                                  ----       ----       ----        ----
   Total Portfolio Operating Expenses ......      0.78%      1.30%      1.34%       0.63%
                                                  ====       ====       ====        ====
---------------------------------------------------------------------------------------------
</TABLE>

      *Class L shares were previously named Class C shares. For shareholders who
owned Class C shares of the Portfolio, Class L shares may be purchased without
incurring the 1% initial sales charge until June 25, 1999.

      **Purchases of Class A shares of $500,000 or more will be made at net
asset value with no sales charge, but will be subject to a CDSC of 1.00% on
redemptions made within 12 months of purchase.

      ***"Management fees" have been restated to reflect the management fee
waiver currently in effect for the Portfolio. Management fees were waived to a
greater extent during the last fiscal year. Absent the fee waiver, the
management fee would be incurred at the rate of 0.45% of each Class' average
daily net assets. Absent the fee waiver, total expenses would be incurred at the
rates of 0.83%, 1.35%, 1.39% and 0.68% for Class A, Class B, Class L and Class Y
shares, respectively.

      ****Upon conversion of Class B shares to Class A shares such shares will
no longer be subject to a distribution fee. Class L shares do not have a
conversion feature and, therefore, are subject to an ongoing distribution fee.
As a result, long-term shareholders of Class L shares may pay more than the
economic equivalent of the maximum front-end sales charge permitted by the
National Association of Securities Dealers, Inc.

      *****For Class Y shares, "Other expenses" have been estimated because no
Class Y shares were outstanding for the period ended March 31, 1998.
    

      Class A shares of the Portfolio purchased through thE Smith Barney
AssetOne Program will be subject to an annual asset-based fee, payable
quarterly, in lieu of the initial sales charge. The fee will vary to a maximum
of 1.5%, depending on the amount of assets held through the Program. For more
information, please call your Smith Barney Financial Consultant.


                                                                               7
<PAGE>

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

   
      The sales charge and CDSC set forth in the above table are the maximum
charges imposed on purchases or redemptions of Portfolio shares and investors
may actually pay lower or no charges, depending on the amount purchased and, in
the case of Class B, Class L and certain Class A shares, the length of time the
shares are held. See "Purchase of Shares" and "Redemption of Shares." Smith
Barney receives an annual 12b-1 service fee of 0.15% of the value of average
daily net assets of Class A shares. Smith Barney also receives with respect to
Class B shares an annual 12b-1 fee of 0.65% of the value of average daily net
assets of that Class, consisting of a 0.50% distribution fee and a 0.15% service
fee. With respect to Class L shares, Smith Barney also receives an annual 12b-1
fee of 0.70% of the value of average daily net assets of that Class, consisting
of a 0.55% distribution fee and a 0.15% service fee. "Other expenses" in the
above table include fees for shareholder services, custodial fees, legal and
accounting fees, printing costs and registration fees.
    

      EXAMPLE

      The following example is intended to assist an investor in understanding
the various costs that an investor in the Portfolio will bear directly or
indirectly. The example assumes payment by the Portfolio of operating expenses
at the levels set forth in the table above. See "Purchase of Shares,"
"Redemption of Shares" and "Management of the Fund."

   
<TABLE>
<CAPTION>
Georgia Portfolio                                         1 Year     3 Years    5 Years   10 Years*
---------------------------------------------------------------------------------------------------
<S>                                                         <C>        <C>        <C>       <C> 
An investor would pay the following expenses on a $1,000
 investment, assuming (1) 5.00% annual return and
 (2) redemption at the end of each time period:
      Class A ..........................................    $48        $64        $82       $133
      Class B ..........................................     58         71         81        142
      Class L ..........................................     34         52         83        170
      Class Y ..........................................      6         20         35         79
                                                                                            
An investor would pay the following expenses on the same                                    
 investment, assuming the same annual return and no                                         
 redemption:                                                                                
      Class A ..........................................    $48        $64        $82       $133
      Class B ..........................................     13         41         71        142
      Class L ..........................................     24         52         83        170
      Class Y ..........................................      6         20         35         79
---------------------------------------------------------------------------------------------------
</TABLE>
    

      * Ten-year figures assume conversion of Class B shares to Class A shares
at the end of the eighth year following the date of purchase.

      The example also provides a means for the investor to compare expense
levels of funds with different fee structures over varying investment periods.
To facilitate such comparison, all funds are required to utilize a 5.00% annual
return assumption. However, the Portfolio's actual return will vary and may be
greater or less than 5.00%. This example should not be considered a
representation of past or future expenses, 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 Portfolio's annual
report dated March 31, 1998. The information set out below should be read in
conjunction with the financial statements and related notes that also appear in
the Portfolio's Annual Report to Shareholders, which is incorporated by
reference into the SAI.
    

For a share of beneficial interest outstanding throughout each year:

   
<TABLE>
<CAPTION>
Georgia Portfolio                                       Class A Shares
--------------------------------------------------------------------------------
Year Ended March 31,                  1998       1997       1996       1995(1)
--------------------------------------------------------------------------------
<S>                                  <C>        <C>        <C>        <C>   
Net Asset Value, Beginning of Year   $12.48     $12.50     $12.10     $12.00
--------------------------------------------------------------------------------
Income From Operations:
  Net investment income (2)            0.67       0.69       0.70       0.62
  Net realized and unrealized gain     1.03       0.04       0.45       0.10
--------------------------------------------------------------------------------
Total Income from Operations           1.70       0.73       1.15       0.72
--------------------------------------------------------------------------------
Less Distributions From:
  Net investment income               (0.67)     (0.67)     (0.70)     (0.62)
  Net realized gains                  (0.08)     (0.08)     (0.05)        --
--------------------------------------------------------------------------------
Total Distributions                   (0.75)     (0.75)     (0.75)     (0.62)
--------------------------------------------------------------------------------
Net Asset Value, End of Year         $13.43     $12.48     $12.50     $12.10
--------------------------------------------------------------------------------
Total Return(P)                       13.85%      5.95%      9.67%      6.29%++
--------------------------------------------------------------------------------
Net Assets, End of Year (millions)      $21        $14        $10         $9
--------------------------------------------------------------------------------
Ratios to Average Net Assets:
  Expenses (2)(3)                      0.50%      0.48%      0.38%      0.28%+
  Net investment income                5.10       5.49       5.57       5.43+
--------------------------------------------------------------------------------
Portfolio Turnover Rate                  36%        81%        63%        34%
================================================================================
</TABLE>
    

(1) For the period from April 4, 1994 (inception date) to March 31, 1995.

   
(2) The Manager has waived all or part of its fees for the years ended March
    31, 1998, 1997 and 1996 and the period ended March 31, 1995. In addition,
    the Manager has reimbursed expenses of $56,755 and $42,317 for the year
    ended March 31, 1996 and the period ended March 31, 1995, respectively. If
    such fees were not waived and expenses not reimbursed, the per share
    decrease of net investment income and the ratios of expenses to average
    net assets would have been:

                                                        Expense Ratios
                  Net Investment Income         Without Expense Reimbursements
                   Per Share Decreases                  and Fee Waivers
              -----------------------------     ------------------------------
              1998    1997    1996    1995      1998    1997    1996     1995
              -----   -----   -----   -----     -----   -----   -----    -----
    Class A   $0.04   $0.04   $0.11   $0.12     0.83%   0.90%   1.23%   1.20%+
    

(3) As a result of voluntary expense limitations, expense ratio would not
    exceed 0.80% for Class A shares.
#   Includes the net per share effect of shareholder sales and redemptions
    activity during the period, most of which occurred at a net asset value
    less than the net asset value at the beginning of the period.
(P) Total returns do not reflect sales loads or contingent deferred sales
    charges.
++  Total return is not annualized as it may not be representative of the
    total return for the year.
+   Annualized.


                                                                               9
<PAGE>

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

For a share of beneficial interest outstanding throughout each year:

   
<TABLE>
<CAPTION>
Georgia Portfolio                                     Class B Shares(1)                         Class L Shares(2)
------------------------------------------------------------------------------------------------------------------------------
Year Ended March 31,                         1998      1997      1996      1995(3)     1998      1997      1996      1995(4)
------------------------------------------------------------------------------------------------------------------------------
<S>                                          <C>       <C>       <C>       <C>         <C>       <C>       <C>       <C>   
Net Asset Value, Beginning of Year           $12.47    $12.50    $12.11    $12.27      $12.46    $12.49    $12.09    $12.06
------------------------------------------------------------------------------------------------------------------------------
Income From Operations:
  Net investment income (5)                    0.61      0.62      0.64      0.49        0.60      0.62      0.63      0.55
  Net realized and unrealized gain (loss)      1.03      0.04      0.45     (0.16)#      1.02      0.03      0.46      0.04#
------------------------------------------------------------------------------------------------------------------------------
Total Income from Operations                   1.64      0.66      1.09      0.33        1.62      0.65      1.09      0.59
------------------------------------------------------------------------------------------------------------------------------
Less Distributions From:
  Net investment income                       (0.60)    (0.61)    (0.65)    (0.49)      (0.59)    (0.60)    (0.64)    (0.56)
  Net realized gains                          (0.08)    (0.08)    (0.05)       --       (0.08)    (0.08)    (0.05)       --
------------------------------------------------------------------------------------------------------------------------------
Total Distributions                           (0.68)    (0.69)    (0.70)    (0.49)      (0.67)    (0.68)    (0.69)    (0.56)
------------------------------------------------------------------------------------------------------------------------------
Net Asset Value, End of Year                 $13.43    $12.47    $12.50    $12.11      $13.41    $12.46    $12.49    $12.09
------------------------------------------------------------------------------------------------------------------------------
Total Return(P)                               13.39%     5.33%     9.08%     2.88%++    13.23%     5.28%     9.12%     5.11%++
------------------------------------------------------------------------------------------------------------------------------
Net Assets, End of Year (millions)              $11        $7        $5        $3          $5        $3        $3        $1
------------------------------------------------------------------------------------------------------------------------------
Ratios to Average Net Assets:
  Expenses (5)(6)                              1.02%     1.00%     0.92%     0.85%+      1.06%     1.04%     0.97%     0.90%+
  Net investment income                        4.58      4.97      5.20      5.37+       4.54      4.93      5.18      5.22+
------------------------------------------------------------------------------------------------------------------------------
Portfolio Turnover Rate                          36%       81%       63%       34%         36%       81%       63%       34%
==============================================================================================================================
</TABLE>
    

(1) On November 7, 1994, the former Class E shares were renamed Class B
    shares.

   
(2) On November 7, 1994, the former Class B shares were renamed Class C
    shares. On June 12, 1998, the Class C shares were renamed Class L shares.
    

(3) For the period from June 15, 1994 (inception date) to March 31, 1995.
(4) For the period from April 14, 1994 (inception date) to March 31, 1995.

   
(5) The Manager has waived all or part of its fees for the years ended March
    31, 1998, 1997 and 1996 and the period ended March 31, 1995. In addition,
    the Manager has reimbursed expenses of $56,755 and $42,317 for the year
    ended March 31, 1996 and the period ended March 31, 1995, respectively. If
    such fees were not waived and expenses not reimbursed, the per share
    decrease of net investment income and the ratios of expenses to average
    net assets would have been:

                                                        Expense Ratios
                  Net Investment Income         Without Expense Reimbursements
                   Per Share Decreases                  and Fee Waivers
              -----------------------------     ------------------------------
              1998    1997    1996    1995      1998    1997    1996    1995
              -----   -----   -----   -----     -----   -----   -----   -----
    Class B   $0.04   $0.05   $0.10   $0.11     1.35%   1.42%   1.77%   1.82%+
    Class C    0.04    0.05    0.10    0.12     1.39    1.46    1.82    1.85+

(6) As a result of voluntary expense limitations, expense ratios would not
    exceed 1.30% and 1.35% for Class B and L shares, respectively.
    

#   Includes the net per share effect of shareholder sales and redemptions
    activity during the period, most of which occurred at a net asset value
    less than the net asset value at the beginning of the period.
(P) Total returns do not reflect sales loads or contingent deferred sales
    charges.
++  Total return is not annualized as it may not be representative of the
    total return for the year.
+   Annualized.


10
<PAGE>

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

   
      The Portfolio seeks as high a level of income exempt from Federal income
taxes and from the personal income taxes of the State of Georgia as is
consistent with prudent investing. The Portfolio will invest primarily in
obligations of the State of Georgia and its political subdivisions, agencies and
instrumentalities, the interest from which is, in the opinion of bond counsel
for the various issuers, exempt from state as well as Federal income taxes at
the time of their issuance. For certain shareholders, a portion of the
Portfolio's income may be subject to the alternative minimum tax ("AMT") on
tax-exempt income discussed below. Such obligations are often issued to raise
money for public projects that enhance the quality of life including health
facilities, housing, airports, schools, highways and bridges. The Portfolio
invests its assets in securities of ranging maturities, without limitation,
depending on market conditions. Typically, the remaining maturity of municipal
bonds will range between 5 and 30 years.

      The two principal classifications of municipal obligations are "general
obligation" and "revenue." General obligations are secured by a municipal
issuer's pledge of its full faith, credit and taxing power for the payment of
principal and interest. Revenue obligations are payable only from the revenues
derived from a particular facility or class of facilities or, in some cases,
from the proceeds of a special excise tax or other specific revenue source.
Please see the SAI for a more detailed discussion about the different types of
municipal obligations.

      Under the Tax Reform Act of 1986, interest income from municipal
obligations issued to finance certain "private activities" ("AMT-Subject Bonds")
becomes an item of "tax preference" which is subject to the AMT when received by
a person in a tax year during which he is subject to that tax. Such private
activity bonds include bonds issued to finance such projects as certain solid
waste disposal facilities, student loan programs and water and sewage projects.
Because interest income on AMT-Subject Bonds is taxable to certain investors, it
is expected, although there can be no guarantee, that such municipal obligations
generally will provide some what higher yields than other municipal obligations
of comparable quality and maturity. There is no limitation on the percent or
amount of the Portfolio's assets that may be invested in AMT-Subject Bonds.

      Municipal bonds purchased for the Portfolio must, at the time of purchase,
be investment-grade municipal bonds, and at least two-thirds of the Portfolio's
municipal bonds must be rated within the three highest ratings categories by a
nationally recognized statistical rating organization ("NRSRO").
Investment-grade bonds are rated within the four highest categories by an NRSRO,
such as those rated Aaa, Aa, A and Baa by Moody's Investors Service, Inc.
("Moody's") or AAA, AA, A and BBB by Standard & Poor's Ratings Group ("S&P") or,
if unrated, determined to be of comparable quality by MMC; pre-refunded bonds
escrowed by U.S. Treasury obligations are considered AAA rated (the highest
    


                                                                              11
<PAGE>

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

   
rating) even though the issuer does not obtain a new rating. Up to one-third of
the assets of the Portfolio may be invested in municipal bonds rated in the
fourth highest category (this grade, while regarded as having an adequate
capacity to pay interest and repay principal, is considered to be of medium
quality and has speculative characteristics) or in unrated municipal bonds if,
based upon credit analysis by the Manager, it is believed that such securities
are at least of comparable quality to those securities in which the Portfolio
may invest. In determining the suitability of an investment in an unrated
municipal bond, the Manager will take into consideration debt service coverage,
the purpose of the financing, history of the issuer, existence of other rated
securities of the issuer and other general conditions as may be relevant,
including comparability to other issues. After the Portfolio purchases a
municipal bond, the issue may cease to be rated or its rating may be reduced
below the minimum required for purchase. Such an event would not require the
elimination of the issue from the Portfolio but the Manager will consider such
an event in determining whether the Portfolio should continue to hold the
security.

      The Portfolio's short-term municipal obligations will be limited to
high-grade obligations (obligations that are secured by the full faith and
credit of the United States or are rated MIG 1 or MIG 2, VMIG 1 or VMIG 2 or
Prime-1 or Aa or better by Moody's or SP-1+, SP-1, SP-2, or A-1 or AA or better
by S&P or have a rating within comparable categories by any other NRSRO, or
obligations that are unrated but determined by the Manager to be comparable).
Among the types of short-term instruments in which the Portfolio may invest are
floating- or variable-rate demand instruments, tax-exempt commercial paper
(generally having a maturity of less than nine months), and other types of notes
generally having maturities of less than three years, such as Tax Anticipation
Notes, Revenue Anticipation Notes, Tax and Revenue Anticipation Notes and Bond
Anticipation Notes. Demand instruments usually have an indicated maturity of
over one year, but contain a demand feature that enables the holder to liquidate
the investment on no more than 30 days' notice; variable-rate demand instruments
provide for automatic establishment of a new interest rate on set dates;
floating-rate demand instruments provide for automatic adjustment of their
interest rates whenever some other specified interest rate changes (e.g., the
prime rate). The Portfolio may purchase participation interests in variable-rate
tax-exempt securities (such as industrial development bonds) owned by banks.
Participations are frequently backed by an irrevocable letter of credit or
guarantee of a bank that the Manager has determined meets the prescribed quality
standards for the Portfolio. Participation interests will be purchased only if
management believes interest income on such interests will be tax exempt when
distributed as dividends to shareholders.

      The Portfolio will not invest more than 15% of the value of its net assets
in illiquid securities, including those for which there is no established
market.
    


12
<PAGE>

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

   
      The Portfolio may purchase new issues of municipal obligations on a
when-issued basis, i.e. delivery and payment normally take place 15 to 45 days
after the purchase date. The payment obligation and the interest rate to be
received are each fixed on the purchase date, although no interest accrues with
respect to a when-issued security prior to its stated delivery date. During the
period between purchase and settlement, assets consisting of cash or debt
securities of any grade having a value equal to or greater than the Portfolio's
purchase commitments, provided such securities have been determined by the
Manager to be liquid and unencumbered and are marked to market daily pursuant to
guidelines established by the Board of Trustees, will be segregated at the
custodian bank. Interest rates at settlement may be lower or higher than on the
purchase date, which would result in appreciation or depreciation, respectively.
Although a Portfolio will only purchase municipal obligations on a when-issued
basis with the intention of actually acquiring the securities, the Portfolio may
sell these securities before the settlement date if it is deemed advisable.
    

      Portfolio transactions will be undertaken primarily to accomplish the Port
folio's objective in relation to anticipated movements in the general level of
interest rates, but the Portfolio may also engage in short-term trading
consistent with its objective.

   
      The Portfolio may borrow on a short-term basis in amounts of up to 5% of
its assets in order to facilitate the settlement of portfolio securities
transactions.

      The Portfolio may invest in municipal bond index futures contracts
(currently traded on the Chicago Board of Trade) or in listed contracts based on
U.S. government securities as a hedging policy in pursuit of its investment
objective, provided that immediately thereafter not more than 33 1/3% of its net
assets would be hedged or the amount of margin deposits on the Portfolio's
existing futures contracts would not exceed 5% of the value of its total assets.
Since any income would be taxable, it is anticipated that such investments will
be made only in those circumstances when the Manager anticipates the possibility
of an extreme change in interest rates or market conditions but does not wish to
liquidate the Portfolio's securities. A further discussion of futures contracts
and their associated risks is contained in the SAI.

      The Portfolio 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 that 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-
    


                                                                              13
<PAGE>

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

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.

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

      The liquidity of municipal lease obligations varies. Municipal leases held
by the Portfolio will be considered illiquid securities unless the Board of
Trustees determines that the leases are readily marketable. Certain municipal
lease obligations contain "non-appropriation" clauses which provide that the
municipality has no obligation to make lease or installment purchase payments in
future years unless money is appropriated for such purpose on a yearly basis. In
the case of a "non-appropriation" lease, the Portfolio's ability to recover
under the lease in the event of non-appropriation or default will be limited
solely to the repossession of the leased property, without recourse to the
general credit of the lessee, and disposition of the property in the event of
foreclosure might be difficult. The Portfolio will not invest more than 5% of
its assets in such "non-appropriation" municipal lease obligations.
    

      It is a fundamental policy that, under normal market conditions, the
Portfolio will seek to invest 100% of its assets -- and the Portfolio will
invest not less than 80% of its assets -- in municipal obligations the interest
on which is exempt from Federal income taxes (other than the AMT). It is also a
fundamental policy that, under normal market conditions, the Portfolio will
invest at least 65% of its assets in municipal obligations the interest on which
is also exempt from the personal income taxes of the State of Georgia in the
opinion of bond counsel to the issuers. The Portfolio may invest up to 20% of
its assets in taxable fixed-income securities, but only in obligations issued or
guaranteed by the full faith and credit of the United States, and may invest
more than 20% of its assets in U.S. government securities during periods when in
the Manager's opinion a temporary defensive posture is warranted, including any
period when the Portfolio's monies available for investment exceed the
municipal obligations available for purchase that meet the


14
<PAGE>

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

Portfolio's rating, maturity and other investment criteria. To the extent the
Portfolio is so invested, the investment objective may not be achieved.

   
      Year 2000. The investment management services provided to the Fund by the
Manager 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. The Manager 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, the Manager 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 the Manager, Smith Barney or any other service provider will be successful,
or that interaction with other non-complying computer systems will not impair
Fund or shareholder services at that time.

      In addition, the ability of issuers to make timely payments of interest
and principal or to continue their operations or services may be impaired by the
inadequate preparation of their computer systems for the year 2000. This may
adversely affect the market values of securities of specific issuers or of
securities generally if the inadequacy of preparation is perceived as widespread
or as affecting trading markets.
    

      RISK AND INVESTMENT CONSIDERATIONS

      The ability of the Portfolio to achieve its investment objective is
dependent on a number of factors, including the skills of the Manager in
purchasing municipal obligations whose issuers have the continuing ability to
meet their obligations for the payment of interest and principal when due. The
ability to achieve a high level of income is dependent on the yields of the
securities in the portfolio. Yields on municipal obligations are the product of
a variety of factors, including the general conditions of the municipal bond
markets, the size of a particular offering, the maturity of the obligation and
the rating of the issue. In general, the longer the maturity of a municipal
obligation, the higher the rate of interest it pays. However, a longer average
maturity is generally associated with a higher level of volatility in the market
value of a municipal obligation. During periods of falling interest rates, the
values of long-term municipal obligations generally rise. Conversely, during
periods of rising interest rates, the values of such securities generally
decline. Changes in the value of Portfolio securities will not affect interest
income derived from those securities but will affect the Portfolio's net asset
value. Since the Port-


                                                                              15
<PAGE>

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

folio's objective is to provide high current income, it will invest in municipal
obligations with an emphasis on income rather than stability of net asset value.

   
      The Portfolio is registered as a "non-diversified" company under the
Investment Company Act of 1940, as amended (the "1940 Act") in order for the
Portfolio to have the ability to invest more than 5% of its assets in the
securities of any issuer. The Portfolio intends to comply with Subchapter M of
the Internal Revenue Code of 1986, as amended (the "Code") which limits the
aggregate value of all holdings (except U.S. government and cash items, as
defined in the Code) that exceed 5% of the Portfolio's total assets to an
aggregate amount of 50% of such assets. Also, holdings of a single issuer (with
the same exceptions) may not exceed 25% of the Portfolio's total assets. These
limits are measured at the end of each quarter. Under the Subchapter M limits,
up to 50% of the Portfolio's total assets may be invested in as few as two
single issuers. In the event of decline in credit worthiness of, or default
upon, the obligations of one or more such issuers exceeding 5%, an investment
in the Portfolio may entail greater risk than in a portfolio having a policy of
diversification because a high percentage of the Portfolio's assets may be
invested in municipal obligations of one or two issuers. Furthermore, a high
percentage of investments among few issuers may result in a greater degree of
fluctuation in the market value of the assets of the Portfolio, and consequently
a greater degree of fluctuation of the Portfolio's net asset value, because the
Portfolio will be more susceptible to economic, political, or regulatory
developments affecting these securities than would be the case with a portfolio
composed of varied obligations of more issuers.
    

      RISK FACTORS AFFECTING GEORGIA

   
      The Portfolio's ability to achieve its investment objective is dependent
upon the ability of the issuers of Georgia obligations to meet their continuing
obligations for the payment of principal and interest. The Portfolio's
concentration in Georgia obligations involves certain additional risks that
should be considered carefully by investors. Certain Georgia constitutional and
statutory limitations with respect to indebtedness incurred by Georgia's
governmental entities, departments and agencies could result in certain adverse
consequences affecting Georgia's obligations and may have the effect of
impairing the ability of certain issuers of Georgia obligations to pay principal
and interest on their obligations.

      Additional information regarding the state is included in the SAI.
    

      PORTFOLIO TRANSACTIONS AND TURNOVER

      Portfolio securities ordinarily are purchased from and sold to parties
acting as either principal or agent. Newly issued securities ordinarily are
purchased directly from the issuer or from an underwriter; other purchases and
sales usually are placed with those dealers from which it appears that the best
price or execution will be


16
<PAGE>

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

   
obtained. Usually, no brokerage commissions, as such, are paid by the Portfolio,
since purchases and sales of municipal bonds and other debt securities are
traded through broker-dealers in principal transactions, although the price paid
usually includes a compensation to the dealer.

      The Portfolio cannot accurately predict its portfolio turnover rate, but
anticipates that the annual turnover will not exceed 100%. An annual turnover
rate of 100% would occur when all of the securities held by the Portfolio are
replaced one time during a period of one year. The Manager will not consider
turnover rate a limiting factor in making investment decisions consistent with
the investment objective and policies of the Portfolio. See "Financial
Highlights" for the Portfolio's annual turnover rate during each year since
inception.
    

--------------------------------------------------------------------------------
Valuation of Shares
--------------------------------------------------------------------------------

   
      The Portfolio's net asset value per share is determined as of the close of
regular trading on the NYSE, which is currently 4:00 p.m. (New York City time)
on each day that the NYSE is open, by dividing the Portfolio's net asset values
attributable to each Class by the total number of shares of the Class
outstanding.

      When, in the judgment of the pricing service, quoted bid prices for
investments are readily available and are representative of the bid side of the
market, these investments are valued at the mean between the quoted bid and
asked prices. Investments for which, in the judgment of the pricing service,
there are no readily obtainable market quotations (which may constitute a
majority of the portfolio securities) are carried at fair value of securities of
similar type, yield and maturity. Pricing services generally determine value by
reference to transactions in municipal obligations, quotations from municipal
bond dealers, market transactions in comparable securities and various
relationships between securities. Short-term instruments maturing within 60 days
will be valued at cost plus (minus) amortized discount (premium), if any, when
amortized cost approximates 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 Trustees.
    

--------------------------------------------------------------------------------
Dividends, Distributions and Taxes
--------------------------------------------------------------------------------

      DIVIDENDS AND DISTRIBUTIONS

   
      Dividends from the Portfolio's net investment income are generally
declared and paid monthly, and any net realized capital gains are declared and
distributed at least annually.
    


                                                                              17
<PAGE>

--------------------------------------------------------------------------------
Dividends, Distributions and Taxes (continued)
--------------------------------------------------------------------------------

      If a shareholder does not otherwise instruct, dividends and capital gain
distributions will be reinvested automatically in additional shares of the same
Class at net asset value, subject to no sales charge or CDSC.

      Income dividends and capital gain distributions that are invested are
credited to shareholders' accounts in additional shares at the net asset value
as of the close of business on the payment date. A shareholder may change the
option at any time by notifying his or her Smith Barney Financial Consultant.
Accounts held directly by the Fund's transfer agent, First Data Investor
Services Group, Inc. ("First Data") should notify First Data in writing at least
five business days prior to the payment date to permit the change to be entered
in the shareholder's account.

   
      The per share dividends on Class B and Class L shares of the Portfolio may
be lower than the per share dividends on Class A and Class Y shares principally
as a result of the distribution fee applicable to Class B and Class L shares.
The per share dividends on Class A shares of the Port folio may be lower than
the per share dividends on Class Y shares principally as a result of the
service fee applicable to Class A shares. Distributions of capital gains, if
any, will be in the same amount for Class A, Class B, Class L and Class Y
shares.

      TAXES

      The following is a summary of the material tax considerations affecting
the Portfolio and its shareholders. Please refer to the SAI for further
discussion. In addition to the considerations described below and in the SAI,
there may be other federal, state, local, or foreign tax implications to
consider. Because taxes are a complex matter, prospective shareholders are urged
to consult their tax advisors for more detailed information with respect to the
tax consequences of an investment.

      The Portfolio intends to qualify, as it has in prior years, under
Subchapter M of the Internal Revenue Code (the "Code") for tax treatment as a
separate regulated investment company. In each taxable year that the Portfolio
qualifies, so long as such qualification is in the best interests of its
shareholders, the Portfolio will pay no federal income tax on its net investment
income and long-term capital gain that is distributed to shareholders, provided
the Portfolio distributes at least 90% of its net investment income and net
short-term capital gains for the taxable year. The Portfolio also intends to
satisfy conditions that will enable it to pay "exempt-interest dividends" to
shareholders. Exempt-interest dividends are generally not subject to regular
federal income taxes, although they may be considered taxable for certain state
and local income (or intangible) tax purposes.

      Exempt-interest dividends attributable to interest received by the
Portfolio on certain "private-activity" bonds will be treated as a specific tax
preference item to be included in a shareholder's alternative minimum tax
computation. All exempt-interest dividends will be a component of the "current
earnings" adjustment item
    


18
<PAGE>

--------------------------------------------------------------------------------
Dividends, Distributions and Taxes (continued)
--------------------------------------------------------------------------------

   
for purposes of the Federal corporate alternative minimum tax. Exempt-interest
dividends derived from the interest earned on private activity bonds will not be
exempt from federal income tax for those shareholders who are "substantial
users" (or persons related to "substantial users") of the facilities financed by
these bonds.

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

      The interest expense incurred by a shareholder on borrowing made to
purchase or carry Portfolio shares is not deductible for federal income tax
purposes to the extent related to the exempt-interest dividends received on such
shares.

      Dividends paid by the Portfolio from interest income on taxable
investments, net realized short-term securities gains and all or a portion of
any gains realized from the sale or other disposition of certain market discount
bonds are subject to federal income tax as ordinary income. Distributions, if
any, from net realized long-term securities gains derived from the sale of bonds
held by the Portfolio for more than one year are taxable as long-term capital
gains regardless of the length of time a shareholder has owned Portfolio shares.

      Shareholders are required to pay tax on all taxable distributions even if
those distributions are automatically reinvested in additional shares. None of
the dividends paid by the Portfolio will qualify for the corporate dividends
received deduction. The Fund will inform shareholders of the source and tax
status of all distributions promptly after the close of each calendar year.

      A shareholder's gain or loss on the disposition of shares (whether by
redemption, sale or exchange) generally will be a long-term or short-term gain
or loss depending on whether the shares had been owned for more than 12 months,
or 12 months or less, respectively. Losses realized by a shareholder on the
disposition of shares owned for six months or less will be treated as a
long-term capital loss to the extent a capital gain dividend had been
distributed on such shares.

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


                                                                              19
<PAGE>

--------------------------------------------------------------------------------
Dividends, Distributions and Taxes (continued)
--------------------------------------------------------------------------------

      GEORGIA TAXES

   
      Exempt-interest dividends and distributions by the Portfolio to a Georgia
resident that are attributable to interest on Georgia municipal obligations or
direct obligations of the United States and its territories and possessions will
not be subject to the State of Georgia income tax. Dividends or other
distributions by the Portfolio which are attributable to other sources,
including all distributions that qualify as capital gains dividends for Federal
income tax purposes, will be subject to the State of Georgia income tax at the
applicable rate.
    

      Investors purchasing municipal obligations of their state of residence, or
a fund comprised of such obligations, should recognize that the benefits of the
exemption from local taxes, in addition to the exemption from Federal taxes,
necessarily limits the Portfolio's ability to diversify geographically. The
Portfolio will make available annually to its shareholders information
concerning the tax status of its distributions, including the amount of its
dividends designated as exempt-interest dividends and as capital gains
dividends.

   
      The foregoing is only a brief summary of the tax considerations generally
affecting the Portfolio and its shareholders who are Georgia residents.
Investors are urged to consult their tax advisers with specific reference to
their own tax situation.
    

--------------------------------------------------------------------------------
Purchase of Shares
--------------------------------------------------------------------------------

      GENERAL

   
      The Portfolio offers four Classes of shares. Class A and Class L shares
are sold to investors with an initial sales charge; Class B shares are sold
without an initial sales charge; Class B and Class L shares are subject to a
CDSC payable upon certain redemptions. Class Y shares are sold without an
initial sales charge or CDSC and are available only to investors investing a
minimum of $15,000,000 (except for purchases of Class Y shares by Smith Barney
Concert Allocation Series Inc., for which there is no minimum purchase amount).
Until June 25, 1999, purchases of Class L shares by investors who were holders
of Class C shares of the Portfolio on June 12, 1998 will not be subject to the
1% initial sales charge. See "Prospectus Summary -- Alternative Purchase
Arrangements" for a discussion of factors to consider in selecting which Class
of shares to purchase.

      Purchases of Portfolio shares must be made through a brokerage account
maintained with Smith Barney, an Introducing Broker or an investment dealer in
the selling group. When purchasing shares of the Portfolio, investors must
specify whether the purchase is for Class A, Class B, Class L or Class Y shares.
Smith Barney and other broker-dealers may charge their customers an annual
account maintenance fee in connection with a brokerage account through which an
investor purchases or holds shares. Accounts held directly at First Data are not
subject to a
    


20
<PAGE>

--------------------------------------------------------------------------------
Purchase of Shares (continued)
--------------------------------------------------------------------------------

maintenance fee.

   
      Investors in Class A, Class B and Class L shares may open an account by
making an initial investment of at least $1,000 for each account in the
Portfolio. Investors in Class Y shares may open an account by making an initial
investment of at least $15,000,000. Subsequent investments of at least $50 may
be made for all Classes. For shareholders purchasing shares of the Portfolio
through the Systematic Investment Plan on a monthly basis, the minimum initial
investment requirement for Class A, Class B and Class L shares and the
subsequent investment requirement for all Classes is $25. For shareholders
purchasing shares of the Portfolio through the Systematic Investment Plan on a
quarterly basis, the minimum initial investment requirement for Class A, Class
B and Class L shares and the subsequent investment requirement for all Classes
is $50.00. There are no mini mum investment requirements in Class A for
employees of Travelers and its subsidiaries, including Smith Barney, a
unitholder who invests distributions from a UIT sponsored by Smith Barney, and
Trustees or Directors of any Travelers-affiliated funds, including the Smith
Barney Mutual Funds, and their spouses and children. The Fund reserves the right
to waive or change minimums, to decline any order to purchase its shares and to
suspend the offering of shares from time to time. Shares purchased will be held
in the shareholder's account by the Fund's transfer agent, First Data. Share
certificates are issued only upon a shareholder's written request to First Data.
It is not recommended that the Portfolio be used as an investment for Keogh, IRA
or other qualified retirement plans.

      Purchase orders received by the Fund or Smith Barney prior to the close of
regular trading on the NYSE on any day the Portfolio calculates its net asset
value are priced according to the net asset value determined on that day (the
"trade date"). Orders received by dealers or introducing brokers prior to the
close of regular trading on the NYSE on any day the Portfolio calculates its net
asset value, are priced according to the net asset value determined on that day,
provided the order is received by the Fund or Smith Barney prior to Smith
Barney's close of business. For shares purchased through Smith Barney or
Introducing Brokers purchasing through the Distributor, payment for Portfolio
shares is due on the third business day after the trade date. In all other
cases, payment must be made with the purchase order.
    

      SYSTEMATIC INVESTMENT PLAN

      Shareholders may make additions to their accounts at any time by
purchasing shares through a service known as the Systematic Investment Plan.
Under the Systematic Investment Plan, Smith Barney or First Data is authorized
through preauthorized transfers of at least $25 on a monthly basis or at least
$50 on a quarterly basis to charge the regular bank account or other financial
institution indicated by the shareholder to provide systematic additions to the
shareholder's Portfolio 


                                                                              21
<PAGE>

--------------------------------------------------------------------------------
Purchase of Shares (continued)
--------------------------------------------------------------------------------

account. A shareholder who has insufficient funds to complete the transfer will
be charged a fee of up to $25 by Smith Barney or First Data. The Systematic
Investment Plan also authorizes Smith Barney to apply cash held in the share
holder's Smith Barney brokerage account or redeem the shareholder's shares of a
Smith Barney money market fund to make additions to the account. Additional
information is available from the Fund or a Smith Barney Financial Consultant.

      INITIAL SALES CHARGE ALTERNATIVE -- CLASS A SHARES

      The sales charges applicable to purchases of Class A shares of the
Portfolio are as follows:

   
================================================================================
                                       Sales Charge               Dealer's
                                    % of        % of Amount  Reallowance as % of
  Amount of Investment         Offering Price     Invested     Offering Price
--------------------------------------------------------------------------------
  Less than $25,000                  4.00%          4.17%            3.60%
  $25,000 -  49,999                  3.50           3.63             3.15
   50,000 -  99,999                  3.00           3.09             2.70
  100,000 - 249,999                  2.50           2.56             2.25
  250,000 - 449,999                  1.50           1.52             1.35
  500,000 and over*                    *              *                *
================================================================================

      * Purchases of Class A shares of $500,000 or more will be made at net
asset value without any initial sales charge, but will be subject to a CDSC of
1.00% on redemptions made within 12 months of purchase. The CDSC on Class A
shares is payable to Smith Barney, which compensates Smith Barney Financial
Consultants and other dealers whose clients make purchases of $500,000 or more.
The CDSC is waived in the same circumstances in which the CDSC applicable to
Class B and Class L shares is waived. See "Deferred Sales Charge Alternatives"
and "Waivers of CDSC."
    

      Members of the selling group may receive up to 90% of the sales charge and
may be deemed to be underwriters of the Fund as defined in the Securities Act of
1933, as amended.

      The reduced sales charges shown above apply to the aggregate of purchases
of Class A shares of the Portfolio made at one time by "any person," which
includes an individual and his or her immediate family, or a trustee or other
fiduciary of a single trust estate or single fiduciary account.

   
      INITIAL SALES CHARGE WAIVERS -- CLASS A SHARES

      Purchases of Class A shares may be made at net asset value without a sales
charge in the following circumstances: (a) sales to (i) Board members and
employees of Travelers and its subsidiaries and of any Travelers-affiliated
funds, including the Smith Barney Mutual Funds (including retired Board members
and employees); the immediate families of such persons (including the surviving
spouse of a deceased Board member or employee); and to a pension, profit-sharing
or other 
    


22
<PAGE>

--------------------------------------------------------------------------------
Purchase of Shares (continued)
--------------------------------------------------------------------------------

benefit plan for such persons and (ii) employees of members of the National
Association of Securities Dealers, Inc., provided such sales are made upon the
assurance of the purchaser that the purchase is made for investment purposes and
that the securities will not be resold except through redemption or repurchase;
(b) offers of Class A shares to any other investment company to effect the
combination of such company with the Portfolio by merger, acquisition of assets
or other wise; (c) purchases of Class A shares by any client of a newly
employed Smith Barney Financial Consultant (for a period up to 90 days from the
commencement of the Financial Consultant's employment with Smith Barney), on the
condition the purchase of Class A shares is made with the proceeds of the
redemption of shares of a mutual fund which (i) was sponsored by the Financial
Consultant's prior employer, (ii) was sold to the client by the Financial
Consultant and (iii) was subject to a sales charge; (d) purchases by
shareholders who have redeemed Class A shares in the Portfolio (or Class A
shares of another fund of the Smith Barney Mutual Funds that are sold with a
sales charge) and who wish to reinvest their redemption proceeds in the
Portfolio, provided the reinvestment is made within 60 calendar days of the
redemption; (e) purchases by accounts managed by registered investment advisory
subsidiaries of Travelers; (f) investments of distributions from a UIT sponsored
by Smith Barney; and (g) purchases by investors participating in a Smith Barney
fee-based arrangement. In order to obtain such discounts, the purchaser must
provide sufficient information at the time of purchase to permit verification
that the purchase would qualify for the elimination of the sales charge.

      RIGHT OF ACCUMULATION

   
      Class A shares of the Portfolio may be purchased by "any person" (as
defined above) at a reduced sales charge or at net asset value determined by
aggregating the dollar amount of the new purchase and the total net asset value
of all Class A shares of the Portfolio and other Smith Barney Mutual Funds
offered with a sales charge, as currently listed under "Exchange Privilege,"
then held by such person and applying the sales charge applicable to such
aggregate. In order to obtain such discount, the purchaser must provide
sufficient information at the time of purchase to permit verification that the
purchase qualifies for the reduced sales charge. The right of accumulation is
subject to modification or discontinuance at any time with respect to all shares
purchased thereafter.
    

      GROUP PURCHASES

      Upon completion of certain automated systems, a reduced sales charge or
purchase at net asset value will also be available to employees (and partners)
of the same employer purchasing as a group, provided each participant makes the
mini mum initial investment required. The sales charge applicable to purchases
by each member of such a group will be determined by the table set forth under
"Initial Sales Charge Alternative -- Class A Shares," and will be based upon the
aggregate 


                                                                              23
<PAGE>

--------------------------------------------------------------------------------
Purchase of Shares (continued)
--------------------------------------------------------------------------------

   
sales of Class A shares of Smith Barney Mutual Funds offered with a sales charge
to, and share holdings of, all members of the group. To be eligible for such
reduced sales charges or to purchase at net asset value, all purchases must be
made pursuant to an employer- or partnership-sanctioned plan meeting certain
requirements. One such requirement is that the plan must be open to specified
partners or employees of the employer and its subsidiaries, if any. Such plan
may, but is not required to, provide for payroll deductions. The Distributor may
also offer a reduced sales charge or net asset value purchase for aggregating
related fiduciary accounts under such conditions that it will realize economies
of sales efforts and sales-related expenses. An individual who is a member of a
qualified group may also purchase Class A shares of the Portfolio at the reduced
sales charge applicable to the group as a whole. The sales charge is based upon
the aggregate dollar value of Class A shares offered with a sales charge that
have been previously purchased and are still owned by the group, plus the amount
of the current purchase. A "qualified group" is one which (a) has been in
existence for more than six months, (b) has a purpose other than acquiring
Portfolio shares at a discount and (c) satisfies uniform criteria which enable
Smith Barney to realize economies of scale in its costs of distributing shares.
A qualified group must have more than 10 members, must be available to arrange
for group meetings between representatives of the Portfolio and the members and
must agree to include sales and other materials related to the Portfolio in its
publications and mailings to members at no cost to the Distributor. In order to
obtain such reduced sales charge or to purchase at net asset value, the
purchaser must provide sufficient information at the time of purchase to permit
verification that the purchase qualifies for the reduced sales charge. Approval
of group purchase reduced sales charge plans is subject to the discretion of the
Distributor.
    

      LETTER OF INTENT

      Class A Shares. A Letter of Intent for amounts of $50,000 or more provides
an opportunity for an investor to obtain a reduced sales charge by aggregating
investments over a 13-month period, provided that the investor refers to such
Letter when placing orders. For purposes of a Letter of Intent, the "Amount of
Investment" as referred to in the preceding sales charge table includes
purchases of all Class A shares of the Portfolio and other funds of the Smith
Barney Mutual Funds offered with a sales charge over the 13-month period based
on the total amount of intended purchases plus the value of all Class A shares
previously purchased and still owned. An alternative is to compute the 13-month
period starting up to 90 days before the date of execution of a Letter of
Intent. Each investment made during the period receives the reduced sales charge
applicable to the total amount of the investment goal. If the goal is not
achieved within the period, the investor must pay the difference between the
sales charges applicable to the purchases made and the charges previously paid,
or an appropriate number of escrowed shares will be redeemed. Please contact a
Smith Barney Financial Consultant or First Data to


24
<PAGE>

--------------------------------------------------------------------------------
Purchase of Shares (continued)
--------------------------------------------------------------------------------

obtain a Letter of Intent application.

   
      Class Y Shares. A Letter of Intent may also be used as a way for investors
to meet the minimum investment requirement for Class Y shares. Such investors
must make an initial minimum purchase of $5,000,000 in Class Y shares of the
Portfolio and agree to purchase a total of $15,000,000 of Class Y shares of the
Portfolio within six months from the date of the Letter. If a total investment
of $15,000,000 is not made within the six-month period, all Class Y shares
purchased to date will be transferred to Class A shares, where they will be
subject to all fees (including a service fee of 0.15%) and expenses applicable
to the Portfolio's Class A shares, which may include a CDSC of 1.00%. Please
contact a Smith Barney Financial Consultant or First Data for further
information.

      INITIAL SALES CHARGE ALTERNATIVE -- CLASS L SHARES

      The sales charge applicable to purchases of Class L shares is 1.00% of the
public offering price, which is 1.01% of the amount invested, and all of this
amount is re allowed to dealers who sell Class L shares.

      The initial sales charge on Class L shares is paid to the Distributor.
Members of the selling group may be deemed to be underwriters of the Fund as
defined in the Securities Act of 1933, as amended.
    

      DEFERRED SALES CHARGE ALTERNATIVES

   
      "CDSC Shares" include any shares for which a CDSC may be imposed on
certain redemptions. "CDSC Shares" are (a) Class B shares; (b) Class L shares;
and (c) Class A shares that were purchased without an initial sales charge but
subject to a CDSC.

      Any applicable CDSC will be assessed on an amount equal to the lesser of
the original investment in the shares being redeemed or their account value at 
the time of redemption. CDSC Shares that are redeemed will not be subject to
 a CDSC to the extent that the value of such shares represents: (a) capital 
appreciation of Portfolio assets; (b) reinvestment of dividends or capital gain
distributions; (c) with respect to Class B shares, shares redeemed more than
five years after their purchase; or (d) with respect to Class L shares and Class
A shares that are CDSC Shares, shares redeemed more than 12 months after their
purchase.

      Class L shares and Class A shares that are CDSC Shares are subject to a
1.00% CDSC if redeemed within 12 months of purchase. In circumstances in which
the CDSC is imposed on Class B shares, the amount of the charge will depend on
the number of years since the shareholder made the purchase payment from which
the amount is being redeemed. Solely for purposes of deter mining the number of
years since a purchase payment, all purchase payments made during a month will
be aggregated and deemed to have been made on the last day of the preceding
Smith
    


                                                                              25
<PAGE>

--------------------------------------------------------------------------------
Purchase of Shares (continued)
--------------------------------------------------------------------------------

   
Barney statement month. The following table sets forth the CDSC for redemptions
of Class B shares by shareholders of the Portfolio:
    

      Year Since Purchase
      Payment Was Made                            CDSC
--------------------------------------------------------------------------------
            First                                 4.50%
            Second                                4.00
            Third                                 3.00
            Fourth                                2.00
            Fifth                                 1.00
            Sixth and thereafter                  0.00
--------------------------------------------------------------------------------

      Class B shares will convert automatically to Class A shares eight years
after the date on which they were purchased and thereafter will no longer be
subject to any distribution fees. There will also be converted at that time such
proportion of Class B Dividend Shares owned by the shareholder as the total
number of his or her Class B shares converting at the time bears to the total
number of outstanding Class B shares (other than Class B Dividend Shares) owned
by the shareholder. See "Prospectus Summary -- Alternative Purchase Arrangements
-- Class B Shares Conversion Feature."

      In determining the applicability of any CDSC, it will be assumed that a
redemption is made first of shares representing capital appreciation, next of
shares representing the reinvestment of dividends and capital gain distributions
and finally of other shares held by the shareholder for the longest period of
time. The length of time that CDSC Shares acquired through an exchange have been
held will be calculated from the date that the shares exchanged were initially
acquired in one of the other Smith Barney Mutual Funds, and Portfolio shares
being redeemed will be considered to represent, as applicable, capital
appreciation or dividend and capital gain distribution reinvestments in such
other funds. For Federal income tax purposes, the amount of the CDSC will reduce
the gain or increase the loss, as the case may be, on the amount realized on
redemption. The amount of any CDSC will be paid to Smith Barney.

      To provide an example, assume an investor purchased 100 Class B shares at
$10 per share for a cost of $1,000. Subsequently, the investor acquired five
additional shares through dividend reinvestment. During the fifteenth month
after the purchase, the investor decided to redeem $500 of his or her
investment. Assuming at the time of the redemption the net asset value had
appreciated to $12 per share, the value of the investor's shares would be $1,260
(105 shares at $12 per share). The CDSC would not be applied to the amount which
represents appreciation ($200) and the value of the reinvested dividend shares
($60). Therefore, $240 of the $500 redemption proceeds ($500 minus $260) would
be charged at a rate of 4.00% (the applicable rate for Class B shares) for a
total deferred sales charge of $9.60.


26
<PAGE>

--------------------------------------------------------------------------------
Purchase of Shares (continued)
--------------------------------------------------------------------------------

      WAIVERS OF CDSC

      The CDSC will be waived on: (a) exchanges (see "Exchange Privilege"); (b)
automatic cash withdrawals in amounts equal to or less than 1.00% per month of
the value of the shareholder's shares at the time the withdrawal plan commences
(see "Automatic Cash Withdrawal Plan"), provided, however, that automatic cash
withdrawals in amounts equal to or less than 2.00% per month of the value of
the share holder's shares will be permitted for withdrawal plans that were
established prior to November 7, 1994; (c) redemptions of shares within 12
months following the death or disability of the shareholder; (d) involuntary
redemptions; and (e) redemptions of shares to effect a combination of the
Portfolio with any investment company by merger, acquisition of assets or
otherwise. In addition, a shareholder who has redeemed shares from other funds
of the Smith Barney Mutual Funds may, under certain circumstances, reinvest all
or part of the redemption proceeds within 60 days and receive pro rata credit
for any CDSC imposed on the prior redemption.

      CDSC waivers will be granted subject to confirmation (by Smith Barney in
the case of shareholders who are also Smith Barney clients or by First Data in
the case of all other shareholders) of the shareholder's status or holdings, as
the case may be.

--------------------------------------------------------------------------------
Exchange Privilege
--------------------------------------------------------------------------------

   
      Except as otherwise noted below, shares of each Class may be exchanged for
shares of the same Class in the following funds of the Smith Barney Mutual
Funds, to the extent shares are offered for sale in the shareholder's state of
residence. Exchanges of Class A, Class B and Class L shares are subject to
minimum investment requirements and all shares are subject to other
requirements of the fund into which exchanges are made.
    

FUND NAME
--------------------------------------------------------------------------------

Growth Funds

   
      Concert Peachtree Growth Fund
      Concert Social Awareness Fund
      Smith Barney Aggressive Growth Fund Inc.
      Smith Barney Appreciation Fund Inc.
      Smith Barney Balanced Fund
      Smith Barney Contrarian Fund
      Smith Barney Convertible Fund
      Smith Barney Fundamental Value Fund Inc.
      Smith Barney Funds, Inc. -- Large Cap Value Fund
      Smith Barney Large Cap Blend Fund
      Smith Barney Large Capitalization Growth Fund
    


                                                                              27
<PAGE>

--------------------------------------------------------------------------------
Exchange Privilege (continued)
--------------------------------------------------------------------------------

   
      Smith Barney Natural Resources Fund Inc.
      Smith Barney Premium Total Return Fund
      Smith Barney Small Cap Blend Fund, Inc.
      Smith Barney Special Equities Fund
    

Taxable Fixed-Income Funds

   
   ** Smith Barney Adjustable Rate Government Income Fund
      Smith Barney Diversified Strategic Income Fund
  *** Smith Barney Funds, Inc. -- Short-Term High Grade Bond Fund
      Smith Barney Funds, Inc. -- U.S. Government Securities Fund
      Smith Barney Government Securities Fund
      Smith Barney High Income Fund
      Smith Barney Investment Grade Bond Fund
      Smith Barney Managed Governments Fund Inc.
      Smith Barney Total Return Bond Fund
    

Tax-Exempt Funds

   
      Smith Barney Arizona Municipals Fund Inc.
      Smith Barney California Municipals Fund Inc.
    * Smith Barney Intermediate Maturity California Municipals Fund
    * Smith Barney Intermediate Maturity New York Municipals Fund
      Smith Barney Managed Municipals Fund Inc.
      Smith Barney Massachusetts Municipals Fund
      Smith Barney Municipal High Income Fund
      Smith Barney Muni Funds -- Florida Portfolio
    * Smith Barney Muni Funds -- Limited Term Portfolio
      Smith Barney Muni Funds -- National Portfolio
      Smith Barney Muni Funds -- New York Portfolio
      Smith Barney Muni Funds -- Pennsylvania Portfolio
      Smith Barney New Jersey Municipals Fund Inc.
      Smith Barney Oregon Municipals Fund

Global-International Funds

      Smith Barney Hansberger Global Small Cap Value Fund
      Smith Barney Hansberger Global Value Fund
      Smith Barney World Funds, Inc. -- Emerging Markets Portfolio
      Smith Barney World Funds, Inc. -- European Portfolio
      Smith Barney World Funds, Inc. -- Global Government Bond Portfolio
      Smith Barney World Funds, Inc. -- International Balanced Portfolio
      Smith Barney World Funds, Inc. -- International Equity Portfolio
      Smith Barney World Funds, Inc. -- Pacific Portfolio
    

Smith Barney Concert Allocation Series Inc.

   
      Smith Barney Concert Allocation Series Inc. -- Balanced Portfolio
      Smith Barney Concert Allocation Series Inc. -- Conservative Portfolio
      Smith Barney Concert Allocation Series Inc. -- Global Portfolio
    


28
<PAGE>

--------------------------------------------------------------------------------
Exchange Privilege (continued)
--------------------------------------------------------------------------------

      Smith Barney Concert Allocation Series Inc. -- Growth Portfolio
      Smith Barney Concert allocation Series Inc. -- High Growth Portfolio
      Smith Barney Concert Allocation Series Inc. -- Income Portfolio

Money Market Funds
    + Smith Barney Exchange Reserve Fund
  *** Smith Barney Money Funds, Inc. -- Cash Portfolio
  *** Smith Barney Money Funds, Inc. -- Government Portfolio
   ++ Smith Barney Money Funds, Inc. -- Retirement Portfolio
  *** Smith Barney Municipal Money Market Fund, Inc.
  *** Smith Barney Muni Funds -- California Money Market Portfolio
  *** Smith Barney Muni Funds -- New York Money Market Portfolio

----------
   
  *   Available for exchange with Class A, Class L and Class Y shares of the
      Portfolio.
    
  **  Available for exchange with Class A and Class B shares of the Portfolio.
  *** Available for exchange with Class A and Class Y shares of the Portfolio.
   
  +   Available for exchange with Class B and Class L shares of the Portfolio.
    
  ++  Available for exchange with Class A shares of the Portfolio.

      Class B Exchanges. In the event a Class B shareholder wishes to exchange
all or a portion of his or her shares in any of the funds imposing a higher CDSC
than that imposed by the Portfolio, the exchanged Class B shares will be subject
to the higher applicable CDSC. Upon an exchange, the new Class B shares will be
deemed to have been purchased on the same date as the Class B shares of the
Portfolio that have been exchanged.

   
      Class L Exchanges. Upon an exchange, the new Class L shares will be deemed
to have been purchased on the same date as the Class L shares of the Portfolio
that have been exchanged.
    

      Class A and Class Y Exchanges. class A and Class Y shareholders of the
Portfolio who wish to ex change all or a portion of their shares for shares of
the respective Class in any of the funds identified above may do so without
imposition of any charge.

   
      Additional Information Regarding the Exchange Privilege. Excessive
exchange transactions can be detrimental to the Portfolio's performance and its
shareholders. The Manager may determine that a pattern of frequent exchanges is
excessive and contrary to the best interests of the Portfolio's other
shareholders. In this event, the Fund may, at its discretion, decide to limit
additional purchases and/or exchanges by the shareholder. Upon such a
determination, the Fund will provide notice in writing or by telephone to the
shareholder at least 15 days prior to suspending the exchange privilege and
during the 15-day period the shareholder will be required to (a) redeem his or
her shares in the Portfolio or (b) remain invested in the Portfolio or exchange
into any of the funds of the Smith Barney Mutual Funds ordinarily available,
which position the shareholder would be expected to maintain for a
    


                                                                              29
<PAGE>

--------------------------------------------------------------------------------
Exchange Privilege (continued)
--------------------------------------------------------------------------------

significant period of time. All relevant factors will be considered in
determining what constitutes an abusive pattern of exchanges.

      Certain shareholders may be able to exchange shares by telephone. See
"Redemption of Shares -- Telephone Redemption and Exchange Program." Exchanges
will be processed at the net asset value next determined. Redemption procedures
discussed below are also applicable for exchanging shares, and ex changes will
be made upon receipt of all supporting documents in proper form. If the account
registration of the shares of the fund being acquired is identical to the
registration of the shares of the fund exchanged, no signature guarantee is
required. A capital gain or loss for tax purposes will be realized upon the
exchange, depending upon the cost or other basis of shares redeemed. Before
exchanging shares, investors should read the current prospectus describing the
shares to be acquired. The Portfolio reserves the right to modify or discontinue
exchange privileges upon 60 days' prior notice to shareholders.

--------------------------------------------------------------------------------
Redemption of Shares
--------------------------------------------------------------------------------

      The Fund is required to redeem the shares of the Portfolio tendered to it,
as described below, at a redemption price equal to their net asset value per
share next determined after receipt of a written request in proper form at no
charge other than any applicable CDSC. Redemption requests received after the
close of regular trading on the NYSE are priced at the net asset value next
determined.

      If a shareholder holds shares in more than one Class, any request for
redemption must specify the Class being redeemed. In the event of a failure to
specify which Class, or if the investor owns fewer shares of the Class than
specified, the redemption request will be delayed until the Fund's transfer
agent receives further instructions from Smith Barney, or if the shareholder's
account is not with Smith Barney, from the shareholder directly. The redemption
proceeds will be remitted on or before the third business day following receipt
of proper tender, except on any days on which the NYSE is closed or as permitted
under the 1940 Act in extraordinary circumstances. Generally, if the
redemption proceeds are remitted to a Smith Barney brokerage account, these
funds will not be invested for the share holder's benefit without specific
instruction and Smith Barney will benefit from the use of temporarily uninvested
funds. Redemption proceeds for shares purchased by check, other than a certified
or official bank check, will be remitted upon clearance of the check, which may
take up to ten days or more.

      Shares held by Smith Barney as custodian must be redeemed by submitting a
written request to a Smith Barney Financial Consultant. Shares other than those
held by Smith Barney as custodian may be redeemed through an investor's Finan-


30
<PAGE>

--------------------------------------------------------------------------------
Redemption of Shares (continued)
--------------------------------------------------------------------------------

cial Consultant, Introducing Broker or dealer in the selling group, or by
submitting a written request for redemption to:

   
      Smith Barney Muni Funds/Georgia Portfolio 
      Class A, B, L or Y (please specify)
      c/o First Data Investor Services Group, Inc.
      P.O. Box 5128
      Westborough, Massachusetts 01581-5128

      A written redemption request must (a) state the Class and number or dollar
amount of shares to be redeemed, (b) identify the shareholder's account number
and (c) be signed by each registered owner exactly as the shares are registered.
If the shares to be redeemed were issued in certificate form, the certificates
must be endorsed for transfer (or be accompanied by an endorsed stock power) and
must be submitted to First Data together with the redemption request. Any
signature appearing on a share certificate, stock power or written redemption
request in excess of $10,000 must be guaranteed by an eligible guarantor
institution such as a domestic bank, savings and loan institution, domestic
credit union, member bank of the Federal Reserve System or member firm of a
national securities exchange. Written redemption requests of $10,000 or less do
not require a signature guarantee unless more than one such redemption request
is made in any 10-day period. Redemption proceeds will be mailed to an
investor's address of record. First Data may require additional supporting
documents for redemptions made by corporations, executors, administrators,
trustees or guardians. A redemption request will not be deemed properly received
until First Data receives all required documents in proper form.
    

      AUTOMATIC CASH WITHDRAWAL PLAN

      The Portfolio offers shareholders an automatic cash withdrawal plan, under
which shareholders who own shares with a value of at least $10,000 may elect to
receive cash payments of at least $50 monthly or quarterly. The withdrawal plan
will be carried over on exchanges between funds or Classes of the Portfolio. Any
applicable CDSC will not be waived on amounts withdrawn by a shareholder that
exceed 1.00% per month of the value of the shareholder's shares subject to the
CDSC at the time the withdrawal plan commences. With respect to withdrawal plans
in effect prior to November 7, 1994, any applicable CDSC will be waived on
amounts withdrawn that do not exceed 2.00% per month of the value of the share
holder's shares subject to the CDSC. For further information regarding the
automatic cash withdrawal plan, shareholders should contact a Smith Barney
Financial Consultant.

      TELEPHONE REDEMPTION AND EXCHANGE PROGRAM

      Shareholders who do not have a Smith Barney brokerage account may be
eligible to redeem and exchange portfolio shares by telephone. To determine if a
shareholder


                                                                              31
<PAGE>

--------------------------------------------------------------------------------
Redemption of Shares (continued)
--------------------------------------------------------------------------------

is entitled to participate in this program, he or she should contact First Data
at 1-800-451-2010. Once eligibility is confirmed, the shareholder must complete
and return a Telephone/Wire Authorization Form, along with a signature
guarantee, that will be provided by First Data upon request. Alternatively, an
investor may authorize telephone redemptions on the new account application
with the applicant's signature guarantee when making his or her initial
investment in the Portfolio.

   
      Redemptions. Redemption requests of up to $10,000 of any class or classes
of the Portfolio's shares may be made by eligible shareholders by calling First
Data at 1-800-451-2010. Such requests may be made between 9:00 a.m. and 4:00
p.m. (New York City time) on any day the NYSE is open. Redemption requests
received after the close of regular trading on the NYSE are priced at the net
asset value next determined. Redemptions of shares (i) by retirement plans or
(ii) for which certificates have been issued are not permitted under this
program.
    

      A shareholder will have the option of having the redemption proceeds
mailed to his or her address of record or wired to a bank account predesignated
by the share holder. Generally, redemption proceeds will be mailed or wired, as
the case may be, on the next business day following the redemption request. In
order to use the wire procedures, the bank receiving the proceeds must be a
member of the Federal Reserve System or have a correspondent relationship with a
member bank. The Fund reserves the right to charge shareholders a nominal fee
for each wire redemption. Such charges, if any, will be assessed against the
shareholder's account from which shares were redeemed. In order to change the
bank account designated to receive redemption proceeds, a shareholder must
complete a new Telephone/ Wire Authorization Form and, for the protection of
the shareholder's assets, will be required to provide a signature guarantee and
certain other documentation.

   
      Exchanges. Eligible shareholders may make exchanges by telephone if the
account registration of the shares of the fund being acquired is identical to
the registration of the shares of the fund exchanged. Such exchange requests may
be made by calling First Data at 1-800-451-2010 between 9:00 a.m. and 4:00 p.m.
(New York City time) on any day on which the NYSE is open. Exchange requests
received after the close of regular trading on the NYSE are processed at the net
value next determined.
    

      Additional Information Regarding Telephone Redemption and Exchange
Program. Neither the Fund nor its agents will be liable for following
instructions communicated by telephone that are reasonably believed to be
genuine. The Fund and its agents will employ procedures designed to verify the
identity of the caller and legitimacy of instructions (for example, a
shareholder's name and account number will be required and phone calls may be
recorded). The Fund reserves the right to suspend, modify or discontinue the
telephone redemption and exchange program or to impose a charge for this service
at any time following at least seven days' prior notice to shareholders.


32
<PAGE>

--------------------------------------------------------------------------------
Minimum Account Size
--------------------------------------------------------------------------------

      The Fund reserves the right to involuntarily liquidate any shareholder's
account if the aggregate value of the shares held in a Portfolio account is less
than $500. If a shareholder has more than one account in this Portfolio, each
account must satisfy the minimum account size. The Fund, however, will not
redeem shares based solely on market reductions in net asset value. Before the
Fund exercises such right, shareholders will receive written notice and will be
permitted 60 days to bring the account up to the minimum to avoid involuntary
liquidation.

--------------------------------------------------------------------------------
Performance
--------------------------------------------------------------------------------

   
      From time to time the Fund may include a Portfolio's yield, taxable
equivalent yield, total return and average annual total return in
advertisements. In other types of sales literature, the Fund may also include
the Portfolio's distribution rate. These figures are computed separately for
Class A, Class B, Class L and Class Y shares of the Portfolio. These figures are
based on historical earnings and are not intended to indicate future
performance. The yield of a Portfolio Class refers to the net income earned by
an investment in the Class over a 30-day period ending at month end. This net
income is then annualized, i.e., the amount of income earned by the investment
during that 30-day period is assumed to be earned each 30-day period for 12
periods and is expressed as a percentage of the investment. The net income
earned on the investment for six periods is also assumed to be reinvested at the
end of the sixth 30-day period. The taxable equivalent yield is calculated
similarly to the yield, except that a stated income tax rate is used to
demonstrate the taxable yield necessary to produce an after-tax yield equivalent
to the tax-exempt yield of the Class. The yield and taxable equivalent yield
quotations are calculated according to a formula prescribed by the SEC to
facilitate comparison with yields quoted by other investment companies. The
distribution rate is calculated by annualizing the latest monthly distribution
and dividing the result by the maximum offering price per share as of the end of
the period to which the distribution relates. The distribution rate is not
computed in the same manner as, and therefore can be significantly different
from, the above-described yield. Total return is computed for a specified period
of time assuming deduction of the maximum sales charge, if any, from the initial
amount invested and reinvestment of all income dividends and capital gains
distributions on the reinvestment dates at prices calculated as stated in this
Prospectus, then dividing the value of the investment at the end of the period
so calculated by the initial amount invested and subtracting 100%. The standard
average annual total return, as prescribed by the SEC, is derived from this
total return, which provides the ending redeemable value. Such standard total
return information may also be accompanied with nonstandard total return
information for differing periods computed in the same manner but without
annualizing the total return or taking sales charges into account. The Fund may
also include comparative performance information in advertising or marketing its
shares. Such performance information may include data from Lipper Analytical
Services, Inc. and other financial publications.
    


                                                                              33
<PAGE>

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

   
      BOARD OF TRUSTEES

      Overall responsibility for management and supervision of the Portfolio
rests with the Fund's Board of Trustees. The Board of Trustees approves all
significant agreements between the Fund and the companies that furnish services
to the Fund and the Portfolio, including agreements with the Fund's distributor,
investment manager, custodian and transfer agent. The day-to-day operations of
the Portfolio are delegated to the Port folio's investment manager. The SAI
contains background information regarding each Trustee and executive officer of
the Fund.
    

      MANAGER

      The Manager manages the day-to-day operations of the Portfolio pursuant to
a management agreement entered into by the Fund on behalf of the Portfolio.

   
      MMC was incorporated in 1968 under the laws of Delaware. MMC, Holdings and
Smith Barney are each located at 388 Greenwich Street, New York, New York 10013.
As of March 31, 1998, MMC had aggregate assets under management of approximately
$100.5 billion.

      MMC provides the Fund with investment management services and executive
and other personnel, pays the remuneration of Fund officers, provides the Fund
with office space and equipment, furnishes the Fund with bookkeeping,
accounting, administrative services and services relating to research,
statistical work and supervision of the Portfolio. For the services provided,
the management agreement provides that the Fund will pay MMC an annual fee
calculated at the rate of 0.45% of the Portfolio's average daily net assets. MMC
waived a portion of its management fee for the Portfolio for the fiscal year
ended March 31, 1998, and the effective rate of the management fee was 0.12%.
For the past fiscal year, total operating expenses were 0.50% of the average
daily net assets for Class A shares; 1.02% of the average daily net assets for
Class B shares; and 1.06% of the average daily net assets for Class L shares.
MMC has voluntarily agreed to waive its fee if in any fiscal year the aggregate
expenses of any Class of the Portfolio exclusive of 12b-1 fees, taxes,
brokerage, interest and extraordinary expenses, such as litigation costs,
exceed 0.65% of such Class' average net asset values for that fiscal year. This
voluntary expense limitation will remain in effect until terminated by notice to
shareholders and by supplement to the then-current prospectus. In addition, as
noted above, the Manager has waived its fees on a voluntary basis in amounts
greater than that required under the foregoing voluntary expense limitation.

      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 has been
approved by the stockholders of each of Travelers and Citicorp. Travelers has
filed an application to become a bank holding company so that, upon consummation
of the merger, the
    


34
<PAGE>

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

   
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 BHCA, the Glass-Steagall Act and certain other laws and regulations will
then be applicable to Travelers and its subsidiaries.

      The Manager 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. Smith Barney and the
Manager believe that the Manager's services under the Management Agreement and
the shareholder service activities performed by Smith Barney are not
underwriting and would be consistent with the Glass-Steagall Act and other
relevant federal and state laws. However, there is little controlling precedent
regarding the performance of the combination of investment advisory, shareholder
servicing and administrative activities by subsidiaries of bank holding
companies. If Smith Barney and the Manager, or their affiliates, were to be
prevented from acting as the manager or a shareholder service agent, the Fund
would seek alternative means for obtaining these services. The Fund does not
expect that shareholders would suffer any adverse financial consequences as a
result of any such occurrence.
    

      PORTFOLIO MANAGEMENT

   
      Peter M. Coffey, a Managing Director of Smith Barney, has served as Vice
President of the Fund and portfolio manager of the Portfolio since it commenced
operations (April 4, 1994) and manages the day-to-day investment operations of
the Portfolio, including making all investment decisions. Mr. Coffey serves as
the portfolio manager for five of the Fund's non-money market portfolios.

      Management's discussion and analysis, and additional performance
information regarding the Portfolio during the fiscal year ended March 31, 1998
is included in the Annual Report dated March 31, 1998. A copy of the Annual
Report may be obtained upon request and without charge from a Smith Barney
Financial Consultant or by writing or calling the Fund at the address or phone
number listed on page one of this Prospectus.
    

--------------------------------------------------------------------------------
Distribution
--------------------------------------------------------------------------------

   
      Smith Barney distributes shares of the Portfolio as principal underwriter
and as such conducts a continuous offering pursuant to a "best efforts"
arrangement requiring Smith Barney to take and pay for only such securities as
may be sold to the public. Pursuant to a plan of distribution adopted by the
Portfolio under Rule 12b-1 under the 1940 Act (the "Plan"), Smith Barney is paid
a service fee with respect to Class A, Class B and Class L shares of the
Portfolio at the annual rate of 0.15% of
    


                                                                              35
<PAGE>

--------------------------------------------------------------------------------
Distribution (continued)
--------------------------------------------------------------------------------

   
the average daily net asset values attributable to these Classes. Smith Barney
is also paid a distribution fee with respect to Class B and Class L shares at
the annual rate of 0.50% and 0.55%, respectively, of the average daily net asset
values attributable to these Classes. Class B shares will no longer be subject
to a distribution fee after conversion to Class A shares, eight years after the
date of purchase. The fees are used by Smith Barney to pay its Financial
Consultants for servicing shareholder accounts and, in the case of Class B and
Class L shares, to cover expenses primarily intended to result in the sale of
those shares. These expenses include: advertising expenses; the cost of printing
and mailing prospectuses to potential investors; payments to and expenses of
Smith Barney Financial Consultants and other persons who provide support
services in connection with the distribution of shares; interest and/or carrying
charges; and indirect and overhead costs of Smith Barney associated with the
sale of Portfolio shares, including lease, utility, communications and sales
promotion expenses.

      The payments to Smith Barney Financial Consultants for selling shares of a
Class include a commission or fee paid by the investor or Smith Barney at the
time of sale and, with respect to Class A, Class B and Class L shares, a
continuing fee for servicing shareholder accounts for as long as a shareholder
remains a holder of that Class. Smith Barney Financial Consultants may receive
different levels of compensation for selling the different Classes of shares.

      Payments under the Plan with respect to Class B and Class L shares are not
tied exclusively to the distribution and shareholder services expenses actually
incurred by Smith Barney, and the payments may exceed distribution expenses
actually incurred. The Fund's Board of Trustees will evaluate the
appropriateness of the Plan and its payment terms on a continuing basis and in
so doing will consider all relevant factors, including expenses borne by Smith
Barney, amounts received under the Plan and proceeds of the CDSC.

      The Glass-Steagall Act currently prohibits certain financial institutions
from underwriting securities of open-end investment companies, such as the Fund.
There fore, in connection with the anticipated merger of Travelers and Citicorp
and as a consequence of the anticipated applicability of the BHCA and the
Glass-Steagall Act, the Fund plans to retain the services of a new entity (which
is not otherwise affiliated with Travelers) to act as distributor of the
Portfolio's shares.
    

--------------------------------------------------------------------------------
Additional Information
--------------------------------------------------------------------------------

   
      The Fund, an open-end management investment company, is organized as a
"Massachusetts business trust" pursuant to a Declaration of Trust dated August
14, 1985. Pursuant to the Declaration of Trust, the Board of Trustee has
authorized the issuance of different series of shares, each representing shares
in one of the separate
    


36
<PAGE>

--------------------------------------------------------------------------------
Additional Information (continued)
--------------------------------------------------------------------------------

   
portfolios. The assets of each portfolio are segregated and separately managed.
Class A, Class B, Class L and Class Y shares of each portfolio represent
interests in the assets of that portfolio and have identical voting, dividend,
liquidation and other rights on the same terms and conditions, except that
expenses related to the share holder service and distribution of Class A, Class
B and Class L shares are borne solely by the respective Class and each such
Class of shares has exclusive voting rights with respect to provisions of the
Fund's Rule 12b-1 distribution plan which pertains to that Class. It is the
intention of the Fund not to hold annual meetings of share holders. The Board
of Trustees may call meetings of shareholders for action by shareholder vote as
may be required by the 1940 Act or the Declaration of Trust, and shareholders
are entitled to call a meeting of shareholders upon a vote of 10% of the Fund's
out standing shares for purposes of voting on removal of a Trustee or Trustees.
Share holders will receive assistance in communicating with other shareholders
in connection with the removal of Trustees as required by Section 16(c) of the
1940 Act. Shares do not have cumulative voting rights or preemptive rights and
have only such conversion or exchange rights as the Board of Trustees may grant
in its discretion. When issued for payment as described in this Prospectus, the
Fund's shares will be fully paid and transferrable (subject to the Portfolio's
minimum account size). Shares are redeemable as set forth under "Redemption of
Shares" and are subject to involuntary redemption as set forth under "Minimum
Account Size."
    

      PNC Bank, National Association, located at 17th and Chestnut Streets,
Philadelphia, PA 19103, serves as custodian of the Portfolio's investments.

      First Data, located at Exchange Place, Boston, Massachusetts 02109, serves
as the Fund's transfer agent.

      The Fund sends its shareholders a semi-annual report and an audited annual
report, which include listings of the investment securities held by the
Portfolio at the end of the period covered. In an effort to reduce the Fund's
printing and mailing costs, the Fund plans to consolidate the mailing of its
semi-annual and annual reports by household. This consolidation means that a
household having multiple accounts with the identical address of record will
receive a single copy of each report. Shareholders who do not want this
consolidation to apply to their account should contact their Smith Barney
Financial Consultant or the Fund's transfer agent.


                                                                              37
<PAGE>

                                                                    SMITH BARNEY


                                                A Member of TravelersGroup[LOGO]


                                                                    Smith Barney
                                                                      Muni Funds
                                                               Georgia Portfolio


                                                            388 Greenwich Street
                                                        New York, New York 10013

   
                                                                    FD 0771 7/98
    

<PAGE>


 
 
                                                         SMITH BARNEY MUNI FUNDS
                                               California Money Market Portfolio
                                                                 
                                                              JULY 29, 1998     
 
                                                   PROSPECTUS BEGINS ON PAGE ONE



[LOGO]  Smith Barney Mutual Funds
        INVESTING FOR YOUR FUTURE.
        EVERY DAY.
<PAGE>
 
   
PROSPECTUS                                                   July 29, 1998     
 
Smith Barney Muni Funds
California Money Market Portfolio
388 Greenwich Street 
New York, New York 10013 
(800) 451-2010
   
  The California Money Market Portfolio (the "Portfolio") is one of eight
investment portfolios that currently comprise Smith Barney Muni Funds (the
"Fund"). The Portfolio seeks to provide its shareholders with income exempt
from both Federal income taxes (other than the alternative minimum tax) and
California personal income taxes from a portfolio of high quality short-term
California municipal obligations selected for liquidity and stability of prin-
cipal.     
   
  The Portfolio may invest a significant percentage of its assets in issuers
located in the State of California and therefore an investment in the Portfolio
may be riskier than an investment in other types of money market funds.     
 
  SHARES OF THE PORTFOLIO ARE NOT INSURED OR GUARANTEED BY THE U.S. GOVERNMENT.
THERE IS NO ASSURANCE THAT THE PORTFOLIO WILL BE ABLE TO MAINTAIN A STABLE NET
ASSET VALUE OF $1.00 PER SHARE.
 
  This Prospectus sets forth concisely certain information about the Fund and
the Portfolio, including service fees and expenses, that prospective investors
will find helpful in making an investment decision. Investors are encouraged to
read this Prospectus carefully and retain it for future reference.
   
  Additional information about the Portfolio is contained in a Statement of
Additional Information dated July 29, 1998, as amended or supplemented from
time to time (the "SAI"), that is available upon request and without charge by
calling or writing the Fund at the telephone number or address set forth above
or by contacting a Smith Barney Financial Consultant. The Statement of Addi-
tional Information has been filed with the Securities and Exchange Commission
(the "SEC") and is incorporated by reference into this Prospectus in its
entirety.     
 
SMITH BARNEY INC.
Distributor
   
MUTUAL MANAGEMENT CORP.     
Investment Manager
   
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION PASSED UPON
THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.     
 
                                                                               1
<PAGE>
 
TABLE OF CONTENTS
 
<TABLE>   
<S>                                           <C>
FEE TABLE                                       3
-------------------------------------------------
FINANCIAL HIGHLIGHTS                            4
-------------------------------------------------
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES    5
-------------------------------------------------
VALUATION OF SHARES                            10
-------------------------------------------------
DIVIDENDS, AUTOMATIC REINVESTMENT AND TAXES    11
-------------------------------------------------
PURCHASE OF SHARES                             13
-------------------------------------------------
REDEMPTION OF SHARES                           15
-------------------------------------------------
EXCHANGE PRIVILEGE                             18
-------------------------------------------------
MINIMUM ACCOUNT SIZE                           21
-------------------------------------------------
YIELD INFORMATION                              21
-------------------------------------------------
MANAGEMENT OF THE FUND                         22
-------------------------------------------------
DISTRIBUTION                                   23
-------------------------------------------------
ADDITIONAL INFORMATION                         24
-------------------------------------------------
</TABLE>    
 
--------------------------------------------------------------------------------
   
  No person has been authorized to give any information or to make any
representations in connection with this offering other than those contained in
this Prospectus and, if given or made, such other information and
representations must not be relied upon as having been authorized by the
Portfolio or Smith Barney Inc. (the "Distributor"). This Prospectus does not
constitute an offer by the Portfolio or the Distributor to sell or a
solicitation of an offer to buy any of the securities offered hereby in any
jurisdiction to any person to whom it is unlawful to make such offer or
solicitation in such jurisdiction.     
 
--------------------------------------------------------------------------------
 
2
<PAGE>
 
FEE TABLE
 
  The following expense table lists the costs and expenses an investor will
incur either directly or indirectly as a shareholder of the Portfolio based,
unless otherwise noted, on its operating expenses for its most recent fiscal
year:
 
<TABLE>   
<CAPTION>
  CALIFORNIA MONEY MARKET PORTFOLIO        CLASS A CLASS Y
----------------------------------------------------------
  <S>                                      <C>     <C>
  SHAREHOLDER TRANSACTION EXPENSES
    Sales Charge Imposed on Purchases       None    None
    Contingent Deferred Sales Charge        None*   None
----------------------------------------------------------
  ANNUAL PORTFOLIO OPERATING EXPENSES
  (AS A PERCENTAGE OF AVERAGE NET ASSETS)
    Management fees                         0.50%   0.50%
    12b-1 fees                              0.10%     --
    Other expenses                          0.03%   0.04%
----------------------------------------------------------
  TOTAL PORTFOLIO OPERATING EXPENSES        0.63%   0.54%
----------------------------------------------------------
</TABLE>    
 * Class A shares acquired as part of an exchange privilege transaction, which
   were originally acquired in one of the other Smith Barney Mutual Funds at
   net asset value subject to a contingent deferred sales charge ("CDSC"),
   remain subject to the original fund's CDSC while held in the Portfolio.
       
  Class A shares of the Portfolio purchased through the Smith Barney AssetOne
Program will be subject to an annual asset-based fee, payable quarterly. 
The fee will vary to a maximum of 1.50%, depending on the amount of assets 
held through the Program. For more information, please call your Smith 
Barney Financial Consultant.
 
 EXAMPLE
   
  The following example is intended to assist an investor in understanding the
various costs that an investor in the Portfolio will bear directly or indi-
rectly. The example assumes payment by the Portfolio of operating expenses at
the levels set forth in the table above. See "Purchase of Shares," "Redemption
of Shares," "Management of the Fund" and "Distribution."     
 
<TABLE>   
<CAPTION>
  CALIFORNIA MONEY MARKET PORTFOLIO             1 YEAR 3 YEARS 5 YEARS 10 YEARS
-------------------------------------------------------------------------------
  <S>                                           <C>    <C>     <C>     <C>
  An investor would pay the following expenses
  on a $1,000 investment, assuming (1) 5.00%
  annual return and (2) redemption at the end
  of each time period:
    Class A                                      $ 6     $20     $35     $79
    Class Y                                      $ 6     $17     $30     $68
-------------------------------------------------------------------------------
</TABLE>    
 
  The example also provides a means for the investor to compare expense levels
of funds with different fee structures over varying investment periods. To
facilitate such comparison, all funds are required to utilize a 5.00% annual
return assumption. However, the Portfolio's actual return will vary and may be
greater or less than 5.00%. THIS EXAMPLE SHOULD NOT BE CONSIDERED A
REPRESENTATION OF PAST OR FUTURE EXPENSES. ACTUAL EXPENSES MAY BE GREATER OR
LESS THAN THOSE SHOWN.
 
                                                                              3
<PAGE>
 
FINANCIAL HIGHLIGHTS
   
  The following information has been audited by KPMG Peat Marwick LLP, inde-
pendent auditors, whose report thereon for the five-year period ended 
March 31, 1998 appears in the Portfolio's annual report dated March 31, 1998.
The information set out below should be read in conjunction with the financial
statements and related notes that also appear in the Portfolio's Annual Report
to Shareholders, which is incorporated by reference into the SAI.     
 
 
FOR A SHARE OF BENEFICIAL INTEREST OUTSTANDING THROUGHOUT EACH YEAR:
 
<TABLE>   
<CAPTION>
                                                                                               CLASS Y
                                              CLASS A SHARES                                    SHARES
                         ---------------------------------------------------------------    ---------------
CALIFORNIA MONEY MARKET
PORTFOLIO                 1998    1997    1996    1995    1994    1993    1992   1991(1)     1998   1997(2)
-------------------------------------------------------------------------------------------------------------
<S>                      <C>     <C>     <C>     <C>     <C>     <C>     <C>     <C>        <C>     <C>
NET ASSET VALUE,
 BEGINNING OF YEAR        $1.00   $1.00   $1.00   $1.00   $1.00   $1.00   $1.00   $1.00      $1.00   $1.00
-------------------------------------------------------------------------------------------------------------
INCOME FROM
 INVESTMENT OPERATIONS:
 Net investment
  income(3)               0.029   0.028   0.032   0.026   0.018   0.021   0.035   0.044      0.031   0.020
-------------------------------------------------------------------------------------------------------------
Total Income from
 Investment Operations    0.029   0.028   0.032   0.026   0.018   0.021   0.035   0.044      0.031   0.020
-------------------------------------------------------------------------------------------------------------
LESS DISTRIBUTIONS:
 Dividends from net
  investment income      (0.029) (0.028) (0.032) (0.026) (0.018) (0.021) (0.035) (0.044)    (0.031) (0.020)
-------------------------------------------------------------------------------------------------------------
Total Distributions      (0.029) (0.028) (0.032) (0.026) (0.018) (0.021) (0.035) (0.044)    (0.031) (0.020)
-------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END
 OF YEAR                  $1.00   $1.00   $1.00   $1.00  $ 1.00   $1.00  $ 1.00  $ 1.00     $ 1.00   $1.00
-------------------------------------------------------------------------------------------------------------
TOTAL RETURN               2.98%   2.79%   3.22%   2.66%   1.84%   2.05%   3.51%   4.49%++    3.09%   2.04%++
-------------------------------------------------------------------------------------------------------------
NET ASSETS, END
 OF YEAR (MILLIONS)      $1,789  $1,400  $1,346  $  953  $  190  $  160  $  167  $  136         $3      $8
-------------------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE
 NET ASSETS:
 Expenses (3)              0.63%   0.67%   0.64%   0.61%   0.64%   0.67%   0.60%   0.46%+     0.54%   0.56%+
 Net investment income     2.92    2.75    3.15    3.02    1.82    2.05    3.46    4.73+      3.01    2.77+
-------------------------------------------------------------------------------------------------------------
</TABLE>    
(1) For the period from May 10, 1990 (inception date) to March 31, 1991.
(2) For the period from July 9, 1996 (inception date) to March 31, 1997.
(3) The Manager has waived all or part of its fees for the period ended March
    31, 1991 and the two-year period ended March 31, 1996. If such fees were
    not waived, the per share decreases in net investment income and the
    ratios of expenses to average net assets would be as follows:
 
<TABLE>
<CAPTION>
         PER SHARE DECREASES       EXPENSE RATIOS
CLASS  IN NET INVESTMENT INCOME  WITHOUT FEE WAIVERS
  A    ----------------------------------------------
         1996    1995    1991    1996   1995   1991
       -------- ---------------------- ------ -------
<S>    <C>      <C>     <C>     <C>    <C>    <C>
         $.000*   $.002   $.001  0.65%  0.63%  0.60%+
</TABLE>
 
 ++Total return is not annualized, as the result may not be representative of
   the total return for the year.
 + Annualized.
 * Amount represents less than $.001.
 
4
<PAGE>
 
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES
   
  The Portfolio seeks to provide income exempt from both Federal income taxes
and California personal income taxes from a portfolio of high quality short-
term municipal obligations selected for liquidity and stability of principal.
The Portfolio seeks to be fully invested in obligations that are issued by the
State of California and its political subdivisions, agencies and instrumental-
ities, the interest from which in the opinion of counsel for the various
issuers, is exempt from California as well as Federal income taxes. (For cer-
tain shareholders, a portion of the Portfolio's income may be subject to the
alternative minimum tax.) The Portfolio operates as a money market fund, and
utilizes certain investment policies so that, to the extent reasonably possi-
ble, its price per share will not change from $1.00, although no assurance can
be given that this goal will be achieved on a continuous basis. For example,
the Portfolio will not purchase a security which, after giving effect to any
demand features, has a remaining maturity of greater than 13 months, or main-
tain a dollar-weighted average portfolio maturity in excess of 90 days.     
   
  Except for temporary defensive purposes, it is a fundamental policy that at
least 80% of the Portfolio's assets will be invested in securities that pro-
duce income that is exempt from Federal income taxes (other than the alterna-
tive minimum tax) and from California personal income taxes in the opinion of
bond counsel for the various issuers.     
   
  Opinions relating to the validity of municipal obligations and to the exemp-
tion of interest thereon from Federal income taxes and from California per-
sonal income taxes are rendered by bond counsel to the respective issuers at
the time of issuance. Neither the Portfolio nor its investment adviser, Mutual
Management Corp. ("MMC" or the "Manager"), will review the proceedings relat-
ing to the issuance of municipal obligations or the basis for such opinions.
       
  The two principal classifications of municipal obligations are "general
obligation" and "revenue." General obligations are secured by a municipal
issuer's pledge of its full faith, credit, and taxing power for the payment of
principal and interest. Revenue obligations are payable only from the revenues
derived from a particular facility or class of facilities or, in some cases
from the proceeds of a special excise tax or other specific revenue source.
Please see the SAI for a more detailed discussion about the different types of
municipal obligations.     
          
  The Portfolio's investments are limited to United States dollar-denominated
instruments that the Fund's Board of Trustees or its delegates determine pres-
ent minimal credit risks and that (i) are secured by the full faith and credit
of the United States or (ii) are "Eligible Securities," as defined by the
Investment Company Act of 1940 (the "1940 Act"), at the time of acquisition by
the Portfolio. The term "Eligible Securities" includes securities rated by the
"Requisite NRSROs" in one of the two highest short-term rating categories,
securities of issuers that have received such ratings with respect to other
short-term debt securities, and compara-     
 
                                                                              5
<PAGE>
 
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
   
ble unrated securities. "Requisite NRSROs" means (a)any two nationally 
recognized statistical rating organizations ("NRSROs") that have issued 
ratings with respect to a security or class of debt obligations of an issuer,
 or (b) one NRSRO, if it is the only NRSRO to have assigned such a rating. 
Currently, there are five NRSROs: Standard & Poor's Ratings Group, Moody's 
Investors Service, Inc., Fitch IBCA, Inc., Duff and Phelps Inc. and 
Thomson BankWatch. The Portfolio may also invest in unrated securities if 

    
   
  Municipal obligations, which are issued by states, municipalities and their
agencies, may include municipal bonds and notes. Among the types of obligations
in which the Portfolio may invest are floating or variable rate instruments
subject to demand features ("demand instruments"); tax-exempt commercial paper;
and notes such as Tax Anticipation Notes, Revenue Anticipation Notes, Tax and
Revenue Anticipation Notes and Bond Anticipation Notes. Demand instruments usu-
ally have an indicated maturity of more than 13 months but have a demand fea-
ture (or "put") that entitles the holder to receive the principal amount of the
underlying security and may be exercised either (a) at any time on no more than
30 days' notice; or (b) at specified intervals not exceeding one year and upon
no more than 30 days' notice. Demand features generally consist of a letter of
credit issued by a domestic or foreign bank. A variable rate instrument pro-
vides for adjustment of its interest rate on set dates and upon such adjustment
can reasonably be expected to have a market value that approximates its amor-
tized cost; a floating rate instrument provides for adjustment of its interest
rate whenever a specific interest rate (e.g., the prime rate) changes and at
any time can reasonably be expected to have a market value that approximates
its amortized cost.     
 
   
  The Portfolio may invest without limit in private activity bonds. Interest
income on certain types of private activity bonds issued after August 7, 1986
to finance non-governmental activities is a specific tax preference item for
purposes of the Federal individual and corporate alternative minimum taxes.
Individual and corporate shareholders may be subject to a Federal alternative
minimum tax to the extent the Portfolio's dividends are derived from interest
on these bonds. See "Taxes." These private activity bonds are included in the 
term "municipal obligations" for purposes of determining compliance with 
the 80% test described above.
    
 
  The Portfolio may invest up to 20% of the value of its assets in one or more
of the three principal types of derivative product structures described below.
Derivative products are typically structured by a bank, broker-dealer or other
financial institution. A derivative product generally consists of a trust or
partnership through which the Portfolio holds an interest in one or more under-
lying bonds coupled with a conditional right to sell ("put") the Portfolio's
interest in the underlying bonds at par plus accrued interest to a financial
institution (a "Liquidity Provider"). Typical-
 
6
<PAGE>
 
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
 
ly, a derivative product is structured as a trust or partnership which pro-
vides for pass-through tax-exempt income. There are currently three principal
types of derivative structures: (1) "Tender Option Bonds," which are instru-
ments which grant the holder thereof the right to put an underlying bond at
par plus accrued interest at specified intervals to a Liquidity Provider; (2)
"Swap Products," in which the trust or partnership swaps the payments due on
an underlying bond with a swap counterparty who agrees to pay a floating
municipal money market interest rate; and (3) "Partnerships," which allocate
to the partners income, expenses, capital gains and losses in accordance with
a governing partnership agreement.
   
  Investments in derivative products raise certain tax, legal, regulatory and
accounting issues which may not be presented by investments in other municipal
bonds. There is some risk that certain issues could be resolved in a manner
that could adversely impact the performance of the Portfolio. For example, the
tax-exempt treatment of the interest paid to holders of derivative products is
premised on the legal conclusion that the holders of such derivative products
have an ownership interest in the underlying bonds. While the Portfolio
receives an opinion of legal counsel to the effect that the income from each
derivative product is tax-exempt to the same extent as the underlying bond,
the Internal Revenue Service (the "IRS") has not issued a ruling on this sub-
ject. Were the IRS to issue an adverse ruling, there is a risk that the inter-
est paid on such derivative products would be deemed taxable.     
 
  The Portfolio intends to limit the risk of derivative products by purchasing
only those derivative products that are consistent with the Portfolio's
investment objective and policies. The Portfolio will not use such instruments
to leverage securities. Hence, derivative products' contributions to the over-
all market risk characteristics of a Portfolio will not materially alter its
risk profile and will be fully representative of the Portfolio's maturity
guidelines.
   
  The Portfolio will not invest more than 10% of the value of its total assets
in illiquid securities, which may include certain derivative products and will
include any repurchase transactions that do not mature within seven days.     
   
  Please see the SAI for a more detailed discussion about the different types
of municipal obligations. The Portfolio cannot change its investment objective
and fundamental policies without the vote of a "majority of the outstanding
voting securities" as defined under the 1940 Act. (See "Voting Rights" in the
SAI.)     
 
 RISK AND PORTFOLIO MANAGEMENT
 
  There can be no assurance that the Portfolio will achieve its investment
objective. The ability of the Portfolio to achieve its investment objective is
dependent on a number of factors, including the skills of the Manager in pur-
chasing municipal obligations whose issuers have the continuing ability to
meet their obligations for
 
                                                                              7
<PAGE>
 
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
 
the payment of interest and principal when due. The ability to achieve a high
level of income is dependent on the yields of the securities in the portfolio.
Yields on municipal obligations are the product of a variety of factors,
including the general conditions of the money market, of the municipal bond and
municipal note markets, the size of a particular offering, the maturity of the
obligation and the rating of the issue. Municipal obligations with longer matu-
rities tend to produce higher yields and are generally subject to potentially
greater price fluctuations than obligations with shorter maturities.
 
   
  The Portfolio's concentration in California obligations involves certain
additional risks that should be considered carefully by investors. Certain Cal-
ifornia constitutional amendments, legislative measures, executive orders,
administrative regulations, court decisions and voter initiatives could result
in certain adverse consequences affecting California obligations. In particu-
lar, there are risks resulting from certain recent amendments to the California
Constitution and other statutes that limit the taxing and spending authority of
California governmental entities, and these may have the effect of impairing
the ability of certain issuers of California obligations to pay principal and
interest on their obligations. See the SAI for a more detailed description of 
these and other risks relating to the Portfolio's investments in California 
obligations.
    
   
  When-Issued Purchase Commitments. New issues of municipal obligations are
often offered on a "when-issued" basis, i.e., delivery and payment normally
take place 15 to 45 days after the purchase date. The payment obligation and
the interest rate to be received on the securities are fixed at the time the
buyer enters into the commitment, although no interest accrues with respect to
a when-issued security prior to its stated delivery date. The Portfolio will
only make commitments to purchase such securities with the intention of actu-
ally acquiring the securities, but the Portfolio may sell these securities
before the settlement date if it is deemed advisable as a matter of investment
strategy. A segregated account of the Portfolio consisting of cash or debt
securities of any grade having a value equal to or greater than the Portfolio's
purchase commitments, provided such securities have been determined by the Man-
ager to be liquid and unencumbered and are marked to market daily pursuant to
guidelines established by the Board of Trustees, will be maintained with PNC
Bank, National Association (the "Custodian") and monitored on a daily basis so
that the market value of the account will equal or exceed the amount of such
commitments by the Portfolio.     
 
  Securities purchased on a when-issued basis are subject to changes in market
value prior to delivery based not only upon the public's perception of the
creditworthiness of the issuer but also changes in the level of interest rates,
i.e., appreciating when interest rates decline and depreciating when interest
rates rise. Therefore, if in order to achieve higher interest income the Port-
folio remains substantially fully invested at the same time that it has pur-
chased securities on a when-issued basis,
 
8
<PAGE>
 
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
 
   
there will be a greater possibility that the market value of the Portfolio's
assets will vary from $1.00 per share. See "Valuation of Shares." There will 
also be a greater potential for the realization of capital gains, which are 
not exempt from Federal or state income taxes.
    
   
  Stand-By Commitments. The Portfolio may acquire "stand-by commitments" with
respect to municipal obligations held in its portfolio. Under a stand-by com-
mitment a dealer agrees to purchase, at the Portfolio's option, specified
municipal obligations at a specified price. The Portfolio intends to enter into
stand-by commitments only with banks and broker-dealers that, in the opinion of
the Manager, present minimal credit risks. In evaluating the creditworthiness
of the issuer of a stand-by commitment, the Manager will review periodically
the issuer's assets, liabilities, contingent claims and other relevant finan-
cial information. The Portfolio will acquire stand-by commitments solely to
facilitate portfolio liquidity and does not intend to exercise its rights
thereunder for trading purposes.     
 
  Other Factors to be Considered. Investors purchasing municipal obligations of
their state of residence, or a fund comprised of such obligations, should rec-
ognize that the benefits of the exemption from state and local taxes, in addi-
tion to the exemption from Federal taxes, necessarily limits the fund's ability
to diversify geographically.
 
  The Portfolio anticipates being as fully invested as practicable in Califor-
nia municipal obligations and generally expects to invest the proceeds received
from the sale of shares in California municipal obligations as soon as reasona-
bly possible, which is generally within one day. At no time will more than 20%
of the Portfolio's net assets be invested in taxable investments except when
the Portfolio has adopted a temporary defensive investment policy.
 
  The Portfolio may engage in short-term trading to attempt to take advantage
of short-term market variations or may dispose of a portfolio security prior to
its maturity if it believes such disposition advisable or it needs to generate
cash to satisfy redemptions. In such cases, the Portfolio may realize a gain or
loss.
   
  The Fund is registered as a "non-diversified" company under the 1940 Act, in
order for the Portfolio to have the ability to invest more than 5% of its
assets in the securities of any issuer; however Rule 2a-7 under the 1940 Act 
imposes diversification requirements that the Portfolio intends to meet. 
The Portfolio intends to comply with Subchapter M of the Internal Revenue 
Code of 1986, as amended (the "Code"), which limits the aggregate value of 
all holdings (except U.S. government and cash items, as defined in the Code) 
that exceed 5% of the Portfolio's total assets to an aggregate amount of 50% 
of such assets. Also, holdings of a single issuer (with the same exceptions)
may not exceed 25% of the Portfolio's total assets.  These limits are measured
at the end of each quarter. Under Subchapter M limits, up to 50% of the
Portfolio's total assets may be invested in as few as two single issuers. In
the event of a decline
 
                                                                               9
<PAGE>
 
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)

    
   
in creditworthiness of, or default upon, the obligations of one or more such

    
   
in creditworthiness of, or default upon, the obligations of one or more such
issuers exceeding 5%, an investment in the Portfolio may entail greater risk
than in a portfolio having a policy of diversification because a high percent-
age of the Portfolio's assets may be invested in municipal obligations of one
or two issuers.     
 
  Because the Portfolio invests in securities backed by banks and other finan-
cial institutions, changes in the credit quality of these institutions could
cause losses to the Portfolio and affect its share price.
   
  From time to time, proposals have been introduced before Congress for the
purpose of restricting or eliminating the Federal income tax exemption for
interest on municipal obligations and similar proposals may be introduced in
the future. If one of these proposals were enacted, the availability of tax
exempt obligations for investment by the Portfolio and the value of the Port-
folio securities would be affected. The Board of Trustees would then reevalu-
ate the Portfolio's investment objective and policies.     
   
  Year 2000. The investment management services provided to the Fund by the
Manager and the services provided to shareholders by Smith Barney depend on
the smooth functioning of their computer systems. Many computer software sys-
tems 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. The Manager 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, the Manager has been advised by the Fund's cus-
todian, 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 the Manager, Smith Barney or any other service provider will
be successful, or that interaction with other non-complying computer systems
will not impair Fund or shareholder services at that time.     
   
  In addition, the ability of issuers to make timely payments of interest and
principal or to continue their operations or services may be impaired by the
inadequate preparation of their computer systems for the year 2000. This may
adversely affect the market values of securities of specific issuers or of
securities generally if the inadequacy of preparation is perceived as wide-
spread or as affecting trading markets.     
 
VALUATION OF SHARES
   
  The Portfolio's net asset value per share is determined as of the close of
regular trading on each day that the New York Stock Exchange ("NYSE") is open
by dividing the net asset values attributable to each Class (i.e., the value
of its assets     
 
10
<PAGE>
 
   
VALUATION OF SHARES (CONTINUED)     
   
less liabilities) by the total number of its shares of the Class outstanding.
The Portfolio may also determine net asset value per share on days when the
NYSE is not open, but when the settlement of securities may otherwise occur.
The Portfolio employs the "amortized cost method" of valuing portfolio 
securities and intends to use its best efforts to continue to maintain a 
constant net asset value of $1.00 per share.     
 
DIVIDENDS, AUTOMATIC REINVESTMENT AND TAXES
 
 
 DIVIDENDS AND AUTOMATIC REINVESTMENT
 
  The Portfolio declares dividends daily from its net investment income on
each day the NYSE is open. Net investment income includes interest accrued and
discount earned and is less premium amortized and expenses accrued (the amount
of discount or premium on portfolio investments is fixed at the time of pur-
chase). Unless the shareholder has elected to receive monthly distributions of
income, such dividends will automatically be reinvested in Portfolio shares of
the same Class at net asset value. If a shareholder redeems an account in full
between payment dates, all dividends declared up to and including the date of
liquidation will be paid with the proceeds from the redemption of shares. The
per share dividends of Class A shares of the Portfolio may be less than the
per share dividends of the Class Y shares, principally as a result of the
service fee applicable to Class A shares.
 
 TAXES
   
  The following is a summary of the material tax considerations affecting the 
Portfolio and the Portfolio's shareholders. Please refer to the SAI for 
further discussion. In addition to the considerations described below and 
in the SAI, there may be other federal, state, local or foreign tax 
implications to consider. Because taxes are a complex matter, prospective 
shareholders are urged to consult their tax advisors for more detailed 
information with respect to the tax consequences of an investment.     
   
  The Portfolio intends to qualify, as it has in prior years, under Subchapter
M of the Code for tax treatment as a separate regulated investment company. 
In each taxable year that the Portfolio qualifies, so long as such 
qualification is in the best interests of its shareholders, the Portfolio 
will pay no federal income tax on its net investment income and long-term 
capital gain that is distributed to shareholders, provided the Portfolio 
distributes at least 90% of its net investment income and net short-term 
capital gains for the taxable year. The Portfolio also intends to satisfy
conditions that will enable it to pay "exempt-interest dividends" to its
shareholders.  Exempt-interest dividends are gnerally not subject to regular 
federal income taxes, although, may be considered taxable for certain
state and local income or (intangible) tax purposes. 
    
 
                                                                             11
<PAGE>
 
DIVIDENDS, AUTOMATIC REINVESTMENT AND TAXES (CONTINUED)
   
  Exempt-interest dividends attributable to interest received by the Portfolio
on certain "private-activity" bonds will be treated as a specific tax prefer-
ence item to be included in a shareholder's alternative minimum tax computa-
tion. All exempt-interest dividends will be a component of the "current earn-
ings" adjustment item for purposes of the federal corporate alternative minimum
tax. Exempt-interest dividends derived from the interest earned on private
activity bonds will not be exempt from federal income tax for those sharehold-
ers who are "substantial users" (or persons related to "substantial users") of
the facilities financed by these bonds.     
   
  Shareholders who receive social security or equivalent railroad retirement
benefits should note that exempt-interest dividends are one of the items taken
into consideration in determining the amount of these benefits that may be sub-
ject to federal income tax.     
   
  The interest expense incurred by a shareholder on borrowing made to purchase
or carry Portfolio shares is not deductible for federal income tax purposes to
the extent related to the exempt-interest dividends received on such shares.
       
  Dividends paid by the Portfolio from interest income on taxable investments,
net realized short-term securities gains, and all or a portion of any gains
realized from the sale or other disposition of certain market discount bonds
are subject to federal income tax as ordinary income. Distributions, if any,
from net realized long-term securities gains, derived from the sale of bonds
held by the Portfolio for more than one year, are taxable as long-term capital
gains, regardless of the length of time a shareholder has owned Portfolio
shares.     
   
  Shareholders are required to pay tax on all taxable distributions even if
those distributions are automatically reinvested in additional Portfolio
shares. None of the dividends paid by the Portfolio will qualify for the corpo-
rate dividends received deduction. The Fund will inform shareholders of the
source and tax status of all distributions promptly after the close of each
calendar year.     
   
  The Fund is required to withhold ("backup withholding") 31% of all taxable
dividends, capital gain distributions, and the proceeds of any redemption, for
those shareholders who do not provide the Fund with a correct taxpayer identi-
fication number (social security or employer identification number). Withhold-
ing from taxable dividends and capital gain distributions also is required for
shareholders who otherwise are subject to backup withholding. Any tax withheld
as a result of backup withholding does not constitute an additional tax, and
may be claimed as a credit on the shareholders' federal income tax return.     
 
  California State Taxes. California shareholders will not be subject to Cali-
fornia state personal income tax on Portfolio dividends to the extent that such
distribu-
 
12
<PAGE>
 
   
DIVIDENDS, AUTOMATIC REINVESTMENT AND TAXES (CONTINUED)     
 
tions qualify as exempt-interest dividends under the Code and California law
and provided that, at the close of each quarter of the Portfolio's taxable
year, at least 50% of the Portfolio's total assets are invested in municipal
obligations of California issuers. To the extent that distributions are derived
from taxable income, including long or short-term capital gains, such distribu-
tions will not be exempt from California state personal income tax. Dividends
on the Portfolio are not excluded in determining California state franchise
taxes on corporations and financial institutions.
 
PURCHASE OF SHARES
 
 
  Purchases of Portfolio shares may be made through a brokerage account main-
tained with Smith Barney Inc. ("Smith Barney"), with a broker that clears secu-
rities transactions through Smith Barney on a fully disclosed basis (an "Intro-
ducing Broker") or an investment dealer in the selling group. No maintenance
fee will be charged by the Portfolio in connection with a brokerage account
through which an investor purchases or holds shares.
   
  Class A and Class Y shares of the Portfolio are available for purchase
directly by investors. Investors in Class A may open an account by making an
initial investment of at least $1,000 for each Portfolio account. Investors in
Class Y may open an account by making an initial investment of at least
$15,000,000. Subsequent investments of at least $50 may be made for either
Class. There are no minimum investment requirements in Class A for employees of
Travelers Group Inc. ("Travelers") and its subsidiaries, including Smith Bar-
ney, and Trustees or Directors of any Travelers-affiliated funds, including the
Smith Barney Mutual Funds, and their spouses and children. The Portfolio
reserves the right to waive or change minimums, to decline any order to pur-
chase its shares and to suspend the offering of shares from time to time. Share
certificates are issued only upon a shareholder's written request to the Fund's
transfer agent, First Data Investor Services Group, Inc. ("First Data").     
 
  For investors who maintain a brokerage account with Smith Barney, Smith Bar-
ney has advised the Portfolio that depending on the type of securities account,
its clients' free credit balances (i.e., immediately available funds) will be
invested automatically in full shares of the Portfolio either on a daily or
weekly basis. In addition to this "sweep" service, shareholders who open a
Smith Barney FMA PLUSSM account, which is a full service investment account,
will also be able to take advantage of, among other things: a free Individual
Retirement Account, free dividend reinvestment, unlimited checking, 100 free
ATM withdrawals each year, free gain/loss analysis and online computer access
to account information. Smith Barney clients should contact their Financial
Consultant for more complete information. A complete record of Portfolio divi-
dends, purchases and redemptions will be included on such shareholders' regular
Smith Barney statements.
       
                                                                              13
<PAGE>
 
PURCHASE OF SHARES (CONTINUED)
 
 
  The Portfolio's shares are sold continuously at their net asset value next
determined after a purchase order is received and becomes effective. A purchase
order becomes effective when the Fund, Smith Barney or an Introducing Broker
receives, or converts the purchase amount into, Federal funds (i.e., monies of
member banks within the Federal Reserve System held on deposit at a Federal
Reserve Bank). When orders for the purchase of Portfolio shares are paid for in
Federal funds, or are placed by an investor with sufficient Federal funds or
cash balance in the investor's brokerage account with Smith Barney or the
Introducing Broker, the order becomes effective on the day of receipt if
received prior to the close of regular trading on the NYSE on any day the Port-
folio calculates its net asset value. See "Valuation of Shares." Purchase
orders received after the close of regular trading on the NYSE on any business
day are effective as of the time the net asset value is next determined. When
orders for the purchase of Portfolio shares are paid for other than in Federal
funds, Smith Barney or the Introducing Broker, acting on behalf of the invest-
or, will complete the conversion into, or itself advance, Federal funds, and
the order will become effective on the day following its receipt by the Fund,
Smith Barney or the Introducing Broker. Shares purchased directly through First
Data begin to accrue income dividends on the day that the purchase order
becomes effective. All other shares begin to accrue income dividends on the
next business day following the day that the purchase order becomes effective.
 
 SYSTEMATIC INVESTMENT PLAN
   
  Shareholders may make additions to their accounts at any time by purchasing
shares through a service known as the Systematic Investment Plan. Under the
Systematic Investment Plan, Smith Barney or First Data is authorized through
preauthorized transfers to charge the regular bank account or other financial
institution indicated by the shareholder on a monthly or quarterly basis to
provide systematic additions to the shareholder's Portfolio account. For share-
holders purchasing shares of the Portfolio through the Systematic Investment
Plan on a monthly basis, the minimum initial investment requirement for Class A
shares and the minimum subsequent investment requirement for both Classes is
$25. For shareholders purchasing shares of the Portfolio through the Systematic
Investment Plan on a quarterly basis, the minimum initial investment require-
ment for Class A shares and the minimum subsequent investment requirement for
both Classes is $50. A shareholder who has insufficient funds to complete the
transfer will be charged a fee of up to $25 by Smith Barney or First Data.
Additional information is available from the Fund or a Smith Barney Financial
Consultant.     
 
 LETTER OF INTENT
   
  Class Y Shares. A Letter of Intent provides an opportunity for investors to
meet the minimum investment requirement for Class Y shares by aggregating
investments over a 13-month period. Such investors must make an initial minimum
pur-     
 
14
<PAGE>
 
PURCHASE OF SHARES (CONTINUED)
   
chase of $5,000,000 in Class Y shares of the Portfolio and agree to purchase a
total of $15,000,000 of Class Y shares of the Portfolio within 13 months from
the date of the Letter. If a total investment of $15,000,000 is not made within
the 13-month period, all Class Y shares purchased to date will be converted
into Class A shares, and will be subject to all fees (including a service fee
of 0.10%) and expenses applicable to the Portfolio's Class A shares.     
Please contact a Smith Barney Financial Consultant or First Data for further
information.
 
REDEMPTION OF SHARES
   
  Shareholders may redeem their shares without charge on any day the Portfolio
calculates its net asset value. See "Valuation of Shares." Redemption requests
received in proper form before the close of regular trading on the NYSE are
priced at the net asset value as next determined on that day. Redemption
requests received after the close of regular trading are priced at the net
asset value next determined.     
   
  The Portfolio normally transmits redemption proceeds on the business day fol-
lowing receipt of a redemption request but, in any event, payment will be made
within three business days thereafter, exclusive of days on which the NYSE is
closed and the settlement of securities does not otherwise occur, or as permit-
ted under the 1940 Act in extraordinary circumstances. Generally, if the
redemption proceeds are remitted to a Smith Barney brokerage account, these
funds will not be invested for the shareholder's benefit without specific
instruction and Smith Barney will benefit from the use of temporarily
uninvested funds. A shareholder who pays for Portfolio shares by personal check
will be credited with the proceeds of a redemption of those shares only after
the purchase check has been collected, which may take up to ten days or more. A
shareholder who anticipates the need for more immediate access to his or her
investment should purchase shares with Federal funds, by bank wire or with a
certified or cashier's check.     
 
  Shareholders who purchase securities through Smith Barney or an Introducing
Broker may take advantage of special redemption procedures under which Class A
shares of the Portfolio will be redeemed automatically to the extent necessary
to satisfy debit balances arising in the shareholder's account with Smith Bar-
ney or the Introducing Broker. One example of how an automatic redemption may
occur involves the purchase of securities. If a shareholder purchases securi-
ties but does not pay for them by the settlement date, the number of Portfolio
shares necessary to cover the debit will be redeemed automatically as of the
settlement date, which usually occurs three business days after the trade date.
Class A shares that are subject to a CDSC (see "Redemption of Shares--Contin-
gent Deferred Sales Charge") are not eligible for such automatic redemption and
will only be redeemed upon specific request. If the shareholder does not
request redemption of such
 
                                                                              15
<PAGE>
 
REDEMPTION OF SHARES (CONTINUED)
 
shares, the shareholder's account with Smith Barney or the Introducing Broker
may be margined to satisfy debit balances if sufficient Portfolio shares that
are not subject to any applicable CDSC are unavailable. No fee is currently
charged with respect to these automatic transactions. Shareholders not wishing
to participate in these arrangements should notify a Smith Barney Financial
Consultant.
 
  Redemption requests must be made through Smith Barney, an Introducing Broker
or the securities dealer through which the shares were purchased. A shareholder
desiring to redeem shares represented by certificates also must present the
certificates to Smith Barney or the Introducing Broker endorsed for transfer
(or accompanied by an endorsed stock power), signed exactly as the shares are
registered. Redemption requests involving shares represented by certificates
will not be deemed received until the certificates are received by First Data
in proper form.
   
  A written redemption request must (a) state the Class and number or dollar
amount of shares to be redeemed, (b) identify the shareholder's account number
and (c) be signed by each registered owner exactly as the shares are regis-
tered. If the shares to be redeemed were issued in certificate form, the cer-
tificates must be endorsed for transfer (or be accompanied by an endorsed stock
power) and must be submitted to First Data together with the redemption
request. Any signature appearing on a share certificate, stock power or written
redemption request in excess of $10,000 must be guaranteed by an eligible guar-
antor institution such as a domestic bank, savings and loan institution, domes-
tic credit union, member bank of the Federal Reserve System or member firm of a
national securities exchange. Written redemption requests of $10,000 or less do
not require a signature guarantee unless more than one such redemption request
is made in any 10-day period. Redemption proceeds will be mailed to an invest-
or's address of record. First Data may require additional supporting documents
for redemptions made by corporations, executors, administrators, trustees or
guardians. A redemption request will not be deemed properly received until
First Data receives all required documents in proper form.     
 
 TELEPHONE REDEMPTION AND EXCHANGE PROGRAM
 
   
  Shareholders who do not have a Smith Barney brokerage account may be eligible
to redeem and exchange Portfolio shares by telephone. To determine if a 
shareholder is entitled to participate in this program, he or she should 
contact First Data at 1-800-451-2010. Once eligibility is confirmed, the 
shareholder must complete and return a Telephone/Wire Authorization Form, 
along with a signature guarantee that will be provided by First Data upon 
request. Alternatively, an investor may authorize telephone redemptions on 
the new account application with the applicant's signature guarantee when
making his or her initial investment in the Portfolio.
    
 
   
  Redemptions. Redemption requests of up to $10,000 of any class or classes of
the Portfolio's shares may be made by eligible shareholders by calling 
First Data at
    
 
16
<PAGE>
 
REDEMPTION OF SHARES (CONTINUED)
   
1-800-451-2010. Such requests may be made between 9:00 a.m. and 4:00 p.m. (New
York City time) on any day the NYSE is open. Redemptions of shares (i) by
retirement plans or (ii) for which certificates have been issued are not per-
mitted under this program.     
 
  A shareholder will have the option of having the redemption proceeds mailed
to his or her address of record or wired to a bank account predesignated by
the shareholder. Generally, redemption proceeds will be mailed or wired, as
the case may be, on the next business day following the redemption request. In
order to use the wire procedures, the bank receiving the proceeds must be a
member of the Federal Reserve System or have a correspondent relationship with
a member bank. The Fund reserves the right to charge shareholders a nominal
fee for each wire redemption. Such charges, if any, will be assessed against
the shareholder's account from which shares were redeemed. In order to change
the bank account designated to receive redemption proceeds, a shareholder must
complete a new Telephone/Wire Authorization Form and, for the protection of
the shareholder's assets, will be required to provide a signature guarantee
and certain other documentation.
   
  Exchanges. Eligible shareholders may make exchanges by telephone if the
account registration of the shares of the fund being acquired is identical to
the registration of the shares of the fund exchanged. Such exchange requests
may be made by calling First Data at 1-800-451-2010 between 9:00 a.m. and 4:00
p.m. (New York City time) on any day on which the NYSE is open. See "Exchange
Privilege" for more information.     
 
  Additional Information regarding Telephone Redemption and Exchange
Program. Neither the Fund nor its agents will be liable for following instruc-
tions communicated by telephone that are reasonably believed to be genuine.
The Fund and its agents will employ procedures designed to verify the identity
of the caller and legitimacy of instructions (for example, a shareholder's
name and account number will be required and phone calls may be recorded). The
Fund reserves the right to suspend, modify or discontinue the telephone
redemption and exchange program or to impose a charge for this service at any
time following at least seven days' prior notice to shareholders.
 
 CONTINGENT DEFERRED SALES CHARGE
 
  Class A shares of the Portfolio acquired as part of an exchange privilege
transaction, which were originally acquired in one of the other Smith Barney
Mutual Funds at net asset value subject to a CDSC, continue to be subject to
any applicable CDSC of the original fund. Therefore, such Class A shares that
are redeemed within 12 months of the date of purchase of the original fund may
be subject to a CDSC of 1.00%. The amount of any CDSC will be paid to and
retained by Smith Barney. The CDSC will be assessed based on an amount equal
to the net asset value at the time of redemption. Accordingly, no CDSC will be
imposed on
 
                                                                             17
<PAGE>
 
REDEMPTION OF SHARES (CONTINUED)
 
increases in net asset value above the initial purchase price in the original
fund. In addition, no charge will be assessed on shares derived from reinvest-
ment of dividends or capital gain distributions.
 
  In determining the applicability of any CDSC, it will be assumed that a
redemption is made first of shares representing capital appreciation, next of
shares representing the reinvestments of dividends and capital gain distribu-
tions and finally of other shares held by the shareholder for the longest
period of time. The length of time that Class A shares have been held will be
calculated from the date the shares were initially acquired in one of the other
Smith Barney Mutual Funds and such shares being redeemed will be considered to
represent, as applicable, capital appreciation or dividend and capital gain
distribution reinvestments in such other funds. For Federal income tax purpos-
es, the amount of the CDSC will reduce the gain or increase the loss, as the
case may be, on the amount realized on redemption.
 
  The CDSC on Class A shares will be waived on (a) exchanges (see "Exchange
Privilege"); (b) redemptions of shares within 12 months following the death or
disability of the shareholder; (c) involuntary redemptions; and (d) redemptions
of shares to effect a combination of the Portfolio with any investment company
by merger, acquisition of assets or otherwise. In addition, a shareholder who
has redeemed shares from other funds of the Smith Barney Mutual Funds may,
under certain circumstances, reinvest all or part of the redemption proceeds
within 60 days and receive pro rata credit for any CDSC imposed on the prior
redemption.
 
  CDSC waivers will be granted subject to confirmation (by Smith Barney in the
case of shareholders who are also Smith Barney clients or by First Data in the
case of all other shareholders) of the shareholder's status or holdings, as the
case may be.
 
EXCHANGE PRIVILEGE
 
 
  Except as otherwise noted below, shares of each Class may be exchanged for
shares of the same Class in the following funds of the Smith Barney Mutual
Funds, to the extent shares are offered for sale in the shareholder's state of
residence. Exchanges of Class A shares are subject to minimum investment
requirements and all shares are subject to the other requirements of the fund
into which exchanges are made and a sales charge may apply.
 
 FUND NAME
 
  Growth Funds
          
      Concert Peachtree Growth Fund     
         
      Concert Social Awareness Fund     
         
      Smith Barney Aggressive Growth Fund Inc.     
         
      Smith Barney Appreciation Fund Inc.     
 
18
<PAGE>
 
EXCHANGE PRIVILEGE (CONTINUED)
         
      Smith Barney Balanced Fund     
         
      Smith Barney Contrarian Fund     
         
      Smith Barney Convertible Fund     
         
      Smith Barney Fundamental Value Fund Inc.     
         
      Smith Barney Funds, Inc.--Large Cap Value Fund     
         
      Smith Barney Large Cap Blend Fund     
         
      Smith Barney Large Capitalization Growth Fund     
         
      Smith Barney Natural Resources Fund Inc.     
         
      Smith Barney Premium Total Return Fund     
         
      Smith Barney Small Cap Blend Fund, Inc.     
         
      Smith Barney Special Equities Fund     
 
  Taxable Fixed-Income Funds
      Smith Barney Adjustable Rate Government Income Fund
      Smith Barney Diversified Strategic Income Fund
         
      Smith Barney Funds, Inc.--Short-Term High Grade Bond Fund     
         
      Smith Barney Funds, Inc.--U.S. Government Securities Fund     
      Smith Barney Government Securities Fund
      Smith Barney High Income Fund
      Smith Barney Investment Grade Bond Fund
      Smith Barney Managed Governments Fund Inc.
         
      Smith Barney Total Return Bond Fund     
 
  Tax-Exempt Funds
      Smith Barney Arizona Municipals Fund Inc.
      Smith Barney California Municipals Fund Inc.
      Smith Barney Intermediate Maturity California Municipals Fund
      Smith Barney Intermediate Maturity New York Municipals Fund
      Smith Barney Managed Municipals Fund Inc.
      Smith Barney Massachusetts Municipals Fund
         
      Smith Barney Municipal High Income Fund     
      Smith Barney Muni Funds--Florida Portfolio
      Smith Barney Muni Funds--Georgia Portfolio
      Smith Barney Muni Funds--Limited Term Portfolio
      Smith Barney Muni Funds--National Portfolio
      Smith Barney Muni Funds--New York Portfolio
      Smith Barney Muni Funds--Pennsylvania Portfolio
      Smith Barney New Jersey Municipals Fund Inc.
      Smith Barney Oregon Municipals Fund

 
                                                                              19
<PAGE>
 
EXCHANGE PRIVILEGE (CONTINUED)
     
  Global--International Funds     
         
      Smith Barney Hansberger Global Small Cap Value Fund     
         
      Smith Barney Hansberger Global Value Fund     
      Smith Barney World Funds, Inc.--Emerging Markets Portfolio
      Smith Barney World Funds, Inc.--European Portfolio
      Smith Barney World Funds, Inc.--Global Government Bond Portfolio
      Smith Barney World Funds, Inc.--International Balanced Portfolio
      Smith Barney World Funds, Inc.--International Equity Portfolio
      Smith Barney World Funds, Inc.--Pacific Portfolio
     
  Smith Barney Concert Allocation Series Inc.     
      Smith Barney Concert Allocation Series Inc.
      Smith Barney Concert Allocation Series Inc.--Balanced Portfolio
      Smith Barney Concert Allocation Series Inc.--Conservative Portfolio
         
      Smith Barney Concert Allocation Series, Inc.--Global Portfolio     
      Smith Barney Concert Allocation Series Inc.--Growth Portfolio
      Smith Barney Concert Allocation Series Inc.--High Growth Portfolio
      Smith Barney Concert Allocation Series Inc.--Income Portfolio
 
  Money Market Funds
      Smith Barney Money Funds, Inc.--Cash Portfolio
      Smith Barney Money Funds, Inc.--Government Portfolio
      *Smith Barney Money Funds, Inc.--Retirement Portfolio
      Smith Barney Muni Funds--New York Money Market Portfolio
      Smith Barney Municipal Money Market Fund, Inc.
-------------------------------------------------------------------------------
*  Available for exchange with Class A shares of the Portfolio.
 
  Class A Exchanges. Class A shares of the Portfolio will be subject to the
appropriate sales charge upon the exchange of such shares for Class A shares
of another fund of the Smith Barney Mutual Funds sold with a sales charge.
 
  Class Y Exchanges. Class Y shareholders of the Portfolio who wish to
exchange all or a portion of their Class Y shares for Class Y shares in any of
the funds identified above may do so without imposition of any charge.
   
  Additional Information Regarding the Exchange Privilege. Excessive exchange
transactions may be detrimental to the Portfolio's performance and its share-
holders. The Manager may determine that a pattern of frequent exchanges is
excessive and contrary to the best interests of the Portfolio's other share-
holders. In this event the Fund may, at its discretion, decide to limit addi-
tional purchases and/or exchanges by the shareholder. Upon such a determina-
tion, the Fund will provide notice in writing or by telephone to the share-
holder at least 15 days prior to suspending the exchange privilege and during
the 15 day period the shareholder will be required to (a) redeem his or her
shares in the Portfolio or (b) remain invested in the Portfolio or exchange
into any of the funds of the Smith Barney Mutual Funds ordinarily     
 
20
<PAGE>
 
EXCHANGE PRIVILEGE (CONTINUED)
 
available, which position the shareholder would be expected to maintain for a
significant period of time. All relevant factors will be considered in deter-
mining what constitutes an abusive pattern of exchanges.
 
  Certain shareholders may be able to exchange shares by telephone. See "Re-
demption of Shares--Telephone Redemption and Exchange Program." Exchanges will
be processed at the net asset value next determined plus any applicable sales
charge. Redemption procedures discussed above are also applicable for exchang-
ing shares, and exchanges will be made upon receipt of all supporting docu-
ments in proper form. If the account registration of the shares of the fund
being acquired is identical to the registration of the shares of the fund
exchanged, no signature guarantee is required. A capital gain or loss for tax
purposes could be realized upon the exchange, depending upon the cost or other
basis of shares redeemed. Before exchanging shares, investors should read the
current prospectus describing the shares to be acquired. The Portfolio
reserves the right to modify or discontinue exchange privileges upon 60 days'
prior notice to shareholders.
 
MINIMUM ACCOUNT SIZE
 
 
  The Fund reserves the right to involuntarily liquidate any shareholder's
account if the aggregate net asset value of the shares held in the account is
less than $500. If a shareholder has more than one account in the Portfolio,
each account must satisfy the minimum account size. Before the Fund exercises
such right, shareholders will receive written notice and will be permitted 60
days to bring the account up to the minimum to avoid involuntary liquidation.
 
YIELD INFORMATION
   
  From time to time the Portfolio may advertise its yield, effective yield and
taxable equivalent yield. These figures are computed separately for Class A
and Class Y shares of the Portfolio. These yield figures will be based on his-
torical earnings and are not intended to indicate future performance. The
yield of the Portfolio refers to the net investment income generated by an
investment in the Portfolio over a specific seven-day period (which will be
stated in the advertisement). This net investment income is then annualized.
The effective yield is calculated similarly but, when annualized, the income
earned by an investment in the Portfolio is assumed to be reinvested. The
effective yield will be slightly higher than the yield because of the com-
pounding effect of the assumed reinvestment. The taxable equivalent yield 
also is calculated similarly to the yield, except that a stated income tax 
rate is
used to demonstrate the taxable yield necessary to produce an after-tax yield
equivalent to the tax-exempt yield of the Portfolio.     
 
                                                                             21
<PAGE>
 
MANAGEMENT OF THE FUND
    
 BOARD OF TRUSTEES     
   
  Overall responsibility for management and supervision of the Portfolio 
rests with the Fund's Board of Trustees. The Board of Trustees approves all 
significant agreements between the Fund and the companies that furnish 
services to the Fund and the Portfolio, including agreements with the 
Fund's distributor,
investment manager, custodian and transfer agent. The day-to-day operations of
the Fund are delegated to the Manager. The SAI contains background 
information regarding each Trustee and executive officer of the Fund.     
 
 MANAGER
   
  The Manager manages the day to day operations of the Portfolio pursuant to a
Management Agreement entered into by the Fund on behalf of the Portfolio. MMC
is a subsidiary of Salomon Smith Barney Holdings Inc. ("Holdings"), the parent
company of Smith Barney (the "Distributor"). Holdings is a wholly owned sub-
sidiary of Travelers Group, Inc., which is a financial services holding com-
pany engaged, through its subsidiaries, principally in four business segments:
Investment Services including Asset Management, Consumer Finance Services,
Life Insurance Services and Property & Casualty Insurance Services. MMC, Hold-
ings and Smith Barney are each located at 388 Greenwich Street, New York, New
York 10013. MMC renders investment advice to investment companies that had
aggregate assets under management as of March 31, 1998 of approximately $100.5
billion.     
   
  MMC provides the Fund with investment management services, executive and
other personnel, pays the remuneration of Fund officers, provides the Fund
with office space and equipment, furnishes the Fund with bookkeeping, account-
ing, administrative services and services relating to research, statistical
work and supervision of the Portfolio. For the services provided, the Portfo-
lio pays MMC a daily fee calculated at the annual rate of 0.50% of the Portfo-
lio's average net assets. For the last fiscal year the total expenses for
Class A shares were 0.63% of average net assets. MMC has agreed to waive its
fee to the extent that it is necessary if in any fiscal year the aggregate
expenses of a Class exclusive of 12b-1 fees, taxes, brokerage, interest and
extraordinary expenses, such as litigation costs, exceed 0.70% of its average
daily net assets for that fiscal year. The 0.70% expense limitation shall be
in effect until it is terminated by notice to shareholders and by supplement
to the then-current prospectus.     
   
  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 has been 
approved by the stockholders of each of Travelers and Citicorp. Trav-
elers has filed an application to become a bank holding company so that, upon
consummation of the merger, the surviving corporation would be a bank holding
company subject to regulation under     
 
22
<PAGE>
 
MANAGEMENT OF THE FUND (CONTINUED)
   
the Bank Holding Company Act of 1956 (the "BHCA"). The requirements of the
BHCA, the Glass-Steagall Act and certain other laws and regulations will then
be applicable to Travelers and its subsidiaries.     
   
  The Manager does not believe that its compliance with applicable law follow-
ing 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 invest-
ment advisory services that it currently receives. Smith Barney and the Man-
ager believe that the Manager's services under the Management Agreement and
the shareholder service activities performed by Smith Barney are not under-
writing and would be consistent with the Glass-Steagall Act and other relevant
federal and state laws. However, there is little controlling precedent regard-
ing the performance of the combination of investment advisory, shareholder
servicing and administrative activities by subsidiaries of bank holding compa-
nies. If Smith Barney and the Manager, or their affiliates, were to be pre-
vented from acting as the manager or a shareholder service agent, the Fund
would seek alternative means for obtaining these services. The Fund does not
expect that shareholders would suffer any adverse financial consequences as a
result of any such occurrence.     
   
  The term "Smith Barney" in the title of the Fund and Portfolio has been
adopted by permission of Smith Barney and is subject to the right of Smith
Barney to elect that the Fund and Portfolio stop using the term in any form or
combination of its name.     
   
DISTRIBUTION     
 
 
  Smith Barney distributes shares of the Portfolio as principal underwriter
and as such conducts a continuous offering pursuant to a "best efforts"
arrangement requiring Smith Barney to take and pay for only such securities as
may be sold to the public. Pursuant to a plan of distribution adopted by the
Portfolio under Rule 12b-1 under the 1940 Act (the "Plan"), Smith Barney is
paid an annual service fee with respect to Class A shares of the Portfolio at
the annual rate of 0.10% of the average daily net assets of Class A shares.
The fee is used by Smith Barney to pay its Financial Consultants for servicing
Class A shareholder accounts for as long as a shareholder remains a holder of
the Class. The service fee is also spent by Smith Barney on the following
types of expenses: (1) the pro rata share of other employment costs of such
financial consultants (e.g., FICA, employee benefits, etc.); (2) employment
expenses of home office personnel primarily responsible for providing service
to Class A shareholders and (3) the pro rata share of branch office fixed
expenses (including branch overhead allocations). Shareholder servicing
expenses incurred by Smith Barney but not reimbursed by Class A in any year
will not be a continuing liability of the Class in subsequent years.
 
  Smith Barney also advises profit-sharing and pension accounts. Smith Barney
and its affiliates may in the future act as investment advisers for other
accounts.
 
                                                                             23
<PAGE>
 
   
DISTRIBUTION (CONTINUED)     
   
  The Glass-Steagall Act currently prohibits certain financial institutions
from underwriting securities of open-end investment companies, such as the
Fund. Therefore, in connection with the anticipated merger of Travelers and
Citicorp and as a consequence of the anticipated applicability of the BHCA and
the Glass-Steagall Act, the Fund plans to retain the services of a new entity
(which is not otherwise affiliated with Travelers) to act as distributor of the
Portfolio's shares.     
 
ADDITIONAL INFORMATION
   
  The Fund, an open-end management investment company, is organized as a "Mas-
sachusetts business trust" pursuant to a Declaration of Trust dated August 14,
1985. Pursuant to the Declaration of Trust, the Board of Trustees has 
authorized the issuance of different series of shares, each representing 
shares in separate
portfolios. The assets of each portfolio are segregated and separately managed.
Each share of a portfolio represents an equal proportionate interest in the net
assets of that portfolio with each other share of the same portfolio and is
entitled to such dividends and distributions out of the net income of that
portfolio as are declared in the discretion of the Board of Trustees. Share-
holders are entitled to one vote for each share held and will vote by individ-
ual portfolio except as otherwise permitted by the 1940 Act. It is the inten-
tion of the Fund not to hold annual meetings of shareholders. The Board of
Trustees may call meetings of shareholders for action by shareholder vote as
may be required by the 1940 Act or the Declaration of Trust, and shareholders
are entitled to call a meeting upon a vote of 10% of the Fund's outstanding
shares for purposes of voting on removal of a Trustee or Trustees. The Fund
will assist shareholders in calling such a meeting as required by the 1940 Act.
Shares do not have cumulative voting rights or preemptive rights and have only
such conversion or exchange rights as the Board of Trustees may grant in its
discretion. Shares are redeemable as set forth under "Redemption of Shares" and
are subject to involuntary liquidation as set forth under "Minimum Account
Size."     
 
  PNC Bank, National Association, located at 17th and Chestnut Streets, Phila-
delphia, PA 19103, serves as custodian of the Portfolio's investments.
 
  First Data, located at Exchange Place, Boston, Massachusetts 02109, serves as
the Fund's transfer agent.
   
  The Fund sends shareholders of the Portfolio a semi-annual report and an
audited annual report, which include listings of the investment securities held
by the Portfolio at the end of the period covered. In an effort to reduce the
Fund's printing and mailing costs, the Fund plans to consolidate the mailing of
its semi-annual and annual reports by household. This consolidation means that
a household having multiple accounts with the identical address of record will
receive a single copy of each report. Shareholders who do not want this consol-
idation to apply to their account should contact their Smith Barney Financial
Consultants or the Fund's transfer agent.     
 
24
<PAGE>
 
                                              SMITH BARNEY
                                              ----------------------------------
                                              A Member of TravelersGroup [LOGO]














                                                   
                                                                   SMITH BARNEY 
                                                                     MUNI FUNDS 
                                                                     CALIFORNIA 
                                                                   MONEY MARKET 
                                                                      PORTFOLIO 
                                                                               
 
 
 
                                                           388 Greenwich Street 
                                                       New York, New York 10013
                                                                  
                                                               FD 0773 7/98     


P R O S P E C T U S
 
 
                                                         SMITH BARNEY MUNI FUNDS
                                                 New York Money Market Portfolio
                                                                 
                                                              JULY 29, 1998     
 
                                                   PROSPECTUS BEGINS ON PAGE ONE
LOGO  Smith Barney Mutual Funds
      INVESTING FOR YOUR FUTURE.
      EVERY DAY.
<PAGE>
 
   
PROSPECTUS                                                  July 29, 1998      
 
Smith Barney Muni Funds
New York Money Market Portfolio
388 Greenwich Street 
New York, New York 10013 
(800) 451-2010
   
  The New York Money Market Portfolio (the "Portfolio") is one of eight invest-
ment portfolios that currently comprise Smith Barney Muni Funds (the "Fund").
The Portfolio seeks to provide its shareholders with income exempt from both
Federal income taxes (other than the alternative minimum tax) and New York
State and City personal income taxes from a portfolio of high quality short-
term New York municipal obligations selected for liquidity and stability of
principal.     
   
  The Portfolio may invest a significant percentage of its assets in issuers
located in the State of New York and therefore an investment in the Portfolio
may be riskier than an investment in other types of money market funds.     
 
  SHARES OF THE PORTFOLIO ARE NOT INSURED OR GUARANTEED BY THE U.S. GOVERNMENT.
THERE IS NO ASSURANCE THAT THE PORTFOLIO WILL BE ABLE TO MAINTAIN A STABLE NET
ASSET VALUE OF $1.00 PER SHARE.
 
  This Prospectus sets forth concisely certain information about the Fund and
the Portfolio, including service fees and expenses, that prospective investors
will find helpful in making an investment decision. Investors are encouraged to
read this Prospectus carefully and retain it for future reference.
   
  Additional information about the Portfolio is contained in a Statement of
Additional Information dated July 29, 1998, as amended or supplemented from
time to time (the "SAI"), that is available upon request and without charge by
calling or writing the Fund at the telephone number or address set forth above
or by contacting a Smith Barney Financial Consultant. The Statement of Addi-
tional Information has been filed with the Securities and Exchange Commission
(the "SEC") and is incorporated by reference into this Prospectus in its
entirety.     
 
SMITH BARNEY INC.
Distributor
   
MUTUAL MANAGEMENT CORP.     
Investment Manager
   
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION PASSED UPON
THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.     
 
                                                                               1
<PAGE>
 
TABLE OF CONTENTS
 
<TABLE>   
<S>                                           <C>
FEE TABLE                                       3
-------------------------------------------------
FINANCIAL HIGHLIGHTS                            4
-------------------------------------------------
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES    5
-------------------------------------------------
VALUATION OF SHARES                            11
-------------------------------------------------
DIVIDENDS, AUTOMATIC REINVESTMENT AND TAXES    12
-------------------------------------------------
PURCHASE OF SHARES                             13
-------------------------------------------------
REDEMPTION OF SHARES                           16
-------------------------------------------------
EXCHANGE PRIVILEGE                             19
-------------------------------------------------
MINIMUM ACCOUNT SIZE                           22
-------------------------------------------------
YIELD INFORMATION                              22
-------------------------------------------------
MANAGEMENT OF THE FUND                         22
-------------------------------------------------
DISTRIBUTION                                   24
-------------------------------------------------
ADDITIONAL INFORMATION                         24
-------------------------------------------------
</TABLE>    
 
--------------------------------------------------------------------------------
   
  No person has been authorized to give any information or to make any
representations in connection with this offering other than those contained in
this Prospectus and, if given or made, such other information and
representations must not be relied upon as having been authorized by the
Portfolio or Smith Barney Inc. (the "Distributor") the Distributor. This
Prospectus does not constitute an offer by the Portfolio or the Distributor to
sell or a solicitation of an offer to buy any of the securities offered hereby
in any jurisdiction to any person to whom it is unlawful to make such offer or
solicitation in such jurisdiction.     
 
--------------------------------------------------------------------------------
 
2
<PAGE>
 
FEE TABLE
 
  The following expense table lists the costs and expenses an investor will
incur either directly or indirectly as a shareholder of the Portfolio based,
unless otherwise noted, on its operating expenses for its most recent fiscal
year:
 
<TABLE>   
<CAPTION>
  NEW YORK MONEY MARKET PORTFOLIO            CLASS A CLASS Y
-------------------------------------------------------------
  <S>                                        <C>     <C>
  SHAREHOLDER TRANSACTION EXPENSES
    Sales Charge Imposed on Purchases         None    None
    Contingent Deferred Sales Charge          None*   None
-------------------------------------------------------------
  ANNUAL PORTFOLIO OPERATING EXPENSES
    (as a percentage of average net assets)
    Management fees                           0.50%   0.50%
    12b-1 fees                                0.10%   None
    Other expenses                            0.05%   0.05%**
-------------------------------------------------------------
  TOTAL PORTFOLIO OPERATING EXPENSES          0.65%   0.55%
-------------------------------------------------------------
</TABLE>    
  * Class A shares acquired as part of an exchange privilege transaction, which
    were originally acquired in one of the other Smith Barney Mutual Funds at
    net asset value subject to a contingent deferred sales charge ("CDSC"),
    remain subject to the original fund's CDSC while held in the Portfolio.
   
 ** The expenses of Class Y are estimated based on expenses incurred by Class A
    shares because there were no Class Y shares outstanding during the fiscal
    year ended March 31, 1998.     
       
  Class A shares of the Portfolio purchased through the Smith Barney AssetOne
Program will be subject to an annual asset-based fee, payable quarterly. 
The fee will vary to a maximum of 1.50%, depending on the amount of assets 
held through the Program. For more information, please call your 
Smith Barney Financial Consultant.
 
 EXAMPLE
   
  The following example is intended to assist an investor in understanding the
various costs that an investor in the Portfolio will bear directly or indirect-
ly. The example assumes payment by the Portfolio of operating expenses at the
levels set forth in the table above. See "Purchase of Shares," "Redemption of
Shares," "Management of the Fund" and "Distribution."     
 
<TABLE>   
<CAPTION>
  NEW YORK MONEY MARKET PORTFOLIO               1 YEAR 3 YEARS 5 YEARS 10 YEARS
-------------------------------------------------------------------------------
  <S>                                           <C>    <C>     <C>     <C>
  An investor would pay the following expenses
  on a $1,000 investment, assuming (1) 5.00%
  annual return and (2) redemption at the end
  of each time period:
    Class A                                      $ 7     $21     $36     $81
    Class Y                                      $ 6     $18     $31     $69
-------------------------------------------------------------------------------
</TABLE>    
 
  The example also provides a means for the investor to compare expense levels
of funds with different fee structures over varying investment periods. To
facilitate such comparison, all funds are required to utilize a 5.00% annual
return assumption. However, the Portfolio's actual return will vary and may be
greater or less than 5.00%. THIS EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTA-
TION OF PAST OR FUTURE EXPENSES. ACTUAL EXPENSES MAY BE GREATER OR LESS THAN
THOSE SHOWN.
 
                                                                               3
<PAGE>
 
FINANCIAL HIGHLIGHTS
   
  The following information has been audited by KPMG Peat Marwick LLP, inde-
pendent auditors, whose report thereon appears in the Portfolio's annual
report dated March 31, 1998. The information set out below should be read in
conjunction with the financial statements and related notes that also appear
in the Portfolio's Annual Report to Shareholders, which is incorporated by
reference into the SAI.     
 
FOR A SHARE OF BENEFICIAL INTEREST OUTSTANDING THROUGHOUT EACH YEAR:
 
<TABLE>   
<CAPTION>
NEW YORK MONEY MARKET
PORTFOLIO-Class A shares       1998      1997      1996      1995     1994  1993(1)
--------------------------------------------------------------------------------------
<S>                      <C>         <C>       <C>       <C>       <C>      <C>
NET ASSET VALUE,
  BEGINNING OF YEAR      $     1.00  $   1.00  $   1.00  $   1.00  $  1.00  $  1.00
--------------------------------------------------------------------------------------
INCOME FROM INVESTMENT
  OPERATIONS:
 Net investment income
   (2)                        0.030     0.028     0.038     0.025    0.018    0.010
--------------------------------------------------------------------------------------
Total Income from
  Investment Operations       0.030     0.028     0.038     0.025    0.018    0.010
--------------------------------------------------------------------------------------
LESS:
 Dividends from net
   investment income         (0.030)   (0.028)   (0.038)   (0.025)  (0.018)  (0.010)
--------------------------------------------------------------------------------------
Total Distributions          (0.030)   (0.028)   (0.038)   (0.025)  (0.018)  (0.010)
--------------------------------------------------------------------------------------
NET ASSET VALUE, END OF
  YEAR                   $     1.00  $   1.00  $   1.00  $   1.00  $  1.00  $  1.00
--------------------------------------------------------------------------------------
TOTAL RETURN                   3.04%     2.85%     3.17%     2.49%    1.77%    1.01%++
--------------------------------------------------------------------------------------
NET ASSETS, END OF YEAR
  (000S)                 $1,161,000  $937,115  $882,492  $708,391  $82,459  $59,510
--------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET
  ASSETS:
 Expenses(2)                   0.65%     0.67%     0.67%     0.68%    0.60%    0.56%+
 Net investment income         2.99      2.80      3.11      2.94     1.73     1.84+
--------------------------------------------------------------------------------------
</TABLE>    
(1) For the period from September 17, 1992 (inception date) to March 31, 1993.
(2) The manager has waived all or part of its fees for the year ended March
    31, 1994 and the period ended March 31, 1993. If such fees were not
    waived, the per share decrease of net investment income would have been
    $0.001 and $0.001, for the year ended March 31, 1994 and the period ended
    March 31, 1993, respectively, and the ratio of expenses to average net
    assets would have been 0.67% and 0.69%, respectively.
 ++Total return is not annualized, as the result may not be representative of
   the total return for the year.
 + Annualized.
 
4
<PAGE>
 
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES
   
  The New York Money Market Portfolio seeks to provide income exempt from both
Federal income taxes and New York State and New York City personal income taxes
from a portfolio of high quality short-term municipal obligations selected for
liquidity and stability of principal. The Portfolio will seek to be fully
invested in obligations that are issued by the State of New York and its polit-
ical subdivisions, agencies and instrumentalities, the interest from which, in
the opinion of counsel for the various issuers, is exempt from New York State
and City as well as Federal income taxes. (For certain shareholders, a portion
of the Portfolio's income may be subject to the alternative minimum tax.) The
Portfolio operates as a money market fund, and utilizes certain investment pol-
icies so that, to the extent reasonably possible, its price per share will not
change from $1.00, although no assurance can be given that this goal will be
achieved on a continuous basis. For example the Portfolio will not purchase a
security which, after giving effect to any demand features, has a remaining
maturity of greater than 13 months, or maintain a dollar-weighted average port-
folio maturity in excess of 90 days.     
   
  Except for temporary defensive purposes, it is a fundamental policy that at
least 80% of the Portfolio's assets will be invested in securities that produce
income that is exempt from Federal income taxes (other than the alternative
minimum tax) and from New York State and City personal income taxes in the
opinion of bond counsel for the various issuers.     
   
  Opinions relating to the validity of municipal obligations and to the exemp-
tion of interest thereon from Federal income taxes and from New York State and
New York City personal income taxes are rendered by bond counsel to the respec-
tive issuers at the time of issuance. Neither the Portfolio nor its investment
adviser, Mutual Management Corp. ("MMC" or the "Manager"), will review the pro-
ceedings relating to the issuance of municipal obligations or the basis for
such opinions.     
   
  The two principal classifications of municipal obligations are "general obli-
gation" and "revenue." General obligations are secured by a municipal issuer's
pledge of its full faith, credit and taxing power for the payment of principal
and interest. Revenue obligations are payable only from the revenues derived
from a particular facility or class of facilities or, in some cases, from the
proceeds of a special excise tax or other specific revenue source. Please see
the SAI for a more detailed discussion about the different types of municipal
obligations.     
          
  The Portfolio's investments are limited to United States dollar-denominated
instruments that the Fund's Board of Trustees or its delegates determine
present minimal credit risks and that (i) are secured by the full faith and
credit of the United States or (ii) are "Eligible Securities," as defined by
the Investment Company Act of 1940, as amended (the "1940 Act"), at the time of
acquisition by     
 
                                                                               5
<PAGE>
 
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
   
the Portfolio. The term "Eligible Securities" includes securities rated by the
"Requisite NRSROs" in one of the two highest short-term rating categories,
securities of issuers that have received such ratings with respect to other
short-term debt securities and comparable unrated securities. "Requisite
NRSROs" means (a) any two nationally recognized statistical rating organizations
("NRSROs") that have issued ratings with respect to a security or class of debt
obligations of an issuer, or (b) one NRSRO, if it is the only NRSRO that has 
assigned such a rating. Currently, there are five NRSROs: Standard & Poor's
Ratings Group, Moody's Investors Service, Inc., Fitch IBCA, Inc., Duff and
Phelps Inc., and Thomson BankWatch. The Portfolio may also invest in unrated
securities if they are of comparable quality as determined by the Manager in
accordance with criteria established by the Fund's Board of Trustees.     
   
  Municipal obligations, which are issued by states, municipalities and their
agencies, may include municipal bonds and notes. Among the types of obligations
in which the Portfolio may invest are floating or variable rate instruments
subject to demand features ("demand instruments"); tax-exempt commercial paper;
and notes such as Tax Anticipation Notes, Revenue Anticipation Notes, Tax and
Revenue Anticipation Notes and Bond Anticipation Notes. Demand instruments usu-
ally have an indicated maturity of more than 13 months but have a demand fea-
ture ("put") that entitles the holder to receive the principal amount of the
underlying security and may be exercised either (a) at any time on no more than
30 days' notice; or (b) at specified intervals not exceeding one year and upon
no more than 30 days' notice. Demand features generally consist of a letter of
credit issued by a domestic or foreign bank. A variable rate instrument pro-
vides for adjustment of its interest rate on set dates and upon such adjustment
can reasonably be expected to have a market value that approximates its amor-
tized cost; a floating rate instrument provides for adjustment of its interest
rate whenever a specific interest rate (e.g., the prime rate) changes and at
any time can reasonably be expected to have a market value that approximates
its amortized cost.     
 
   
  The Portfolio may invest without limit in private activity bonds. Interest
income on certain types of private activity bonds issued after August 7, 1986
to finance non-governmental activities is a specific tax preference item for
purposes of the Federal individual and corporate alternative minimum taxes.
Individual and corporate shareholders may be subject to a Federal alternative
minimum tax to the extent the Portfolio's dividends are derived from interest
on these bonds. See "Taxes." These private activity bonds are included in the 
term "municipal obligations" for purposes of determining compliance with 
the 80% test described above.
    
 
  The Portfolio may invest up to 20% of the value of its assets in one or more
of the three principal types of derivative product structures described below.
Deriva-
 
6
<PAGE>
 
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
 
tive products are typically structured by a bank, broker-dealer or other
financial institution. A derivative product generally consists of a trust or
partnership through which the Portfolio holds an interest in one or more
underlying bonds coupled with a conditional right to sell ("put") the Portfo-
lio's interest in the underlying bonds at par plus accrued interest to a
financial institution (a "Liquidity Provider"). Typically, a derivative prod-
uct is structured as a trust or partnership which provides for pass-through
tax-exempt income. There are currently three principal types of derivative
structures: (1) "Tender Option Bonds," which are instruments which grant the
holder thereof the right to put an underlying bond at par plus accrued inter-
est at specified intervals to a Liquidity Provider; (2) "Swap Products," in
which the trust or partnership swaps the payments due on an underlying bond
with a swap counterparty who agrees to pay a floating municipal money market
interest rate; and (3) "Partnerships," which allocate to the partners income,
expenses, capital gains and losses in accordance with a governing partnership
agreement.
   
  Investments in derivative products raise certain tax, legal, regulatory and
accounting issues which may not be presented by investments in other municipal
bonds. There is some risk that certain issues could be resolved in a manner
that could adversely impact the performance of the Portfolio. For example, the
tax-exempt treatment of the interest paid to holders of derivative products is
premised on the legal conclusion that the holders of such derivative products
have an ownership interest in the underlying bonds. While the Portfolio
receives an opinion of legal counsel to the effect that the income from each
derivative product is tax-exempt to the same extent as the underlying bond,
the Internal Revenue Service (the "IRS") has not issued a ruling on this sub-
ject. Were the IRS to issue an adverse ruling, there is a risk that the inter-
est paid on such derivative products would be deemed taxable.     
 
  The Portfolio intends to limit the risk of derivative products by purchasing
only those derivative products that are consistent with the Portfolio's
investment objective and policies. The Portfolio will not use such instruments
to leverage securities. Hence, derivative products' contributions to the over-
all market risk characteristics of a Portfolio will not materially alter its
risk profile and will be fully representative of the Portfolio's maturity
guidelines.
   
  The Portfolio will not invest more than 10% of the value of its total assets
in illiquid securities, which may include certain derivative products and will
include any repurchase transactions that do not mature within seven days.     
   
  Please see the SAI for a more detailed discussion about the different types
of municipal obligations. The Portfolio cannot change its investment objective
and fundamental policies without the vote of a "majority of the outstanding
voting securities" as defined under the 1940 Act. (See "Voting Rights" in the
SAI.)     
 
                                                                              7
<PAGE>
 
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
 
 
 RISK AND PORTFOLIO MANAGEMENT
 
  There can be no assurance that the Portfolio will achieve its investment
objective. The ability of the Portfolio to achieve its investment objective is
dependent on a number of factors, including the skills of the Manager in pur-
chasing municipal obligations whose issuers have the continuing ability to meet
their obligations for the payment of interest and principal when due. The abil-
ity to achieve a high level of income is dependent on the yields of the securi-
ties in the portfolio. Yields on municipal obligations are the product of a
variety of factors, including the general conditions of the money market, of
the municipal bond and municipal note markets, the size of a particular offer-
ing, the maturity of the obligation and the rating of the issue. Municipal
obligations with longer maturities tend to produce higher yields and are gener-
ally subject to potentially greater price fluctuations than obligations with
shorter maturities.
 
  The Portfolio's concentration in New York State and New York City obligations
involves certain additional risks that should be considered carefully by
investors. In certain prior fiscal years, the State has failed to enact a bud-
get prior to the beginning of the State's fiscal year. A delay in the adoption
of the State's budget beyond the statutory April 1 deadline and the resultant
delay in the State's Spring borrowing has in certain prior years delayed the
projected receipt by the City of State aid, and there can be no assurance that
State budgets in the future fiscal years will be adopted by the April 1 statu-
tory deadline.
 
  The State has noted that its forecasts of tax receipts have been subject to
variance in recent fiscal years. As a result of these uncertainties and other
factors, actual results could differ materially and adversely from the State's
current projections and the State's projections could be materially and
adversely changed from time to time. There can be no assurance that the State
will not face substantial potential budget gaps in future years resulting from
a significant disparity between tax revenues projected from a lower recurring
receipts base and the spending required to maintain State programs at current
levels. To address any potential budgetary imbalance, the State may need to
take significant actions to align recurring receipts and disbursements in
future fiscal years. Because the State, the City, the State's other political
subdivisions and the State Authorities, all of which borrow money, are or are
perceived in the marketplace to be financially interdependent, any financial
difficulty experienced by one can adversely affect the market value and market-
ability of obligations issued by others. The State's credit is presently
involved with the indebtedness of the Authorities because of the State's guar-
antee or other support. This indebtedness is a substantial amount. The Authori-
ties are likely to require further financial assistance from the State. After
nearly five years of decline, the City appears to be on the verge of a broad-
based recovery which will lift many sectors of the local economy. Most of the
recent local recovery can be attributed to the continued improvement in the
U.S. economy, but a great deal of
 
8
<PAGE>
 
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
 
the strength expected in the City economy will be due to local factors, such
as the heavy concentration of the securities and banking industries in the
City.
 
   
  For each of the 1981 through 1995 fiscal years, the City achieved balanced
operating results as reported in accordance with generally accepted accounting
principles. The City was required to close substantial budget gaps in recent
years in order to maintain balanced operating results as required by laws of
the State. See the SAI for a more detailed description of these and other 
risks relating to the Portfolio's investments in New York obligations.
    
 
  Investors purchasing municipal obligations of their state of residence, or a
fund comprised of such obligations, should recognize that the benefits of the
exemption from state and local taxes, in addition to the exemption from Fed-
eral taxes, necessarily limits the fund's ability to diversify geographically.
   
  When-Issued Purchase Commitments. New issues of municipal obligations are
often offered on a "when-issued" basis, i.e., delivery and payment normally
take place 15 to 45 days after the purchase date. The payment obligation and
the interest rate to be received on the securities are fixed at the time the
buyer enters into the commitment, although no interest accrues with respect to
a when-issued security prior to its stated delivery date. The Portfolio will
only make commitments to purchase such securities with the intention of actu-
ally acquiring the securities, but the Portfolio may sell these securities
before the settlement date if it is deemed advisable as a matter of investment
strategy. A segregated account of the Portfolio consisting of cash or debt
securities of any grade having a value equal to or greater than the Portfo-
lio's purchase commitments, provided such securities have been determined by
the Manager to be liquid and unencumbered and are marked to market daily pur-
suant to guidelines established by the Board of Trustees, will be maintained
with PNC Bank, National Association (the "Custodian") and monitored on a daily
basis so that the market value of the account will equal or exceed the amount
of such commitments by the Portfolio.     
 
   
  Securities purchased on a "when-issued" basis are subject to changes in mar-
ket value prior to delivery based not only upon the public's perception of the
creditworthiness of the issuer but also changes in the level of interest
rates, i.e., appreciating when interest rates decline and depreciating when
interest rates rise. Therefore, if in order to achieve higher interest income 
the Portfolio remains substantially fully invested at the same time that it 
has purchased securities on a "when-issued" basis, there will be a greater 
possibility that the market value of the Portfolio's assets will vary 
from $1.00 per share. (See "Valuation of Shares.") And there will be a 
greater potential for the realization of capital gains, which are not 
exempt from Federal or state income taxes.
    
 
                                                                              9
<PAGE>
 
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
   
  Stand-By Commitments. The Portfolio may acquire "stand-by commitments" with
respect to municipal obligations held in its portfolio. Under a stand-by com-
mitment a dealer agrees to purchase, at the Portfolio's option, specified
municipal obligations at a specified price. The Portfolio intends to enter into
stand-by commitments only with banks and broker-dealers that, in the opinion of
the Manager, present minimal credit risks. In evaluating the creditworthiness
of the issuer of a stand-by commitment, the Manager will review periodically
the issuer's assets, liabilities, contingent claims and other relevant finan-
cial information. The Portfolio will acquire stand-by commitments solely to
facilitate portfolio liquidity and does not intend to exercise its rights
thereunder for trading purposes.     
 
  Other Factors to be Considered. The Portfolio anticipates being as fully
invested as practicable in New York municipal obligations and generally expects
to invest the proceeds received from the sale of shares in New York municipal
obligations as soon as reasonably possible, which is generally within one day.
At no time will more than 20% of the Portfolio's net assets be invested in tax-
able investments except when the Portfolio has adopted a temporary defensive
investment policy.
 
  The Portfolio may engage in short-term trading to attempt to take advantage
of short-term market variations or may dispose of a portfolio security prior to
its maturity if it believes such disposition advisable or it needs to generate
cash to satisfy redemptions. In such cases, the Portfolio may realize a gain or
loss.
   
  The Portfolio is registered as a "non-diversified" company under the 1940 Act
in order for the Portfolio to have the ability to invest more than 5% of its
assets in the securities of any issuer; however Rule 2a-7 under the 1940 Act 
imposes diversification requirements that the Portfolio intends to meet. 
The Portfolio intends to comply with Subchapter M of the Internal Revenue 
Code of 1986, as amended (the "Code"), which limits the aggregate value of 
all holdings (except U.S. government and cash items, as defined in the Code) 
that exceed 5% of the Portfolio's total assets to an aggregate amount of 50% 
of such assets. Also, holdings of a single issuer (with the same exceptions)
may not exceed 25% of the Portfolio's total assets.  These limits are measured
at the end of each quarter.  Under the Subchapter M limits, up to 50% of the
Portfolio's total assets may be invested in as few as two single issuers.
In the event of a decline in creditworthiness of, or default upon, the 
obligations of one or more issuers exceeding 5%, an investment in the Portfolio
may entail greater risk than in a portfolio having a policy of diversification 
because of a high percentage of the Portfolio's assets may be invested in 
municipal obligations of one or two issuers.
 
  Because the Portfolio invests in securities backed by banks and other finan-
cial institutions, changes in the credit quality of these institutions could
cause losses to the Portfolio and affect its share price.
 
10
<PAGE>
 
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)

    
   
  From time to time, proposals have been introduced before Congress for the
purpose of restricting or eliminating the Federal income tax exemption for
interest on municipal obligations and similar proposals may be introduced in
the future. If one of these proposals were enacted, the availability of tax
exempt obligations for investment by the Portfolio and the value of the Port-
folio securities would be affected. The Board of Trustees would then reevalu-
ate the Portfolio's investment objective and policies.     
   
  Year 2000. The investment management services provided to the Fund by the
Manager and the services provided to shareholders by Smith Barney depend on
the smooth functioning of their computer systems. Many computer software sys-
tems 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. The Manager 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, the Manager has been advised by the Fund's cus-
todian, 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 the Manager, Smith Barney or any other service provider will
be successful, or that interaction with other non-complying computer systems
will not impair Fund or shareholder services at that time.     
   
  In addition, the ability of issuers to make timely payments of interest and
principal or to continue their operations or services may be impaired by the
inadequate preparation of their computer systems for the year 2000. This may
adversely affect the market values of securities of specific issuers or of
securities generally if the inadequacy of preparation is perceived as wide-
spread or as affecting trading markets.     
 
VALUATION OF SHARES
   
  The Portfolio's net asset value per share is determined as of the close of
regular trading on each day that the New York Stock Exchange ("NYSE") is open
by dividing the net asset values attributable to each Class (i.e., the value
of its assets less liabilities) by the total number of its shares of the Class
outstanding. The Portfolio may also determine net asset value per share on
days when the NYSE is not open, but when the settlement of securities may oth-
erwise occur. The Portfolio employs the "amortized cost method" of valuing 
portfolio securities and intends to use its best efforts to continue to 
maintain a constant net asset value of $1.00 per share.     
 
                                                                             11
<PAGE>
 
DIVIDENDS, AUTOMATIC REINVESTMENT AND TAXES
 
 
 DIVIDENDS AND AUTOMATIC REINVESTMENT
 
  The Portfolio declares dividends daily from its net investment income on each
day the NYSE is open. Net investment income includes interest accrued and dis-
count earned and is less premium amortized and expenses accrued (the amount of
discount or premium on portfolio investments is fixed at the time of purchase).
Unless the shareholder has elected to receive monthly distributions of income,
such dividends will automatically be reinvested in Portfolio shares of the same
Class at net asset value. If a shareholder redeems an account in full between
payment dates, all dividends declared up to and including the date of liquida-
tion will be paid with the proceeds from the redemption of shares. The per
share dividends on Class A shares of the Portfolio may be lower than the per
share dividends on Class Y shares, principally as a result of the service fee
applicable to Class A shares.
 
 TAXES
   
  The following is a summary of the material tax considerations affect-
ing the Portfolio and the Portfolio's shareholders. Please refer to the SAI for
further discussion. In addition to the considerations described below and in
the SAI, there may be other federal, state, local or foreign tax implications
to consider. Because taxes are a complex matter, prospective shareholders are
urged to consult their tax advisors for more detailed information with respect
to the tax consequences of an investment.     
   
  The Portfolio intends to qualify, as it has in prior years, under Subchapter
M of the Code for tax treatment as a separate regulated investment company. 
In each taxable year that the Portfolio qualifies, so long as such 
qualification is in the best interests of its shareholders, the Portfolio 
will pay no federal income tax on its net investment income and long-term 
capital gain that is distributed to shareholders, provided the Portfolio 
distributes at least 90% of its net investment income and net short-term 
capital gains for the taxable year. The Portfolio also intends to satisfy 
conditions that will enable it to pay "exempt-interest dividends" to its
shareholders, although, may be considered taxable for certain state and local
income (or intangible) tax purposes.  New York resident shareholders will not
be subject to New York State and City personal income tax on exempt-interest
dividends attributable to tax-exempt obligations of the State of New York and
its political subdivisions , as well as certain Federal obligations considered
exempt for New York State and City purposes.  Exempt-interest dividends 
are not excluded in determining New York State franchise of New York City
busines taxes on corporations and financial institutions.

    
   
  Exempt-interest dividends attributable to interest received by the Portfolio
on certain "private-activity" bonds will be treated as a specific tax prefer-
ence item to be included in a shareholder's alternative minimum tax computa-
tion. All exempt-     
 
12
<PAGE>
 
DIVIDENDS, AUTOMATIC REINVESTMENT AND TAXES (CONTINUED)
   
interest dividends will be a component of the "current earnings" adjustment
item for purposes of the federal corporate alternative minimum tax. Exempt-
interest dividends derived from the interest earned on private activity bonds
will not be exempt from federal income tax for those shareholders who are "sub-
stantial users" (or persons related to "substantial users") of the facilities
financed by these bonds.     
   
  Shareholders who receive social security or equivalent railroad retirement
benefits should note that exempt-interest dividends are one of the items taken
into consideration in determining the amount of these benefits that may be sub-
ject to federal income tax.     
   
  The interest expense incurred by a shareholder on borrowing made to purchase
or carry Portfolio shares is not deductible for federal income purposes to the
extent related to the exempt-interest dividends received on such shares.     
   
  Dividends paid by the Portfolio from interest income on taxable investments,
net realized short-term securities gains, and all or a portion of any gains
from the sale or other disposition of certain market discount bonds are subject
to federal income tax as ordinary income. Distributions, if any, from net real-
ized long-term securities gains, derived from the sale of bonds held by the
Portfolio for more than one year, are taxable as long-term capital gains,
regardless of the length of time a shareholder has owned Portfolio shares.     
   
  Shareholders are required to pay tax on all taxable distributions even if
those distributions are automatically reinvested in additional Portfolio
shares. None of the dividends paid by the Portfolio will qualify for the corpo-
rate dividends received deduction. The Fund will inform shareholders of the
source and tax status of all distributions promptly after the close of each
calendar year. The Fund is also required to report annually the source, tax
status and recipient information related to the exempt-interest dividends dis-
tributed with the State of New York.     
   
  The Fund is required to withhold ("backup withholding") 31% of all dividends,
capital gain distributions, and the proceeds of any redemption, for those
shareholders who do not provide the Fund with a correct taxpayer identification
number (social security or employer identification number). Withholding from
taxable dividends and capital distributions also is required for shareholders
who otherwise are subject to backup withholding. Any tax withheld as a result
of backup withholding does not constitute an additional tax, and may be claimed
as a credit on the shareholders' federal income tax return.     
       
       
PURCHASE OF SHARES
 
 
  Purchases of Portfolio shares may be made through a brokerage account main-
tained with Smith Barney Inc. ("Smith Barney"), with a broker that clears
securi-
 
                                                                              13
<PAGE>
 
PURCHASE OF SHARES (CONTINUED)
 
ties transactions through Smith Barney on a fully disclosed basis (an "Intro-
ducing Broker") or an investment dealer in the selling group. No maintenance
fee will be charged by the Portfolio in connection with a brokerage account
through which an investor purchases or holds shares.
   
  Class A and Class Y shares of the Portfolio are available for purchase
directly by investors. Investors in Class A may open an account by making an
initial investment of at least $1,000 for each Portfolio account. Investors in
Class Y may open an account by making an initial investment of at least
$15,000,000 (except for purchases of Class Y shares by Smith Barney Concert
Allocation Series Inc., for which there is no minimum purchase amount). Subse-
quent investments of at least $50 may be made for either Class. There are no
minimum investment requirements in Class A for employees of Travelers Group
Inc. ("Travelers") and its subsidiaries, including Smith Barney, and Trustees
or Directors of any Travelers-affiliated Funds, including the Smith Barney
Mutual Funds, and their spouses and children. The Portfolio reserves the right
to waive or change minimums, to decline any order to purchase its shares and
to suspend the offering of shares from time to time. Share certificates are
issued only upon a shareholder's written request to the Fund's transfer agent,
First Data Investor Services Group, Inc. ("First Data").     
 
  For investors who maintain a brokerage account with Smith Barney, Smith Bar-
ney has advised the Portfolio that depending on the type of securities
account, its clients' free credit balances (i.e., immediately available funds)
may be invested automatically in full shares of the Portfolio either on a
daily or weekly basis. In addition to this "sweep" service, shareholders who
open a Smith Barney FMA PLUS SM account, which is a full service investment
account, will also be able to take advantage of, among other things: a free
Individual Retirement Account, free dividend reinvestment, unlimited checking,
100 free ATM withdrawals each year, free gain/loss analysis and online com-
puter access to account information. Smith Barney clients should contact their
Financial Consultant for more complete information. A complete record of Port-
folio dividends, purchases and redemptions will be included on such sharehold-
ers' regular Smith Barney statements.
       
  The Portfolio's shares are sold continuously at their net asset value next
determined after a purchase order is received and becomes effective. A pur-
chase order becomes effective when the Portfolio, Smith Barney or an Introduc-
ing Broker receives, or converts the purchase amount into, Federal funds
(i.e., monies of member banks within the Federal Reserve System held on
deposit at a Federal Reserve Bank). When orders for the purchase of Portfolio
shares are paid for in Federal funds, or are placed by an investor with suffi-
cient Federal funds or cash balance in
 
14
<PAGE>
 
PURCHASE OF SHARES (CONTINUED)
 
the investor's brokerage account with Smith Barney or the Introducing Broker,
the order becomes effective on the day of receipt if received prior to the
close of regular trading on the NYSE on any day the Portfolio calculates its
net asset value. See "Valuation of Shares." Purchase orders received after the
close of regular trading on the NYSE on any business day are effective as of
the time the net asset value is next determined. When orders for the purchase
of Portfolio shares are paid for other than in Federal funds, Smith Barney or
the Introducing Broker, acting on behalf of the investor, will complete the
conversion into, or itself advance, Federal funds, and the order will become
effective on the day following its receipt by the Fund, Smith Barney or the
Introducing Broker. Shares purchased directly through First Data begin to
accrue income dividends on the day that the purchase order becomes effective.
All other shares begin to accrue income dividends on the next business day fol-
lowing the day that the purchase order becomes effective.
 
 SYSTEMATIC INVESTMENT PLAN
   
  Shareholders may make additions to their accounts at any time by purchasing
shares through a service known as the Systematic Investment Plan. Under the
Systematic Investment Plan, Smith Barney or First Data is authorized through
preauthorized transfers to charge the regular bank account or other financial
institution indicated by the shareholder on a monthly or quarterly basis to
provide systematic additions to the shareholder's Portfolio account. For share-
holders purchasing shares of the Portfolio through the Systematic Investment
Plan on a monthly basis, the minimum initial investment requirement for Class A
shares and the minimum subsequent investment requirement for both Classes is
$25. For shareholders purchasing shares of the Portfolio through the Systematic
Investment Plan on a quarterly basis, the minimum initial investment require-
ment for Class A shares and the minimum subsequent investment requirement for
both Classes is $50. A shareholder who has insufficient funds to complete the
transfer will be charged a fee of up to $25 by Smith Barney or First Data.
Additional information is available from the Fund or a Smith Barney Financial
Consultant.     
 
 LETTER OF INTENT
   
  Class Y Shares. A Letter of Intent provides an opportunity for investors to
meet the minimum investment requirement for Class Y shares by aggregating
investments over a 13-month period. Such investors must make an initial minimum
purchase of $5,000,000 in Class Y shares of the Portfolio and agree to purchase
a total of $15,000,000 of Class Y shares of the Portfolio within 13 months from
the date of the Letter. If a total investment of $15,000,000 is not made within
the 13-month period, all Class Y shares purchased to date will be converted
into Class A shares, and will be subject to all fees (including a service fee
of 0.10%) and expenses applicable to the Portfolio's Class A shares. Please 
contact a Smith Barney Financial Consultant or First Data for further 
information.     
 
                                                                              15
<PAGE>
 
REDEMPTION OF SHARES
   
  Shareholders may redeem their shares without charge on any day the Portfolio
calculates its net asset value. See "Valuation of Shares." Redemption requests
received in proper form before the close of regular trading on the NYSE are
priced at the net asset value as next determined on that day. Redemption
requests received after the close of regular trading on the NYSE are priced at
the net asset value next determined.     
   
  The Portfolio normally transmits redemption proceeds on the business day fol-
lowing receipt of a redemption request but, in any event, payment will be made
within three business days thereafter, exclusive of days on which the NYSE is
closed and the settlement of securities does not otherwise occur, or as permit-
ted under the 1940 Act in extraordinary circumstances. Generally, if the
redemption proceeds are remitted to a Smith Barney brokerage account, these
funds will not be invested for the shareholder's benefit without specific
instruction and Smith Barney will benefit from the use of temporarily
uninvested funds. A shareholder who pays for Portfolio shares by personal check
will be credited with the proceeds of a redemption of those shares only after
the purchase check has been collected, which may take up to ten days or more. A
shareholder who anticipates the need for more immediate access to his or her
investment should purchase shares with Federal funds, by bank wire or with a
certified or cashier's check.     
 
  Shareholders who purchase securities through Smith Barney or an Introducing
Broker may take advantage of special redemption procedures under which Class A
shares of the Portfolio will be redeemed automatically to the extent necessary
to satisfy debit balances arising in the shareholder's account with Smith Bar-
ney or the Introducing Broker. One example of how an automatic redemption may
occur involves the purchase of securities. If a shareholder purchases securi-
ties but does not pay for them by the settlement date, the number of Portfolio
shares necessary to cover the debit will be redeemed automatically as of the
settlement date, which usually occurs three business days after the trade date.
Class A shares that are subject to a CDSC (see "Redemption of Shares--Contin-
gent Deferred Sales Charge") are not eligible for such automatic redemption and
will only be redeemed upon specific request. If the shareholder does not
request redemption of such shares, the shareholder's account with Smith Barney
or the Introducing Broker may be margined to satisfy debit balances if suffi-
cient Portfolio shares that are not subject to any applicable CDSC are unavail-
able. No fee is currently charged with respect to these automatic transactions.
Shareholders not wishing to participate in these arrangements should notify a
Smith Barney Financial Consultant.
 
  Redemption requests must be made through Smith Barney, an Introducing Broker
or the securities dealer through which the shares were purchased. A shareholder
desiring to redeem shares represented by certificates also must present the
certificates to Smith Barney or the Introducing Broker endorsed for transfer
(or accompa-
 
16
<PAGE>
 
REDEMPTION OF SHARES (CONTINUED)
 
nied by an endorsed stock power), signed exactly as the shares are registered.
Redemption requests involving shares represented by certificates will not be
deemed received until the certificates are received by First Data in proper
form.
   
  A written redemption request must (a) state the Class and number or dollar
amount of shares to be redeemed, (b) identify the shareholder's account number
and (c) be signed by each registered owner exactly as the shares are regis-
tered. If the shares to be redeemed were issued in certificate form, the cer-
tificates must be endorsed for transfer (or be accompanied by an endorsed stock
power) and must be submitted to First Data together with the redemption
request. Any signature appearing on a share certificate, stock power or written
redemption request in excess of $10,000 must be guaranteed by an eligible guar-
antor institution such as a domestic bank, savings and loan institution, domes-
tic credit union, member bank of the Federal Reserve System or member firm of a
national securities exchange. Written redemption requests of $10,000 or less do
not require a signature guarantee unless more than one such redemption request
is made in any 10-day period. Redemption proceeds will be mailed to an invest-
or's address of record. First Data may require additional supporting documents
for redemptions made by corporations, executors, administrators, trustees or
guardians. A redemption request will not be deemed properly received until
First Data receives all required documents in proper form.     
 
 TELEPHONE REDEMPTION AND EXCHANGE PROGRAM
 
   
  Shareholders who do not have a Smith Barney brokerage account may be eligible
to redeem and exchange Portfolio shares by telephone. To determine if a share-
holder is entitled to participate in this program, he or she should contact
First Data at 1-800-451-2010. Once eligibility is confirmed, the shareholder
must complete and return a Telephone/Wire Authorization Form, along with a sig-
nature guarantee, that will be provided by First Data upon request. Alterna-
tively, an investor may authorize telephone redemptions on the new account
application with the applicant's signature guarantee when making his or her
initial investment in the Portfolio.
    
   
  Redemptions. Redemption requests of up to $10,000 of any class or classes of
the Portfolio's shares may be made by eligible shareholders by calling 
First Data at 1-800-451-2010. Such requests may be made between 9:00 a.m. 
and 4:00 p.m. (New York City time) on any day the NYSE is open. Redemptions 
of shares (i) by retirement plans or (ii) for which certificates have been 
issued are not per-
mitted under this program.     
 
  A shareholder will have the option of having the redemption proceeds mailed
to his or her address of record or wired to a bank account predesignated by the
shareholder. Generally, redemption proceeds will be mailed or wired, as the
case may be, on the next business day following the redemption request. In
order to use the wire procedures, the bank receiving the proceeds must be a
member of the Federal
 
                                                                              17
<PAGE>
 
REDEMPTION OF SHARES (CONTINUED)
 
Reserve System or have a correspondent relationship with a member bank. The
Fund reserves the right to charge shareholders a nominal fee for each wire
redemption. Such charges, if any, will be assessed against the shareholder's
account from which shares were redeemed. In order to change the bank account
designated to receive redemption proceeds, a shareholder must complete a new
Telephone/Wire Authorization Form and, for the protection of the shareholder's
assets, will be required to provide a signature guarantee and certain other
documentation.
   
  Exchanges. Eligible shareholders may make exchanges by telephone if the
account registration of the shares of the fund being acquired is identical to
the registration of the shares of the fund exchanged. Such exchange requests
may be made by calling First Data at 1-800-451-2010 between 9:00 a.m. and 4:00
p.m. (New York City time) on any day on which the NYSE is open. See "Exchange
Privilege" for more information.     
 
  Additional Information regarding Telephone Redemption and Exchange Program.
Neither the Fund nor its agents will be liable for following instructions com-
municated by telephone that are reasonably believed to be genuine. The Fund
and its agents will employ procedures designed to verify the identity of the
caller and legitimacy of instructions (for example, a shareholder's name and
account number will be required and phone calls may be recorded). The Fund
reserves the right to suspend, modify or discontinue the telephone redemption
and exchange program or to impose a charge for this service at any time fol-
lowing at least seven days' prior notice to shareholders.
 
 CONTINGENT DEFERRED SALES CHARGE
 
  Class A shares of the Portfolio acquired as part of an exchange privilege
transaction, which were originally acquired in one of the other Smith Barney
Mutual Funds at net asset value subject to a CDSC, continue to be subject to
any applicable CDSC of the original fund. Therefore, such Class A shares that
are redeemed within 12 months of the date of purchase of the original fund may
be subject to a CDSC of 1.00%. The amount of any CDSC will be paid to and
retained by Smith Barney. The CDSC will be assessed based on an amount equal
to the net asset value at the time of redemption. Accordingly, no CDSC will be
imposed on increases in net asset value above the initial purchase price in
the original fund. In addition, no charge will be assessed on shares derived
from reinvestment of dividends or capital gain distributions.
 
  In determining the applicability of any CDSC, it will be assumed that a
redemption is made first of shares representing capital appreciation, next of
shares representing the reinvestments of dividends and capital gain distribu-
tions and finally of other shares held by the shareholder for the longest
period of time. The length of time that Class A shares have been held will be
calculated from the date the shares were
 
18
<PAGE>
 
REDEMPTION OF SHARES (CONTINUED)
 
initially acquired in one of the other Smith Barney Mutual Funds and such
shares being redeemed will be considered to represent, as applicable, capital
appreciation or dividend and capital gain distribution reinvestments in such
other funds. For Federal income tax purposes, the amount of the CDSC will
reduce the gain or increase the loss, as the case may be, on the amount real-
ized on redemption.
 
  The CDSC on Class A shares will be waived on (a) exchanges (see "Exchange
Privilege"); (b) redemptions of shares within 12 months following the death or
disability of the shareholder; (c) involuntary redemptions; and (d) redemptions
of shares to effect a combination of the Portfolio with any investment company
by merger, acquisition of assets or otherwise. In addition, a shareholder who
has redeemed shares from other funds of the Smith Barney Mutual Funds may,
under certain circumstances, reinvest all or part of the redemption proceeds
within 60 days and receive pro rata credit for any CDSC imposed on the prior
redemption.
 
  CDSC waivers will be granted subject to confirmation (by Smith Barney in the
case of shareholders who are also Smith Barney clients or by First Data in the
case of all other shareholders) of the shareholder's status or holdings, as the
case may be.
 
EXCHANGE PRIVILEGE
 
 
  Except as otherwise noted below, shares of each Class may be exchanged for
shares of the same Class in the following funds of the Smith Barney Mutual
Funds, to the extent shares are offered for sale in the shareholder's state of
residence. Exchanges of Class A shares are subject to minimum investment
requirements and all shares are subject to the other requirements of the fund
into which exchanges are made and a sales charge may apply.
 
 FUND NAME
  Growth Funds
       
    Concert Peachtree Growth Fund     
       
    Concert Social Awareness Fund     
       
    Smith Barney Aggressive Growth Fund Inc.     
       
    Smith Barney Appreciation Fund Inc.     
       
    Smith Barney Balanced Fund     
       
    Smith Barney Contrarian Fund     
       
    Smith Barney Convertible Fund     
       
    Smith Barney Fundamental Value Fund Inc.     
       
    Smith Barney Funds, Inc.--Large Cap Value Fund     
       
    Smith Barney Large Cap Blend Fund     
       
    Smith Barney Large Capitalization Growth Fund     
       
    Smith Barney Natural Resources Fund Inc.     
       
    Smith Barney Premium Total Return Fund     
       
    Smith Barney Small Cap Blend Fund, Inc.     
       
    Smith Barney Special Equities Fund     
           
                                                                              19
<PAGE>
 
EXCHANGE PRIVILEGE (CONTINUED)
 
 
  Taxable Fixed-Income Funds
    Smith Barney Adjustable Rate Government Income Fund
    Smith Barney Diversified Strategic Income Fund
       
    Smith Barney Funds, Inc.--Short-Term High Grade Bond Fund     
       
    Smith Barney Funds, Inc.--U.S. Government Securities Fund     
    Smith Barney Government Securities Fund
    Smith Barney High Income Fund
    Smith Barney Investment Grade Bond Fund
    Smith Barney Managed Governments Fund Inc.
       
    Smith Barney Total Return Bond Fund     
 
  Tax-Exempt Funds
    Smith Barney Arizona Municipals Fund Inc.
    Smith Barney California Municipals Fund Inc.
    Smith Barney Intermediate Maturity California Municipals Fund
    Smith Barney Intermediate Maturity New York Municipals Fund
    Smith Barney Managed Municipals Fund Inc.
    Smith Barney Massachusetts Municipals Fund
       
    Smith Barney Municipal High Income Fund     
    Smith Barney Muni Funds--Florida Portfolio
    Smith Barney Muni Funds--Georgia Portfolio
    Smith Barney Muni Funds--Limited Term Portfolio
    Smith Barney Muni Funds--National Portfolio
    Smith Barney Muni Funds--New York Portfolio
    Smith Barney Muni Funds--Pennsylvania Portfolio
    Smith Barney New Jersey Municipals Fund Inc.
    Smith Barney Oregon Municipals Fund

     
  Global--International Funds     
       
    Smith Barney Hansberger Global Small Cap Value Fund     
       
    Smith Barney Hansberger Global Value Fund     
    Smith Barney World Funds, Inc.--Emerging Markets Portfolio
    Smith Barney World Funds, Inc.--European Portfolio
    Smith Barney World Funds, Inc.--Global Government Bond Portfolio
    Smith Barney World Funds, Inc.--International Balanced Portfolio
    Smith Barney World Funds, Inc.--International Equity Portfolio
    Smith Barney World Funds, Inc.--Pacific Portfolio
 
  Smith Barney Concert Allocation Series Inc.
    Smith Barney Concert Allocation Series Inc.--Balanced Portfolio
    Smith Barney Concert Allocation Series Inc.--Conservative Portfolio
       
    Smith Barney Concert Allocation Series Inc.--Global Portfolio     
    Smith Barney Concert Allocation Series Inc.--Growth Portfolio
    Smith Barney Concert Allocation Series Inc.--High Growth Portfolio
    Smith Barney Concert Allocation Series Inc.--Income Portfolio
 
20
<PAGE>
 
EXCHANGE PRIVILEGE (CONTINUED)
 
 
  Money Market Funds
    Smith Barney Money Funds, Inc.--Cash Portfolio
    Smith Barney Money Funds, Inc.--Government Portfolio
    *Smith Barney Money Funds, Inc.--Retirement Portfolio
    Smith Barney Muni Funds--California Money Market Portfolio
    Smith Barney Municipal Money Market Fund, Inc.
--------------------------------------------------------------------------------
* Available for exchange with Class A shares of the Portfolio.
 
  Class A Exchanges. Class A shares of the Portfolio will be subject to the
appropriate sales charge upon the exchange of such shares for Class A shares of
another fund of the Smith Barney Mutual Funds sold with a sales charge.
 
  Class Y Exchanges. Class Y shareholders of the Portfolio who wish to exchange
all or a portion of their Class Y shares for Class Y shares in any of the funds
identified above may do so without imposition of any charge.
   
  Additional Information Regarding the Exchange Privilege. Excessive exchange
transactions may be detrimental to the Portfolio's performance and its share-
holders. The Manager may determine that a pattern of frequent exchanges is
excessive and contrary to the best interests of the Portfolio's other share-
holders. In this event the Fund may, at its discretion, decide to limit addi-
tional purchases and/or exchanges by the shareholder. Upon such a determina-
tion, the Fund will provide notice in writing or by telephone to the share-
holder at least 15 days prior to suspending the exchange privilege and during
the 15-day period the shareholder will be required to (a) redeem his or her
shares in the Portfolio or (b) remain invested in the Portfolio or exchange
into any of the funds of the Smith Barney Mutual Funds ordinarily available,
which position the shareholder would be expected to maintain for a significant
period of time. All relevant factors will be considered in determining what
constitutes an abusive pattern of exchanges.     
 
  Certain shareholders may be able to exchange shares by telephone. See "Re-
demption of Shares--Telephone Redemption and Exchange Program." Exchanges will
be processed at the net asset value next determined plus any applicable sales
charge. Redemption procedures discussed above are also applicable for exchang-
ing shares, and exchanges will be made upon receipt of all supporting documents
in proper form. If the account registration of the shares of the fund being
acquired is identical to the registration of the shares of the fund exchanged,
no signature guarantee is required. A capital gain or loss for tax purposes
could be realized upon the exchange, depending upon the cost or other basis of
shares redeemed. Before exchanging shares, investors should read the current
prospectus describing the shares to be acquired. The Portfolio reserves the
right to modify or discontinue exchange privileges upon 60 days' prior notice
to shareholders.
 
                                                                              21
<PAGE>
 
MINIMUM ACCOUNT SIZE
 
 
  The Fund reserves the right to involuntarily liquidate any shareholder's
account if the aggregate net asset value of the shares held in the account is
less than $500. If a shareholder has more than one account in this Portfolio,
each account must satisfy the minimum account size. Before the Fund exercises
such right, shareholders will receive written notice and will be permitted 60
days to bring the account up to the minimum to avoid involuntary liquidation.
 
YIELD INFORMATION
   
  From time to time the Portfolio may advertise its yield, effective yield and
taxable equivalent yield. These figures are computed separately for Class A
and Class Y shares of the Portfolio. These yield figures are based on histori-
cal earnings and are not intended to indicate future performance. The yield of
the Portfolio refers to the net investment income generated by an investment
in the Portfolio over a specific seven-day period (which will be stated in the
advertisement). This net investment income is then annualized. The effective
yield is calculated similarly but, when annualized, the income earned by an
investment in the Portfolio is assumed to be reinvested. The effective yield
will be slightly higher than the yield because of the compounding effect of
the assumed reinvestment. The taxable equivalent yield also is calculated simi-
larly to the yield, except that a stated income tax rate is used to demon-
strate the taxable yield necessary to produce an after-tax yield equivalent to
the tax-exempt yield of the Portfolio.     
 
MANAGEMENT OF THE FUND
    
 BOARD OF TRUSTEES     
   
  Overall responsibility for management and supervision of the Portfolio rests
with the Fund's Board of Trustees. The Board of Trustees approves all 
significant agreements between the Fund and the companies that furnish 
services to the Fund and the Portfolio, including agreements with the 
Fund's distributor, investment manager, custodian and transfer agent. 
The day-to-day operations of the Fund are delegated to the Manager. The 
SAI contains background information regarding each Trustee and executive 
officer of the Fund.     
 
 MANAGER
   
  The Manager manages the day-to-day operations of the Portfolio pursuant to a
Management Agreement entered into by the Fund on behalf of the Portfolio. MMC
is a subsidiary of Salomon Smith Barney Holdings Inc. ("Holdings"), the parent
company of Smith Barney (the "Distributor"). Holdings is a wholly owned sub-
sidiary of Travelers Group, Inc., which is a diversified financial services
holding company engaged, through its subsidiaries, principally in four busi-
ness segments: Invest-     
 
22
<PAGE>
 
MANAGEMENT OF THE FUND (CONTINUED)
   
ment Services including Asset Management, Consumer Finance Services, Life
Insurance Services and Property & Casualty Insurance Services. MMC, Holdings
and Smith Barney are each located at 388 Greenwich Street, New York, New York
10013. MMC renders investment advice to investment companies that had aggregate
assets under management as of March 31, 1998 of approximately $100.5 billion.
       
  MMC provides the Fund with investment management services, executive and
other personnel, pays the remuneration of Fund officers, provides the Fund with
office space and equipment, furnishes the Fund with bookkeeping, accounting,
administrative services and services relating to research, statistical work and
supervision of the Portfolio. For the services provided, the Portfolio pays MMC
a daily fee calculated at the annual rate of 0.50% of the Portfolio's average
net assets. For the last fiscal year the total expenses of the Portfolio's
Class A shares were 0.65% of average net assets. MMC has agreed to waive its
fee to the extent that it is necessary if in any fiscal year the aggregate
expenses of a Class exclusive of 12b-1 fees, taxes, brokerage, interest and
extraordinary expenses, such as litigation costs, exceed 0.70% of its average
daily net assets for that fiscal year. The 0.70% expense limitation shall be in
effect until it is terminated by notice to shareholders and by supplement to
the then-current prospectus.     
   
  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 has been 
approved by the stockholders of each of Travelers and Citicorp. Travel-
ers has filed an application to become a bank holding company so that, 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 BHCA, the Glass-Steagall Act and certain other
laws and regulations will then be applicable to Travelers and its subsidiaries.
       
  The Manager does not believe that its compliance with applicable law follow-
ing 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. Smith Barney and the Manager
believe that the Manager's services under the Management Agreement and the
shareholder service activities performed by Smith Barney are not underwriting
and would be consistent with the Glass-Steagall Act and other relevant federal
and state laws. However, there is little controlling precedent regarding the
performance of the combination of investment advisory, shareholder servicing
and administrative activities by subsidiaries of bank holding companies. If
Smith Barney and the Manager, or their affiliates, were to be prevented from
acting as the manager or a shareholder service agent, the Fund would seek
alternative means for obtaining these services. The     
 
                                                                              23
<PAGE>
 
MANAGEMENT OF THE FUND (CONTINUED)
   
Fund does not expect that shareholders would suffer any adverse financial con-
sequences as a result of any such occurrence.     
   
  The term "Smith Barney" in the title of the Fund and Portfolio has been
adopted by permission of Smith Barney and is subject to the right of Smith Bar-
ney to elect that the Fund and Portfolio stop using the term in any form or
combination of its name.     
   
DISTRIBUTION     
 
 
  Smith Barney distributes shares of the Portfolio as principal underwriter and
as such conducts a continuous offering pursuant to a "best efforts" arrangement
requiring Smith Barney to take and pay for only such securities as may be sold
to the public. Pursuant to a plan of distribution adopted by the Portfolio
under Rule 12b-1 under the 1940 Act (the "Plan"), Smith Barney is paid an
annual service fee with respect to Class A shares of the Portfolio at the
annual rate of 0.10% of the average daily net assets of Class A shares. The fee
is used by Smith Barney to pay its Financial Consultants for servicing Class A
shareholder accounts for as long as a shareholder remains a holder of the
Class. The service fee is also spent by Smith Barney on the following types of
expenses: (1) the pro rata share of other employment costs of such financial
consultants (e.g., FICA, employee benefits, etc.); (2) employment expenses of
home office personnel primarily responsible for providing service to Class A
shareholders and (3) the pro rata share of branch office fixed expenses (in-
cluding branch overhead allocations). Shareholder servicing expenses incurred
by Smith Barney but not reimbursed by Class A in any year will not be a contin-
uing liability of the Class in subsequent years.
 
  Smith Barney also advises profit-sharing and pension accounts. Smith Barney
and its affiliates may in the future act as investment advisers for other
accounts.
   
  The Glass-Steagall Act currently prohibits certain financial institutions
from underwriting securities of open-end investment companies, such as the
Fund. Therefore, in connection with the anticipated merger of Travelers and
Citicorp and as a consequence of the anticipated applicability of the BHCA and
the Glass-Steagall Act, the Fund plans to retain the services of a new entity
(which is not otherwise affiliated with Travelers) to act as distributor of the
Portfolio's shares.     
 
ADDITIONAL INFORMATION
   
  The Fund, an open-end management investment company, is organized as a "Mas-
sachusetts business trust" pursuant to a Declaration of Trust dated August 14,
1985. Pursuant to the Declaration of Trust, the Board of Trustees has 
authorized the issu-     
 
24
<PAGE>
 
   
ADDITIONAL INFORMATION (CONTINUED)     
   
ance of different series of shares, each representing shares in separate port-
folios. The assets of each portfolio are segregated and separately managed.
Each share of a portfolio represents an equal proportionate interest in the net
assets of that portfolio with each other share of the same portfolio and is
entitled to such dividends and distributions out of the net income of that
portfolio as are declared in the discretion of the Board of Trustees. Share-
holders are entitled to one vote for each share held and will vote by individ-
ual portfolio except as otherwise permitted by the 1940 Act. It is the inten-
tion of the Fund not to hold annual meetings of shareholders. The Board of
Trustees may call meetings of shareholders for action by shareholder vote as
may be required by the 1940 Act or the Declaration of Trust, and shareholders
are entitled to call a meeting upon a vote of 10% of the Fund's outstanding
shares for purposes of voting on removal of a Trustee or Trustees. The Fund
will assist shareholders in calling such a meeting as required by the 1940 Act.
Shares do not have cumulative voting rights or preemptive rights and have only
such conversion or exchange rights as the Board of Trustees may grant in its
discretion. Shares are redeemable as set forth under "Redemption of Shares" and
are subject to involuntary liquidation as set forth under
"Minimum Account Size."
    
  PNC Bank, National Association, located at 17th and Chestnut Streets, Phila-
delphia, PA 19103, serves as custodian of the Portfolio's investments.
 
  First Data, located at Exchange Place, Boston, Massachusetts 02109, serves as
the Fund's transfer agent.
   
  The Fund sends shareholders of the Portfolio a semi-annual report and an
audited annual report, which include listings of the investment securities held
by the Portfolio at the end of the period covered. In an effort to reduce the
Fund's printing and mailing costs, the Fund plans to consolidate the mailing of
its semi-annual and annual reports by household. This consolidation means that
a household having multiple accounts with the identical address of record will
receive a single copy of each report. Shareholders who do not want this consol-
idation to apply to their account should contact their Smith Barney Financial
Consultant or the Fund's transfer agent.     
 
                                                                              25
<PAGE>
 
                                              SMITH BARNEY
                                              ----------------------------------
                                              A Member of TravelersGroup [LOGO]


                                                               
                                                                   SMITH BARNEY 
                                                                     MUNI FUNDS 
                                                                       NEW YORK
                                                                   MONEY MARKET
                                                                      PORTFOLIO
                                                                               
 
 
 
 
 
 
 
 
 
                                                           388 Greenwich Street 
                                                       New York, New York 10013
                                                                   
                                                                FD0774 7/98     

Smith Barney Muni Funds
388 Greenwich Street
New York, NY 10013

Statement of Additional 
Information
July 29, 1998

   
	Shares of Smith Barney Muni Funds (the "Fund") are offered 
currently with a choice of eight Portfolios, the National Portfolio, the 
Limited Term Portfolio, the Florida Portfolio, the Georgia Portfolio, 
the New York Portfolio, the Pennsylvania Portfolio, the California Money 
Market Portfolio and the New York Money Market Portfolio (collectively 
referred to as "Portfolios" and individually as "Portfolio"):

	The National Portfolio and the Limited Term Portfolio each seeks 
as high a level of income exempt from Federal income taxes as is 
consistent with prudent investing.

	The Florida Portfolio seeks to pay its shareholders as high a 
level of income exempt from Federal income taxes as is consistent with 
prudent investing, and generally selects investments that will enable 
its shares to be exempt from the Florida intangibles tax.

	The Georgia Portfolio seeks to provide as high a level of income 
exempt from Federal income taxes and from Georgia personal income taxes 
as is consistent with prudent investing.

	The New York Portfolio seeks to provide as high a level of income 
exempt from Federal income taxes and from New York State and New York 
City personal income taxes as is consistent with prudent investing.

	The Pennsylvania Portfolio seeks to pay its shareholders, as high 
a level of income exempt from both Federal income taxes and Pennsylvania 
personal income taxes as is consistent with prudent investing.

	The California Money Market Portfolio seeks to provide income 
exempt from Federal income taxes and from California personal income 
taxes from a portfolio of high quality short-term municipal obligations 
selected for liquidity and stability.

	The New York Money Market Portfolio seeks to provide its 
shareholders with income exempt from both Federal income taxes and New 
York State and New York City personal income taxes from a portfolio of 
high quality short-term New York municipal obligations selected for 
liquidity and stability.
    

	The National Portfolio, Florida Portfolio, Georgia Portfolio, New 
York Portfolio and Pennsylvania Portfolio each offer four classes 
("Classes") of shares:  Class A, Class B, Class L and Class Y.  The 
Limited Term Portfolio offers three classes of shares:  Class A, Class L 
and Class Y.  Class A shares are sold to investors with an initial sales 
charge and Class B shares are sold without an initial sales charge but 
with higher ongoing expenses and a Contingent Deferred Sales Charge 
("CDSC") payable upon certain redemption's.  Class L shares are sold 
with a lower initial sales charge than Class A shares but with higher 
ongoing expenses and a CDSC. Class Y shares are sold without an initial 
sales charge and are available only to investors investing a minimum of 
$15,000,000. The California Money Market Portfolio and the New York 
Money Market Portfolio each offer two classes of shares:  Class A and 
Class Y. Class A shares of each of the California Money Market and New 
York Money Market Portfolios are sold without an initial sales charge. 
These alternatives are designed to provide investors with the 
flexibility of selecting an investment best suited to his or her needs 
based on the amount of purchase, the length of time the investor expects 
to hold the shares and other circumstances.

	This Statement of Additional Information is not a prospectus.  It 
is intended to provide more detailed information about the Fund as well 
as matters already discussed in each Prospectus and therefore should be 
read in conjunction with the appropriate Prospectus which may be 
obtained from the Fund or a Smith Barney Financial Consultant.


   
TABLE OF CONTENTS
Page
Trustees and Officers	2
Additional Information Regarding Investment Policies	4
Additional Tax Information	7
Investment Restrictions	9
Performance Information	10
Valuation of Shares	12
The Management Agreement	13
Distribution	15
Custodian	16
Independent Auditors	16
The Fund	16
Voting Rights	17
Financial Statements	19
Appendix A	20
Appendix B	24
Appendix C	32
Appendix D	39
Appendix E	44
Appendix F	49
    


TRUSTEES AND OFFICERS

	Set forth below is a list of each Trustee and executive officer of 
the Fund, including a description of principal occupation during the 
last 5 years, age and address of each such person.  All officers of the 
Fund have their business address at 388 Greenwich Street, New York, NY 
10013.

   
DONALD R. FOLEY, Trustee
Retired, 3668 Freshwater Drive, Jupiter, Florida  33477.  Trustee or 
director of ten investment companies associated with Smith Barney Inc. 
("Smith Barney").  Formerly Vice President of Edwin Bird Wilson, 
Incorporated (advertising); 75.

PAUL HARDIN, Trustee
Professor of Law at University of North Carolina at Chapel Hill, 12083 
Morehead, Chapel Hill, North Carolina 27514. Trustee or director of 12 
investment companies associated with Smith Barney; and a Director of The 
Summit Bancorporation.  Formerly, Chancellor of the University of North 
Carolina at Chapel Hill; 67.
*HEATH B. MCLENDON, Chairman of the Board, President and Chief Executive 
Officer
Managing Director of Smith Barney; Trustee or director of 58 investment 
companies associated with Smith Barney; President of Mutual Management 
Corp. ("MMC" or the "Manager"); Chairman of Smith Barney Strategy 
Advisors Inc. and President of Travelers Investment Adviser, Inc. 
("TIA"); 65.

RODERICK C. RASMUSSEN, Trustee
Investment Counselor, 9 Cadence Court, Morristown, NJ 07960.  Trustee or 
director of ten investment companies associated with Smith Barney.  
Formerly, Vice President of Dresdner and Company Inc. (investment 
counselors);  72.

JOHN P. TOOLAN, Trustee
Retired, 13 Chadwell Place, Morristown, New Jersey, 07960.  Trustee or 
director of ten investment companies associated with Smith Barney. 
Formerly, Director and Chairman of Smith Barney Trust Company, Director 
of Smith Barney Holdings Inc. and the Manager and Senior Executive Vice 
President, Director and Member of the Executive Committee of Smith 
Barney; 67. 

LEWIS E. DAIDONE, Senior Vice President and Treasurer
Managing Director of Smith Barney; Senior Vice President and Treasurer 
of 42 investment companies associated with Smith Barney, and Director 
and Senior Vice President of the Manager and TIA; 40.

PETER M. COFFEY, Vice President and Investment Officer
Managing Director of Smith Barney and Portfolio Manager; Vice President 
of the Manager and of five investment companies associated with Smith 
Barney; 54.

LAWRENCE McDERMOTT, Vice President and Investment Officer
Managing Director of Smith Barney and Vice President of the Fund and six 
investment companies associated with Smith Barney; 50.

JOSEPH BENEVENTO; Vice President and Investment Officer
Vice President of Smith Barney and Vice President of the Fund and four 
investment companies associated with Smith Barney; 29.

THOMAS M. REYNOLDS, Controller
Director of Smith Barney and Controller of the Fund and 37 investment 
companies associated with Smith Barney; 38.

IRVING DAVID, Controller (California and New York Money Market 
Portfolios)
Director of Smith Barney and the Manager.  Controller of several of the 
investment companies associated with Smith Barney.  Prior to March, 
1994, Assistant Treasurer of First Investment Management Company; 36.

CHRISTINA T. SYDOR, Secretary
Managing Director of Smith Barney and Secretary of 42 investment 
companies associated with Smith Barney; Secretary and General Counsel of 
the Manager and TIA; 47.
    


*Designates a Trustee that is an "interested person" as defined in the 
Investment Company Act of 1940, as amended (the "Act"). Such persons 
compensated by Smith Barney and are not separately compensated by the 
Fund for serving as a Fund officer or Trustee.
	The following table shows the compensation paid by the Fund to 
each person who was a Trustee during the Fund's last fiscal year.  None 
of the officers of the Fund received any compensation from the Fund for 
such period.  Officers and interested Trustees of the Fund are 
compensated by Smith Barney.


COMPENSATION TABLE






Name of Person


   
Aggregate 
Compensatio
n from Fund
Pension or 
Retirement 
Benefits 
Accrued as 
part of Fund 
Expenses

Total 
Compensation 
from Fund and 
Fund Complex

Number of 
Funds for 
Which Person 
Serves within 
Fund Complex

Joseph H. Fleiss+@
$8,028
0
$54,900
10
Donald R. Foley+
8,128
0
55,400
10
Paul Hardin
8,128
0
73,000
12
Francis P. Martin
7,328
0
53,000
10
Heath B. McLendon*
0
0
0
58
Roderick C. 
Rasmussen
8,128
0
55,400
10
John P. Toolan+
8,128
0
           
55,400
            
10






*	Designates a person that is an "interested Trustee" of the Fund.

+ 	Pursuant to a deferred compensation plan, the indicated persons 
elected to defer payment of the following amounts of their compensation 
from the Fund: Joseph H. Fleiss - $1,814, Donald R. Foley - $1,814, and 
John P. Toolan - $8,128, and the following amounts of their compensation 
from the Fund Complex:  Joseph H. Fleiss: $21,000, Donald R. Foley: 
$21,000, and John P. Toolan: $55,400. 

@	 Effective January 1, 1998, Mr. Fleiss became a Trustee Emeritus.  
Upon attainment of age 72 the Fund's current Trustees may elect to 
change to emeritus status.  Any Trustees elected or appointed to the 
Board in the future will be required to change to emeritus status upon 
attainment of age 80.  Trustees 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's Trustees, together with reasonable out-of-
pocket expenses for each meeting attended.  For the last Fiscal year, 
the total paid to Emeritus Trustees by the Fund was $11,592.

	On July 17, 1998, the Trustees and officers owned in the aggregate 
less than 1% of the outstanding shares of each Portfolio of  the Fund.
    

ADDITIONAL INFORMATION REGARDING INVESTMENT POLICIES
   
	In general, municipal obligations are debt obligations (bonds or 
notes) issued by or on behalf of states, territories and possessions of 
the United States and their political subdivisions, agencies and 
instrumentalities the interest on which is exempt from Federal income 
tax in the opinion of bond counsel to the issuer.  Municipal obligations 
are issued to obtain funds for various public purposes, many of which 
may enhance the quality of life, including the construction of a wide 
range of public facilities, such as airports, bridges, highways, 
housing, hospitals, mass transportation, schools, streets, water and 
sewer works, gas, and electric utilities.  They may also be issued to 
refund outstanding obligations, to obtain


funds for general operating expenses, or to obtain funds to loan to 
other public institutions and facilities and in anticipation of the 
receipt of revenue or the issuance of other obligations.  In addition, 
the term "municipal obligations" includes certain types of industrial 
development bonds ("IDBs") issued by public authorities to obtain 
funds to provide various privately-operated facilities for business and 
manufacturing, housing, sports, convention or trade show facilities, 
airport, mass transit, port and parking facilities, air or water 
pollution control facilities, and certain facilities for water supply, 
gas, electricity or sewerage or solid waste disposal.

	The two principal classifications of municipal obligations are 
"general obligation" and "revenue."  General obligations are secured by 
a municipal issuer's pledge of its full faith, credit, and taxing power 
for the payment of principal and interest.  Revenue obligations are 
payable only from the revenues derived from a particular facility or 
class of facilities or, in some cases, from the proceeds of a special 
excise  tax or other specific revenue source.  Although IDBs are issued 
by municipal authorities, they are generally secured by the revenues 
derived from payments of the industrial user.  The payment of the 
principal and interest on IDBs is dependent solely on the ability of the 
user of the facilities financed by the bonds to meet its financial 
obligations and the pledge, if any, of real and personal property so 
financed as security for such payment.  Currently, the majority of each 
Portfolio's municipal obligations are revenue bonds.

	For purposes of diversification and concentration under the 
Investment Company Act of 1940, as amended (the "1940 Act"), the 
identification of the issuer of municipal obligations depends on the 
terms and conditions of the obligation.  If the assets and revenues of 
an agency, authority, instrumentality or other political subdivision are 
separate from those of the government creating the subdivision and the 
obligation is backed only by the assets and revenues of the subdivision, 
such subdivision is regarded as the sole issuer.  Similarly, in the case 
of an IDB or a pollution control revenue bond, if the bond is backed 
only by the assets and revenues of the non-governmental user, the non-
governmental user is regarded as the sole issuer.  If in either case the 
creating government or another entity guarantees an obligation, the 
guaranty is regarded as a separate security and treated as an issue of 
such guarantor.  Similar criteria apply for purposes of the 
diversification requirements under Subchapter M of the Internal Revenue 
Code (the "Code"). 

	Among the types of short-term instruments in which each Portfolio 
may invest are floating- or variable-rate demand instruments, tax-exempt 
commercial paper (generally having a maturity of less than nine months), 
and other types of notes generally having maturities of less than three 
years, such as Tax Anticipation Notes, Revenue Anticipation Notes, Tax 
and Revenue Anticipation Notes and Bond Anticipation Notes.  Demand 
instruments usually have an indicated maturity of more than one year, 
but contain a demand feature that enables the holder to redeem the 
investment on no more than 30 days' notice; variable-rate demand 
instruments provide for automatic establishment of a new interest rate 
on set dates; floating-rate demand instruments provide for automatic 
adjustment of their interest rates whenever some other specified 
interest rate changes (e.g., the prime rate).  Each Portfolio may 
purchase participation interests in variable-rate tax-exempt securities 
(such as Industrial Development Bonds) owned by banks.  Participations 
are frequently backed by an irrevocable letter of credit or guarantee of 
a bank that the Manager has determined meets the prescribed quality 
standards for the Portfolio.  Participation interests will be purchased 
only; if management believes interest income on such interests will be 
tax-exempt when distributed as dividends to shareholders.

	Investments in participation interests in variable-rate tax-exempt 
securities (such as IDBs) purchased from banks give the purchaser an 
undivided interest in the tax-exempt security in the proportion that the 
Portfolio participation interest bears to the total principal amount of 
the tax-exempt security with a demand repurchase feature.  Participation 
interests are frequently backed by an irrevocable letter of credit or 
guarantee of a bank that the Manager, under the supervision of the 
Trustees, has determined meets the prescribed quality standards for the 
Portfolio.  A Portfolio has the right to sell the instrument back to the 
bank and draw on the letter of credit on demand on seven days' notice or 
less, for all or any part of the Portfolio's participation interest in 
the tax-exempt security, plus accrued interest.  Each Portfolio intends 
to exercise the demand under the letter of credit only (1) upon a 
default under the terms of the documents of the tax-exempt security, (2) 
as needed to provide liquidity in order to meet redemptions, or (3) to 
maintain a high quality investment portfolio.  Banks will retain a 
service and letter of credit fee and a fee for issuing repurchase 
commitments in an amount equal to the excess of the interest paid on the 
tax-exempt securities over the negotiated yield at which the instruments 
were purchased by a Portfolio.  The Manager will monitor the pricing, 
quality and liquidity of the variable-rate demand instruments held by 
each Portfolio, including the IDBs supported by bank letters of credit 
or guarantees, on the basis of published financial information, reports 
of rating agencies and other bank analytical services to which the 
Manager may subscribe.

	The yields on municipal obligations are dependent on a variety of 
factors, including general market conditions, supply and demand, general 
conditions of the municipal market, size of a particular offering, the 
maturity of the obligation and the rating of the issue.  The ratings of 
Nationally Recognized Statistical Ratings Organizations ("NRSROs") 
such as Moody's Investment Service, Inc. ("Moody's") and Standard & 
Poor's Ratings Group ("S&P") represent their opinions as to the 
quality to the municipal obligations that they undertake to rate.  It 
should be emphasized, however, that such ratings are general and are not 
absolute standards of quality.  Consequently, municipal obligations with 
the same maturity, coupon and rating may have different yields when 
purchased in the open market, while municipal obligations of the same 
maturity and coupon with different ratings may have the same yield.

	Municipal obligations purchased on a when-issued basis as well as 
the securities held in each Portfolio are generally subject to similar 
changes in market value based upon the public's perception of the 
creditworthiness of the issuer and changes in the level of interest 
rates (i.e., both experiencing appreciation when interest rates decline 
and depreciation when interest rates rise).  Therefore, to the extent a 
Portfolio remains substantially fully invested at the same time that it 
has purchased securities on a when-issued basis, there will be a greater 
possibility that the market value of a Portfolio's assets will 
fluctuate.  Purchasing a tax-exempt security on a when-issued basis 
involves the risk that the yields available in the market when the 
delivery takes place may be higher than those obtained on the security 
so purchased.  A separate account of each Portfolio consisting of cash 
or debt securities of any grade equal to the amount of the when-issued 
commitments will be established with PNC Bank, National Association (the 
"Custodian") and marked-to-market daily pursuant to guidelines 
established by the Trustees, with additional cash or debt securities 
added when necessary.  When the time comes to pay for when-issued 
securities, the Portfolios will meet their respective obligations from 
then-available cash flow, sale of securities held in the separate 
account, sale of other securities or, although they would not normally 
expect to do so, from the sale of the when-issued securities themselves 
(which may have a value greater or lesser than the Portfolios' payment 
obligations).  Sale of securities to meet such obligations carries with 
it a greater potential for the realization of capital gain, which is not 
exempt from Federal income tax (see "Dividends, Distributions and Taxes" 
in the Prospectus).

	The Portfolios may invest in municipal bond index futures 
contracts or in listed contracts based on U.S. government securities.  
Such investments will be made solely for the purpose of hedging against 
changes in the value of portfolio securities due to anticipated changes 
in interest rates and market conditions and not for purposes of 
speculation.  The acquisition or sale of a futures contract could enable 
the Fund to protect a Portfolio's assets from fluctuations in rates on 
tax-exempt securities without actually buying or selling securities.  
The municipal bond index futures contract is based on an index of long-
term, tax-exempt municipal bonds.  The contract obligates the buyer or 
seller to take or make delivery, respectively, of an amount of cash 
equal to the difference between the value of the index upon liquidation 
of the contract and the price at which the index contract was originally 
purchased or sold.  In connection with the use of futures contracts as a 
hedging device, there can be no assurance that there will be a precise 
or even a positive correlation between price movement in the futures 
contracts with that of the municipal bonds that are the subject of the 
hedge, consequently, a Portfolio may realize a profit on a futures 
contract that is less than the loss in the price of the municipal bonds 
being hedged or may even incur a loss.  A Portfolio also may not be able 
to close a futures position in the event of adverse price movements or 
in the event an active market does not exist for the hedging contract on 
the exchange or board of trade on which the contract is traded.  The 
successful use of these investments is dependent on the ability of the 
Manager to predict price or interest rate movements or the correlation 
of futures and cash markets, or both.

	Each Portfolio may invest in securities the disposition of which 
is subject to legal or contractual restrictions.  The sale of restricted 
securities often requires more time and results in higher dealer 
discounts or other selling expenses than does the sale of securities 
that are not subject to restrictions on resale.  Restricted securities 
may sell at a price lower than similar securities that are not subject 
to restrictions on resale.

	Securities may be sold in anticipation of a market decline (a rise 
in interest rates) or purchased in anticipation of a market rise (a 
decline in interest rates).  In addition, a security may be sold and 
another purchased at approximately the same time to take advantage of 
what the Manager believes to be a temporary disparity in the normal 
yield relationship between the two securities.  The Fund believes that, 
in general, the secondary market for tax-exempt securities in each of 
the Fund's Portfolios may be less liquid than that for taxable fixed-
income securities.  Accordingly, the ability of a Portfolio to make 
purchases and sales of securities in the foregoing manner may be 
limited.  Yield disparities may occur for reasons not directly related 
to the investment quality of particular issues or the general movement 
of interest rates, but instead due to such factors as changes in the 
overall demand for or supply of various types of tax-exempt securities 
or changes in the investment objectives of investors.

	Portfolio turnover rate for a fiscal year is the ratio of the 
lesser of purchases or sales (including maturities and calls) of 
portfolio securities to the monthly average of the value of portfolio 
securities including long-term U.S. government securities but excluding 
securities with maturities at acquisition of one year or less.  The Fund 
effects portfolio transactions with a view towards attaining the 
investment objective of each Portfolio and is not limited to a 
predetermined rate of portfolio turnover.  A high portfolio turnover 
results in correspondingly greater transaction costs.  The Fund 
anticipates that each Portfolio's annual turnover rate generally will 
not exceed 100%.
    

ADDITIONAL TAX INFORMATION

   
	Capital gain distributions, if any, are taxable to shareholders, 
and are declared and paid at least annually.  On March 31, 1998, the 
unused capital loss carryovers, by Portfolio, were approximately as 
follows:  Limited Term Portfolio, $3,628,000; California Money Market 
Portfolio, $155,000; New York Money Market Portfolio, $206,000.  For 
Federal income tax purposes, these amounts are available to be applied 
against future securities gains, if any, that are realized.  The 
carryovers expire as follows:



PORTFOLIO
March

31,





(in 
thousands)
1999
2000
2001
2002
2003
2004


Limited 
Term
   --
   --
   --
   --
1,888
1,740

CA Money
$23
  $9
  83
    1
       
1
38

NY Money
   -
-
206
       
--
       
--
      -
-
      -
-



	Generally, interest on municipal obligations is exempt from 
regular Federal income tax.  However, interest on municipal obligations 
that are considered to be "private activity bonds," as defined in the 
Internal Revenue Code of 1986, as amended (the "Code"), will not be 
exempt from Federal income tax to any shareholder who is considered to 
be a "substantial user" of any facility financed by the proceeds of such 
obligations (or a "related person" to such "substantial user" as defined 
in the Code).

	In addition, interest on municipal obligations may subject certain 
investors' Social Security benefits to Federal income taxation.  Tax-
exempt interest is included in modified adjusted gross income solely for 
the purpose of determining what portion, if any, of Social Security 
benefits will be included in gross income; no tax-exempt interest, 
including that received from the Portfolios, will be subject to regular 
Federal income tax for most investors.

	The Tax Reform Act of 1986 (the "Tax Reform Act") provided that 
interest on certain municipal obligations (i.e. certain private activity 
bonds) issued after August 7, 1986 will be treated as a preference item 
for purposes of both the corporate and individual alternative minimum 
tax.  Under Treasury regulations, that portion of the Portfolio's 
exempt-interest dividend which is to be treated as a preference item for 
shareholders will be based on the proportionate share of the interest 
received by the Portfolio from the specified private activity bonds.  In 
addition, the Tax Reform Act provided generally that tax preference 
items for corporations will include one-half the amount by which 
adjusted net book income (which would include tax-exempt interest) of 
the taxpayer exceeds the alternative minimum taxable income of the 
taxpayer before any amount is added to alternative minimum taxable 
income because of this preference.

A shareholder's gain or loss on the disposition of Fund shares 
(whether by redemption, sale or exchange), generally will be a long-term 
or short-term gain or loss depending whether the shares had been owned 
for more than 12 months or not for more than 12 months at disposition.  
Losses realized by a shareholder on the disposition of Fund shares owned 
for six months or less will be treated as a long-term capital loss to 
the extent a capital gain dividend had been distributed on such shares.

	From time to time, proceedings have been introduced before 
Congress for the purpose of restricting or eliminating the Federal 
income tax exemption for interest on municipal obligations.  It may be 
expected that similar proposals may be introduced in the future.  If 
such proposals were to be enacted, the ability of the Fund to pay 
"exempt interest" dividends could be adversely affected and the Fund 
would then need to reevaluate its investment objectives and policies and 
consider changes in its structure.
    


INVESTMENT RESTRICTIONS

   
Each of the Portfolios is subject to certain restrictions and 
policies that are "fundamental," which means that they may not be 
changed without a "vote of a majority of the outstanding voting 
securities" of the Portfolio, as defined under the 1940 Act and Rule 
18f-2 thereunder (see "Voting").  The Portfolios are subject to other 
restrictions and policies that are "non-fundamental" and which may be 
changed by the Fund's Board of Trustees without shareholder approval, 
subject to any applicable disclosure requirements.  

Fundamental Policies - All Portfolios.  Without the approval of a 
majority of its outstanding voting securities, no Portfolio may: 
 
1.	issue "senior securities" as defined in the 1940 Act and the 
rules, regulations and orders thereunder, except as permitted 
under the 1940 Act and the rules, regulations and orders 
thereunder. 
2.	invest more than 25% of its total assets in securities, the 
issuers of which conduct their principal business activities in 
the same industry. For purposes of this limitation, securities of 
the U.S. government (including its agencies and instrumentalities) 
and securities of state or municipal governments and their 
political subdivisions are not considered to be issued by members 
of any industry. 
3.	borrow money, except that (a) the Portfolio may borrow from banks 
for temporary or emergency (not leveraging) purposes, including 
the meeting of redemption requests which might otherwise require 
the untimely disposition of securities, and (b) the Portfolio may, 
to the extent consistent with its investment policies, enter into 
reverse repurchase agreements, forward roll transactions and 
similar investment strategies and techniques. To the extent that 
it engages in transactions described in (a) and (b), the Portfolio 
will be limited so that no more than 33 -1/3% of the value of its 
total assets (including the amount borrowed), valued at the lesser 
of cost or market, less liabilities (not including the amount 
borrowed) valued at the time the borrowing is made, is derived 
from such transactions. 
4.	make loans. This restriction does not apply to: (a) the purchase 
of debt obligations in which the Portfolio may invest consistent 
with its investment objectives and policies; (b) repurchase 
agreements; and (c) loans of its portfolio securities, to the 
fullest extent permitted under the 1940 Act. 
5.	engage in the business of underwriting securities issued by other 
persons, except to the extent that the Portfolio may technically 
be deemed to be an underwriter under the Securities Act of 1933, 
as amended, in disposing of portfolio securities. 
6.	purchase or sell real estate, real estate mortgages, real estate 
investment trust securities, commodities or commodity contracts, 
but this restriction shall not prevent the Portfolio from (a) 
investing in securities of issuers engaged in the real estate 
business or the business of investing in real estate (including 
interests in limited partnerships owning or otherwise engaging in 
the real estate business or the business of investing in real 
estate) and securities which are secured by real estate or 
interests therein; (b) holding or selling real estate  received in 
connection with securities it holds or held; or (c) trading in  
futures contracts and options on futures contracts (including 
options on currencies to the extent consistent with the 
Portfolio's investment objective and policies). 
 
Additional Fundamental Policies.  Without the approval of a majority of 
its outstanding voting securities, neither the National Portfolio nor 
the Limited Term Portfolio may:

1.	invest in a manner that would cause the Portfolio to fail to be a 
"diversified company" under the Act and the rules, regulations and 
orders thereunder.

Nonfundamental Policies.  As a nonfundamental policy, no Portfolio may: 
 
1.	purchase any securities on margin (except for such short-term 
credits as are necessary for the clearance of purchases and sales 
of portfolio securities) or sell any securities short (except 
"against the box").  For purposes of this restriction, the deposit 
or payment by the Portfolio of underlying securities and other 
assets in escrow and collateral agreements with respect to initial 
or maintenance margin in connection with futures contracts and 
related options and options on securities, indexes or similar 
items is not considered to be the purchase of a security on 
margin.  
2. purchase or otherwise acquire any security if, as a result, more 
than 15% of its net assets would be invested in securities that 
are illiquid.
3. write or purchase put, call, straddle or spread options.
4. invest more than 5% of its assets in unseasoned issuers with less 
than three years of continuous operation (including that of 
predecessors).
5. purchase oil, gas or other mineral leases, rights or royalty 
contracts or exploration or development programs, except that each 
Portfolio may may invest in the securities of issuers which 
operate, invest in, or sponsor such programs.

Additional Nonfundamental Policies.  As a nonfundamental policy,

1.	neither the National Portfolio nor the New York Portfolio may 
invest in securities of another investment company except as 
permitted by Section 12(d)(1) of the 1940 Act or as part of a 
merger, consolidation, or acquisition.

All of the foregoing restrictions stated in terms of percentages 
will apply at the time an investment is made; a subsequent increase or 
decrease in the percentage that may result from changes in values or net 
assets will not result in a violation of the restriction. 
    

PERFORMANCE INFORMATION

	From time to time, in advertisements and other types of sales 
literature, each Portfolio may compare its performance to that of other 
mutual funds with similar investment objectives, to appropriate indices 
or rankings such as those compiled by Lipper Analytical Services, Inc. 
or to other financial alternatives.

	Each Portfolio, other than the California Money Market Portfolio 
and New York Money Market Portfolio, computes the average annual total 
return during specified periods that would equate the initial amount 
invested to the ending redeemable value of such investment by adding one 
to the computed average annual total return, raising the sum to a power 
equal to the number of years covered by the computation and multiplying 
the result by one thousand dollars which represents the hypothetical 
initial investment.  The calculation assumes deduction of the maximum 
sales charge from the initial amount invested and reinvestment of all 
income dividends and capital gains distributions on the reinvestment 
dates at prices calculated as stated in the Prospectus.  The ending 
redeemable value is determined by assuming a complete redemption at the 
end of the period(s) covered by the average annual total return 
computation.  Such standard total return information may also be 
accompanied with nonstandard total return information for differing 
periods computed in the same manner but without annualizing the total 
return or taking sales charges into account.

	Each Portfolio's average annual total return with respect to its 
Class A shares for the one-year period, five- and ten-year periods, if 
any, and for the life of the Portfolio ended March 31, 1998 is as 
follows:

PORTFOLIO
One Year
Five Years
Ten Years
Life
Inception 
Date






National
6.98%
6.14%
8.52%
7.84%
8/20/86
Limited 
Term
6.54
5.34
--
6.72
11/28/88
New York
7.34
6.09
8.45
7.30
1/16/87
Florida
6.70
6.05
--
7.55
4/2/91
Georgia
9.30
-- 
--
7.81
4/4/94
Pennsylvani
a
8.96
--
--
8.01
4/4/94

	Each Portfolio's average annual total return with respect to its 
Class B shares for the one-year period, five-year period, if any, and 
for the life of the Portfolio ended March 31, 1998 is as follows:

PORTFOLIO
One 
Year
Five Years
Life
Inception 
Date





National
6.30%
-- 
9.62
%
11/7/94
New York
6.69
--
9.62
11/11/94
Florida
6.09
--
9.76
11/16/94
Georgia
8.89
--
7.60
6/15/94
Pennsylvani
a
8.47
--
7.63
6/20/94

	Each Portfolio's average annual total return with respect to its 
Class L shares for a one-year period, five-year period, if any, and for 
the life of the Portfolio's Class L shares through March 31, 1998 is as 
follows:

PORTFOLIO
One 
Year
Five 
Years
Life
Inception Date





National
9.71%
6.35%
6.85
%
1/5/93
Limited 
Term
7.36
5.50
5.70
1/5/93
New York
10.13
6.30
6.82
1/8/93
Florida
9.51
6.28
6.80
1/5/93
Georgia
12.23
--
8.21
4/14/94
Pennsylvani
a
11.84
--
8.50
4/5/94

	Each Portfolio's yield, other than for the California Money Market 
Portfolio and the New York Money Market Portfolio, is computed by 
dividing the net investment income per share earned during a specified 
30-day period ending at month end by the maximum offering price per 
share on the last day of such period and annualizing the result.  For 
purposes of yield calculation, interest income is determined based on a 
yield to maturity percentage for each long-term debt obligation in the 
Portfolio; income or short-term obligations are based on current payment 
rate.  Yield information may be accompanied with information on tax 
equivalent yield computed in the same manner, with adjustment for 
assumed Federal income tax rates.  No taxable instruments are presently 
held by the Fund.

	Each Portfolio's distribution rate, other than those of the 
California Money Market Portfolio and the New York Money Market 
Portfolio, is calculated by analyzing the latest income distribution and 
dividing the result by the maximum offering price per share as of the 
end of the period to which the distribution relates.  The distribution 
rate is not computed in the same manner as, and therefore can be 
significantly different from, the above-described yield which will be 
computed in accordance with applicable regulations.  A Portfolio may 
quote its distribution rate together with the above-described standard 
total return and yield information in its supplemental sales literature.  
The use of such distribution rates would be subject to an appropriate 
explanation of, among other matters, how the components of the 
distribution rate differ from the above described yield.

	California Money Market Portfolio's yield with respect to its 
Class A shares for the seven-day period ended March 31, 1998 was 2.86% 
(the effective yield was 2.90%) with an average dollar-weighted 
portfolio maturity of 41 days; the New York Money Market Portfolio's 
yield with respect to its Class A shares for the seven-day period ended 
March 31, 1998 was 2.92% (the effective yield was 2.97%) with an average 
dollar-weighted portfolio maturity of 45 days.  From time to time the 
California Money Market Portfolio and New York Money Market Portfolio 
may advertise their yields, effective yields and taxable equivalent 
yields.  These yield figures are based on historical earnings and are 
not intended to indicate future performance.  The yield of each 
Portfolio refers to the net investment income generated by an investment 
in each Portfolio over a specific seven-day period (which will be stated 
in the advertisement).  This net investment income is then annualized.  
The effective yield is calculated similarly but, when annualized, the 
income earned by an investment in each Portfolio is assumed to be 
reinvested.  The effective yield will be slightly higher than the yield 
because of the compounding effect of the assumed reinvestment.  The tax 
equivalent yield also is calculated similarly to the yield, except that 
a stated income tax rate is used to demonstrate the taxable yield 
necessary to produce an after-tax yield equivalent to the tax-exempt 
yield of each Portfolio.

	Performance information may be useful in evaluating a Portfolio 
and for providing a basis for comparison with other financial 
alternatives.  Since the performance of each Portfolio changes in 
response to fluctuations in market conditions, interest rates and 
Portfolio expenses, no performance quotation should be considered a 
representation as to the Portfolio's performance for any future period.


VALUATION OF SHARES

   
	The Prospectus states that the net asset value of each Portfolio's 
Classes of shares will be determined on any date that the New York Stock 
Exchange ("NYSE") is open.  The NYSE is closed on the following 
holidays: New Year's Day, Martin Luther King, Jr. Day, Presidents' Day, 
Good Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day 
and Christmas Day.

	The California Money Market Portfolio and the New York Money 
Market Portfolio use the "amortized cost method" for valuing portfolio 
securities pursuant to Rule 2a-7 under the 1940 Act (the "Rule").  The 
amortized cost method of valuation of a Portfolio's securities 
(including any securities held in the separate account maintained for 
when-issued securities -- See "Investment Objective and Management 
Policies" including "Risk and Portfolio Management" in the Prospectus) 
involves valuing a security at its cost at the time of purchase and 
thereafter assuming a constant amortization to maturity of any discount 
or premium, regardless of the impact of fluctuating interest rates on 
the market value of the instrument.  The market value of each 
Portfolio's securities will fluctuate on the basis of the 
creditworthiness of the issuers of such securities and with changes in 
interest rates generally.  While the amortized cost method provides 
certainty in valuation, it may result in periods during which value, as 
determined by amortized cost, is higher or lower than the price the 
Portfolio would receive if it sold the instrument.  During such periods 
the yield to investors in a Portfolio may differ somewhat from that 
obtained in a similar company that uses mark-to-market values for all 
its portfolio securities.  For example, if the use of amortized cost 
resulted in a lower (higher) aggregate portfolio value on a particular 
day, a prospective investor in a Portfolio would be able to obtain a 
somewhat higher (lower) yield than would result from investment in such 
similar company, and existing investors would receive less (more) 
investment income.  The purpose of this method of valuation is to 
attempt to maintain a constant net asset value per share, and it is 
expected that the price of each such Portfolio's shares will remain at 
$1.00; however, shareholders should be aware that despite procedures 
that will be followed to have a stable price, including maintaining a 
maximum dollar-weighted average portfolio maturity of 90 days, investing 
in securities that have or are deemed to have remaining maturities of 
only 13 months or less and investing in only United States dollar-
denominated instruments determined by the Fund's Board of Trustees to be 
of high quality with minimal credit risks and which are Eligible 
Securities (as defined below), there is no assurance that at some future 
date there will not be a rapid change in prevailing interest rates, a 
default by an issuer or some other event that could cause one of these 
Portfolio's price per share to change from $1.00.

	An Eligible Security is defined in the Rule to mean a security 
which:  (a) has a remaining maturity of 397 days or less; (b)(i) is 
rated in the two highest short-term rating categories by any two 
nationally recognized statistical rating organizations ("NRSROs") that 
have issued a short-term rating with respect to the security or class of 
debt obligations of the issuer, or (ii) if only one NRSRO has issued a 
short-term rating with respect to the security, then by that NRSRO; (c) 
was a long-term security at the time of issuance, is rated in the three 
highest long-term rating categories by the requisite NRSROs, and whose 
issuer has outstanding a short-term debt obligation which is comparable 
in priority and security and has a rating as specified in clause (b) 
above; or (d) if no rating is assigned by any NRSRO as provided in 
clauses (b) and (c) above, the unrated security is determined to be of 
comparable quality to any such rated security. 
    

THE MANAGEMENT AGREEMENT

   
	The Management Agreement for the National Portfolio, the Georgia 
Portfolio and Pennsylvania Portfolio provides for a management fee at 
the annual rate of 0.45% of the Portfolio's average net assets.  The 
management fee for the Limited Term Portfolio, the Florida Portfolio and 
the New York Portfolio is an annual rate of 0.50% of the Portfolio's 
average net assets.

	At a Meeting of Shareholders of the Limited Term Portfolio, the 
Florida Portfolio and the New York Portfolio held on December 15, 1995, 
the shareholders of each of these Portfolios approved a new Management 
Agreement that increases the effective management fee paid by Smith 
Barney Muni Funds on behalf of each of these Portfolios from 0.45% to 
0.50% of each of these Portfolios' average daily net assets.

	The Management Agreements for the California Money Market 
Portfolio and the New York Money Market Portfolio provide for the 
payment of a management fee at an annual rate based on each Money Market 
Portfolio's average daily net assets in accordance with the following 
schedule:

	0.50% on the first $2.5 billion of net assets;
	0.475% on the next $2.5 billion; and
	0.45% on net assets in excess of $5 billion.

	Based on the current asset levels of each Money Market Portfolio, 
the effective rate of the management fee for each of the money market 
Portfolios is 0.50%.

	For the fiscal years ended March 31, 1998, 1997 and 1996, the 
management fee paid by each Portfolio was as follows:


PORTFOLIO
1998
1997
1996




National
$1,754,11
6
$1,780,78
8
$1,893,904
Limited Term
1,416,637
1,495,020
1,260,753
New York
3,734,185
3,682,923
996,273
Florida
974,400
876,101
622,090
California Money (a)
7,817,640
6,706,574
5,699,907
New York Money 
5,154,859
4,554,023
4,035,418
Georgia (b)
35,458
6,917
--
Pennsylvania (c)
13,969
--
--

(a)	The Manager waived its management fee in excess of 0.01% of the 
California Money Market Portfolio's average daily net assets for the 
fiscal year ended March 31, 1996.
(b)	The Manager waived its entire management fee with respect to the 
Georgia Portfolio for the fiscal year ended March 31, 1996 and its 
management fee in excess of 0.42% of the Portfolio's average daily 
net assets for the fiscal year ended March 31, 1997 and in excess of 
0.33% of the Portfolio's average daily net assets for the fiscal year
ended March 31, 1998 .
(c)	The Manager waived its entire management fee with respect to the 
Pennsylvania Portfolio for the fiscal years ended March 31, 1996 and 
March 31, 1997 and its management fee in excess of 0.33% of the 
Portfolio's average daily net assets for the fiscal year ended March 
31, 1998.

	The Management Agreements further provide that all other expenses 
not specifically assumed by the Manager under the Management Agreement 
on behalf of each Portfolio are borne by the Fund.  Expenses payable by 
the Fund include, but are not limited to, all charges of custodians 
(including sums as custodian and sums for keeping books and for 
rendering other services to the Fund) and shareholder servicing agents, 
expenses of preparing, printing and distributing all prospectuses, proxy 
material, reports and notices to shareholders, all expenses of 
shareholders' and Trustees' meetings, filing fees and expenses relating 
to the registration and qualification of the Fund's shares and the Fund 
under Federal or state securities laws and maintaining such 
registrations and qualifications (including the printing of the Fund's  
registration statements), fees of auditors and legal counsel, costs of 
performing portfolio valuations, out-of-pocket expenses of Trustees and 
fees of Trustees who are not "interested persons" as defined in the 1940 
Act, interest, taxes and governmental fees, fees and commissions of 
every kind, expenses of issue, repurchase or redemption of shares, 
insurance expense, association membership dues, all other costs incident 
to the Fund's existence and extraordinary expenses such as litigation 
and indemnification expenses.  Direct expenses of each Portfolio of the 
Fund, including but not limited to the management fee, are charged to 
that Portfolio, and general trust expenses are allocated among the 
Portfolios on the basis of relative net assets.

	The Manager has voluntarily agreed to waive its fees if in any 
fiscal year the aggregate expenses of any Class of the following 
Portfolios, exclusive of 12b-1 fees, taxes, brokerage, interest and 
extraordinary expenses, such as litigation costs, exceed the indicated 
percentage of such Portfolio's average net assets for that fiscal year:


PORTFOLIO



National
0.65%
Limited Term
0.70%
New York
0.70%
Florida
0.70%
California Money 
Market
0.70%
New York Money 
Market
0.70%
Georgia
0.65%
Pennsylvania
0.65%

	The foregoing expense limitations may be terminated at any time by 
the Manager by notification to existing shareholders and by 
supplementing the relevant Portfolio's then-current Prospectus and/or 
Statement of Additional Information.
    

DISTRIBUTION

   
	The Fund, on behalf of each Portfolio, has adopted a plan of 
distribution pursuant to Rule 12b-1 (the "Plan") under the 1940 Act 
under which a service fee is paid by each class of shares (other than 
Class Y shares ) of each Portfolio to Smith Barney in connection with 
shareholder service expenses.  The service fee is equal to 0.15% of the 
average daily net assets of each class (the service fee payable by the 
Class A shares of the California and New York Money Market Portfolios is 
0.10%).  With respect to Class B and Class L shares of each Portfolio, 
Smith Barney is also paid a distribution fee, pursuant to a plan of 
distribution adopted by each Portfolio.  See "Distributor" in each 
applicable Prospectus.

	For the year ended March 31, 1998, the table below represents the 
fees which have been accrued and/or paid to Smith Barney under the plans 
of distribution pursuant to Rule 12b-1 each for each of the Fund's 
Portfolios.  The distribution expenses for 1998 included compensation of 
Smith Barney Financial Consultants and printing costs of prospectuses 
and marketing materials.

PORTFOLIO
Class A
Class B
Class L
Class Y
Total






California Money 
Market
$1,561,7
91
--
--
--
$ 1,561,791
National
538,970
$99,361
$106,426
--
744,757
Limited Term
380,172
N/A
104,579
--
484,751
Florida
202,416
360,738
53,953
--
617,107
Georgia
24,898
57,757
26,535
--
109,190
New York
815,993
1,250,544
73,153
--
2,139,690
NY Money Market
$1,030,9
72
--
--
--
1,030,972
Pennsylvania
23,404
113,999
46,800
--
184,203

On July 13, 1998, the Board of Trustees approved of a new 
distribution agreement between the Fund and CFBDS, Inc., a wholly owned 
subsidiary of the signature Financial Group Inc.  Such new distribution 
arrangement is anticipated to become effective at or about the closing 
date of the Travelers Group Inc./Citicorp merger.
    


CUSTODIAN

	All portfolio securities and cash owned by the Fund will be held 
in the custody of PNC Bank, National Association, 17th and Chestnut 
Streets, Philadelphia, Pennsylvania  19103.

INDEPENDENT AUDITORS

	KPMG Peat Marwick LLP, 345 Park Avenue, New York, New York 10154, 
has been selected as independent auditors to examine and report on the 
Fund's financial statements for the fiscal year ending March 31, 1999.

THE FUND

	The interest of a shareholder is in the assets and earnings of the 
Portfolio in which he or she holds shares.  The Board of Trustees has 
authorized the issuance of shares in separate series, each representing 
shares in one of the separate Portfolios.  Pursuant to such authority, 
the Board may also authorize the creation of additional series of shares 
and additional classes of shares within any series.  The investment 
objectives, policies and restrictions applicable to additional 
Portfolios would be established by the Board of Trustees at the time 
such Portfolios were established and may differ from those set forth in 
the Prospectuses and this Statement of Additional Information.  In the 
event of liquidation or dissolution of a Portfolio or of the Fund, 
shares of a Portfolio are entitled to receive the assets belonging to 
that Portfolio and a proportionate distribution, based on the relative 
net assets of the respective Portfolios, of any general assets not 
belonging to any particular Portfolio that are available for 
distribution.

	The Declaration of Trust may be amended only by a "majority 
shareholder vote" as defined therein, except for certain amendments that 
may be made by the Board of Trustees.  The Declaration of Trust and the 
By-Laws of the Fund are designed to make the Fund similar in certain 
respects to an entity organized as a corporation.  The principal 
distinction between the two forms of business organization relates to 
shareholder liability described below.  Under Massachusetts law, 
shareholders of a business trust may, under certain circumstances, be 
held personally liable as partners for the obligations of the trust, 
which is not the case with a corporation.  The Declaration of Trust of 
the Fund provides that shareholders shall not be subject to any personal 
liability for the acts or obligations of the Fund and that every written 
obligation, contract, instrument or undertaking made by the Fund shall 
contain a provision to the effect that the shareholders are not 
personally liable thereunder.

	Special counsel for the Fund is of the opinion that no personal 
liability will attach to the shareholders under any undertaking 
containing such provision when adequate notice of such provision is 
given, except possibly in a few jurisdictions.  With respect to (a) all 
types of claims in the latter jurisdictions; (b) tort claims; (c) 
contract claims where the provision referred to is omitted from the 
undertaking; (c) claims for taxes; and (d) certain statutory liabilities 
in other jurisdictions, a shareholder may be held personally liable to 
the extent that claims are not satisfied by the Fund; however, upon 
payment of any such liability the shareholder will be entitled to 
reimbursement from the general assets of the Fund.  The Board of 
Trustees intends to conduct the operations of the Fund, with the advice 
of counsel, in such a way so as to avoid, as far as possible, ultimate 
liability of the shareholders for liabilities of the Fund.

	The Declaration of Trust further provides that no Trustee, officer 
or employee of the Fund is liable to the Fund or to a shareholder, 
except as such liability may arise from his or her or its own bad faith, 
willful misfeasance, gross negligence, or reckless disregard of his or 
its duties, nor is any Trustee, officer or employee personally liable to 
any third persons in connection with the affairs of the Fund.  It also 
provides that all third persons shall look solely to the Fund property 
or the property of the appropriate Portfolio of the Fund for 
satisfaction of claims arising in connection with the affairs of the 
Fund or a particular Portfolio, respectively.  With the exceptions 
stated, the Declaration of Trust provides that a Trustee, officer or 
employee is entitled to be indemnified against all liability in 
connection with the affairs of the Fund.

	The Fund shall continue without limitation of time subject to the 
provisions in the Declaration of Trust concerning termination of the 
Trust or any of the series of the Trust by action of the shareholders or 
by action of the Trustees upon notice to the shareholders.

VOTING RIGHTS

   
	The Board of Trustees has the power to alter the number and the 
terms of office of the Trustees, and may at any time lengthen their own 
terms or make their terms of unlimited duration (subject to certain 
removal procedures) and fill vacancies, provided that in accordance with 
the 1940 Act, (i) a shareholder meeting to elect Trustees must promptly 
be called if at any time at least a majority of the Trustees have not 
been elected by the shareholders of the Fund, and (ii) at least 2/3 of 
the Trustees must have been so elected upon the filing of any vacancy by 
the board without a shareholder vote. Shares do not have cumulative 
voting rights and therefore the holders of more than 50% of the 
outstanding shares of the Fund may elect all of the Trustees 
irrespective of the votes of other shareholders.  Class A, Class B, 
Class L and Class Y shares of a Portfolio of the Fund, if any, represent 
interests in the assets of that Portfolio and have identical voting, 
dividend, liquidation and other rights on the same terms and conditions, 
except that each Class of shares has exclusive voting rights with 
respect to provisions of the Fund's Rule 12b-1 distribution plan which 
pertain to a particular class.  For example, a change in investment 
policy for a Portfolio would be voted upon only by shareholders of the 
Portfolio involved.  Additionally, approval of each Portfolio's 
Management Agreement is a matter to be determined separately by that 
Portfolio.  Approval of a proposal by the shareholders of one Portfolio 
is effective as to that Portfolio whether or not enough votes are 
received from the shareholders of the other Portfolios to approve the 
proposal as to those Portfolios. As of July 17, 1998, the following 
shareholders beneficially owned 5% or more of a class of  shares of a 
Portfolio of the Fund :

National Portfolio Class B

James R. Scheele
P.O. Box 2477
Williston, ND 58802-2477
owned 105,761.391 (6.05%) shares

Florida Portfolio Class A

Linda R. Kaminow, Ira Panzier,
S. Norman Reich & Allan Holtz
Co-Succ TTEES U/A/D 01/03/98
E.G. Rosenblatt Trust
2003 North Ocean Blvd. Apt. #704
Boca Raton, FL 33431-7853
owned 632,245.480 (5.88%) shares

Georgia Portfolio Class A

Donald G. Arpin and
Carole A. Arpin JTWROS
8 Marsh Harbor Drive
Savannah, GA 31410-2139
owned 97,102.494 (5.72%) shares

Georgia Portfolio Class L

Jeanette L. Griffis
Rt. 1 Box 266
Fargo, GA 31631-9801
owned 19,223.534 (5.09%) shares

Pennsylvania Portfolio Class A

James J. Broussard
530 Derwyn Rd.
Drexel Hill, PA 19026-1203
owned 202,092.791 (15.39%) shares

Murray L. Katz and Harriet L. Katz JTWROS
186 Commadore Drive
Jupiter, FL 33477-4004
owned 103,446.887 (7.88%) shares

Idlewild Farm Associates
c/o Jerry A & Carol L. Shields
Main Account
Idlewild Farm
617 Williamson Road
Bryn Mawr, PA 19010-1932
owned 90,958.497 (6.93%) shares

Terry A. Halpern
603 Great Springs Road
Bryn Mawr PA 19010-1701
owned 73,894.624 (5.63%) shares

California Money Market Portfolio Class A

Evelyn A. Freed TTEE
FBO Evelyn A. Freed
U/A/D 03/26/90
1511 Clearview Lane
Santa Ana, CA 92705-1501
owned 104,864,495.440 (5.60%) shares
    


FINANCIAL STATEMENTS
   
	The following information is hereby incorporated by reference to 
each Portfolio's March 31, 1998 Annual Report to Shareholders:

		Annual Report
	Annual Report	
		of National	of 
Limited	
Page(s) in:		Portfolio	Term 
Portfolio	
			
Schedules of Investments		7-16	7-17
Statements of Assets and Liabilities		19	20
Statements of Operations		20	21
Statements of Changes in Net Assets		21	22
Notes to Financial Statements		22	23-26
Financial Highlights (for a share of each series of			
beneficial interest outstanding throughout each year)		25	27
Independent Auditors' Report		28	28


			Annual Report	Annual 
Report
				of Florida	
	of California
				Portfolio		 
Money Market
						
	Portfolio
Page(s) in:			
Schedules of Investments			8-16		4-10
Statements of Assets and Liabilities			19		12
Statements of Operations			20		13
Statements of Changes in Net Assets			21		14
Notes to Financial Statements			22-25		15 - 
17
Financial Highlights (for a share of each series of
beneficial interest outstanding throughout each year)			26-28	
	18
Independent Auditors' Report			29		19


			Annual Report	Annual 
Report
			 Of Georgia	of New 
York &
			& Pennsylvania
	N.Y. Money
			Portfolios	
	Market 
					
	Portfolios

Schedules of Investments		12- 19                   
9-23
Statements of Assets and Liabilities		22                         
27
Statements of Operations		23                         
28
Statements of Changes in Net Assets		24 - 25                 
29-30
Notes to Financial Statements		26 - 29                 
31-34
Financial Highlights (for a share of each series of
beneficial interest outstanding throughout each year)		30 - 35                 
35-38
Independent Auditors' Report		36                         
39
    

   
APPENDIX A

RATINGS OF MUNICIPAL BONDS, NOTES AND COMMERCIAL PAPER

Moody's Investors Service, Inc.  ("Moody's"):

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

Aa - Bonds that are rated Aa are judged to be of high quality by all 
standards.  Together with the Aaa group, they comprise what are 
generally known as high-grade bonds.  They are rated lower than the best 
bonds because margins of protection may not be as large as in Aaa 
securities or fluctuation of protective elements may be of greater 
amplitude or there may be other elements present which 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 are considered adequate but 
elements may be present which suggest a susceptibility to impairment 
some time in the future.

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

Standard & Poor's Ratings Group ("S&P"):

AAA - Debt rated AAA has the highest rating assigned by S&P.  Capacity 
to pay interest and repay principal is extremely strong.

AA - Debt rated AA has a very strong capacity to pay interest and repay 
principal and differs from the higher-rated issues only in small degree.

A - Debt rated A has a strong capacity to pay interest and repay 
principal although it is somewhat more susceptible to the adverse 
effects of changes in circumstances and economic conditions than debt in 
higher-rated categories.

BBB - Debt rated BBB is regarded as having adequate capacity to pay 
interest and repay principal.  Whereas it normally exhibits 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


Fitch/IBCA, Inc.:

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 in the AAA category.

DESCRIPTION OF STATE AND LOCAL GOVERNMENT NOTE RATINGS

Notes are assigned distinct rating symbols in recognition of the 
differences between short-term and long-term credit risk.  Factors 
affecting the liquidity of the borrower and short-term cyclical elements 
are critical in short-term ratings, while other factors of major 
importance in bond risk-- long-term secular trends for example-- may be 
less important over the short run.

Moody's Investors Service, Inc.:

Moody's ratings for state and municipal notes and other short-term loans 
are designated Moody's Investment Grade ("MIG").  A short-term rating 
may also be assigned on an issue having a demand feature, a variable-
rate demand obligation.  Such ratings will be designated as "VMIG."  
Short-term ratings on issues with demand features are differentiated by 
the use of the VMIG symbol to reflect such characteristics as payment 
upon periodic demand rather than fixed maturity dates and payment 
relying on external liquidity.  Additionally, investors should be alert 
to the fact that the source of payment may be limited to the external 
liquidity with no or limited legal recourse to the issuer in the event 
the demand is not met.  Symbols used are as follows:

MIG/VMIG 1 - Loans bearing this designation are of the best quality, 
enjoying strong protection from established cash flows of funds, 
superior liquidity support or demonstrated broad-based access to the 
market for refinancing.

MIG 2/VMIG 2 - Loans bearing this designation are of high quality, with 
margins of protection ample although not so large as in the preceding 
group.


Standard & Poor's Ratings Group:

SP-1 - Very strong or strong capacity to pay principal interest.  Those 
issues determined to possess overwhelming safety characteristics will be 
given a plus (+) designation.

SP-2 - Satisfactory capacity to pay principal and interest.

Fitch/IBCA, Inc.: 

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

DESCRIPTION OF HIGHEST COMMERCIAL PAPER RATINGS

Moody's Investors Service, Inc.:

Prime-1 - Issuers (or related supporting institutions) rated Prime-1 
have a superior capacity for repayment of short-term promissory 
obligations.  Prime-1 repayment capacity will normally be evidenced by 
the following characteristics: leading market positions in well-
established industries; high rates of return on funds employed; 
conservative capitalization structures with moderate reliance on debt 
and ample asset protection; broad margins in earnings coverage of fixed 
financial charges and high internal cash generation; and well-
established access to a range of financial markets and assured sources 
of alternate liquidity.

Standard & Poor's Ratings Group:

A-1 - This designation 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 
with a plus (+) sign designation.



Appendices B-F - Special Note:

The following information (set forth in Appendices B-F) is a 
summary of special factors available at the time of the preparation of 
this SAI affecting municipal obligations for state-specific Portfolios 
(California and New York Money Markets, Florida, Georgia, New York and 
Pennsylvania Portfolios).  For any such state, the summary does not 
purport to be a complete description and is based on information from 
official statements and other public information relating to securities 
offerings, finances and bond ratings of issuers within the state.  The 
Manager has not independently verified any such information. The 
respective states typically indicate that budgetary information is based 
on estimates and projections of revenues and expenditures for a fiscal 
year and must not be construed as statements of fact; estimates and 
projections are based upon various assumptions which may be affected by 
numerous factors, including future economic conditions in the state and 
the nation, and that there can be no assurance that the estimates will 
be achieved.  Generally, NRSROs base their ratings on information and 
materials furnished to the agencies and on investigations, studies and 
assumptions by the rating agencies at a particular point in time.  There 
is no assurance that any such rating remains in effect for a given 
period of time or that it will not be lowered or withdrawn entirely if, 
in the judgment of the NRSRO originally establishing the rating, 
circumstances so warrant.  Any such change or withdrawal of the rating 
could have an adverse effect on the market price of the bonds.



APPENDIX B

ADDITIONAL DISCUSSION OF SPECIAL FACTORS RELATING TO CALIFORNIA 
MUNICIPAL OBLIGATIONS

See Special Note prior to Appendix B.

General

Beginning in the 1990-91 fiscal year, California faced the worst 
economic, fiscal and budgetary conditions since the 1930s.  
Construction, manufacturing (especially aerospace), exports and 
financial services, among others, were severely affected.  Job losses 
were the worst of any post-war recession and have been estimated to 
exceed 800,000.

	The recession seriously affected State tax revenues and caused 
increased expenditures for health and welfare programs.  The State has 
also faced a structural imbalance in its budget with the largest 
programs supported by the  General Fund--K-12 schools and community 
colleges, health, welfare and corrections--growing at rates higher than 
the growth rates for the principal revenue sources of the General Fund 
(the General Fund, the State's main operating fund, consists of revenues 
which are not required to be credited to any other fund).  The State 
experienced recurring budget deficits.  The State Controller reported 
that expenditures exceeded revenues for four of the six fiscal years 
ending with 1992-93, and were essentially equal in 1993-94.  According 
to the Department of Finance, the State suffered a continuing budget 
deficit of approximately $2.8 billion in the Special Fund for Economic 
Uncertainties  (Special Funds account for revenues obtained from 
specific revenue sources, and which are legally restricted to 
expenditures for specified purposes).  The 1993-94 Budget Act 
incorporated a Deficit Reduction Plan to repay this deficit over two 
years.  The original budget for 1993-94 reflected revenues which 
exceeded expenditures by approximately $2.8 billion.  As a result of 
continuing recession, the excess of revenues over expenditures for the 
1993-94 fiscal year was less than $300 million.  The accumulated budget 
deficit at June 30, 1994 was not able to be retired by June 30, 1995 as 
planned.  When the economy failed to recover sufficiently in 1993-94, a 
second two-year plan was implemented in 1994-95.  The accumulated budget 
deficits over the past several years, together with expenditures for 
school funding which have not been reflected in the budget, and the 
reduction of available internal borrowable funds, have combined to 
significantly deplete the State's cash resources to pay its ongoing 
expenses.  In order to meet its cash needs, the State has had to rely 
for several years on a series of external borrowings, including 
borrowings past the end of a fiscal year.  At the end of its 1995-96 
fiscal year, however, the State did not borrow monies into the 
subsequent fiscal year.

	Many California counties continue to be under severe fiscal 
distress.  Such distress has impacted smaller, rural counties and larger 
suburban counties such as Los Angeles and Orange County, which declared 
bankruptcy in 1994.  Orange County has implemented significant 
reductions in services and personnel, and continues to face fiscal 
restraints in the aftermath of its bankruptcy.  However, California has 
experienced recent economic expansion, with growth in employment and in 
early 1998 the state recorded its lowest unemployment rate since 1990. 
There can be no assurance this growth trend will continue. 


1995-96 Budget

	The State began the 1995-1996 Fiscal Year with strengthening 
revenues based on an improving economy and the smallest nominal " 
budget gap" to be closed in many years.

	The 1995-96 Budget Act, signed by the Governor on August 3, 1995, 
projects General Fund revenues and transfers of $44.1 billion, about 
$2.2 billion higher than projected revenues in 1994-95.  The Budget Act 
projects Special Fund revenues of $12.7 billion, an increase from $12.1 
billion projected in 1994-95.

	The Department of Finances released updated projections for the 
1995-96 fiscal year in May, 1996, estimating that revenues and transfers 
to be $46.1 billion, approximately $2 billion over the original fiscal 
year estimate.  Expenditures also increased, to an estimated $45.4 
billion, as a result of the requirement to expend revenues for schools 
under Proposition 98, and, among other things, failure of the federal 
government to budget new aid for illegal immigrant costs which had been 
counted on to allow reduction in costs.

	The principal features of the Budget Act were the following:

1. Proposition 98 funding for schools and community colleges will 
increase by about $1 billion (General Fund) and $1.2 billion 
total above revised 1994-95 levels.  Because of higher-than-
projected revenues in 1994-95, an additional $543 million is 
appropriated to the 1994-95 
2. Proposition 98 entitlement.  A significant component of this 
amount is a block grant of about $54 per pupil for any one-time 
purpose.  Per-pupil expenditures are projected to increase by 
another $126 in 1995-96 to $4,435.  A full 2.7% cost-of-living 
allowance is funded for the first time in several years.  The 
budget compromise anticipated a settlement of the CTA v. Gould 
litigation.

2.	Cuts in health and welfare costs totaling about $900 million, 
some of which would require federal legislative approval.

3.	A 3.5% increase in funding for the University of California 
($90 million General Fund) and the California State University 
system ($24 million General Fund), with no increases in student 
fees.

4.	The updated Budget assumes receipt of $494 million in new 
federal aid for costs of illegal immigrants, in excess of federal 
government commitments.

5.	General Fund support for the Department of Corrections is 
increased by about 8% over 1994-95, reflecting estimates of 
increased prison population.  This amount is less than was 
proposed in the 1995 Governor's Budget.

1996-97 Budget

	The 1996-97 Budget Act was signed by the Governor on July 15, 1996 
and projected General Fund revenues and transfers of approximately 
$47.64 billion and General Fund expenditures of approximately $47.25 
billion.  The Governor vetoed about $82 million of appropriations (both 
General Fund and Special Fund) and the State has implemented its regular 
cash flow borrowing program with the issuance of $3 billion of Revenue 
Anticipation Notes to mature on or before June 30, 1997.  The 1996-97 
Budget Act appropriated a budget reserve in the Special Fund for 
Economic Uncertainties of $305 million, as of June 30, 1997.

	The Budget Act contained General Fund appropriations totaling 
$47.251 billion, a 4.0% increase over the final estimated 1995-96 
expenditures.  Special Fund expenditures are budgeted at $12.6 billion.

	The principal features of the Budget Act were the following:

1.	Proposition 98 funding for schools and community college 
districts increased by almost $1.6 billion (General Fund) and 
$1.65 billion total above revised 1995-96 level periods. Almost 
half of this money was budgeted to fund class-size reduction in 
kindergarten and grades 1-3. 

2.	Proposed cuts in health and welfare costs totaling about $660 
million.  All of these cuts require federal law changes (including 
welfare reform), federal waivers or federal budget appropriations 
in order to be achieved.  The 1996-97 Budget Act assumes 
approval/action by October, 1996, with the savings to be achieved 
beginning November, 1996. The 1996-97 Budget Act was based on 
continuation of previously approved assistance levels for Aid to 
Families with Dependent Children and other health and welfare 
programs, which had been reduced in prior years, including 
suspension of State-authorized cost-of-living increases. 

3.	A 4.9% increase in funding for the University of California 
($130 million General Fund) and the California State University 
system ($101 million General Fund), with no increases in student 
fees, maintaining the second year of the Governor's four-year 
"compact" with the State's higher education units.

4.	General Fund support for the Department of Corrections was 
increased by about 7% over the prior year, reflecting estimates of 
increased prison population.

5.	With respect to aid to local governments, the principal new 
programs included in the 1996-97 Budget Act are $100 million in 
grants to cities and counties for law enforcement purposes, and 
budgeted $50 million for competitive grants to local governments 
for programs to combat juvenile crime. 

	The 1996-97 Budget Act did not contain any tax increases.  As 
noted, there was a reduction in corporate taxes.  In addition, the 
Legislature approved another one-year suspension of the renters' tax 
credit, saving $520 in expenditures.

1997-98 Budget 

		On January 9, 1997, the Governor announced his proposed 1997-98 
State budget detailing plans to cut welfare, increase education spending 
and provide certain tax cuts to businesses and banks. The total spending 
plan in the amount of approximately $66.6 billion represents an increase 
of approximately 4% from the 1996-97 State Budget, with an increase in 
the State's General Fund to approximately $50.3 billion. The Governor 
announced a proposal to restructure the State's welfare system, placing 
strict time limits on the provision of assistance and introducing 
penalties, and included a plan to increase spending for elementary and 
secondary schools. 

		On August 11, 1997, the State Legislature approved a 1997-98 State 
Budget of approximately $68 billion which included approximately $32 
billion for public schools, an increase of approximately $4 billion over 
the prior year. The Budget also included approximately $100 million for 
local law enforcement and approximately $75 million in spending to 
subsidize hospitals that care for large numbers of uninsured patients, 
as well as approximately $40 million for legal immigrants and an 
increase of approximately $223 million in welfare spending, including 
job training. The education portion of the State Budget approved by the 
Legislature for 1997-98 included approximately $850 million to expand 
the class-size reduction program and full statutory funding of the 
Revenue Limit COLA comprising a 2.65% COLA, consistent with the May 
Revision. Revenue Limit Equalization is as funded in the amount of 
approximately $261 million for the school district revenue limit 
equalization for 1996-97. 
		The final State Budget was signed by the Governor on August 18, 
1997 after using his line-item veto authority to veto, with reservation 
until an acceptable school testing bill is passed, a significant amount 
of education funding from the State Budget approved by the Legislature. 
Vetoes which would be restored if a testing bill acceptable to the 
Governor is passed include approximately $955,000 in Department of 
Education spending, and approximately $900 million in local assistance. 
Vetoes not relating to the testing issue, but which need legislation in 
order to restore the vetoed funds, included more than $20 million in 
Department of Education spending. The final State Budget also provided 
approximately $377 million for child care programs administered by the 
Department of Education and the Department of Social Services, 
approximately $160 million for welfare-to-work programs, approximately 
$25 million in adult education funding and approximately $50 million to 
California community colleges, approximately $100 million to cities and 
counties to enhance local law enforcement, approximately $55 million in 
federal funds to local government for the construction of detention 
facilities and approximately $1.2 billion in deferred general fund 
contributions to the Public Employees Retirement System. The final State 
Budget did not include the Governor's proposed 10% tax cut for bank and 
corporations. 

Proposed 1998-99 Budget 

		In 1997, California experienced employment growth exceeding 3 
percent-approximately 400,000 new jobs-and income rose by more than 7 
percent. The State's unemployment rate fell during 1997 to a low of 5.8 
percent in November. In fiscal year 1996-97, the State's General Fund 
collections grew by over 6 percent to reach $49.2 billion, and revenue 
for the 1997-98 and 1998-99 fiscal years is expected to reach $52.9 
billion and $55.4 billion respectively. This represents an annual growth 
of $3.7 billion (7.5 percent) for 1997-98 and $2.5 billion (4.7 percent) 
for 1998-99. 

		The 1998-99 Governor's Budget provides $50 million in General Fund 
and $200 million in a proposed bond issue to capitalize the 
Infrastructure and Development Bank, which will provide capital to local 
governments to help businesses locate and expand in California, and $3 
million for the small business loan guarantee program. The Budget also 
includes an Early Childhood Development Initiative, which is designed to 
improve the health and development of children from birth to age three 
and provides additional funds for anti-gang programs and for the 
apprehension of sexual predators. The Budget proposes an approximately 
$7 billion investment plan to maintain and build the State's system of 
schools, water supply, prisons, natural resources, and other 
infrastructure. 

		In addition, the Budget includes approximately $40 billion to be 
devoted to California's 999 school districts and 58 county offices of 
education, resulting on estimated total per-pupil expenditures from all 
sources of $6,620 in fiscal year 1997-98 and $6,749 in 1998-99. 
Projected state revenues will contribute to a 7 percent increase in 
Proposition 98 General Fund support for K-12 education in 1998-99. This 
level of resources results in K-12 Proposition 98 per-pupil expenditures 
of $5,636 in 1998-99, up from $5,114 in 1996-97 and $5,414 in 1997-98. 
In addition, approximately $350 million has been allocated to lengthen 
the school year to 180 days while maintaining sufficient funds for staff 
development days. The State Budget includes a 2.22% COLA for revenue 
limit, special education, and child development in an amount of $657.4 
million which includes school district and county office of education 
apportionments ($470.6 million), summer school ($4.0 million), special 
education ($57.8 million), child development ($14.6 million), class size 
reduction ($33.6 million), and categorical program COLA and growth 
($73.7 million); enrollment growth funding of $564.5 million; class size 
reduction funding in the amount of $547 billion for all pupils in grades 
K-3 at $818 per pupil; and approximately $2 billion in state bonds for 
the 1998 election and $2.0 billion for each two years thereafter in 
2000, 2002, and 2004 and an additional $135 million for deferred 
maintenance to be matched locally. 

		It cannot be predicted what actions will be taken in the future by 
the State Legislature and the Governor to deal with changing State 
revenues and expenditures. The State budget will be affected by national 
and state economic conditions and other factors. 

Voter Initiative

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

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

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

The Proposition further provides as follows:

	"Except for fees or charges for sewer, water, and refuse 
collection services, no property related fee or charge shall be 
imposed or increased unless and until such fee or charge is 
submitted and approved by a majority vote of the property owners 
of the property subject to the fee or charge or, at the option of 
the agency, by a two-thirds vote of the electorate residing in the 
affected area."

Additionally, the Proposition provides, with respect to stand-by 
charges as follows:

	"No fee or charge may be imposed for a service unless that 
service is actually used by, or immediately available to, the 
owner of the property in question.  Fees or charges based on 
potential or future use of a service are not permitted.  Standby 
charges, whether characterized as charges or assessments, shall be 
classified as assessments and shall not be imposed without 
compliance with Section 4 of this Article."

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

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

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

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

Future Initiatives 

		Articles XIIIA, XIIIB, XIIIC and XIIID were each adopted as 
measures that qualified for the ballot pursuant to the State's 
initiative process. From time to time, other initiative measures could 
be adopted which could affect revenues of the State or public agencies 
within the State. 

State Appropriations Limit

	The State is subject to an annual appropriations limit imposed by 
Article XIIIB of the State Constitution (the "Appropriations Limit"), 
and is prohibited from spending "appropriations subject to limitation" 
in excess of the Appropriations Limit.  Article XIIIB, originally 
adopted in 1979, was modified substantially by Propositions 98 and 111 
in 1988 and 1990, respectively.  "Appropriations subject to limitation" 
are authorizations to spend "proceeds of taxes," which consist of tax 
revenues and certain other funds, including proceeds from regulatory 
licenses, user charges or other fees to the extent that such proceeds 
exceed the reasonable cost of providing the regulation, product or 
service.  The Appropriations Limit is based on the limit for the prior 
year, adjusted annually for certain changes, and is tested over 
consecutive two-year periods.  Any excess of the aggregate proceeds of 
taxes received over such two-year period above the combined 
Appropriation Limits for those two years is divided equally between 
transfers to K-14 districts and refunds to taxpayers.

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

	Article XIIIB, as amended by Proposition 98 on November 8, 1988, 
also establishes a minimum level of state funding for school and 
community college districts and requires that excess revenues up to a 
certain limit be transferred to schools and community college districts 
instead of returned to the taxpayers.  Determination of the minimum 
level of funding is based on several tests set forth in Proposition 98.  
During fiscal year 1991-92, revenues were smaller than expected, thus 
reducing the payment owed to schools in 1991-92 under alternate "test" 
provisions.  In response to the changing revenue situation, and to fully 
fund the Proposition 98 guarantee in the 1991-92 and 1992-93 fiscal 
years without exceeding it, the Legislature enacted legislation to 
reduce 1991-92 appropriations.  The amount budgeted to schools, but 
which exceeded the reduced appropriation, was treated as a non-
Proposition 98 short-term loan in 1991-92.  As part of the 1992-93 
Budget, $1.083 billion of the amount budgeted to K-14 schools was 
designated to "repay" the prior year loan, thereby reducing cash outlays 
in 1992-93 by that amount.  To ADA funding, the 1992-93 Budget included 
loans of $732 million to K-12 schools and $241 million to community 
colleges, to be repaid from future Proposition 98 entitlements.  The 
1993-94 Budget also provided new loans of $609 million to K-12 schools 
and $178 million to community colleges to maintain ADA funding.  These 
loans have been combined with the 1992-93 fiscal year loans into one 
loan of $1.76 billion, to be repaid from future years' Proposition 98 
entitlements, and conditioned upon maintaining current funding levels 
per pupil at K-12 schools.

	A Sacramento County Superior Court in California Teachers' 
Association, et al.  v.  Gould, et al., ruled that the 1992-93 loans to 
K-12 schools and community colleges violate Proposition 98.  As part of 
the negotiations leading to the 1995-96 Budget Act, an oral agreement 
was reached to settle this case.  The parties reached a conditional 
final settlement of the case in April, 1996.  The settlement required 
adoption of legislation satisfactory to the parties to implement its 
terms, which has occurred, and final approval by the court, which was 
pending in early July, 1996.

	The settlement provides, among other things, that both the State 
and K-14 schools share in the repayment of prior year's emergency loans 
to schools.  Of the total $1.76 billion in loans, the State will repay 
$935 million by forgiveness of the amount owed, while schools will repay 
$825 million.  The State share of the repayment will be reflected as 
expenditures above the current Proposition 98 base circulation.  The 
school's share of the repayment will count as appropriations that count 
toward satisfying the Proposition 98 guarantee, or from "below" the 
current base.  Repayments are to be spread over the eight-year period 
beginning 1994-95 through 2002-03.  Once the Director of Finance 
certifies that a settlement has occurred, approximately $377 million in 
appropriations from the 1995-96 fiscal year to schools will be 
disbursed.

	Because of the complexities of Article XIIIB, the ambiguities and 
possible inconsistencies in its terms, the applicability of its 
exceptions and exemptions and the impossibility of predicting future 
appropriations, the Sponsor cannot predict the impact of this or related 
legislation on the Bonds in the California Money Market Portfolio.  
Other Constitutional amendments affecting state and local taxes and 
appropriations have been proposed from time to time.  If any such 
initiatives are adopted, the State could be pressured to provide 
additional financial assistance to local governments or appropriate 
revenues as mandated by such initiatives.  Propositions such as 
Proposition 98 and others that may be adopted in the future, may place 
increasing pressure on the State's budget over future years, potentially 
reducing resources available for other State programs, especially to the 
extent the Article XIIIB spending limit would restrain the State's 
ability to fund such other programs by raising taxes.

State Indebtedness

	As of July 1, 1996, the State had over $18.20 billion aggregate 
amount of its general obligation bonds outstanding.  General obligation 
bond authorizations in the aggregate amount of approximately $4.31 
billion remained unissued as of July 1, 1996.  The State also builds and 
acquires capital facilities through the use of lease-purchase borrowing.  
As of July 1, 1996, the State had approximately $5.85 billion of 
outstanding lease-purchase debt.

	In addition to the general obligation bonds, State agencies and 
authorities had approximately $20.77 billion aggregate principal amount 
of revenue bonds and notes outstanding as of June 30, 1996.  Revenue 
bonds represent both obligations payable from State revenue-producing 
enterprises and projects, which are not payable from the General Fund, 
and conduit obligations payable only from revenues paid by private users 
of facilities financed by such revenue bonds.  Such enterprises and 
projects include transportation projects, various public works and 
exposition projects, education facilities (including the California 
State University and University of California systems), housing, health 
and pollution control facilities.

Litigation

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

Ratings

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

	The Manager believes the information summarized above describes 
some of the more significant aspects relating to the California Money 
Market Portfolio.  The sources of such information are Preliminary 
Official Statements and Official Statements relating to the State's 
general obligation bonds and the State's revenue anticipation notes, or 
obligations of other issuers located in the State of California, or 
other publicly available documents.  Although the Manager has not 
independently verified this information, it has no reason to believe 
that such information is not correct in all material aspects.



APPENDIX C

See Special Note prior to Appendix B.

ADDITIONAL DISCUSSION OF SPECIAL FACTORS RELATING TO NEW YORK MUNICIPAL 
OBLIGATIONS

Economic Trends

	Over the long term, the State of New York (the "State") and the 
City of New York (the "City") face serious economic problems.  The 
City accounts for approximately 41% of the State's population and 
personal income, and the City's financial health effects the State in 
numerous ways.   The State historically has been one of the wealthiest 
states in the nation.  For decades, however, the State has grown more 
slowly than the nation as a whole, gradually eroding its relative 
economic affluence.  Statewide, urban centers have experienced 
significant changes involving migration of the more affluent to the 
suburbs and an influx of generally less affluent residents.  Regionally, 
the older Northeast cities have suffered because of the relative success 
that the South and West have had in attracting people and business.  The 
City has also had to face greater competition as other major cities have 
developed financial and business capabilities which make them less 
dependent on the specialized services traditionally available almost 
exclusively in the City.

	The State has for many years had a very high state and local tax 
burden relative to other states.  The State and its localities have used 
these taxes to develop and maintain their transportation networks, 
public schools and colleges, public health systems and other social 
services and recreational facilities.   Despite these benefits, the 
burden of state and local taxation, in combination with the many other 
causes of regional economic dislocation, has contributed to the decision 
of some businesses and individuals to relocate outside, or not locate 
within, the State.

	Notwithstanding the numerous initiatives that the State and its 
localities may take to encourage economic growth and achieve balanced 
budgets, reductions in federal spending could materially and adversely 
affect the financial condition and budget projections of the State and 
its localities.

The State and its Authorities

		The State's budget for the State's 1997-1998 fiscal year, 
commencing on April 1, 1997, was adopted by the Legislature on August 4, 
1997. Prior to adoption of the budget, the Legislature enacted 
appropriations for disbursements for its 1997-1998 fiscal year 
considered to be necessary for State operations and other purposes. The 
State Financial Plan for the 1997-1998 fiscal year was formulated on 
August 11, 1997 and is based on the State's budget as enacted by the 
Legislature, as well as actual results for the first quarter of the 
current fiscal year. The 1997-1998 State Financial Plan is expected to 
be updated in October and January. The 1997-1998 State Financial Plan is 
projected to be balanced on a cash basis. Total General Fund receipts 
and transfers from other funds are projected to be $35.09 billion, while 
total General Fund disbursements and transfers to other funds are 
projected to be $34.60 billion. The adopted 1997-1998 budget projects a 
year-over-year increase in General Fund disbursements of 5.2 percent. As 
compared to the Governor's proposed budget amended in February 1997, the 
State's adopted budget for 1997-1998 increases General Fund spending by 
$1.7 billion, primarily due to increases for local assistance ($1.3 
billion). Resources used to fund these additional expenditures include 
increased revenues projected for the 1997-1998 fiscal year, increased 
resources produced in the 1996-1997 fiscal year that will be utilized in 
1997-1998, reestimates of social service, fringe benefit and other 
spending, and certain non-recurring resources. 

		The 1997-1998 adopted budget includes multi-year tax reductions, 
including a State funded property and local income tax reduction 
program, estate tax relief, utility gross receipts tax reductions, 
permanent reductions in the State sales tax on clothing, and elimination 
of assessments on medical providers. The various elements of the State 
and local tax and assessment reductions have little or no impact on the 
1997-1998 Financial Plan, and do not begin to materially affect the out-
year projections until the State's 1999-2000 fiscal year. 

		The economic and financial condition of the State may be affected 
by various financial, social, economic and political factors. Those 
factors can be very complex, may vary from fiscal year to fiscal year, 
and are frequently the result of actions taken not only by the State and 
its agencies and instrumentalities, but also by entities, such as the 
Federal government, that are not under the control of the State. In 
addition, the State Financial Plan is based upon forecasts of national 
and State economic activity. Economic forecasts have frequently failed 
to predict accurately the timing and magnitude of changes in the 
national and the State economies. Actual results could differ materially 
and adversely from projections and those projections may be changed 
materially and adversely from time to time. 

	The State closed projected budget gaps of $5.0 billion, $3.9 
billion and $2.3 for its 1995-96, 1996-97 and 1997-1998 fiscal years, 
respectively. The 1998-1999 budget gap was projected at $1.68 billion 
(before the application of any assumed efficiencies) in the out-year 
projections submitted to the Legislature in February 1997. As a result 
of changes made in the adopted budget, the 1998-1999 gap is now expected 
by the State to be about the same or smaller than the amount previously 
projected, after application of the $530 million reserve for future 
needs.   The Governor has indicated that he will propose to close any 
potential imbalance primarily through General Fund expenditure 
reductions and without increases in taxes or deferrals of scheduled tax 
reductions. The revised expectations for the 1998-1999 fiscal year 
reflect the loss of $1.4 billion in surplus resources from 1996-1997 
operations that are being utilized to finance current year spending, an 
incremental effect of approximately $300 million in legislated State and 
local tax reductions in the out-year and other factors. 

		In recent years, State actions affecting the level of receipts and 
disbursements, the relative strength of the State and regional economy, 
actions of the Federal government and other factors have created 
structural budget gaps for the State. These gaps resulted from a 
significant disparity between recurrent revenues and the costs of 
maintaining or increasing the level of support for State programs. To 
address a potential imbalance in any given fiscal year, the State would 
be required to take actions to increase receipts and/or reduce 
disbursements as it enacts the budget for that year, and under the State 
Constitution, the Governor is required to propose a balanced budget each 
year. There can be no assurance, however, that the Legislature will 
enact the Governor's proposals or that the State's actions will be 
sufficient to preserve budgetary balance in a given fiscal year or to 
align recurring receipts and disbursements in future fiscal years. 

		Other actions taken in the 1997-1998 adopted budget add further 
pressure to future State budget balance. For example, the fiscal effects 
of tax reductions adopted in the 1997-1998 budget are projected to grow 
more substantially beyond the 1998-1999 fiscal year. The full annual 
cost of the enacted tax reduction package is estimated by the State at 
approximately $4.8 billion when fully effective in State fiscal year 
2001-2002. In addition, the 1997-1998 budget included multi-year 
commitments for school aid pre-kindergarten early learning programs 
which could add as much as $1.4 billion in costs when fully annualized 
in fiscal year 2001-2002. These spending commitments are subject to 
annual appropriation. 

		On September 11, 1997, the New York State Comptroller issued a 
report which noted that the ability to deal with future budget gaps 
could become a significant issue in the State's 2000-2001 fiscal year, 
when the cost of tax cuts increases by $1.9 billion. The report 
contained projections that, based on current economic conditions and 
current law for taxes and spending, showed a gap in the 2000-2001 State 
fiscal year of $5.6 billion and of $7.4 billion in the 2001-2002 State 
fiscal year. The report noted that these gaps would be smaller if 
recurring spending reductions produce savings in earlier years. The 
State Comptroller has also stated that if Wall Street earnings moderate 
and the State experiences a moderate recession, the gap for the 2001-
2002 State fiscal year could grow to nearly $12 billion. 

		In recent years, the State has failed to adopt a budget prior to 
the beginning of its fiscal year. A prolonged delay in the adoption of 
the State's budget beyond the statutory April 1 deadline without interim 
appropriations could delay the projected receipt by the City of State 
aid, and there can be no assurance that State budgets in future fiscal 
years will be adopted by the April 1 statutory deadline. 

		On August 28, 1997, Standard & Poor's revised its ratings on the 
State's general obligation bonds from A- to A and, in addition, revised 
its ratings on the State's moral obligation, lease purchase, guaranteed 
and contractual obligation debt. On January 6, 1992, Moody's reduced its 
ratings on outstanding limited-liability State lease purchase and 
contractual obligations from A to Baa1. On February 10, 1997, Moody's 
confirmed its A2 rating on the State's general obligation long-term 
indebtedness. 

New York City 

	The City, with a population of approximately 7.3 million, is an 
international center of business and culture.  Its non-manufacturing 
economy is broadly based, with the banking and securities, life 
insurance, communications, publishing, fashion design, retailing and 
construction industries accounting for a significant portion of the 
City's total employment earnings.  Additionally, the City is the 
nation's leading tourist destination.  The City's manufacturing activity 
is conducted primarily in apparel and printing.

	The national economic downturn which began in July 1990 adversely 
affected the local economy, which had been declining since late 1989.  
As a result, the City experienced job losses in 1990 and 1991 and real 
Gross City Product ("GCP") fell in those two years.  Beginning in 
calendar year 1992, the improvements in the national economy helped 
stabilize conditions in the City.  Employment losses moderated toward 
year-end and real GCP increased, boosted by strong wage gains.  After 
noticeable improvements in the City's economy during calendar year 1994, 
economic growth slowed in calendar year 1995, and thereafter improved 
during calendar year 1996, reflecting improved securities industry 
earnings and employment in other sectors. The City's current four-year 
financial plan assumes that moderate growth will continue through 
calendar year 2001, with moderating job growth and wage increases.

	For each of the 1981 through 1996 fiscal years, the City achieved 
balanced operating results as reported in accordance with generally 
accepted accounting principles ("GAAP").  The City was required to 
close substantial budget gaps in recent years in order to maintain 
balanced operating results.  There can be no assurances that the City 
will continue to maintain a balanced budget as required by State law 
without additional tax or other revenue increases or reductions in City 
services, which could adversely affect the City's economic base. 

	Pursuant to the New York State Financial Emergency Act of the City 
of New York, the City prepares an annual four-year financial plan, which 
is reviewed and revised on a quarterly basis and which includes the 
City's capital, revenue and expense projections and outlines proposed 
gap-closing programs for years with projected budget gaps.  The City's 
current four-year financial plan projects a surplus in the 1998 fiscal 
year (before discretionary transfers) and substantial budget gaps for 
each of the 1999, 2000 and 2001 fiscal years.  This pattern of current 
year surplus and projected subsequent year budget gaps has been 
consistent through virtually the entire period since 1982, during which 
the City has achieved balanced operating results for each fiscal year.  
The City is required to submit its financial plans to review bodies 
including the New York State Financial Control Board (the "Control 
Board").

	The City depends on State aid both to enable the City to balance 
its budget and to meet its cash requirements.  The State's 1995-96 
Financial Plan projects a balanced General Fund.  There can be no 
assurance that there will not be reductions in State aid to the City 
from amounts currently projected or that State budgets in future fiscal 
years will be adopted by the April 1 statutory deadline and that such 
reductions or delays will not have adverse effects on the City's cash 
flow or expenditures.  In addition, the federal budget negotiation 
process could result in a reduction in or a delay in the receipt of 
federal grants which could have additional adverse effects on the City's 
cash flow or revenues.

	The Mayor is responsible for preparing the City's four-year 
financial plan, including the City's current financial plan for the 1998 
through 2001 fiscal years (the "1998-2001 Financial Plan" or 
"Financial Plan").  The City's projections set forth in the Financial 
Plan are based on various assumptions and contingencies which are 
uncertain and which may not materialize.  Changes in major assumptions 
could significantly affect the City's ability to balance its budget as 
required by State law and to meet its annual cash flow and financing 
requirements.  Such assumptions and contingencies include the condition 
of the regional and local economies, the impact on real estate tax 
revenues of the real estate market, wage increases for City employees 
consistent with those assumed in the Financial Plan, employment growth, 
the results of a pending actuarial audit of the City's pension system 
which is expected to significantly increase the City's annual pension 
costs, the ability to implement proposed reductions in City personnel 
and other cost reduction initiatives, which may require in certain cases 
the cooperation of the City's municipal unions, the ability of the New 
York City Health and Hospitals Corporation ("HHC") and the Board of 
Education ("BOE") to take actions to offset potential budget 
shortfalls the ability to complete revenue-generating transactions and 
provisions of State and federal aid and mandate relief and the impact on 
City revenues of proposals for federal and State welfare reform and any 
future legislation affecting Medicare or other entitlements.

	Implementation of the Financial Plan is also dependent upon the 
City's ability to market its securities successfully.  The City's 
financing program for fiscal years 1998 through 2001 contemplates the 
issuance of $4.9 billion of general obligation bonds and $7.1 billion of 
bonds to be issued by the proposed New York City Infrastructure Finance 
Authority ("Finance Authority") to finance City capital projects.  The 
Finance Authority was created as part of the City's effort to assist in 
keeping the City's indebtedness within the forecast level of the 
constitutional restrictions on the amount of debt the City is authorized 
to incur.  In addition, the City issues revenue and tax anticipation 
notes to finance its seasonal working capital requirements.  The success 
of projected public sales of City bonds and notes, New York Municipal 
Water Finance Authority ("Water Authority") bonds and Finance 
Authority bonds will be subject to prevailing market conditions.  Future 
developments concerning the City and public discussion of such 
developments, as well as prevailing market conditions, may affect the 
market for outstanding City general obligation bonds and notes.

	The City's operating results for the 1996 fiscal year were 
balanced in accordance with GAAP, after taking into account a 
discretionary transfer of $224 million, the 16th consecutive year of 
GAAP balanced results. 

		The most recent quarterly modification to the City's financial 
plan for the 1997 fiscal year, which was submitted to the Control Board 
on June 10, 1997 (the ''1997 Modification''), projects a balanced budget 
in accordance with GAAP for the 1997 fiscal year, after taking into 
account an increase in projected tax revenues of $1.2 billion during the 
1997 fiscal year and a discretionary prepayment in the 1997 fiscal year 
of $1.3 billion of debt service due in the 1998 and 1999 fiscal years. 
		
		On June 10, 1997, the City submitted to the Control Board the 
financial Plan for the 1998 through 2001 fiscal years, which relates to 
the City, BOE and the City University of New York (''CUNY'') and 
reflects the City's expense and capital budgets for the 1998 fiscal 
year, which were adopted on June 6, 1997. The Financial Plan projects 
revenues and expenditures for the 1998 fiscal year balanced in 
accordance with GAAP. The Financial Plan includes increased tax revenue 
projections; reduced debt service costs; the assumed restoration of 
Federal funding for programs, assisting certain legal aliens; additional 
expenditures for textbooks, computers, improved education programs and 
welfare reform, law enforcement, immigrant naturalization, initiatives 
proposed by the City Council and other initiatives; and a proposed 
discretionary transfer to the 1998 fiscal year of $300 million of debt 
service due in the 1999 fiscal year for budget stabilization purposes. 
In addition, the Financial Plan reflects the discretionary transfer to 
the 1997 fiscal year of $1.3 billion of debt service due in the 1998 and 
1999 fiscal years, and includes actions to eliminate a previously 
projected budget gap for the 1998 fiscal year. These gap closing actions 
include (i) additional agency actions totaling $621 million; (ii) the 
proposed sale of various assets; (iii) additional State aid of $294 
million, including a proposal that the State accelerate a $142 million 
revenue sharing payment to the City from March 1999; and (iv) 
entitlement savings of $128 million which would result from certain of 
the reductions in Medicaid spending proposed in the Governor's 1997-1998 
Executive Budget and the State making available to the City $77 million 
of additional Federal block grant aid, as proposed in the Governor's 
1997-1998 Executive Budget. The Financial Plan also sets forth 
projections for the 1999 through 2001 fiscal years and projects gaps of 
$1.8 billion, $2.8 billion and $2.6 billion for the 1999 through 2001 
fiscal years, respectively. 

		The Financial Plan assumes approval by the State Legislature and 
the Governor of (i) a tax reduction program proposed by the City 
totaling $272 million, $435 million, $465 million and $481 million in 
the 1998 through 2001 fiscal years, respectively, which includes a 
proposed elimination of the 4% City sales tax on clothing items under 
$500 as of December 1, 1997, and (ii) a proposed State tax relief 
program, which would reduce the City property tax and personal income 
tax, and which the Financial Plan assumes will be offset by proposed 
increased State aid totaling $47 million, $254 million, $472 million and 
$722 million in the 1998 through 2001 fiscal years, respectively. 

	The Financial Plan assumes (i) approval by the Governor and the 
State Legislature of the extension of the 14% personal income tax 
surcharge, which is scheduled to expire on December 31, 1999 and the 
extention of which is projected to provide revenue of $166 million and 
$494 million in the 2000 and 2001 fiscal years, respectively, and of the 
extension of the 12.5% personal income tax surcharge, which scheduled to 
expire on December 31, 1998 and the extention of which is projected to 
provide revenue of $188 million, $527 million and $554 million in the 
1999 through 2001 fiscal years, respectively; (ii) collection of the 
projected rent payments for the City's airports, totalling $385 million, 
$175 million and $170 million in the 1999 through 2001 fiscal years, 
respectively, which may depend on the successful completion of 
negotiations with the Port Authority or enforcement of the City's rights 
under the existing leases through pending legal actions; and (iii) State 
approval of the cost containment initiatives and State aid proposed by 
the City; as gap-closing actions for the 1998 fiscal year, and $115 
million in additional State aid which is assumed in the Financial Plan 
but not provided for in the Governor's  1997-98 Executive Budget.  The 
Financial Plan reflects the increased costs which the City expects to 
incur as a result of welfare legislation recently enacted by Congress. 
The Financial Plan provides no additional wage increases for City 
employees after their contracts expire in fiscal years 2000 and 2001. In 
addition, the economic and financial condition of the City may be 
affected by various financial, social, economic and political factors 
which could have a material effect on the City. 

		The City annually prepares a modification to its financial plan in 
October or November which amends the financial plan to accommodate any 
revisions to forecast revenues and expenditures and to specify any 
additional gap-closing initiatives to the extent required to offset 
decreases in projected revenues or increases in projected expenditures. 
The Mayor is expected to publish the first quarter modification (the 
''Modification'') for the 1998 fiscal year in November. Since the 
preparation of the Financial Plan, the State has adopted its budget for 
the 1997-1998 fiscal year. The State budget enacted a smaller sales tax 
reduction than the tax reduction program assumed by the City in the 
Financial Plan, which will increase projected City sales tax revenues; 
provided for State aid to the City which was less than assumed in the 
Financial Plan; and enacted a State funded tax relief program which 
begins a year later than reflected in the Financial Plan. In addition, 
the net effect of tax law changes made in the Federal Balanced Budget 
Act of 1997 are expected to increase tax revenues in the 1998 fiscal 
year. These changes will be reflected in the Modification. 

	The projections for the 1998 through 2001 fiscal years reflect the 
costs of the settlements with the United Federation of Teachers 
("UFT") and a coalition of unions headed by District Council 37 of the 
American Federation of State, County and Municipal Employees ("District 
Council 37"), which together represent approximately two-thirds of the 
City's work force, and assume that the City will reach agreement with 
its remaining municipal unions under terms which are generally 
consistent with such settlements.  The settlement provides for a wage 
freeze in the first two years, followed by a cumulative effective wage 
increase of 11% by the end of the five-year period covered by the 
proposed agreements, ending in fiscal years 2000 and 2001.  Additional 
benefit increases would raise the total cumulative effective increase to 
13% above present costs.  Costs associated with similar settlements of 
all City-funded employees would total $49 million, $459 million and $1.2 
billion in the 1997, 1998 and 1999 fiscal years, respectively, and 
exceed $2 billion in each fiscal year after the 1999 fiscal year. 
Subsequently, the City reached settlements, through agreements or 
statutory impasse procedures, with bargaining units which, together with 
the UFT and District Council 37, represent approximately 86% of the 
City's workforce. 

		In 1975, Standard & Poor's suspended its A rating of City bonds. 
This suspension remained in effect until March 1981, at which time the 
City received an investment grade rating of BBB from Standard & Poor's. 
On July 2, 1985, Standard & Poor's revised its rating of City bonds 
upward to BBB+ and on November 19, 1987, to A-. On July 10, 1995, 
Standard & Poor's revised its rating of City bonds downward to BBB+. 

		Moody's ratings of City bonds were revised in November 1981 from B 
(in effect since 1977) to Ba1, in November 1983 to Baa, in December 1985 
to Baa1, in May 1988 to A and again in February 1991 to Baa1. On July 
17, 1997, Moody's changed its outlook on City bonds to positive from 
stable. Since July 15, 1993, Fitch has rated City bonds A-. Since July 
8, 1997, IBCA Limited has rated City bonds A. 


Litigation

	A number of court actions have been brought involving State 
finances.  The court actions in which the State is a defendant generally 
involve state programs and miscellaneous tort, real property and 
contractual claims.  While the ultimate outcome and fiscal impact, if 
any, on the State of those proceedings and claims are not currently 
predictable, adverse determinations in certain of them might have a 
material adverse effect upon the State's ability to maintain a balanced 
1997-98 State Financial Plan.

	The claims involving the City other than routine litigation 
incidental to the performance of governmental and other functions and 
certain other litigation, arise out of alleged constitutional 
violations, tort, breaches of contract and other violations of law and 
condemnation proceedings.  While the ultimate outcome and fiscal impact, 
if any, on the City of those proceedings and claims are not currently 
predictable, adverse determinations in certain of them might have a 
material adverse effect upon the City's ability to carry out the 1998-
2001 Financial Plan.  The City has estimated that its potential future 
liability on account of outstanding claims against it as of June 30, 
1996 amounted to approximately $2.8 billion.



APPENDIX D

ADDITIONAL DISCUSSION OF SPECIAL FACTORS RELATING TO FLORIDA MUNICIPAL 
OBLIGATIONS

See Special Note prior to Appendix B.

General

	In 1980, Florida was the seventh most populous state in the U.S.  
The State has grown dramatically since then and as of April 1, 1995, 
ranks fourth with an estimated population of 14.1 million.  Florida's 
attraction, as both a growth and retirement state, has kept net 
migration at an average of 224,240 new residents a year from 1987 
through 1995.  The U.S. average population increase since 1984 is about 
1% annually, while Florida's average annual rate of increase is about 
2.2%.  Florida continues to be the fastest growing of the 11 largest 
states.  This strong population growth is one reason the State's economy 
is performing better than the nation as a whole.  In addition to 
attracting senior citizens to Florida as a place for retirement, the 
State is also recognized as attracting a significant number of working 
age individuals.  Since 1987, the prime working age population (18-44) 
has grown at an average annual rate of 2.1%.  The share of Florida's 
total working age population (18-59) to total State population is 
approximately 54%.  This share is not expected to change appreciably 
into the 21st century.

	The State's personal income has been growing strongly the last 
several years and has generally outperformed both the U.S. as a whole 
and the Southeast in particular, according to the U.S. Department of 
Commerce and the Florida Consensus Economic Estimating Conference.  This 
is because Florida's population has been growing at a very strong pace 
and, since the early 70's, the State's economy has diversified so as to 
provide a broader economic base.  As a result, Florida's real per capita 
personal income has tracked closely with the national average and has 
tracked above the Southeast.  From 1985 through 1995, the State's real 
per capita income rose an average 5.0% a year, while the national real 
per capita income increased at an average 4.9%.

	Because Florida has a proportionately greater retirement age 
population, property income (dividends, interest and rent) and transfer 
payments (Social Security and pension benefits among other sources of 
income) are relatively more important sources of income.  For example, 
Florida's total wages and salaries and other labor income in 1995 was 
60.6% of total personal income, while a similar figure for the nation 
for 1990 was 70.8%.  Transfer payments are typically less sensitive to 
the business cycle than employment income and, therefore, act as 
stabilizing forces in weak economic periods.

	The State's per capita personal income in 1996 of $24,104 was 
slightly above the national average of $24,231 and significantly ahead 
of that for the Southeast United States, which was $21,880.  Real 
personal income in the State is estimated to increase 5.2% in 1997-98 
and 3.7% in 1998-99. Real personal income per capita  in the State is 
projected to grow at 3.2% in 1997-98 and 1.8% in 1998-99.  The Florida 
economy appears to be performing in line with the U.S. economy and is 
expected to experience steady if unspectacular growth over the next 
couple of years.

	Since 1987, the State's population has increased an estimated 20%.  
In that same period, Florida's total non-farm employment has grown by 
over 27%.  Since 1987, the job creation rate in the state is more than 
twice that of the nation as whole.  Contributing to this is the State's 
rapid rate of growth in employment and income is international trade.  
Changes to its economy has also contributed to the State's strong 
performance.  The State is now less dependent on employment from 
construction, construction-related manufacturing and resource-based 
manufacturing, which have declined as a proportion of total State 
employment.  The State's service sector employment is nearly 87% of 
total non-farm employment.  While the Southeast and the nation have a 
greater proportion of manufacturing jobs, which tend to pay higher 
wages, service jobs tend to be less sensitive to swings in the business 
cycle.  The State has a concentration of manufacturing jobs in high-tech 
and high value-added sectors, such as electrical and electronic 
equipment, as well as printing and publishing.  These type of 
manufacturing jobs tend to be less cyclical.  The State's unemployment 
rate throughout the 1980's tracked below the nation's. In the 1990's, 
this trend reversed, until 1995 and 1996, when the unemployment rate 
again tracked below the national average.  The average rate in Florida 
since 1987 has been 6.2%. The national average is also 6.2%.  According 
to the U.S.  Department of Commerce, the Florida Department of Labor and 
Employment Security, and the Florida Consensus Economic Estimating 
Conference (together, the "Organization") the State's unemployment rate 
was 4.8% during 1997.  As of October, 1997, the Organization estimates 
that the unemployment rate will be 4.7% for 1998 and 4.9% in 1999.

	The State's economy is expected to decelerate along with the 
nation, but is expected to outperform the nation as a whole.  Total non-
farm employment in Florida is expected to grow at an increase of 3.9% in 
1997-98 and 2.6% in 1998-99.  Trade and services, the two largest, 
account for more than half of the total non-farm employment.  Employment 
in the service sectors should experience an increase of 4.8% in 1997-98, 
while growing 4.1% in 1998-99.  Trade is expected to expand 3.7% in 1998 
and 2.3% in 1999.  The service sector is now the State's largest 
employment category.

Construction

The State's economy has in the past been highly dependent on the 
construction industry and construction-related manufacturing.  This 
dependency has declined in recent years and continues to do so as a 
result of continued diversification of the State's economy. For example, 
in 1980, total contract construction employment as a share of total non-
farm employment was just about 7.5%, and in 1985, the share had edged 
downward to 5%.  This trend is expected to continue as the state's 
economy continues to diversify. Florida, nevertheless, has a dynamic 
construction industry, with single and multi-family housing starts 
accounting for 8.1% of total U.S. housing starts in 1996 while the 
State's population is 5.5% of the U.S. total population.  Florida's 
housing starts in 1996 were 118,400. 

	A driving force behind the State's construction industry has been 
the State's rapid rate of population growth.  Although the State 
currently is the fourth most populous state, its annual population 
growth is now projected to slow somewhat as the number of people moving 
into the State is expected to grow close to 230,000 a year throughout 
the 1990's.  This population trend should provide fuel for business and 
home builders to keep construction activity lively in Florida for some 
time to come.  However, other factors do influence the level of 
construction in the State. 

	Single and multi-family housing starts in 1996-97 were projected 
to reach a combined level of 129,500, increasing to 131,300 in 1997-
1998. Total construction expenditures were forecasted to increase 13.2% 
last year and increase 6.5% this year.

Tourism

	Tourism is one of State's most important industries.  
Approximately 42.9 million tourists visited the State in 1996, as 
reported by the Florida Department of Commerce.  In terms of business 
activities and state tax revenues, tourists in Florida in 1996 
represented an estimated 4.6 million additional residents.  Visitors to 
the State tend to arrive slightly more by air than by car.  The State's 
tourist industry over the years has become more sophisticated, 
attracting visitors year-round and, to a degree, reducing its 
seasonality.  Tourist arrivals were expected to increase 2.1% last 
fiscal year and 4.0% this fiscal year.  Tourist arrivals to Florida by 
air were expected to increase by 1.6% last year and increase by 3.7 next 
year, while arrivals by car are expected fall by 2.7% last year and 
increase 4.2% this fiscal year.  By the end of the State's current 
fiscal year, 43.8 million domestic and international tourists were 
expected to have visited the State.  In 1997-99, tourist arrivals should 
approximate 45.6 million.

Revenues and Expenses

	Estimated fiscal year 1997-98 General Revenue plus Working Capital 
and Budget Stabilization funds available to the State total $18,150.9 
million, an 8.5% increase over 1996-97.  Of the total General Revenue 
plus Working Capital and Budget Stabilization funds available to the 
State, $16,598.5 million of that is Estimated Revenues, which represents 
an increase of 5.7% over the previous year's Estimated Revenues.  With 
effective General Revenues plus Working Capital Fund and Budget 
Stabilization appropriations at $17,114 million, unencumbered reserves 
at the end of 1996-97 are estimated at $1,036.9 million.  Estimated, 
fiscal year 1998-99 General Revenue plus Working Capital and Budget 
Stabilization funds available total $18,644 million, a 7.7% increase 
over 1998-98.  The $17,405.5 million in Estimated Revenues (including 
recent Measures Affecting Revenues) represents an increase of 4.9% over 
the previous year's Estimated Revenues. 

	In fiscal year 1996-97, approximately 67% of the State's total 
direct revenue to its three operating funds were derived from State 
taxes and fees, with federal grants and other special revenue accounting 
for the balance.  State sales and use tax, corporate income tax, 
intangible personal property tax, beverage tax and estate tax amounted 
to 68%, 8%, 4%, 3% and 4%, respectively, of total General Revenue Funds 
available during fiscal 1996-97.  In that same year, expenditures for 
education, health and welfare and public safety amounted to 
approximately 53%, 26% and 14%, respectively, of total expenditures from 
the General Revenue Fund.

	The State's sales and use tax (6%) currently accounts for the 
State's single largest source of tax receipts.  Slightly less than 10% 
of the State's sales and use tax is designated for local governments and 
is distributed to the respective counties in which collected for use by 
the counties, and the municipalities therein.  In addition to this 
distribution, local governments may (by referendum) assess a 0.5% or a 
1.0% discretionary sales surtax within their county.  Proceeds from this 
local option sales tax are earmarked for funding local infrastructure 
programs and acquiring land for public recreation or conservation or 
protection of natural resources as provided under applicable Florida 
law.  Certain charter counties have other taxing powers, in addition, 
and non-consolidated counties with a population in excess of 800,000 may 
levy a local option sales tax to fund indigent health care.   It alone 
cannot exceed 0.5% and when combined with the infrastructure surtax 
cannot exceed 1.0%.  For the fiscal year ended June 30, 1997, sales and 
use tax receipts (exclusive of the tax on gasoline and special fuels) 
totaled $12,089 million, an increase of 5.5% over fiscal year 1995-1996.

	The second largest source of State tax receipts is the tax on 
motor fuels.  However, these revenues are almost entirely dedicated 
trust funds for specific purposes and are not included in the State's 
General Revenue Fund.

	The State imposes an alcoholic beverage wholesale tax (excise tax) 
on beer, wine and liquor.  This tax is one of the State's major tax 
sources, with revenues totaling $447.2 million in fiscal year ending 
June 30, 1997.  Alcoholic beverage tax receipts increased 1.0% from the 
previous year's total.  Ninety-eight percent of the revenues collected 
from this tax are deposited into the State's General Revenue Fund.

	The State imposes a corporate income tax.  All receipts of the 
corporate income tax are credited to the General Revenue Fund.  For the 
fiscal year ended June 30, 1996, receipts from this source were $1,3623 
million, an increase of 17.2% from fiscal year 1995-96.

	The State imposes a documentary stamp tax on deeds and other 
documents relating to realty, corporate shares, bonds, certificates of 
indebtedness, promissory notes, wage assignments, and retail charge 
accounts.  The documentary stamp tax collections totaled $844.2 million 
during fiscal year 1996-97, an 8.9% increase from the previous fiscal 
year.  For fiscal year 1996-97, 62.63% of these taxes were deposited to 
the General Revenue Fund.

	The State imposes a gross receipts tax on electric, natural gas 
and telecommunications services.  All gross receipts utilities tax 
collections are credited to the State's Public Education Capital Outlay 
and Debt Service Trust Fund.  In fiscal year 1996-97, this amounted to 
$575.7 million, an increase of 6.0% over the previous year.

	The State imposes an intangible personal property tax on stocks, 
bonds, including bonds secured by liens in Florida real property, notes, 
governmental leaseholds and certain other intangibles not secured by 
liens on Florida real property.  The annual rate of tax is 2 mils 
($2,000 of tax per $1,000,000 of value).  Second, the State imposes a 
non-recurring 2 mil tax on mortgages and other obligations secured by 
liens on Florida real property.  In fiscal year 1996-97, total 
intangible personal property tax collections were $952.4 million, a 6.3% 
increase over the prior year.  Of the tax proceeds, 66.5% are 
distributed to the General Revenue Fund.

		The State imposes an estate tax on the estate of a decedent for 
the privilege of transferring property at death. All receipts of the 
estate tax are credited to the General Revenue Fund. For the fiscal year 
ended June 30, 1997, receipts from this source were $546.9 million, an 
increase of 30% from fiscal year 1995-96. 

	The State began its own lottery in 1988.  State law requires that 
lottery revenues be distributed 50% to the public in prizes, 38% for use 
in enhancing education, and the balance, 12%, for the costs of 
administering the lottery.  Fiscal year 1996-97 lottery ticket sales 
totaled $2.09 billion, providing education with approximately $792.3 
million.

Debt-Balanced Budget Requirement

	At the end of fiscal 1997, approximately $7.89 billion in 
principal amount of debt secured by the full faith and credit of the 
State was outstanding.  In addition, since July 1, 1997, the State 
issued about $799.9 million in principal amount of full faith and credit 
bonds.

	The State Constitution and statutes mandate that the State budget, 
as a whole, and each separate fund within the State budget, be kept in 
balance from currently available revenues each fiscal year.  If the 
Governor or Comptroller believes a deficit will occur in any State fund, 
by statute, he must certify his opinion to the Administrative 
Commission, which then is authorized to reduce all State agency budgets 
and releases by a sufficient amount to prevent a deficit in any fund.  
Additionally, the State Constitution prohibits issuance of State 
obligations to fund State operations.


Litigation

	Currently under litigation are several issues relating to State 
actions or State taxes that put at risk substantial amounts of General 
Revenue Fund monies.  Accordingly, there is no assurance that any of 
such matters, individually or in the aggregate, will not have a material 
adverse affect on the State's financial position.

	The State was assigned a bond rating of Aa, AA and AA from 
Moody's, S&P and Fitch, respectively, on the majority of its general 
obligation bonds, although the rating of a particular series of revenue 
bonds relates primarily to the project, facility, or other revenue 
source from which such series derives funds for repayment.  While these 
ratings and some of the information presented above indicate that the 
State has been in satisfactory economic health, there can be no 
assurance that there will not be a decline in economic conditions or 
that particular Florida municipal obligations will not be adversely 
affected by any such changes.



APPENDIX E

See special note prior to Appendix B.

ADDITIONAL DISCUSSION OF SPECIAL FACTORS RELATING TO GEORGIA MUNICIPAL 
OBLIGATIONS

Appropriations and Debt Limitations

	Article III, Section IX, Paragraph IV(b) of the Constitution of 
the State of Georgia (the "Constitution") provides:

The General Assembly shall not appropriate funds for any given 
fiscal year which, in aggregate, exceed a sum equal to the amount 
of unappropriated surplus expected to have accrued in the state 
treasury at the beginning of the fiscal year together with an 
amount not greater than the total treasury receipts from existing 
revenue sources anticipated to be collected in the fiscal year, 
less refunds, as estimated in the budget report and amendments 
thereto.  Supplement appropriations, if any, shall be made in the 
manner provided in Paragraph V of this section of the 
Constitution; but in no event shall a supplementary appropriations 
Act continue in force and effect beyond the expiration of the 
general appropriations Act in effect when such supplementary 
appropriations Act was adopted and approved.

Article VII, Section W, Paragraph f(c), (d), (e) and (f) of the 
Constitution provides that the State may incur public debt of two types 
for public purposes: (1) general obligation debt and (2) guaranteed 
revenue debt.  General obligation debt may be incurred to acquire, 
construct, develop, extend, enlarge or improve land, waters, property, 
highways, buildings, structures, equipment or facilities of the State, 
its agencies, departments, institutions and certain State Authorities, 
to provide educational facilities for county and independent school 
systems, to provide public library facilities for county and independent 
school systems, counties, municipalities, and boards of trustees of 
public libraries or boards of trustees of public library systems, to 
make loans to counties, municipal corporations, political subdivisions, 
local authorities and other local government entities for water or 
sewerage facilities or systems, and to make loans to local government 
entities for regional or multi-jurisdictional solid waste recycling or 
solid waste facilities or systems.  Guaranteed revenue debt may be 
incurred by guaranteeing the payment of certain revenue obligations 
issued by an instrumentality of the State as set forth in said 
subparagraph (f) of Paragraph 1, Section IV, Article VII of the 
Constitution.  Article VII, Section IV, Paragraph II(b)-(e) of the 
Constitution further provides that:

"(b) 	No debt may be incurred under subparagraphs (c), (d), and 
(e) of Paragraph I of this section or Paragraph V of this section 
at any time when the highest aggregate annual debt service 
requirements for the then current year or any subsequent year for 
outstanding general obligation debt and guaranteed revenue debt, 
including the proposed debt, and the highest aggregate annual 
payments for the then current year or any subsequent fiscal year 
of the state under all contracts then in force to which the 
provisions of the second paragraph of Article IX, Section VI, 
Paragraph l(a) of the Constitution of 1976 are applicable, exceed 
10 percent of the total revenue receipts, less refunds, of the 
state treasury in the fiscal year immediately preceding the year 
in which any such debt is to be incurred.

(c)	No debt may be incurred under subparagraphs (c) and (d) of 
Paragraph I of this section at any time when the term of the debt 
is in excess of 25 years.

(d)	No guaranteed revenue debt may be incurred to finance water 
or sewage treatment facilities or systems when the highest 
aggregate annual debt service requirements for the then current 
year or any subsequent fiscal year of the state for outstanding or 
proposed guaranteed revenue debt for water facilities or systems 
or sewage facilities or systems exceed 1 percent of the total 
revenue receipts less refunds, of the state treasury in the fiscal 
year immediately preceding the year in which any debt is to be 
incurred.

(e)	The aggregate amount of guaranteed revenue debt incurred to 
make loans for educational purposes that may be outstanding at any 
time shall not exceed $18 million, and the aggregate amount of 
guaranteed revenue debt incurred to purchase, or to lend or 
deposit against the security of, loans for educational purposes 
that may be outstanding at any time shall not exceed $72 million."

In addition, Article VII, Section IV, Paragraph IV of the 
Constitution provides:

"The state, and all state institutions, departments and agencies 
of the state are prohibited from entering into any contract except 
contracts pertaining to guaranteed revenue debt with any public 
agency, public corporation, authority, or similar entity if such 
contract is intended to constitute security for bonds or other 
obligations issued by any such public agency, public corporation, 
or authority and, in the event any contract between the state, or 
any state institution, department or agency of the state and any 
public agency, public corporation, authority or similar entity, or 
any revenues from any such contract, is pledged or assigned as 
security for the repayment of bonds or other obligations, then and 
in either such event, the appropriation or expenditure of any 
funds of the state for the payment of obligations under any such 
contract shall likewise be prohibited."

	Article VII, Section IV, Paragraph l(b) of the Constitution 
provides that the State may incur: "Public debt to supply a temporary 
deficit in the state treasury in any fiscal year created by a delay in 
collecting the taxes of that year.  Such debt shall not exceed, in the 
aggregate, 5 percent of the total revenue receipts, less refunds, of the 
state treasury in the fiscal year immediately preceding the year in 
which such debt is incurred.  The debt incurred shall be repaid on or 
before the last day of the fiscal year in which it is incurred out of 
taxes levied for that fiscal year.  No such debt may be incurred in any 
fiscal year under the provisions of this subparagraph (b) if there is 
then outstanding unpaid debt from any previous fiscal year which was 
incurred to supply a temporary deficit in the state treasury." No such 
debt has been incurred under this provision since its inception.

	Virtually all debt obligations represented by bonds issued by the 
State of Georgia, counties, or municipalities or other public 
authorities require validation by a judicial proceeding prior to the 
issuance of such obligation.  The judicial validation makes these 
obligations incontestable and conclusive, as provided under the Georgia 
Constitution.

The state's overall debt was recently estimated at $677 per capita 
and 3.25% of personal income (personal income per capita in 1995 was 
$21,741).  Debt service carrying charges were estimated at 5%-6% of 
estimated 1997 treasury receipts.  Principal amortization is accelerated 
on all long term debt.

Revenue

	The State of Georgia operates on a fiscal year beginning on July 1 
and ending on June 30.  Each year the State Economist, the Governor, and 
the State Revenue Commissioner jointly prepare a revenue forecast upon 
which is based the state budget which is considered, amended, and 
approved by the Georgia General Assembly.  Since 1975, the Governor and 
the General Assembly have attempted to maintain a $100 million reserve 
fund, which in 1992 was eroded because of a revenue shortfall.  
Estimated revenues for fiscal year 1997 equal $11.3 billion of which the 
majority are derived from income taxes (44.6%); sales taxes (34.8%); 
motor fuel taxes (4.9%); lottery proceeds (4.8%); fees and sales (3.3%); 
indigent care (1.3%); and all other taxes (6.2%).

Expenditures during fiscal year 1997 are estimated to equal $11.3 
billion which is allocated in the following manner:  education (54.2%); 
human resources (24.0%); public safety (8.5%); transportation (4.8%); 
debt service (3.6%); general government (1.6%); natural resources 
(1.2%); legislative/judicial (1.2%); and economic development (0.9%).

At the end of fiscal year 1996, the rainy day fund (which serves 
as a savings account for the state should revenue collections decline 
unexpectedly or uncontrollably) had $313 mm  (up to 3% of net revenue 
collections) available.

Georgia's lottery laws require the establishment of two reserves 
that are funded as a percentage of lottery collections to avoid 
disruption in the program should collections fall short of annual 
appropriations.  The two lottery reserves as of June 30, 1996 totalled 
as follows: shortfall reserve subaccount $50,306,302 and scholarship 
shortfall reserve subaccount $77,718,586 for a total lottery reserve 
equal to $128,024,888.  Net lottery proceeds grew to $558 million in 
fiscal 1996, were estimated at $546 million for fiscal 1997 and budgeted 
at $510 million in fiscal 1998.  Initially, expectations for net lottery 
proceeds in fiscal 1994 were $139 million.  As a result of the stronger 
than expected performance of the lottery, the state has set aside 
reserves of 10% of lottery proceeds as a revenue reserve and an 
additional amount as a scholarship shortfall reserve.

Estimated revenues for fiscal year 1998 equal $11.7 billion of 
which the majority are derived from income taxes (45.4%); sales taxes 
(34.8%); motor fuel taxes (4.8%); lottery proceeds (4.3%); fees and 
sales (3.3%); indigent care (1.3%); and all other taxes (6.1%).

Expenditures during fiscal year 1998 are estimated to equal $11.7 
billion which is allocated in the following manner:  education (55.8%); 
human resources (23.2%); public safety (8.4%); transportation (4.6%); 
debt service (3.3%); general government (1.5%); natural resources 
(1.1%); legislative/judicial (1.3%); and economic development (0.8%).

Environment

Governor Miller established the Preservation 2000 program in 1991 
in an effort to acquire and protect 100,000 acres of natural and 
environmentally sensitive land.  Total funding for Preservation 2000 
totaled $69.7 million of which $65 million was general obligation bonds.  
Governor Miller announced during 1995 his intention to establish the 
River Care 2000 Program, the guiding principle of this program is to 
preserve Georgia's 70,000 miles of rivers and streams.  A committee has 
been selected that is currently approving procedures for selecting 
riverfront lands to acquire.  Recommended state appropriations for 
fiscal year 1998 equals $93 million and $10 million in bonds will be 
issued for the River Care 2000 Program, brining the total amount 
available to River Care equal to $24.5 million since Governor Miller 
initiated the program.  


Transportation

The recommended state appropriation for the Department of 
Transportation during fiscal year 1998 equals $542 million. During 
fiscal year 1998, $100 million in general obligation bonds will be 
issued to continue work on the Governor's Road Improvement Program.  
With the bond funds, the department will have received over $710 million 
for the 2,697 mile developmental highway system during the Governor's 
administration.  Over 42% of the system has been completed or is under 
construction or right-of-way acquisition as of September 1996.

The motor fuel tax revenue estimate for fiscal year 1998 is $570 
million.  Of this amount $35 million is appropriated directly to the 
general obligation debt sinking fund to meet fiscal year 1998 debt 
service requirements on bonds previously issued on behalf of the 
Department of Transportation.  Five percent ($28.5 million) of the motor 
fuel funds provides funding that enables local governments to enhance 
their road systems and will assist in the construction of approximately 
1,900 miles of road.

Human Resources

The recommended state appropriations for fiscal year 1998 for the 
Department of Human Resources equals $1.2 billion, a decrease of $41 
million over the fiscal year 1997 budget.  The Governor is proposing a 
revised welfare budget to recognize the implementation of Georgia's new 
Technical Assistance for Needy Families (TANF) program effective January 
1, 1997.  A total of $533.3 million in combined state and federal block 
grant funds is recommended to provide assistance to needy families with 
children on a temporary basis and provide parents with job preparation, 
work opportunities, and other support services to enable them to become 
self-sufficient and leave the program as soon as possible.

Education

The recommended state appropriations for education for fiscal year 
1998 equals $4.5 billion, an increase of $156 million over the fiscal 
year 1997 budget.  Of the $4.5 billion in state appropriations, $176 
million will be used to provide a six percent pay increase for 
certificated personnel, continuing the Governors commitment to raise 
Georgia teachers' salaries.  Approximately $60 million will be used to 
reduce the class size of the high school program from 23 to 20.  Lottery 
funds in the amount of $26 million will be used to provide half-time 
technology specialists on site to provide K-12 teachers necessary 
training in the use and application of computers and advanced electronic 
technology.  General obligation bonds in the amount of $98 million will 
be issued for 33 school systems to fund new school construction and/or 
renovations.

The recommended state appropriations for Regents, University 
System of Georgia, for fiscal year 1998 equals $1.4 billion, an increase 
of $12 million over the fiscal year 1997 budget.  Of this amount, $69 
million will be used to provide a six percent pay increase for all 
employees of the Board of Regents in keeping with the Governor's 
commitment to raise faculty salaries.  The Miller Administration has 
funded over $833 million in new construction for the University system 
and during fiscal year 1998 an additional $75 million in bonds will be 
issued for eight new construction or repair projects for the University 
system.

Medicaid

The recommended state appropriations for fiscal year 1998 for the 
Department of Medical Assistance equal $1.3 billion, which is an 
increase of $7.7 million over the 1997 budget.  In fiscal year 1996, 
roughly one in six Georgians, or 16% of the state's population, was 
covered by Medicaid.  The Governor's recommendation reflects $37 million 
in savings in state funds from various cost saving and cost containment 
initiatives.  

Legal Matters

	The State from time to time is named as a party in certain 
lawsuits, which may or may not have a material adverse impact on the 
financial position of the State if decided in a manner adverse to the 
State's interests.  Certain of such lawsuits could have a significant 
impact on the State's financial position.

Ratings

	Moody's, S&P and Fitch gave Georgia's General Obligation Bonds, 
series 1997A, ratings of "Aaa", "AA+" and "AAA," respectively.  Series 
1997B and 1997C Bonds were rated AAA  by Fitch. 



APPENDIX F

See special note prior to Appendix B.
	
ADDITIONAL DISCUSSION OF SPECIAL FACTORS AFFECTING PENNSYLVANIA 
MUNICIPAL OBLIGATIONS 

General

	Pennsylvania had been historically identified as a heavy industry 
state.  That reputation has changed over the last thirty years as the 
coal, steel and railroad industries declined and the Commonwealth's 
business environment readjusted to reflect a more diversified industrial 
base.  This economic readjustment was a direct result of a long-term 
shift in jobs, investment and workers away from the Northeast part of 
the nation.  Currently, the major sources of growth in Pennsylvania are 
in the service sector, including trade, medical and health services, 
education and financial institutions.

	Pennsylvania's agricultural industries remain an important 
component of the Commonwealth's economic structure, accounting for more 
than $2.6 billion in crop and lives stock products annually.  
Agribusiness and food-related industries support $9 billion in economic 
activity annually, Over 51,000 farms form the backbone of the State's 
agricultural economy.  Farmland in Pennsylvania includes over four 
million acres of harvested cropland and four million acres of pasture 
and farm woodlands--nearly one-third of the Commonwealth's total land 
area.  Agricultural diversity in the Commonwealth is demonstrated by the 
fact that Pennsylvania ranks among the top ten states in the production 
of a number of agricultural products.

	Pennsylvania's natural resources include major deposits of coal, 
petroleum, natural gas and cement.  Extensive public and private forests 
provide a vast source of material for the lumber/wood products industry 
and the related furniture industry.  Additionally, the Commonwealth 
derives a good water supply from underground sources, abundant rainfall, 
and a large number of rivers, streams and man-made and natural lakes.

	Human resources are plentiful in Pennsylvania.  The work force is 
estimated at 5.9 million people, ranking as the sixth largest labor pool 
in the nation.  The high level of education embodied in the 
Commonwealth's work force fosters a wide variety of employment 
capabilities.  Pennsylvania's basic and higher education statistics 
compare favorably with other states in the nation.

	The Commonwealth is highly urbanized.  Of the Commonwealth's 1990 
census population, 79 percent residing the 15 Metropolitan Statistical 
Areas ("MSAs") of the Commonwealth.  The largest MSAs in the 
Commonwealth are those which include the cities of Philadelphia and 
Pittsburgh, which together contain almost 44 percent of the State's 
total population.  The population of Pennsylvania, 12.06 million people 
in 1996, according to the U.S. Bureau of the Census, represents a slight 
increase from the 1987 population of 11.81 million.  A high proportion 
(15.9 percent) of Pennsylvania's population is comprised of persons 65 
and over.  

	Manufacturing employment constitutes a diminished share of total 
employment within the Commonwealth.  Manufacturing, contributing 17.9 
percent of 1995 non-agricultural employment and 17.5 percent as of 
December 1996, has fallen behind both the services sector and the trade 
sector as the largest single source of employment within the 
Commonwealth.  In 1991, the services sector accounted for 28.6 percent 
of all non-agricultural employment while the trade sector accounted for 
22.8 percent.

	In 1994 and 1995, Pennsylvania's annual average unemployment rate 
was below the Middle Atlantic region's average, but slightly higher than 
that of the nation.  As of January, 1997 the seasonally adjusted 
unemployment rate for the Commonwealth was 4.7 percent, compared to 5.4 
percent for the United States.

The commonwealth of Pennsylvania and certain of its municipal 
subdivisions, including the City of Philadelphia, have undergone the 
financial difficulties and pressures that accompany a decline in 
economic conditions.  As the heavy industries historically associated 
with Pennsylvania - e.g., coal, steel and railroad - have declined with 
increasing competition for foreign producers, the services sector, 
including trade, medical and health services, education and financial 
institutions, has provided major new sources of growth.  Agriculture and 
related industries continue to be an important part of Pennsylvania/s 
economy.  

Budgetary Process

	All funds received by the Commonwealth are subject by statute to 
appropriation in specific amounts by the General Assembly or by 
executive authorizations by the Governor.  The Governor's budget 
encompasses both annual appropriations and executive authorizations.

	The Constitution mandates that total operating budget 
appropriations made by the General Assembly may not exceed the sum of 
(a) the actual and estimated revenues in a given year, and (b) the 
surplus of the preceding year.  The Constitution further specifies that 
a surplus of operating funds at the end of the fiscal year shall be 
appropriated.  That is, if funds remain from the end of a fiscal year 
they must be appropriated for the ensuing year.  Also, if a deficit 
occurs at year-end, funds must be provided for such a deficit.

	Pursuant to the Administrative Code, the revenue estimates used in 
the budget are determined by the executive branch.  In practice, the 
revenue estimates used to balance the operating budget consist of the 
appropriate fund's available surplus and its estimated cash receipts for 
the fiscal year as well as net accruals.  Lapses estimated to occur 
during the year or at year-end are not included; lapses are not 
available for appropriation until they occur.

	Under Pennsylvania's budgetary process, a deficit can occur if 
revenues are less than those estimated in the budget and the shortfall 
is not offset by any unappropriated surplus or by lapses during or at 
the end of the year or by legislative action to increase revenues or 
reduce appropriation.

	Both the Commonwealth of Pennsylvania and the City of Philadelphia 
have historically experienced significant revenue shortfalls.  On the 
other hand, rising demands on state programs, particularly for medical 
assistance and cash assistance programs, and the increased cost of 
special education programs and correction facilities and programs, have 
contributed to increased expenditures.  In response, the Commonwealth 
and the City of Philadelphia have, in recent years, sought to balanced 
budgets with a combination of tax increases and expenditure restraints.

To deal with its budget deficits, Philadelphia has considered 
significant service cuts and a plan to privatize certain city-provided 
services.  In addition, in 1991 the Commonwealth created the 
Pennsylvania Inter-Governmental cooperation Authority ("PICA"), with 
authority to issue notes and bonds on behalf of Philadelphia to cover 
budget shortfalls , to eliminate projected deficits and to fund capital 
spending.  PICA has issued approximately $1.76 billion of Special 
Revenue Bonds on behalf of the city.  However, its power to issue bonds 
for most purposes expired on December 31, 1994 and its power to issue 
bonds to finance cash flow deficits expired on December 31, 1996.  
PICA's authority to refund existing debt will not expire.  PICA had 
approximately $1.1 billion in special revenue bonds outstanding as of 
June 30, 1997.

Bond Ratings

Although there can be no assurance that such conditions will 
continue, the Commonwealth's general obligation bonds have recently been 
rated AA - by Standard & Poors, A1 by Moody's and AA by Fitch, while 
Philadelphia's general obligation bonds have recently been rated BBB and 
Baa by Standard & Poor's and Moody's, respectively.
    


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