--------------------------------------------------------------------------------

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                                        SMITH BARNEY                    
                                                                        
                                        A member of TravelersGroup[LOGO]
                                                                        
                                        Greenwich
                                        Street
                                        Municipal                       
                                        Fund Inc.                       
                                                                        
                                        Common Stock                    
                                                                        
                                        388 Greenwich Street            
                                        New York, New York 10013        
                                                                        
   
                                        FD01204 9/98                    
    

<PAGE>

--------------------------------------------------------------------------------
Prospectus                                                    September 28, 1998
--------------------------------------------------------------------------------

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

      Greenwich Street Municipal Fund Inc. (the "Fund") is a non-diversified,
closed-end management investment company that seeks as high a level of current
income exempt from Federal income tax as is consistent with the preservation of
principal. Under normal conditions, the Fund will, in seeking its investment
objective, invest substantially all of its assets in long-term, investment-grade
obligations issued by state and local governments, political subdivisions,
agencies and public authorities ("Municipal Obligations"). For a discussion of
the risks associated with certain of the Fund's investments, see "Investment
Objective and Policies."

   
      The Fund seeks to invest substantially all of its assets in Municipal
Obligations and, under normal conditions, at least 80% of the Fund's assets will
be invested in Municipal Obligations rated investment grade by Moody's Investors
Service Inc. ("Moody's"), Standard & Poor's Ratings Group ("S&P"), Fitch IBCA,
Inc. ("Fitch") or another nationally recognized statistical rating agency
("NRSRO"). The Fund is intended to operate in such a manner that dividends paid
by the Fund may be excluded by the Fund's shareholders from their gross incomes
for Federal income tax purposes. See "Investment objective and Policies" and
"Taxation."

      This Prospectus sets forth concisely the information about the Fund that a
prospective investor ought to know before investing and should be retained for
future reference. A Statement of Additional Information dated September 28, 1998
(the "SAI") containing additional information about the Fund has been filed with
the Securities and Exchange Commission ("SEC") and is hereby incorporated by
reference in its entirety into this Prospectus. A copy of the SAI may be
obtained without charge by calling or writing to the Fund at the telephone
number or address set forth above or by contacting a Salomon Smith Barney
Financial Consultant.
    

                                                           (Continued on page 2)

   
SALOMON SMITH BARNEY INC.

MUTUAL MANAGEMENT CORP.
    

Investment Manager and Administrator

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

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Prospectus (Continued)                                        September 28, 1998
--------------------------------------------------------------------------------

   
      Salomon Smith Barney Inc. ("Salomon Smith Barney") currently intends to
make a market in the Fund's Common Stock ("Common Stock"), although it is not
obligated to conduct market-making activities and any such activities may be
discontinued at any time without notice, at the sole discretion of Salomon Smith
Barney. The shares of Common Stock that may be offered from time to time
pursuant to this Prospectus were issued and sold by the Fund in a public
offering which commenced July 16, 1994, at a price of $12.00 per share. No
assurance can be given as to the liquidity of, or the trading market for, the
Common Stock as a result of any market-making activities undertaken by Salomon
Smith Barney. The Fund will not receive any proceeds from the sale of any Common
Stock offered pursuant to this Prospectus.
    

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


2
<PAGE>

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Table of Contents
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Prospectus Summary                                                             4
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Fund Expenses                                                                  7
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Financial Highlights                                                           8
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The Fund                                                                       9
--------------------------------------------------------------------------------
The Offering                                                                   9
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Use of Proceeds                                                                9
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Investment Objective and Policies                                              9
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Share Price Data                                                              18
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Net Asset Value                                                               18
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Taxation                                                                      19
--------------------------------------------------------------------------------
Management of the Fund                                                        20
--------------------------------------------------------------------------------
Dividends and Distribution; Dividend Reinvestment Plan                        22
--------------------------------------------------------------------------------
Description of Common Stock                                                   24
--------------------------------------------------------------------------------
Certain Provisions of the Articles of Incorporation                             
and Market Discount                                                           25
--------------------------------------------------------------------------------
Custodian and Transfer Agent                                                  26
--------------------------------------------------------------------------------
Experts                                                                       27
--------------------------------------------------------------------------------
Further Information                                                           27
--------------------------------------------------------------------------------
Appendix A                                                                   A-1
--------------------------------------------------------------------------------
    


                                                                               3
<PAGE>

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

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

The Fund The Fund is a non-diversified, closed-end management investment
company. See "The Fund."

Investment Objective The Fund seeks as high a level of current income exempt
from Federal income tax as is consistent with the preservation of principal. See
"Investment Objective and Policies."

Tax-Exempt Income The Fund is intended to operate in such a manner that
dividends paid by the Fund may be excluded by the Fund's shareholders from their
gross income for Federal income tax purposes. See "Investment Objective and
Policies" and "Taxation."

   
Quality Investments The Fund will invest substantially all of its assets in
long-term investment-grade Municipal Obligations. At least 80% of the Fund's
total assets will be invested in securities rated investment grade by Moody's,
S&P, Fitch or another NRSRO (for example, rated no lower than Baa, MIG or
Prime-1 by Moody's, BBB, SP-2 or A-1 by S&P or BBB or F-1 by Fitch). Up to 20%
of the Fund's total assets may be invested in unrated securities that are deemed
by the Fund's investment manager to be of a quality comparable to investment
grade. See "Investment Objective and Policies."

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

Listing NYSE

Symbol GSI

   
Investment Manager and Administrator Mutual Management Corp. (formerly known as
Smith Barney Mutual Funds Management Inc.) ("MMC"), serves as the Fund's
investment manager and administrator (the "Investment Manager" or
"Administrator"). The Investment Manager provides investment advisory and
management services to investment companies affiliated with Salomon Smith
Barney. MMC is a wholly owned subsidiary of Salomon Smith Barney Holdings Inc.
("Holdings"), which is in turn a wholly owned subsidiary of Travelers Group Inc.
("Travelers"). Subject to the supervision and direction of the Fund's Board of
Directors, the Investment Manager manages the securities held by the Fund in
accordance with the Fund's stated investment objective and policies, makes
investment decisions for the Fund, places orders to purchase and sell
    


4
<PAGE>

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

   
securities on behalf of the Fund and employs professional fund managers. MMC
also acts as administrator of the Fund and in that capacity provides certain
administrative services, including overseeing the Fund's non-investment
operations and its relations with other service providers and providing
executive and other officers to the Fund. The Fund pays the Investment Manager a
fee for services provided to the Fund that is computed daily and paid monthly at
the annual rate of 0.70% of the value of the Fund's average daily net assets.
The Fund pays MMC a fee for administrative services provided to the Fund that is
computed daily and paid monthly at the annual rate of 0.20% of the value of the
Fund's average daily net assets. The Fund will bear other expenses and costs in
connection with its operation in addition to the costs of investment management
services. See "Management of the Fund -- Investment Manager and Administrator."
    

Custodian PNC Bank, National Association ("PNC Bank") serves as the Fund's
custodian. See "Custodian and Transfer Agent."

Transfer Agent First Data Investor Services Group, Inc. ("First Data") serves as
the Fund's transfer agent, dividend-paying agent and registrar. See "Custodian
and Transfer Agent."

Dividends and Distributions The Fund expects to pay monthly dividends of net
investment income (income other than net realized capital gains) and to
distribute net realized capital gains, if any, annually. All dividends or
distributions with respect to shares of common stock are reinvested
automatically in additional shares through participation in the Fund's Dividend
Reinvestment Plan, unless a shareholder elects to receive cash. See "Dividends
and Distributions; Dividend Reinvestment Plan."

   
Risk Factors and Special Considerations Shares of common stock of closed-end
investment companies frequently trade at a discount from net asset value, or in
some cases trade at a premium. Shares of closed-end investment companies
investing primarily in fixed income securities tend to trade on the basis of
income yield on the market price of the shares and the market price may also be
affected by trading volume, general market conditions and economic conditions
and other factors beyond the control of the Fund. As a result, the market price
of the Fund's shares may be greater or less than the net asset value. Since the
commencement of the Fund's operations, the Fund's shares have generally traded
in the market at prices below net asset value.

      Some closed-end companies have taken certain actions, including the
repurchase of common stock in the market at market prices and the making of one
or more tender offers for common stock at net asset value, in an effort to
reduce or mitigate the discount, and others have converted to an open-end
investment company, the shares of which are redeemable at net asset value. The
Fund's Board of Directors has seen no reason to adopt any of the steps mentioned
above, which some other closed-end funds have used to address the discount,
although the Fund
    


                                                                               5
<PAGE>

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

   
may seek to address the discount by reducing fees on a temporary basis in order
to increase the dividend yield. There can be no assurance that any other actions
will be taken or, if undertaken, will cause the Fund's shares to trade at a
price equal to their net asset value.

      The Fund will not purchase securities that are not rated in one of the
highest four categories by any NRSRO at the time of purchase. Although
obligations rated Baa by Moody's or BBB by S&P or Fitch are considered to be
investment grade, they may be subject to greater risks than other higher-rated
investment grade securities.
    

      The Fund may invest up to 20% of its total assets in unrated securities
that the Investment Manager determines to be of comparable quality to the
securities rated investment grade in which the Fund may invest. Dealers may not
maintain daily markets in unrated securities and retail secondary markets for
many of them may not exist; this lack of markets may affect the Fund's ability
to sell these securities when the Investment Manager deems it appropriate. The
Fund has the right to invest without limitation in state and local obligations
that are "private activity bonds," the income from which may be taxable as a
specific preference item for purposes of the Federal alternative minimum tax
(the "AMT"). Thus, the Fund may not be a suitable investment for investors who
are subject to the AMT. See "Investment Objective and Policies" and "Taxation."

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

      The combined annual rate of fees paid by the Fund for advisory and
administrative services, 0.90% of the value of the Fund's average daily net
assets, is higher than the rates for similar services paid by other publicly
offered, closed-end management investment companies that have investment
objectives and policies similar to those of the Fund. The Fund will bear, in
addition to the costs of advisory and administrative services, other expenses
and costs in connection with its operation. See "Management of the Fund."


6
<PAGE>

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

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

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

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

   
--------------------------------------------------------------------------------
Annual Expenses
    (as a percentage of net assets attributable to Common Stock)
    Management Fees* ................................................      0.90%
    Other Expenses** ................................................      0.10%
--------------------------------------------------------------------------------
Total Annual Operating Expenses .....................................      1.00%
--------------------------------------------------------------------------------
*     On September 1, 1998, MMC instituted a voluntary waiver of a portion of
      its management fees in order to enable the Fund to increase its dividend
      yield. The waiver is a temporary measure and may be terminated at any time
      by MMC.
**    "Annual Expenses," as shown above, are based upon amounts of expenses for
      the fiscal year ended May 31, 1998.
    

   EXAMPLE

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

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

   
              One Year         Three Years      Five Years         Ten Years
--------------------------------------------------------------------------------
                $10                $32             $55               $122
--------------------------------------------------------------------------------
    

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


                                                                               7
<PAGE>

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

   
The following information for the three years ended March 31, 1998 has been
audited by KPMG Peat Marwick LLP, independent auditors, whose report thereon
appears in the Fund's annual report dated May 31, 1998. The following
information for the fiscal period ended May 31, 1995 has been audited by other
independent auditors. The information set forth below should be read in
conjunction with the financial statements and related notes that also appear in
the Fund's Annual Report to Shareholders, which is incorporated by reference
into this Prospectus.

For a share of capital stock outstanding throughout each period:

For the year ended May 31,                 1998      1997      1996     1995(1)
================================================================================
Net Asset Value, Beginning of Year        $11.59    $12.19    $12.84   $12.00
--------------------------------------------------------------------------------
Income From Operations:
  Net investment income                     0.50      0.66      0.66     0.63
  Net realized and unrealized gain (loss)   0.66     (0.26)    (0.42)    0.77
--------------------------------------------------------------------------------
Total Income From Operations                1.16      0.40      0.24     1.40
--------------------------------------------------------------------------------
Offering Costs Charged to Paid-In Capital     --        --        --    (0.02)
--------------------------------------------------------------------------------
Less Distributions From:
  Net investment income                    (0.60)    (0.66)    (0.66)   (0.54)
  In excess of net investment income       (0.01)       --        --       --
  Net realized gains                       (0.36)    (0.34)    (0.23)      --
--------------------------------------------------------------------------------
Total Distributions                        (0.97)    (1.00)    (0.89)   (0.54)
--------------------------------------------------------------------------------
Net Asset Value, End of Year              $11.78    $11.59    $12.19   $12.84
--------------------------------------------------------------------------------
Total Return, Based on Market Value        (0.20)%    8.97%     5.52%    1.65%++
--------------------------------------------------------------------------------
Total Return, Based on Net Asset Value*    10.53%     3.61%     2.40%   12.28%++
--------------------------------------------------------------------------------
Net Assets, End of Year (millions)          $234      $228      $238     $251
--------------------------------------------------------------------------------
Ratios to Average Net Assets:
  Expenses                                  1.00%     1.03%     1.06%    1.05%+
  Net investment income                     4.25      5.57      5.17     5.63+
--------------------------------------------------------------------------------
Portfolio Turnover Rate                       85%      115%       42%     115%
--------------------------------------------------------------------------------
Market Value, End of Year                $10.438   $11.375   $11.375  $11.625
================================================================================
(1)   For the period from June 24, 1994 (commencement of operations) to May 31,
      1995.
*     The total return calculation assumes that dividends are reinvested in
      accordance with the Fund's Dividend Reinvestment Plan.
++    Total return is not annualized, as it may not be representative of the
      total return for the year.
+     Annualized.
    


8
<PAGE>

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

   
      The Fund is a non-diversified, closed-end management investment company
that seeks as high a level of current income exempt from Federal income tax as
is consistent with the preservation of principal. The Fund, which was
incorporated under the laws of the State of Maryland on February 19, 1993, is
registered under the 1940 Act and has its principal office at 388 Greenwich
Street, New York, New York 10013. The Fund's telephone number is (800) 331-1710.
    

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

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

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

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

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

   
      The Fund's investment objective is to seek as high a level of current
income exempt from Federal income taxes as is consistent with the preservation
of principal. The Fund's investment objective may not be changed without the
affirmative vote of the holders of a "majority of the outstanding voting
securities" (as defined in the 1940 Act) of the Fund. In seeking its objective,
the Fund will invest in long-term Municipal Obligations. The Fund will operate
subject to a fundamental investment policy providing that, under normal
conditions, the Fund will invest at least 80% of its net assets in Municipal
Obligations. No assurance can be given that the Fund's investment objective will
be achieved.
    


                                                                               9
<PAGE>

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

   
      The Fund normally invests at least 80% of its net assets in Municipal
Obligations rated investment grade, that is, rated within the highest four
ratings categories by any NRSRO. Up to 20% of the Fund's total assets may be
invested in unrated securities that are deemed by the Investment Manager to be
of a quality comparable to investment grade. The Fund will not invest in
Municipal Obligations that are not rated investment grade by any NRSRO at the
time of purchase. A description of the relevant Moody's, S&P and Fitch ratings
is set forth in the Appendix to the SAI. Although Municipal Obligations rated
Baa by Moody's or BBB by S&P or Fitch are considered to be investment grade,
they may be subject to greater risks than other higher-rated investment-grade
securities. Municipal Obligations rated Baa by Moody's, for example, are
considered medium-grade obligations that lack outstanding investment
characteristics and have speculative characteristics as well. Municipal
Obligations rated BBB by S&P are regarded as having an adequate capacity to pay
principal and interest. Municipal Obligations rated BBB by Fitch are deemed to
be subject to a higher likelihood that their rating will fall below investment
grade than higher-rated bonds.
    

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

      The Fund generally will not invest more than 25% of its total assets in
any industry. Governmental issuers of Municipal Obligations are not considered
part of any industry. Municipal Obligations backed only by the assets and
revenues of non-governmental users may be deemed to be issued by the
non-governmental users, and would be subject to the Fund's 25% industry
limitation. The Fund may invest more than 25% of its total assets in a broad
segment of the Municipal Obligations market if the Investment Manager determines
that the yields available from obligations in a particular segment of the market
justify the additional risks associated with a large investment in the segment.
The Fund reserves the right to invest more than 25% of its assets in industrial
development bonds ("IDBs") or in issuers located in the same state, although it
has no current intention of investing more than 25% of its assets in issuers
located in the same state. If the Fund were to invest more than 25% of its total
assets in issuers located in the same state, it would be 


10
<PAGE>

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

more susceptible to adverse economic, business or regulatory conditions in that
state.

      Municipal Obligations are classified as general obligation bonds, revenue
bonds and notes. General obligation bonds are secured by the issuer's pledge of
its full faith, credit and taxing power for the payment of principal and
interest. Revenue bonds are payable from the revenue derived from a particular
facility or class of facilities or, in some cases, from the proceeds of a
special excise tax or other specific revenue source, but not from the general
taxing power. Notes are short-term obligations of issuing municipalities or
agencies and are sold in anticipation of a bond sale, collection of taxes or
receipt of other revenues. Municipal Obligations bear fixed, floating and
variable rates of interest, and variations exist in the security of Municipal
Obligations, both within a particular classification and between
classifications. The types of Municipal Obligations in which the Fund may invest
are described in Appendix A to this Prospectus.

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

   
      Opinions relating to the validity of Municipal Obligations and to the
exemption of interest on them from Federal taxes are rendered by bond counsel to
the respective issuers at the time of issuance. Neither the Fund nor the
Investment Manager will review the procedures relating to the issuance of
Municipal Obligations or the basis for opinions of counsel. Issuers of Municipal
Obligations may be subject to the provisions of bankruptcy, insolvency and other
laws affecting the rights and remedies of creditors. In addition, the
obligations of those issuers may become subject to laws enacted in the future by
Congress, state legislatures or referenda extending the time for payment of
principal and/or interest, or imposing other constraints upon enforcement of the
obligations or upon the ability of municipalities to levy taxes. The possibility
also exists that, as a result of litigation or other conditions, the power or
ability of any issuer to pay, when due, the principal of, and interest on, its
obligations may be materially affected.
    

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


                                                                              11
<PAGE>

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

      Investment Techniques

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

   
      When-Issued and Delayed Delivery Transactions. The Fund may purchase
municipal securities on a "when-issued" and "delayed delivery" basis and may
purchase or sell municipal securities on a "delayed delivery" basis in order to
hedge against anticipated changes in interest rates and prices. No income
accrues to the Fund on municipal securities in connection with such transactions
prior to the date the Fund actually takes delivery of such securities. These
transactions are subject to market fluctuation; the value of the municipal
securities at delivery may be more or less than their purchase price, and yields
generally available on municipal securities when delivery occurs may be higher
than yields on the municipal securities obtained pursuant to such transactions.
Because the Fund relies on the buyer or seller, as the case may be, to
consummate the transaction, failure by the other party to complete the
transaction may result in the Fund missing the opportunity of obtaining a price
or yield considered to be advantageous. When the Fund is the buyer in such a
transaction, however, it will maintain, in a segregated account with its
custodian, cash, debt securities of any grade or equity securities, having a
value equal to or greater than the Fund's purchase commitments, provided such
securities have been determined by the Investment Manager to be liquid and
unencumbered, and are marked to market daily, pursuant to guidelines established
by the Directors. When the Fund is the seller in such a transaction, it will
cover its commitment to deliver the security by maintaining positions in
portfolio securities that would serve to satisfy or offset the risk of such
obligations. The Fund will make commitments to purchase municipal securities on
such basis only with the intention of actually acquiring these securities, but
the Fund may sell such securities prior to the settlement date if such sale is
considered to be advisable.

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


12
<PAGE>

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

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

      Financial Futures and Options Transactions. To hedge against a decline in
the value of Municipal Obligations it owns or an increase in the price of
Municipal Obligations it proposes to purchase, the Fund may enter into financial
futures contracts and invest in options on financial futures contracts that are
traded on a U.S. exchange or board of trade. The futures contracts or options on
futures contracts that may be entered into by the Fund will be restricted to
those that are either based on an index of Municipal Obligations or relate to
debt securities the prices of which are anticipated by the Investment Manager to
correlate with the prices of the Municipal Obligations owned or to be purchased
by the Fund. Commodity Futures Trading Commission ("CFTC") regulations
applicable to the Fund require that its transactions in futures and options be
engaged in for "bona fide hedging" purposes or other permitted purposes,
provided that aggregate initial margin deposits and premiums required to
establish positions other than those considered by the CFTC to be "bona fide
hedging" will not exceed 5% of the Fund's net asset value, after taking into
account unrealized profits and unrealized losses on such contracts.

      A financial futures contract provides for the future sale by one party and
the purchase by another party of a certain amount of a specified property at a
specified price, date, time and place. Unlike a direct investment in a futures
contract, an option on a financial futures contract gives the purchaser the
right, in return for the premium paid, to assume a position in the financial
futures contract at a specified exercise price at any time prior to the
expiration date of the option. Upon exercise of an option, the delivery of the
futures position by the writer of the option to the holder of the option will be
accompanied by delivery of the accumulated balance in the writer's futures
margin account, which represents the amount by which the market price of the
futures contract exceeds, in the case of a call, or is less than, in the case of
a put, the exercise price of the option on the futures contract. The potential
loss related to the purchase of an option on financial futures contracts is
limited to the premium paid for the option (plus transaction costs). The value
of the option may change daily and that change would be reflected in the net
asset value of the Fund.

      Lending Securities. The Fund is authorized to lend securities it holds to
brokers, dealers and other financial organizations, but it will not lend
securities to any affiliate of the Investment Manager unless the Fund applies
for and receives specific 


                                                                              13
<PAGE>

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

authority to do so from the SEC. Loans of the Fund's securities, if and when
made, may not exceed 33 1/3% of the value of the Fund's total assets taken at
value. The Fund's loans of securities will be collateralized by cash, letters of
credit or U.S. government securities that will be maintained at all times in a
segregated account with PNC Bank in an amount equal to the current market value
of the loaned securities.

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

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


14
<PAGE>

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

      Risk Factors and Special Considerations

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

      Municipal Obligations. Market rates of interest available with respect to
Municipal Obligations generally may be lower than those available with respect
to taxable securities, although the differences may be wholly or partially
offset by the effects of Federal income tax on income derived from taxable
securities. The amount of available information about the financial condition of
issuers of Municipal Obligations may be less extensive than that for corporate
issuers with publicly traded securities, and the market for Municipal
Obligations may be less liquid than the market for corporate debt obligations.
Although the Fund's policy will generally be to hold Municipal Obligations until
their maturity, the relative illiquidity of some of the Fund's securities may
adversely affect the ability of the Fund to dispose of the securities in a
timely manner and at a fair price. The market for less liquid securities tends
to be more volatile than the market for more liquid securities, and market
values of relatively illiquid securities may be more susceptible to change as a
result of adverse publicity and investor perceptions than are the market values
of more liquid securities. Although the issuer of certain Municipal Obligations
may be obligated to redeem the obligations at face value, redemption could
result in capital losses to the Fund to the extent that the Municipal
Obligations were purchased by the Fund at a premium to face value.

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

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

      Municipal Leases. Municipal leases in which the Fund may invest have
special risks not normally associated with Municipal Obligations. Municipal
leases frequently contain non-appropriation clauses that provide that the
governmental issuer 


                                                                              15
<PAGE>

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

of the obligation need not make future payments under the lease or contract
unless money is appropriated for that purpose by a legislative body annually or
on another periodic basis. Moreover, although a municipal lease typically will
be secured by financed equipment or facilities, the disposition of the equipment
or facilities in the event of foreclosure might prove difficult.

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

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

      Lending Securities. The risks associated with lending Fund securities, as
with other extensions of credit, consist of possible loss of rights in the
collateral should the borrower fail financially.

      Financial Futures and Options. Although the Fund intends to enter into
financial futures contracts and options on financial futures contracts that are
traded on a U.S. exchange or board of trade only if an active market exists for
those instruments, no assurance can be given that an active market will exist
for them at any particular time. If closing a futures position in anticipation
of adverse price movements is not possible, the Fund would be required to make
daily cash payments of variation margin. In those circumstances, an increase in
the value of the portion of the Fund's investments being hedged, if any, may
offset partially or completely losses on the futures contract. No assurance can
be given, however, that the price of the securities being hedged will correlate
with the price movements in a futures contract and, thus, provide an offset to
losses on the futures contract or option on the futures contract. In addition,
in light of the risk of an imperfect correlation between securities held by the
Fund that are the subject of a hedging transaction and the futures or options
used as a hedging device, the hedge may not be fully effective because, for
example, losses on the securities held by the Fund may be in excess of gains on
the futures contract or losses on the futures contract may be in excess of gains
on the securities held by the Fund that were the subject of the hedge. If the
Fund has hedged against the possibility of an increase in interest rates
adversely affecting the value of securities it holds and rates decrease instead,
the Fund will lose part or all of the benefit of the increased value of
securities that it has hedged because it will have offsetting losses in its
futures or options positions.


16
<PAGE>

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

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

      Investment Restrictions

   
      The Fund has adopted certain fundamental investment restrictions that may
not be changed without the prior approval of the holders of a "majority of the
outstanding voting securities of the Fund," within the meaning of the 1940 Act.
A "majority of the outstanding voting securities" for this purpose means the
lesser of (1) 67% or more of the shares of the Fund's Common Stock present at a
meeting of shareholders, if the holders of 50% of the outstanding shares are
present or represented by proxy at the meeting or (2) more than 50% of the
outstanding shares. Among the investment restrictions applicable to the Fund is
that the Fund is prohibited from borrowing money, except for temporary or
emergency purposes, or for clearance of transactions, and then only in amounts
not exceeding 15% of its total assets (not including the amount borrowed) and as
otherwise described in this Prospectus. When the Fund's borrowings exceed 5% of
the value of its total assets, the Fund will not make any additional
investments. In addition, the Fund will not invest more than 25% of its total
assets in the securities of issuers in any single industry, except that this
limitation will not be applicable to the purchase of U.S. government securities.
Also, the Fund may not purchase securities other than Municipal Obligations and
Taxable Investments. For a complete listing of the investment restrictions
applicable to the Fund, see "Investment Objective and Policies -- Investment
Restrictions" in the SAI. All percentage limitations included in the investment
restrictions apply at the time of an investment by the Fund, and any subsequent
change in any applicable percentage resulting from market fluctuations will not
require the Fund to dispose of any security that it holds.
    


                                                                              17
<PAGE>

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

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

      The following table sets forth the high and low sales prices for the
Fund's Common Stock, the net asset value per share and the discount or premium
to net asset value represented by the quotation for each quarterly period during
the last two fiscal years and for the first quarter of 1998.

                     Quarterly High Price             Quarterly Low Price
                     --------------------             -------------------
                                     Premium                         Premium
                 Net Asset  NYSE   (Discount)     Net Asset   NYSE  (Discount)
                   Value    Price    to NAV         Value    Price   to NAV
================================================================================
 8/31/96          $11.98   $11.750    (1.96)%      $12.10   $11.250   (7.56)%
11/29/96           12.33    11.750    (4.70)        11.98    11.375   (5.05)  
 2/28/97           12.29    11.750    (4.39)        11.65    11.250   (3.43)  
 5/30/97           11.62    11.025    (5.12)        11.26    11.125   (1.20)  
 8/29/97           11.98    12.000     0.17         11.71    11.500   (1.79)  
11/30/97           11.94    11.688    (2.11)        11.76    11.063   (5.92)  
 2/28/98           12.08    11.813    (2.21)        11.74    11.063   (5.76)  
 5/31/98           11.81    11.500    (2.62)        11.62    10.438  (10.17)  
 8/31/98           11.84    10.813    (8.67)        11.72    10.063  (14.13)  
================================================================================

      As of September 11, 1998, the price of Common Stock as quoted on the NYSE
was $10.375, representing a 11.69% discount from the Common Stock's net asset
value calculated on that day.
    

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

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

      The valuation of the Fund's assets is made by the Investment Manager after
consultation with an independent pricing service (the "Service") approved by the
Board of Directors. When, in the judgment of the Service, quoted bid prices for
investments are readily available and are representative of the bid side of the


18
<PAGE>

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

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

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

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

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

   
      Exempt-interest dividends attributable to interest received by the Fund on
certain "private-activity" bonds will be treated as a specific tax preference
item to be included in a shareholder's AMT computation. In addition to the AMT,
corporate shareholders must include this percentage as a component in the
corporate environmental tax computation. 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.


                                                                              19
<PAGE>

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

      The interest expense incurred by a shareholder on borrowings made to
purchase or carry Fund 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 Fund from interest income on taxable investments,
net realized short-term securities gains, and all, or a portion of, any gains
realized from the sale or other disposition of certain market discount bonds are
subject to Federal income tax as ordinary income. Distributions, if any, from
net realized long-term securities gains are taxable as long-term capital gains,
regardless of the length of time a shareholder has owned Fund shares.

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

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

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

      Board of Directors

      Overall responsibility for management and supervision of the Fund rests
with the Fund's Board of Directors. The Directors approve all significant
agreements with the Fund's Investment Manager, Administrator, custodian and
transfer agent. The day-to-day operations of the Fund are delegated to the
Fund's Investment Manager. The SAI contains background information regarding
each Director and executive officer of the Fund.

      Investment Manager and Administrator

   
      MMC, located at 388 Greenwich Street, New York, New York 10013, serves as
the Fund's Investment Manager. MMC (through its predecessor entities) has been
in the investment counseling business since 1968 and is a registered invest-
    


20
<PAGE>

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

   
ment adviser. MMC renders investment advice to a wide variety of individuals and
institutional clients that had aggregate assets under management as of August
31, 1998 in excess of $106 billion. MMC is wholly owned by Holdings, the parent
company of Salomon Smith Barney. Holdings is a wholly owned subsidiary of
Travelers, a 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. MMC, Holdings and Salomon Smith
Barney are each located at 388 Greenwich Street, New York, New York 10013.

      Subject to the supervision and direction of the Fund's Board of Directors,
the Investment Manager manages the securities held by the Fund in accordance
with the Fund's stated investment objective and policies, makes investment
decisions for the Fund, places orders to purchase and sell securities on behalf
of the Fund and employs managers and securities analysts who provide research
services to the Fund. The Fund pays the Investment Manager a fee for investment
advisory services provided to the Fund that is computed daily and paid monthly
at the annual rate of 0.70% of the value of the Fund's average daily net assets.
In addition, MMC serves as the Fund's administrator and is paid a fee by the
Fund that is computed daily and paid monthly at an annual rate of 0.20% of the
value of its average daily net assets.

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

      On April 6, 1998, Travelers announced that it had entered into a Merger
Agreement with Citicorp. The transaction, which was originally 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 
    


                                                                              21
<PAGE>

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

   
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. Salomon Smith Barney
and the Manager believe that the Manager's services under the Management
Agreement and the market-making activities performed by Salomon 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 and
administrative activities by subsidiaries of bank holding companies. If Salomon
Smith Barney and the Manager, or their affiliates, were to be prevented from
acting as the manager or administrator, 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.
    

      Fund Management

   
      Joseph P. Deane, Vice President and Investment Officer of the Fund, is
primarily responsible for the management of the Fund's assets. Mr. Deane has
served in this capacity since the Fund commenced operations in 1994 and manages
the day-to-day operations of the Fund, including making all investment
decisions. Mr. Deane is an Investment Officer of MMC and is the senior portfolio
manager for a number of investment companies and other accounts investing in
tax-exempt securities.
    

--------------------------------------------------------------------------------
Dividends and Distribution; Dividend Reinvestment Plan
--------------------------------------------------------------------------------

   
      The Fund generally expects to pay monthly dividends of net investment
income (income other than net realized capital gains) and to distribute net
realized capital gains, if any, annually. From time to time, when the Fund makes
a substantial capital gains distribution, it may do so in lieu of paying its
regular monthly dividend. All dividends or distributions with respect to shares
of Common Stock are reinvested automatically in additional shares through
participation in the Fund's Dividend Reinvestment Plan (the "Plan"), unless a
shareholder elects to receive cash.

      Under the Plan, a shareholder whose shares of Common Stock are registered
in his or her own name will have all distributions from the Fund reinvested
automatically by First Data as purchasing agent under the Plan, unless the
shareholder elects to receive cash. Distributions with respect to shares
registered in the name of a broker-dealer or other nominee (that is, in "street
    


22
<PAGE>

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

   
name") will be reinvested by the broker or nominee in additional shares under
the Plan, unless the service is not provided by the broker or nominee or the
shareholder elects to receive distributions in cash. Investors who own Common
Stock registered in street name should consult their broker-dealers for details
regarding reinvestment. All distributions to Fund shareholders who do not
participate in the Plan will be paid by check mailed directly to the record
holder by or under the direction of First Data as dividend paying agent.

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

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

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


                                                                              23
<PAGE>

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

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

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

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

   
                                                           Amount Outstanding
                                                          Exclusive of Shares
                                        Amount Held    Held by Portfolio for Its
                         Amount       by Portfolio for     Own Account as of
 Title of Class        Authorized     Its Own Account      September 11, 1998
================================================================================
  Common Stock      500,000,000 Shares       0                 19,882,055
================================================================================
    

      No shares, other than those currently outstanding, are offered for sale
pursuant to this Prospectus. All shares of Common Stock have equal
non-cumulative voting rights and equal rights with respect to dividends, assets
and liquidation. Shares of Common Stock will be fully paid and non-assessable
when issued and have no preemptive, conversion or exchange rights. A majority of
the votes cast at any meeting of the shareholders is sufficient to take or
authorize action, except for election of Directors or as otherwise provided in
the Fund's Articles of Incorporation as described under "Certain Provisions of
the Articles of Incorporation and Market Discount."

   
      Under the rules of the NYSE applicable to listed companies, the Fund is
required to hold an annual meeting of shareholders in each year. If the Fund's
shares are no longer listed on the NYSE (or any other national securities
exchange the rules of which require annual meetings of shareholders), the Fund
may decide not to hold annual meetings of shareholders. See "Stock Purchases and
Tenders" in the SAI.
    

      The Fund has no current intention of offering additional shares, except
that additional shares may be issued under the Plan. See "Dividends and
Distributions; 


24
<PAGE>

--------------------------------------------------------------------------------
Description of Common Stock (continued)
--------------------------------------------------------------------------------

   
Dividend Reinvestment Plan." Such offerings of shares, if made, will require
approval of the Fund's Board of Directors and will be subject to the requirement
of the 1940 Act that shares may not be sold at a price below the then-current
net asset value (exclusive of underwriting discounts and commissions) except in
connection with an offering to existing shareholders or with the consent of
holders of a majority of the Fund's outstanding shares.
    

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

      Anti-Takeover Provisions

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

      The Board of Directors is classified into three classes, each with a term
of three years with only one class of Directors standing for election in any
year. Such classification may prevent replacement of a majority of the Directors
for up to a two-year period. The Articles of Incorporation provide that the
maximum number of Directors that may constitute the Fund's entire board is 12.
Directors may be removed from office, or the maximum number of Directors
increased, only by vote of at least 75% of the shares entitled to be voted on
the matter. If approved by two-thirds of the Fund's Directors, a majority of the
shares entitled to vote may approve the conversion of the Fund from a closed-end
to an open-end investment company. If fewer than two-thirds of the Directors
approve such conversion, the affirmative vote of shareholders holding at least
two-thirds of the outstanding shares will be required to approve such action. If
approved by three-fourths of the Fund's Directors, a majority of the shares
entitled to vote may approve: (i) the dissolution or liquidation of the Fund;
(ii) the merger, consolidation or share exchange of the Fund with or into any
other person; or (iii) any sale, lease, exchange or other disposition by the
Fund of any assets of the Fund having an aggregate market value of $1,000,000,
except for transactions in securities in the ordinary course of business. If
fewer than three-fourths of the Directors approve the actions described in (i)
through (iii) above, or in the case of any business combination described above,
the affirmative vote of shareholders holding at least three-fourths of the
outstanding shares will be required. The affirmative vote of at least 75% of the
shares will be required to amend the Articles of Incorporation or By-Laws to
change any of the foregoing provisions.

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


                                                                              25
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--------------------------------------------------------------------------------
Certain Provisions of the Articles of Incorporation (continued)
--------------------------------------------------------------------------------

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

      Market Discount

      Shares of common stock of closed-end investment companies frequently trade
at a discount from net asset value, or in some cases trade at a premium. Shares
of closed-end investment companies investing primarily in fixed-income
securities tend to trade on the basis of income yield on the market price of the
shares and the market price may also be affected by trading volume, general
market conditions and economic conditions, and other factors beyond the control
of the Fund. As a result, the market price of the Fund's shares may be greater
or less than the net asset value. Since the commencement of the Fund's
operations, the Fund's shares have traded in the market at prices that were at
times equal to, but generally were below, net asset value.

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

   
      The Fund's Board of Directors has seen no reason to adopt any of the steps
specified above, which some other closed-end funds have used to address the
discount. The experience of many closed-end funds suggests that the effect of
many of these steps (other than open-ending) on the discount may be temporary or
insignificant. Accordingly, there can be no assurance that any of these actions
will be taken or, if undertaken, will cause the Fund's shares to trade at a
price equal to their net asset value. The Fund's Investment Manager may
involuntarily waive its fees from time to time in order to increase the Fund's
dividend yield in an effort to reduce the discount. Any such waiver may be
terminated at any time, and there can be no assurance that such actions would be
successful at reducing the discount.
    

--------------------------------------------------------------------------------
Custodian and Transfer Agent
--------------------------------------------------------------------------------

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


26
<PAGE>

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

      The audited financial statements have been incorporated by reference in
the SAI in reliance upon the report of KPMG Peat Marwick LLP, independent
auditors, and upon the authority of said firm as experts in accounting and
auditing.

--------------------------------------------------------------------------------
Further Informatioon
--------------------------------------------------------------------------------

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

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


                                                                              27
<PAGE>

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

                         Types of Municipal Obligations

   
      The Fund may invest in the following types of Municipal Obligations and in
such other types of Municipal Obligations as may be described in the Prospectus.
    

      Municipal Bonds

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

      Industrial Development Bonds and Private Activity Bonds

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

      Municipal Lease Obligations

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


                                                                             A-1
<PAGE>

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

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 Fund will be considered illiquid securities unless the Fund's Board of
Directors determines on an on-going basis 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
Fund's ability to recover under the lease in the event of non-appropriation or
default will be limited solely to the repossession of the leased property,
without recourse to the general credit of the lessee, and disposition of the
property in the event of foreclosure might be difficult. The Fund will not
invest more than 5% of its assets in such "non-appropriation" municipal lease
obligations.
    

      Zero Coupon Obligations

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

      Floating- and Variable-Rate Obligations

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


A-2
<PAGE>

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

   
market for variable-and floating-rate obligations held by the Fund, although the
Fund may be able to obtain payment of principal at face value by exercising the
demand feature of the obligation.
    

      Participation Interests

   
      The Fund may invest up to 5% of its total assets in participation
interests in municipal bonds, including IDBs, PABs and floating- and
variable-rate securities. A participation interest gives the Fund an undivided
interest in a municipal bond owned by a bank. The Fund has the right to sell the
instrument back to the bank. If the participation interest is unrated, it will
be backed by an irrevocable letter of credit or guarantee of a bank that the
Fund's Board of Directors has determined meets certain credit quality standards
or the payment obligation will otherwise be collateralized by U.S. government
securities. The Fund will have the right, with respect to certain participation
interests, to draw on the letter of credit on demand, after specified notice for
all or any part of the principal amount of the Fund's participation interest,
plus accrued interest. Generally, the Fund intends to exercise the demand under
the letters of credit or other guarantees only upon a default under the terms of
the underlying bond, or to maintain the Fund's assets in accordance with its
investment objective and policies. The ability of a bank to fulfill its
obligations under a letter of credit or guarantee might be affected by possible
financial difficulties of its borrowers, adverse interest rate or economic
conditions, regulatory limitations or other factors. MMC will monitor the
pricing, quality and liquidity of the participation interests held by the Fund
and the credit standing of the banks issuing letters of credit or guarantees
supporting such participation interests on the basis of published financial
information reports of rating services and bank analytical services.
    

      Custodial Receipts

   
      The Fund may acquire custodial receipts or certificates underwritten by
securities dealers or banks that evidence ownership of future interest payments,
principal payments or both on certain Municipal Obligations. The underwriter of
these certificates or receipts typically purchases Municipal Obligations and
deposits the obligations in an irrevocable trust or custodial account with a
custodian bank, which then issues receipts or certificates that evidence
ownership of the periodic unmatured coupon payments and the final principal
payment on the obligations. Custodial receipts evidencing specific coupon or
principal payments have the same economic attributes as zero coupon Municipal
Obligations described above. Although under the terms of the custodial receipt
the Fund would be typically authorized to assert its rights directly against the
issuer of the underlying obligation, the Fund could be required to assert
through the custodian bank those rights that may exist against the underlying
issuer. Thus, in the event the underlying issuer fails to pay principal or
interest when due, the Fund may be subject to delays, expenses and risks that
are 
    


                                                                             A-3
<PAGE>

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

   
greater than those that would have been involved if the Fund had purchased a
direct obligation of the issuer. In addition, in the event that the trust or
custodial account in which the underlying security has been deposited is
determined to be an association taxable as a corporation, instead of a
non-taxable entity, the yield on the underlying security would be reduced in
recognition of any taxes paid.
    

      Municipal Obligation Components

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

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