File No. 2-99861

SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM N-1A

POST-EFFECTIVE AMENDMENT NO.    39    
to the
REGISTRATION STATEMENT UNDER
THE SECURITIES ACT OF 1933

and

POST-EFFECTIVE AMENDMENT NO.    40    
to the
REGISTRATION STATEMENT UNDER
THE INVESTMENT COMPANY ACT OF 1940


SMITH BARNEY MUNI FUNDS
(Formerly, Smith Barney Muni Bond Funds)
(Exact name of Registrant as specified in the Declaration of 
Trust)

388 Greenwich Street, New York, New York 10013
(Address of principal executive offices)

(212) 816-6474
(Registrant's telephone number)

Christina T. Sydor
388 Greenwich Street New York, New York 10013 (22nd floor)
(Name and address of agent for service)


Rule 24f-2(a) (1) Declaration:

The shares of beneficial interest of Smith Barney Muni Funds 
previously registered hereunder as an indefinite number of shares 
of beneficial interest are classified as Florida Portfolio Shares, 
New Jersey Portfolio Shares, Limited Term Portfolio Shares, 
National Portfolio Shares, California Portfolio Shares, New York 
Portfolio Shares, California Money Market Portfolio Shares, New 
York Money Market Portfolio Shares, California Limited Term 
Portfolio Shares,         Arizona Portfolio Shares, Connecticut 
Portfolio Shares, Georgia Portfolio Shares, Massachusetts 
Portfolio Shares, Michigan Portfolio Shares, Ohio Portfolio 
Shares, Pennsylvania Portfolio Shares, Texas Portfolio Shares, 
Washington Portfolio Shares and New Jersey Money Market Portfolio 
Shares.


To Register Additional Securities under Reg. 270.24e-2

CALCULATION OF REGISTRATION FEE
   
<TABLE>
<CAPTION>
<S>			<C>
Title of securities		Share Amount
being registered		being registered

National Portfolio	1,878,647

New York Portfolio	1,570,384

Ohio Portfolio		116,713

Limited Term Portfolio	2,453,426
</TABLE>

During its fiscal year ended March 31, 1997, the fund redeemed 
8,760,338 shares of the National Portfolio. During its current 
fiscal year, the fund used 6,881,691 shares of the National 
Portfolio it redeemed during its fiscal year ended March 31, 1997, 
for a reduction pursuant to Rule 24f-2(c).

The fund currently is registering 1,878,647 shares for the 
National Portfolio, which is equal to the remaining 1,878,647 
shares redeemed during its fiscal year ended March 31, 1997. 
During its current fiscal year, the fund filed no other post-
effective amendments for the purpose of reduction pursuant to Rule 
24e-2(a).

During its fiscal year ended March 31, 1997, the fund redeemed 
8,140,144 shares of the New York Portfolio. During its current 
fiscal year, the fund used 6,569,760 shares of the New York 
Portfolio it redeemed during its fiscal year ended March 31, 1997, 
for a reduction pursuant to Rule 24f-2(c).

The fund currently is registering 1,570,384 shares for the New 
York Portfolio, which is equal to the remaining 1,570,384 shares 
redeemed during its fiscal year ended March 31, 1997.  During its 
current fiscal year, the fund filed no other post-effective 
amendments for the purpose of reduction pursuant to Rule 24e-2(a).

During its fiscal year ended March 31, 1997, the fund redeemed 
246,817 shares of the Ohio Portfolio. During its current fiscal 
year, the fund used 130,104 shares of the Ohio Portfolio it 
redeemed during its fiscal year ended March 31, 1997, for a 
reduction pursuant to Rule 24f-2(c).

The fund currently is registering 116,713 shares for the Ohio 
Portfolio, which is equal to the remaining 116,713 shares redeemed 
during its fiscal year ended March 31, 1997.  During its current 
fiscal year, the fund filed no other post-effective amendments for 
the purpose of reduction pursuant to Rule 24e-2(a).

During its fiscal year ended March 31, 1997, the fund redeemed 
9,428,330 shares of the Limited Term Portfolio. During its current 
fiscal year, the fund used 6,974,904 shares of the Limited Term 
Portfolio it redeemed during its fiscal year ended March 31, 1997, 
for a reduction pursuant to Rule 24f-2(c).

The fund currently is registering 2,453,426 shares for the Limited 
Term Portfolio, which is equal to the remaining 2,453,426 shares 
redeemed during its fiscal year ended March 31, 1997.  During its 
current fiscal year, the fund filed no other post-effective 
amendments for the purpose of reduction pursuant to Rule 24e-2(a).

Rule 24f-2 (1) Declaration:

Registrant filed its Rule 24f-2 Notice on May 9, 1997 for its most 
recent fiscal year ended March 31, 1997

It is proposed that this Post-Effective Amendment will become 
effective July 29, 1997 pursuant to paragraph (b) of Rule 485.
    


CROSS REFERENCE SHEET
(as required by Rule 495(a))

Prospectus

Part A of Form N-1A			Prospectus Caption

1.  Cover Page				cover page

2.  Synopsis				"Prospectus Table"

3.  Condensed Financial Information	"Financial Highlights"

4.  General Description of Registrant	"Additional Information" cover 
					page "Investment Objective and 
					Policies"

5.  Management of the Fund		"Management of the Fund" 
					"Prospectus Summary"

6.  Capital Stock and Other
	 Securities			"Additional Information" 
					"Redemption of Shares" cover 
					page "Dividends, Distributions 	
					and Taxes"
7.  Purchase of Securities Being
	 Offered				"Purchase of Shares" 
					"Prospectus Summary" 
					"Management of the Fund" 
					"Valuation of Shares"

8.  Redemption or Repurchase		"Redemption of Shares" "Minimum 
					Account Size"

9.  Legal Proceedings			not applicable

Statement of Additional Information

Part B of Form N-1A			Information Caption

10.  Cover Page				cover page

11.  Table of Contents			"Table of Contents"

12.  General Information and History	not applicable

13.  Investment Objectives and
	 Policies				cover page "Additional 
					Information Regarding 
					Investment Policies" 
					"Investment Restrictions" See 
					Prospectus-"Investment 
					Objective and Management 
					Policies"

14.  Management of the Registrant		"Trustees and Officers"

15.  Control Persons and Principal
	     Holders of Securities		See Prospectus - "Additional 
					Information"

16.  Investment Advisory and
	 Other Services			See Prospectus - "Management 
					of the Fund" "Trustees and 
					Officers" "Independent 
					Auditors" "Custodian"

17.  Brokerage Allocation			See Prospectus - "Management 
					of the Fund"

18.  Capital Stock and Other
	 Securities			See Prospectus - "Additional 
					Information" "Voting Rights" 
					"The Fund"

19.  Purchase, Redemption and
	Pricing of Securities Being
	Offered				See Prospectus - "Purchase of 
					Shares" "Prospectus Summary" 
					"Determination of Net Asset 
					Value" See Prospectus - 
					"Valuation of Shares" 
					"Financial Statements" 
					"Redemption of Shares"

20.  Tax Status				See Prospectus - "Dividends, 
					Distributions and Taxes"

21.  Underwriters				See Prospectus - "Management 
					of the Fund" "Purchase of 
					Shares"

22.  Calculation of Performance Data	"Performance Information" See 	
					Prospectus - "Performance"

23.  Financial Statements			"Financial Statements"

Part C of Form N-1A

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

<PAGE>

PROSPECTUS

                                                                    SMITH BARNEY
                                                                      MUNI FUNDS
                                                                         Florida
                                                                       Portfolio

                                                                   JULY 29, 1997

                                                   Prospectus begins on page one


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

--------------------------------------------------------------------------------
Prospectus                                                         July 29, 1997
--------------------------------------------------------------------------------

      Smith Barney Muni Funds
      Florida Portfolio
      388 Greenwich Street
      New York, NY 10013
      (800) 451-2010
     
      The Florida Portfolio (the "Portfolio") is one of nine investment
portfolios that currently comprise Smith Barney Muni Funds (the "Fund"). The
Portfolio seeks to pay its shareholders as high a level of monthly income exempt
from Federal income taxes as is consistent with prudent investing. The Portfolio
will invest primarily in obligations issued by the State of Florida and its
political subdivisions, agencies and instrumentalities. The Portfolio will seek
generally to select investments that will enable its shares to be exempt from
the Florida intangibles tax. The Portfolio may invest without limit in municipal
obligations whose interest is a tax-preference item for purposes of the Federal
alternative minimum tax.

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

      Additional information about the Portfolio is contained in a Statement of
Additional Information dated July 29, 1997, as amended or supplemented from
time to time, that is available upon request and without charge by calling or
writing the Fund at the telephone number or address set forth above or by
contacting a Smith Barney Financial Consultant. The Statement of Additional
Information has been filed with the Securities and Exchange Commission (the
"SEC") and is incorporated by reference into this Prospectus in its entirety.

SMITH BARNEY INC.
Distributor

SMITH BARNEY MUTUAL FUNDS MANAGEMENT INC.
Investment Manager

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


                                                                               1
<PAGE>

--------------------------------------------------------------------------------
Table of Contents
--------------------------------------------------------------------------------
Prospectus Summary                                                            3
--------------------------------------------------------------------------------
Financial Highlights                                                          9
--------------------------------------------------------------------------------
Investment Objective and Management Policies                                 11
--------------------------------------------------------------------------------
Valuation of Shares                                                          16
--------------------------------------------------------------------------------
Dividends, Distributions and Taxes                                           17
--------------------------------------------------------------------------------
Purchase of Shares                                                           19
--------------------------------------------------------------------------------
Exchange Privilege                                                           26
--------------------------------------------------------------------------------
Redemption of Shares                                                         29
--------------------------------------------------------------------------------
Minimum Account Size                                                         32
--------------------------------------------------------------------------------
Performance                                                                  32
--------------------------------------------------------------------------------
Management of the Fund                                                       33
--------------------------------------------------------------------------------
Distributor                                                                  34
--------------------------------------------------------------------------------
Additional Information                                                       35
--------------------------------------------------------------------------------

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


2
<PAGE>

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

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

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

ALTERNATIVE PURCHASE ARRANGEMENTS The Portfolio offers several classes of shares
("Classes") to investors designed to provide them with the flexibility of
selecting an investment best suited to their needs. The general public is
offered three Classes of shares: Class A shares, Class B shares and Class C
shares, which differ principally in terms of sales charges and rate of expenses
to which they are subject. A fourth Class of shares, Class Y shares, is offered
only to investors meeting an initial investment minimum of $5,000,000. See
"Purchase of Shares" and "Redemption of Shares."

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

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

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


                                                                               3
<PAGE>

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

Dividend Shares") will be converted at that time. See "Purchase of Shares --
Deferred Sales Charge Alternatives."

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

      Class Y Shares. Class Y shares are available only to investors meeting an
initial investment minimum of $5,000,000. Class Y shares are sold at net asset
value with no initial sales charge or CDSC. They are not subject to any service
or distribution fees.

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

      Intended Holding Period. The decision as to which Class of shares is more
beneficial to an investor depends on the amount and intended duration of his or
her investment. Shareholders who are planning to establish a program of regular
investment may wish to consider Class A shares; as the investment accumulates
shareholders may qualify for reduced sales charges and the shares are subject to
lower ongoing expenses over the term of the investment. As an alternative,
Class B and Class C shares are sold without any initial sales charge so the
entire purchase price is immediately invested in the Portfolio. Any investment
return on these additional invested amounts may partially or wholly offset the
higher annual expenses of these Classes. Because the Portfolio's future return
cannot be predicted, how ever, there can be no assurance that this would be the
case.

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

      Reduced or No Initial Sales Charge. The initial sales charge on Class A
shares may be waived for certain eligible purchasers and the entire purchase
price would be immediately invested in the Portfolio. In addition, Class A share
purchases of $500,000 or more will be made at net asset value with no initial
sales charge, but will be subject to a CDSC of 1.00% on redemptions made within
12 months of 


4
<PAGE>

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

purchase. The $500,000 investment may be met by adding the purchase to the net
asset value of all Class A shares offered with a sales charge held in funds
sponsored by Smith Barney Inc. ("Smith Barney") listed under "Exchange
Privilege." Class A share purchases may also be eligible for a reduced initial
sales charge. See "Purchase of Shares." Because the ongoing expenses of Class A
shares may be lower than those for Class B and Class C shares, purchasers
eligible to purchase Class A shares at net asset value or at a reduced sales
charge should consider doing so.

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

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

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

INVESTMENT MINIMUMS Investors in Class A, Class B and Class C shares may open an
account by making an initial investment of at least $1,000 for each account.
Investors in Class Y shares may open an account for an initial investment of
$5,000,000. Subsequent investments of at least $50 may be made for all Classes.
The minimum investment requirements for purchases of Portfolio shares through
the Systematic Investment Plan are described below. There is no minimum
investment requirement in Class A shares for unitholders who invest
distributions from a unit investment trust ("UIT") sponsored by Smith Barney. It
is not recommended that the Portfolio be used as a vehicle for Keogh, IRA or
other qualified retirement plans. See "Purchase of Shares." 

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

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


                                                                               5
<PAGE>

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

MANAGEMENT OF THE PORTFOLIO Smith Barney Mutual Funds Management Inc. ("SBMFM"
or the "Manager") serves as the Portfolio's investment manager. SBMFM provides
investment advisory and management services to investment companies affiliated
with Smith Barney. SBMFM is a wholly owned subsidiary of Smith Barney Holdings
Inc. ("Holdings"). Holdings is a wholly owned subsidiary of Travelers Group Inc.
("Travelers"), a diversified financial services holding company engaged,
through its subsidiaries, principally in four business segments: Investment
Services, Consumer Finance Services, Life Insurance Services and Property &
Casualty Insurance Services. See "Management of the Fund." 

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

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

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

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

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


6
<PAGE>

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

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

Florida Portfolio                           Class A  Class B  Class C  Class Y**
--------------------------------------------------------------------------------
Shareholder Transaction Expenses
  Maximum sales charge imposed on 
    purchases (as a percentage of 
    offering price) ........................  4.00%    None     None     None
  Maximum CDSC (as a percentage of 
    original cost or redemption 
    proceeds, whichever is lower) ..........  None*    4.50%    1.00%    None
Annual Portfolio Operating Expenses                                         
(as a percentage of average net assets)                                     
  Management Fees ..........................  0.50%    0.50%    0.50%    0.50%
  12b-1 Fees** .............................  0.15     0.65     0.70      --
  Other Expenses ...........................  0.20     0.20     0.20     0.20
                                              ----     ----     ----     ----
Total Portfolio Operating Expenses .........  0.85%    1.35%    1.40%    0.70%
                                              ----     ----     ----     ----
--------------------------------------------------------------------------------

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

 **  "Other Expenses" for Class Y shares have been estimated because no Class Y
     shares were outstanding for the year ended March 31, 1997.

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

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


                                                                               7
<PAGE>

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

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

EXAMPLE

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

Florida Portfolio                            1 Year  3 Years  5 Years  10 Years*
--------------------------------------------------------------------------------
An investor would pay the following expenses 
on a $1,000 investment, assuming (1) 5.00% 
annual return and (2) redemption at the end 
of each time period:

      Class A................................. $48     $66      $85      $141
      Class B.................................  59      73       84       149
      Class C.................................  24      44       77       168
      Class Y.................................   7      22       39        87

An investor would pay the following expenses 
on the same investment, assuming the same 
annual return and no redemption:

      Class A................................. $48     $66      $85      $141
      Class B.................................  14      43       74       149
      Class C.................................  14      44       77       168
      Class Y.................................   7      22       39        87
--------------------------------------------------------------------------------

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

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


8
<PAGE>

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

      The following information has been audited by KPMG Peat Marwick LLP,
independent auditors, whose report thereon for the five-year period ended March
31, 1997 appears in the Fund's annual report dated March 31, 1997. The
information set out below should be read in conjunction with the financial
statements and related notes that also appear in the Fund's Annual Report to
Shareholders, which is incorporated by reference into the Statement of
Additional Information. As of March 31, 1997, no Class Y shares were outstanding
and, accordingly, no comparable information is available at this time for that
class.

For a share of beneficial interest outstanding throughout each year:

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

   
(1)  Per share amounts have been calculated using the monthly average share
     method rather than the undistributed net investment income method because
     it more accurately reflects the per share data for the year.
    
(2)  On October 10, 1994, the former Class C shares were exchanged into Class A
     shares.
(3)  For the period from April 2, 1991 (inception date) to March 31, 1992.
(4)  The Manager waived all or part of its fees for the year ended March 31,
     1993. If such fees were not waived, the decrease in net investment income
     and and the expense ratio would have been $0.012 and 0.56%, respectively.
(5)  As a result of voluntary expense limitations, the ratio of expenses to
     average net assets will not exceed 0.85%.
#    Includes the net per share effect of shareholder sales and redemptions
     activity during the period, most of which occurred at a net asset value at
     the beginning of the period.
(P)  Total returns do not reflect sales loads or contingent deferred sales
     charges.
++   Total returns are not annualized as it may not be representative of the
     total return for the year.
+    Annualized.


                                                                               9
<PAGE>

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

For a share of beneficial interest outstanding throughout each year:

<TABLE>
<CAPTION>
Florida Portfolio                          Class B Shares                                  Class C Shares
   
--------------------------------------------------------------------------------------------------------------------------------
Year Ended March 31,              1997       1996(1)     1995(2)        1997       1996(1)      1995       1994(3)     1993(4)
--------------------------------------------------------------------------------------------------------------------------------
    
<S>                             <C>         <C>         <C>           <C>         <C>         <C>         <C>         <C>    
Net Asset Value,
Beginning of Year               $ 13.23     $ 12.89     $ 11.91       $ 13.22     $ 12.89     $ 12.81     $ 13.20     $ 12.86
--------------------------------------------------------------------------------------------------------------------------------
Income from Operations:
  Net investment income            0.65        0.68        0.30          0.65        0.66        0.67        0.68        0.19
  Net realized and unrealized
    gain (loss)                    0.01        0.35       0.97#         (0.01)       0.35       0.08#       (0.39)       0.33
--------------------------------------------------------------------------------------------------------------------------------
Total from Operations              0.64        1.03        1.27          0.64        1.01        0.75        0.29        0.52
================================================================================================================================
Less Distributions From:
  Net investment income           (0.68)      (0.69)      (0.29)        (0.67)      (0.68)      (0.67)      (0.68)      (0.18)
  Net realized gains              (0.05)         --          --         (0.05)         --          --          --          --
--------------------------------------------------------------------------------------------------------------------------------
Total Distributions               (0.73)      (0.69)      (0.29)        (0.72)      (0.68)      (0.67)      (0.68)      (0.18)
--------------------------------------------------------------------------------------------------------------------------------
Net Asset Value,
  End of Year                   $ 13.14     $ 13.23     $ 12.89       $ 13.14     $ 13.22     $ 12.89     $ 12.81     $ 13.20
================================================================================================================================
Total Return(P)                    4.91%       8.09%      10.77%++       4.94%       7.96%       6.12%       2.05%       4.05%++
--------------------------------------------------------------------------------------------------------------------------------
Net Assets,
  End of Year (000s)            $51,261     $46,267     $ 1,990       $ 7,105     $ 2,665     $ 2,750     $ 2,487     $   691
--------------------------------------------------------------------------------------------------------------------------------
Ratios to Average
  Net Assets:
  Expenses (5)                     1.35%       1.20%       1.20%+        1.40%       1.28%       1.25%       1.24%       1.24%+
  Net investment income            4.93        5.00        5.57+         4.84        5.04        5.40        4.95        5.21+
--------------------------------------------------------------------------------------------------------------------------------
Portfolio Turnover Rate              62%         47%         43%           62%         47%         43%         20%         26%
================================================================================================================================
</TABLE>

(1)  Per share amounts have been calculated using the monthly average share
     method rather than the undistributed net investment income method because
     it more accurately reflects the per share data for the year.
(2)  For the period from November 16, 1994 (inception date) to March 31, 1995.
(3)  On November 7, 1994 the former Class B shares were renamed Class C shares.
(4)  For the period from January 5, 1993 (inception date) to March 31, 1993.
(5)  As a result of voluntary expense limitations, the ratio of expenses to
     average net assets will not exceed 1.35% and 1.40%, respectively.
#    Includes the net per share effect of shareholder sales and redemptions
     activity during the period, most of which occurred at a net asset value
     less than the net asset value at the beginning of the period.
(P)  Total returns do not reflect sales loads or contingent deferred sales
     charges.
++   Total return is not annualized as the result may not be representative of
     the total return for the year.
+    Annualized.


10
<PAGE>

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

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

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

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

      Municipal bonds purchased for the Portfolio must, at the time of purchase,
be investment-grade municipal bonds and at least two-thirds of the Portfolio's
municipal bonds must be rated in the category of A or better. Investment-grade
bonds are those rated Aaa, Aa, A and Baa by Moody's Investors Service, Inc.
("Moody's") or AAA, AA, A and BBB by Standard & Poor's Ratings Group ("S&P") or
have an equivalent rating by any nationally recognized statistical rating
organization; pre-refunded bonds escrowed by U.S. Treasury obligations will be
considered AAA-rated even though the issuer does not obtain a new rating. Up to
one-third of the assets of the Portfolio may be invested in municipal bonds
rated Baa or BBB (this grade, while regarded as having an adequate capacity to
pay interest and repay principal, is considered to be of medium quality and has


                                                                              11
<PAGE>

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

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

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

      The Portfolio will not invest more than 10% of the value of its net assets
in illiquid securities, including those that are not readily marketable or for
which there is no established market.


12
<PAGE>

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

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

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

      The Portfolio may invest in municipal bond index futures contracts
(currently traded on the Chicago Board of Trade) or in listed contracts based on
U.S. government securities as a hedging policy in pursuit of its investment
objective, provided that immediately thereafter not more than 331 1/43% of its
net assets would be hedged or the amount of margin deposits on the Portfolio's
existing futures would not exceed 5% of the value of its total assets. Since any
income would be taxable, it is anticipated that such investments will be made
only in those circumstances when the Manager anticipates the possibility of an
extreme change in interest rates or market conditions but does not wish to
liquidate the Portfolio's securities. A further discussion of futures contracts
and their associated risks is contained in the Statement of Additional
Information.

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


                                                                              13
<PAGE>

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

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

      RISK FACTORS AFFECTING FLORIDA

      Investors should be aware that Florida municipal obligations may be
adversely affected by political and economic conditions and developments within
the State of Florida. Population growth in Florida since 1985 has increased
approximately 26.1%. The state's current population, estimated at 14 million, is
the fourth highest in the nation. Services and trade continue to be the largest
employment and earning sectors reflecting the tourist element of the economy as
well as growth in these activities to meet the needs of Florida's expanding
population. Manufacturing, primarily high technology, electrical and electronic
equipment industries and financial services are rapidly growing and diversifying
elements of Florida's economy. Agriculture, once sharing with tourism the role
of dominant economic sector, is now only one of several important elements.

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

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


14
<PAGE>

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

      Additional information regarding the state is included in the Statement of
Additional Information.

      RISK AND INVESTMENT CONSIDERATIONS

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

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


                                                                              15
<PAGE>

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

      PORTFOLIO TRANSACTIONS AND TURNOVER

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

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

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

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

      When, in the judgment of the pricing service, quoted bid prices for
investments are readily available and are representative of the bid side of the
market, these investments are valued at the mean between the quoted bid and
asked prices. Investments for which, in the judgment of the pricing service,
there are no readily obtainable market quotations (which may constitute a
majority of the portfolio securities) are carried at fair value of securities of
similar type, yield and maturity. Pricing services generally determine value by
reference to transactions in municipal obligations, quotations from municipal
bond dealers, market transactions in comparable securities and various
relationships between securities. Short-term instruments maturing within 60 days
will be valued at cost plus (minus) amortized discount (premium), if any, when
the Trustees have determined that amortized cost equals fair value. Securities
and other assets that are not priced by a pricing service and for which market
quotations are not available will be valued in good faith at fair value by or
under the direction of the Trustees.


16
<PAGE>

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

      DIVIDENDS AND DISTRIBUTIONS

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

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

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

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

      TAXES

      The Portfolio intends to qualify as a "regulated investment company" and
to meet the requirements for distributing "exempt-interest dividends" under the
Code so that no Federal income taxes will be payable by the Portfolio and
dividends representing net interest received on municipal obligations will not
be includable by shareholders in their gross income for Federal income tax
purposes. To the extent dividends are derived from taxable income from temporary
investments, market discounts or from the excess of net short-term capital gain
over net long-term capital loss, they are treated as ordinary income whether the
shareholder has elected to receive them in cash or in additional shares. Capital
gains distributions, if any, whether paid in cash or invested in shares of the
Portfolio, will be taxable to shareholders.

      Exempt-interest dividends allocable to interest received by the Portfolio
from the AMT-Subject Bonds in which the Portfolio may invest will be treated as
interest paid directly on such obligations and will give rise to an "item of tax
preference" that will increase a shareholder's alternative minimum taxable
income. In addition, for corporations, alternative minimum taxable income will
be increased by a percentage of the amount by which a special measure of income
(including exempt-interest dividends) exceeds the amount otherwise determined to
be alternative 


                                                                              17
<PAGE>

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

minimum taxable income. Accordingly, investment in the Portfolio may cause
shareholders to be subject to (or result in an increased liability under) the
AMT. The Fund will annually furnish to its shareholders a report indicating the
ratable portion of exempt-interest dividends attributable to AMT-Subject Bonds.

      The Portfolio will be treated as a separate regulated investment company
for Federal tax purposes. Accordingly, the Portfolio's net investment income is
determined separately based on the income earned on its securities less its
costs of operations. The Portfolio's net long-term and short-term gain (loss)
realized on investments is determined after offsetting any capital loss
carryover of the Portfolio from prior periods.

      Under the Code, interest on indebtedness incurred or continued to purchase
or carry shares of the Portfolio will not be deductible to the extent that the
Portfolio's distributions are exempt from Federal income tax. In addition, any
loss realized upon the redemption of shares held less than six months will be
disallowed to the extent of any exempt-interest dividends received by the
shareholder during such period. Further, persons who may be "substantial users"
(or "related persons" of substantial users) of facilities financed by industrial
development bonds should consult their tax advisers concerning an investment in
the Portfolio.

      FLORIDA TAXES

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

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


18
<PAGE>

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

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

      The foregoing is only a brief summary of some of the important tax
considerations generally affecting the Portfolio and its shareholders.
Additional tax information of relevance to particular investors is contained in
the Statement of Additional Information. Investors are urged to consult their
tax advisers with specific reference to their own tax situation.

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

      GENERAL

      The Portfolio offers four Classes of shares. Class A shares are sold to
investors with an initial sales charge and Class B and Class C shares are sold
without an initial sales charge but are subject to a CDSC payable upon certain
redemptions. Class Y shares are sold without an initial sales charge or CDSC and
are available only to investors investing a minimum of $5,000,000 (except for
purchases of Class Y shares by Smith Barney Concert Allocation Series Inc., for
which there is no minimum purchase amount). See "Prospectus Summary --
Alternative Purchase Arrangements" for a discussion of factors to consider in
selecting which Class of shares to purchase.

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

      Investors in Class A, Class B and Class C shares may open an account by
making an initial investment of at least $1,000 for each account in the
Portfolio. Investors in Class Y shares may open an account by making an initial
investment of $5,000,000. Subsequent investments of at least $50 may be made for
all Classes. For shareholders purchasing shares of the Portfolio through the
Portfolio's Systematic Investment Plan on a monthly basis, the minimum initial
investment 


                                                                              19
<PAGE>

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

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

      The minimum initial investment requirement in the Portfolio for an account
established under the Uniform Gift to Minors Act is $250 and the subsequent
investment requirement is $50.

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

      SYSTEMATIC INVESTMENT PLAN

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


20
<PAGE>

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

      INITIAL SALES CHARGE ALTERNATIVE - CLASS A SHARES

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

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

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

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

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

      INITIAL SALES CHARGE WAIVERS

      Purchases of Class A shares may be made at net asset value without a sales
charge in the following circumstances: (a) sales to (i) Board members and
employees of Travelers and its subsidiaries and any of the Smith Barney Mutual
Funds (including retired Board members and employees); the immediate families of
such persons (including the surviving spouse of a deceased Board member or
employee); and to a pension, profit-sharing or other benefit plan for such
persons and (ii) employees of members of the National Association of Securities
Dealers, Inc., provided such sales are made upon the assurance of the purchaser
that the purchase is made for investment purposes and that the securities will
not be resold except through redemption or repurchase; (b) offers of Class A
shares to any other investment company to effect the combination of such company
with the Portfolio by merger, acquisition of assets or otherwise; (c) purchases
of Class A shares by any client of a newly employed Smith Barney Financial
Consultant (for a period up 


                                                                              21
<PAGE>

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

   
to 90 days from the commencement of the Financial Consultant's employment with
Smith Barney), on the condition the purchase of Class A shares is made with the
proceeds of the redemption of shares of a mutual fund which (i) was sponsored by
the Financial Consultant's prior employer, (ii) was sold to the client by the
Financial Consultant and (iii) was subject to a sales charge; (d) purchases by
shareholders who have redeemed Class A shares in the Portfolio (or Class A
shares of another fund of the Smith Barney Mutual Funds that are offered with a
sales charge) and who wish to reinvest their redemption proceeds in the
Portfolio, provided the reinvestment is made within 60 calendar days of the
redemption; (e) purchases by accounts managed by registered investment
advisory subsidiaries of Travelers; (f) investments of distributions from a UIT
sponsored by Smith Barney; and (g) purchases by investors participating in a
Smith Barney fee-based arrangement. In order to obtain such discounts, the
purchaser must provide sufficient information at the time of purchase to permit
verification that the purchase would qualify for the elimination of the sales
charge.
    

      RIGHT OF ACCUMULATION

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

      GROUP PURCHASES

      Upon completion of certain automated systems, a reduced sales charge or
purchase at net asset value will also be available to employees (and partners)
of the same employer purchasing as a group, provided each participant makes the
minimum initial investment required. The sales charge applicable to purchases by
each member of such a group will be determined by the table set forth above
under "Initial Sales Charge Alternative -- Class A Shares," and will be based
upon the aggregate sales of Class A shares of Smith Barney Mutual Funds offered
with a sales charge to, and share holdings of, all members of the group. To be
eligible for such reduced sales charges or to purchase at net asset value, all
purchases must be made pursuant to an employer-or partnership-sanctioned plan
meeting certain requirements. One such requirement is that the plan must be
open 


22
<PAGE>

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

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

      LETTER OF INTENT

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

      Class Y Shares. A Letter of Intent may also be used as a way for investors
to meet the minimum investment requirement for Class Y shares. Such investors
must 


                                                                              23
<PAGE>

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

make an initial minimum purchase of $1,000,000 in Class Y shares of the
Portfolio and agree to purchase a total of $5,000,000 of Class Y shares of the
same Portfolio within six months from the date of the Letter. If a total
investment of $5,000,000 is not made within the six-month period, all Class Y
shares purchased to date will be transferred to Class A shares, where they will
be subject to all fees (including a service fee of 0.15%) and expenses
applicable to the Portfolio's Class A shares, which may include a CDSC of 1.00%.
Please contact a Smith Barney Financial Consultant or First Data for further
information.

      DEFERRED SALES CHARGE ALTERNATIVES

      "CDSC Shares" are sold at net asset value next determined without an
initial sales charge so that the full amount of an investor's purchase payment
may be immediately invested in the Portfolio. A CDSC, however, may be imposed on
certain redemptions of these shares. "CDSC Shares" are: (a) Class B shares; (b)
Class C shares; and (c) Class A shares that were purchased without an initial
sales charge but subject to a CDSC.

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

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

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


24
<PAGE>

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

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

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

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

      WAIVERS OF CDSC

      The CDSC will be waived on: (a) exchanges (see "Exchange Privilege"); (b)
automatic cash withdrawals in amounts equal to or less than 1.00% per month of
the value of the shareholder's shares at the time the withdrawal plan commences
(see "Automatic Cash Withdrawal Plan") provided, however, that automatic cash
withdrawals in amounts equal to or less than 2.00% per month of the value of the
shareholder's shares will be permitted for withdrawal plans that were
established prior to November 7, 1994; (c) redemptions of shares within 12
months following the death or disability of the shareholder; (d) involuntary
redemptions; and (e)


                                                                              25
<PAGE>

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

redemptions of shares to effect a combination of the Portfolio with any
investment company by merger, acquisition of assets or other wise. In addition,
a shareholder who has redeemed shares from other funds of the Smith Barney
Mutual Funds may, under certain circumstances, reinvest all or part of the
redemption proceeds within 60 days and receive pro rata credit for any CDSC
imposed on the prior redemption.

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

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

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

Fund Name
--------------------------------------------------------------------------------
Growth Funds
      Smith Barney Aggressive Growth Fund Inc.
      Smith Barney Appreciation Fund Inc.
      Smith Barney Disciplined Small Cap Fund, Inc.
      Smith Barney Fundamental Value Fund Inc.
      Smith Barney Growth Opportunity Fund
      Smith Barney Large Capitalization Growth Fund.
      Smith Barney Managed Growth Fund
      Smith Barney Natural Resources Fund Inc.
      Smith Barney Special Equities Fund

Growth and Income Funds
      Concert Social Awareness Fund
      Smith Barney Convertible Fund
      Smith Barney Funds, Inc. -- Equity Income Portfolio
      Smith Barney Growth and Income Fund
      Smith Barney Premium Total Return Fund
      Smith Barney Utilities Fund

Taxable Fixed-Income Funds
   ** Smith Barney Adjustable Rate Government Income Fund
      Smith Barney Diversified Strategic Income Fund
  *** Smith Barney Funds, Inc. -- Short-Term U.S. Treasury Securities Portfolio
      Smith Barney Funds, Inc. -- U.S. Government Securities Portfolio


26
<PAGE>

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

      Smith Barney Government Securities Fund
      Smith Barney High Income Fund
      Smith Barney Investment Grade Bond Fund
      Smith Barney Managed Governments Fund Inc.

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

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

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

Money Market Funds
    + Smith Barney Exchange Reserve Fund
  *** Smith Barney Money Funds, Inc. -- Cash Portfolio
  *** Smith Barney Money Funds, Inc. -- Government Portfolio
   ++ Smith Barney Money Funds, Inc. -- Retirement Portfolio


                                                                              27
<PAGE>

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

  *** Smith Barney Municipal Money Market Fund, Inc.
  *** Smith Barney Muni Funds -- California Money Market Portfolio
  *** Smith Barney Muni Funds -- New York Money Market Portfolio

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

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

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

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

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

      Certain shareholders may be able to exchange shares by telephone. See
"Redemption of Shares -- Telephone Redemption and Exchange Program." Exchanges
will be processed at the net asset value next determined. Redemption procedures
discussed below are also applicable for exchanging shares, and exchanges will be
made upon receipt of all supporting documents in proper form. 


28
<PAGE>

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

If the account registration of the shares of the fund being acquired is
identical to the registration of the shares of the fund ex changed, no signature
guarantee is required. A capital gain or loss for tax purposes will be realized
upon the exchange, depending upon the cost or other basis of shares redeemed.
Before exchanging shares, investors should read the current prospectus
describing the shares to be acquired. The Portfolio reserves the right to modify
or discontinue exchange privileges upon 60 days' prior notice to shareholders.

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

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

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

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

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


                                                                              29
<PAGE>

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

      A written redemption request must (a) state the Class and number or dollar
amount of shares to be redeemed, (b) identify the shareholder's account number
and (c) be signed by each registered owner exactly as the shares are registered.
If the shares to be redeemed were issued in certificate form, the certificates
must be endorsed for transfer (or be accompanied by an endorsed stock power) and
must be submitted to First Data together with the redemption request. Any
signature appearing on a share certificate, stock power or written redemption
request in excess of $2,000 must be guaranteed by an eligible guarantor
institution such as a domestic bank, savings and loan institution, domestic
credit union, member bank of the Federal Reserve System or member firm of a
national securities exchange. Written redemption requests of $2,000 or less do
not require a signature guarantee unless more than one such redemption request
is made in any 10-day period. Redemption proceeds will be mailed to an
investor's address of record. First Data may require additional supporting
documents for redemptions made by corporations, executors, administrators,
trustees or guardians. A redemption request will not be deemed properly received
until First Data receives all required documents in proper form.

      AUTOMATIC CASH WITHDRAWAL PLAN

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

      TELEPHONE REDEMPTION AND EXCHANGE PROGRAM

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


30
<PAGE>

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

      Redemptions. Redemption requests of up to $10,000 of any class or classes
of the Portfolio's shares may be made by eligible shareholders by calling First
Data at 1-800-451-2010. Such requests may be made between 9:00 a.m. and 5:00
p.m. (New York City time) on any day the NYSE is open. Redemption requests
received after the close of regular trading on the NYSE are priced at the net
asset value next determined. Redemptions of shares (i) by retirement plans or
(ii) for which certificates have been issued are not permitted under this
program.

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

      Exchanges. Eligible shareholders may make exchanges by telephone if the
account registration of the shares of the fund being acquired is identical to
the registration of the shares of the fund exchanged. Such exchange requests may
be made by calling First Data at 1-800-451-2010 between 9:00 a.m. and 5:00 p.m.
(New York City time) on any day on which the NYSE is open. Exchange requests
received after the close of regular trading on the NYSE are processed at the net
asset value next determined.

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


                                                                              31
<PAGE>
--------------------------------------------------------------------------------
Minimum Account Size
--------------------------------------------------------------------------------

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

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

      From time to time the Portfolio may include its yield, tax equivalent
yield, total return and average annual total return in advertisements. In
addition, in other types of sales literature the Portfolio may also include its
distribution rate. These figures are computed separately for Class A, Class B,
Class C and Class Y shares of the Portfolio. These figures are based on
historical earnings and are not intended to indicate future performance. The
yield of a Portfolio class refers to the net income earned by an investment in
the Class over a 30-day period ending at month end. This net income, which does
not include any element of non-tax exempt income, if any, is then annualized,
i.e., the amount of income earned by the investment during that 30-day period is
assumed to be earned each 30-day period for 12 periods and is expressed as a
percentage of the investment. The net income earned on the investment for six
periods is also assumed to be reinvested at the end of the sixth 30-day period.
The tax equivalent yield is calculated similarly to the yield, except that a
stated income tax rate is used to demonstrate the taxable yield necessary to
produce an after-tax yield equivalent to the tax-exempt yield of the Class. The
yield and tax equivalent yield quotations are calculated according to a formula
prescribed by the SEC to facilitate comparison with yields quoted by other
investment companies. The distribution rate is calculated by annualizing the
latest monthly distribution and dividing the result by the maximum offering
price per share as of the end of the period to which the distribution relates.
The distribution rate is not computed in the same manner as, and therefore can
be significantly different from, the above-described yield. Total return is
computed for a specific period of time assuming deduction of the maximum sales
charge, if any, from the initial amount invested and reinvestment of all income
dividends and capital gains distributions on the reinvestment dates at prices
calculated as stated in this Prospectus, then dividing the value of the
investment at the end of the period so calculated by the initial amount invested
and subtracting 100%. The standard average annual total return, as prescribed by
the SEC, is derived from this total return, which provides the ending redeemable
value. Such standard total return information may also be accompanied with
nonstandard total return information for differing periods computed in the 


32
<PAGE>

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

same manner but without annualizing the total return or taking sales charges
into account. The Portfolio may also include comparative performance information
in advertising or marketing its shares. Such performance information may include
data from Lipper Analytical Services, Inc. and other financial publications.

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

      TRUSTEES

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

      MANAGER

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

      SBMFM was incorporated in 1968 under the laws of Delaware. SBMFM, Holdings
and Smith Barney are each located at 388 Greenwich Street, New York, New York
10013. As of May 31, 1997, SBMFM had aggregate assets under management in excess
of $87 billion.

      SBMFM provides the Fund with investment management services and executive
and other personnel, pays the remuneration of Fund officers, provides the Fund
with office space and equipment, furnishes the Fund with bookkeeping,
accounting, administrative services and services relating to research,
statistical work and supervision of the Portfolio. At a Meeting of Shareholders
of the Portfolio held on December 15, 1995, the shareholders approved a new
management agreement that increased the effective management fee paid by the
Fund on behalf of the Portfolio from 0.45% to 0.50% of the Portfolio's average
daily net assets. The new management agreement also provides that the
Portfolio's investment manager shall voluntarily reduce its fee to the extent
that in any fiscal year the aggregate expenses of the Portfolio, exclusive of
taxes, brokerage, interest, and extraordinary expenses, such as litigation and
indemnification expenses, exceed 0.70% of such Portfolio's average daily net
assets. (Certain Class specific expenses, such as 12b-1 fees, will also continue
to be excluded when determining whether the expense limitation applies.)
Previously, the expense limitation was 0.65%. The change in the rate of the
expense limitation corresponds to the change in the rate of the management fee.


                                                                              33
<PAGE>

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

The increased management fee and expense limitation became effective on December
18, 1995.

      For the fiscal year ended March 31, 1997, total expenses were 0.85% of the
average daily net assets for Class A shares; 1.35% of the average daily net
assets for Class B shares; and 1.40% of the average daily net assets for Class C
shares.

      PORTFOLIO MANAGEMENT

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

      Management's discussion and analysis, and additional performance
information regarding the Portfolio during the fiscal year ended March 31, 1997
is included in the Annual Report dated March 31, 1997. A copy of the Annual
Report may be obtained upon request and without charge from a Smith Barney
Financial Consultant or by writing or calling the Fund at the address or phone
number listed on page one of this Prospectus.

--------------------------------------------------------------------------------
Distributor
--------------------------------------------------------------------------------

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


34
<PAGE>

--------------------------------------------------------------------------------
Distributor (continued)
--------------------------------------------------------------------------------

costs of Smith Barney associated with the sale of Portfolio shares, including
lease, utility, communications and sales promotion expenses.

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

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

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

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


                                                                              35
<PAGE>

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

described in this Prospectus, the Fund's shares will be fully paid and
transferrable (subject to the Portfolio's minimum account size). Shares are
redeemable as set forth under "Redemption of Shares" and are subject to
involuntary redemption as set forth under "Minimum Account Size."

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

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

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


36
<PAGE>

                                                                    SMITH BARNEY
                                                                    ------------

                                               A Member of TravelersGroup [LOGO]


                                                                    Smith Barney
                                                                      Muni Funds
                                                               Florida Portfolio

                                                            388 Greenwich Street
                                                        New York, New York 10013

                                                                    FD 0605 7/97
<PAGE>

PROSPECTUS

                                                                    SMITH BARNEY
                                                                      MUNI FUNDS

                                                                         Georgia
                                                                       Portfolio

                                                                   July 29, 1997

                                                   Prospectus begins on page one

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

--------------------------------------------------------------------------------
Prospectus                                                         July 29, 1997
--------------------------------------------------------------------------------

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

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

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

     Additional information about the Portfolio is contained in a Statement of
Additional Information dated July 29, 1997, as amended or supplemented from time
to time, that is available upon request and without charge by calling or writing
the Fund at the telephone number or address set forth above or by contacting a
Smith Barney Financial Consultant. The Statement of Additional Information has
been filed with the Securities and Exchange Commission (the "SEC") and is
incorporated by reference into this Prospectus in its entirety.

SMITH BARNEY INC.
Distributor

SMITH BARNEY MUTUAL FUNDS MANAGEMENT INC.
Investment Manager

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


                                                                               1
<PAGE>

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

   
Prospectus Summary                                                             3
--------------------------------------------------------------------------------
Financial Highlights                                                           9
--------------------------------------------------------------------------------
Investment Objective and Management Policies                                  11
--------------------------------------------------------------------------------
Valuation of Shares                                                           16
--------------------------------------------------------------------------------
Dividends, Distributions and Taxes                                            16
--------------------------------------------------------------------------------
Purchase of Shares                                                            19
--------------------------------------------------------------------------------
Exchange Privilege                                                            25
--------------------------------------------------------------------------------
Redemption of Shares                                                          28
--------------------------------------------------------------------------------
Minimum Account Size                                                          31
--------------------------------------------------------------------------------
Performance                                                                   31
--------------------------------------------------------------------------------
Management of the Fund                                                        32
--------------------------------------------------------------------------------
Distributor                                                                   33
--------------------------------------------------------------------------------
Additional Information                                                        34
--------------------------------------------------------------------------------
    

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


2
<PAGE>

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

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

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

     ALTERNATIVE PURCHASE ARRANGEMENTS The Portfolio offers several classes of
shares ("Classes") to investors designed to provide them with the flexibility
of selecting an investment best suited to their needs. The general public is
offered three Classes of shares: Class A shares, Class B shares and Class C
shares, which differ principally in terms of sales charges and rate of expenses
to which they are subject. A fourth Class of shares, Class Y shares, is offered
only to investors meeting an initial investment minimum of $5,000,000. See
"Purchase of Shares" and "Redemption of Shares."

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

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

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


                                                                               3
<PAGE>

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

Dividend Shares") will be converted at that time. See "Purchase of Shares --
Deferred Sales Charge Alternatives."

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

     Class Y Shares. Class Y shares are available only to investors meeting an
initial investment minimum of $5,000,000. Class Y shares are sold at net asset
value with no initial sales charge or CDSC. They are not subject to any service
or distribution fees.

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

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

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

     Reduced or No Initial Sales Charge. The initial sales charge on Class A
shares may be waived for certain eligible purchasers and the entire purchase
price would be immediately invested in the Portfolio. In addition, Class A share
purchases of $500,000 or more will be made at net asset value with no initial
sales charge, but will be subject to a CDSC of 1.00% on redemptions made within
12 months of 


4
<PAGE>

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

purchase. The $500,000 investment may be met by adding the purchase to the net
asset value of all Class A shares offered with a sales charge held in funds
sponsored by Smith Barney Inc. ("Smith Barney") listed under "Exchange
Privilege." Class A share purchases may also be eligible for a reduced initial
sales charge. See "Purchase of Shares." Because the ongoing expenses of Class A
shares may be lower than those for Class B and Class C shares, purchasers
eligible to purchase Class A shares at net asset value or at a reduced sales
charge should consider doing so.

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

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

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

     INVESTMENT MINIMUMS Investors in Class A, Class B and Class C shares may
open an account by making an initial investment of at least $1,000 for each
account. Investors in Class Y shares may open an account for an initial
investment of $5,000,000. Subsequent investments of at least $50 may be made for
all Classes. The minimum initial investment requirement for purchases of
Portfolio shares through the Systematic Investment Plan are described below. It
is not recommended that the Portfolio be used as a vehicle for Keogh, IRA or
other qualified retirement plans. There is no minimum investment requirement
in Class A for unitholders who invest distributions from a unit investment trust
("UIT") sponsored by Smith Barney. See "Purchase of Shares."

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

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

     MANAGEMENT OF THE PORTFOLIO Smith Barney Mutual Funds Management Inc.
("SBMFM" or the "Manager") serves as the Portfolio's


                                                                               5
<PAGE>

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

investment manager. SBMFM provides investment advisory and management services
to investment companies affiliated with Smith Barney. SBMFM is a wholly owned
subsidiary of Smith Barney Holdings Inc. ("Holdings"). Holdings is a wholly
owned subsidiary of Travelers Group Inc. ("Travelers"), a diversified financial
services holding company engaged, through its subsidiaries, principally in four
business segments: Investment Services, Consumer Finance Services, Life
Insurance Services and Property & Casualty Insurance Services. See "Management
of the Fund."

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

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

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

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

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


6
<PAGE>

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

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

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

Annual Portfolio Operating Expenses**
  (as a percentage of average net assets)
    Management fees (after fee waiver)......  0.33%     0.33%    0.33%    0.33%
    12b-1 fees***...........................  0.15      0.65     0.70     --
    Other expenses****......................  0.30      0.32     0.31     0.30
                                              ----      ----     ----     ----
  Total Portfolio Operating Expenses........  0.78%     1.30%    1.34%    0.63%
                                              ====      ====     ====     ====
--------------------------------------------------------------------------------
    

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

   
      ** "Management fees" have been restated to reflect the management fee
waiver currently in effect for the Portfolio. Absent the fee waiver, the
management fee would be incurred at the rate of 0.45% of each Class' average
daily net assets for the current fiscal period. Absent the fee waiver, total
expenses would be incurred at the rates of 90%, 1.42%, 1.46% and 0.75% for Class
A, Class B, Class C and Class Y shares, respectively.

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

     **** For Class Y shares, "Other expenses" have been estimated because no
Class Y shares were outstanding for the period ended March 31, 1997.
    

     Class A shares of the Portfolio purchased through the Smith Barney AssetOne
Program will be subject to an annual asset-based fee, payable quarterly, in lieu
of the initial sales charge. The fee will vary to a maximum of 1.5%, depending
on the amount of assets held through the Program. For more information, please
call your Smith Barney Financial Consultant.

     The sales charge and CDSC set forth in the above table are the maximum
charges imposed on purchases or redemptions of Portfolio shares and investors
may 


                                                                               7
<PAGE>

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

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

     EXAMPLE

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

Georgia Portfolio                            1 Year  3 Years  5 Years  10 Years*
--------------------------------------------------------------------------------

An investor would pay the following expenses 
 on a $1,000 investment, assuming (1) 5.00% 
 annual return and (2) redemption at the end 
 of each time period:
      Class A................................  $48     $64      $82     $133
      Class B................................   58      71       81      142
      Class C................................   24      42       73      161
      Class Y................................    6      20       35       79

An investor would pay the following expenses 
 on the same investment, assuming the same 
 annual return and no redemption:
      Class A................................  $48     $64      $82     $133
      Class B................................   13      41       71      142
      Class C................................   14      42       73      161
      Class Y................................    6      20       35       79
--------------------------------------------------------------------------------

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

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


8
<PAGE>

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

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

For a share of beneficial interest outstanding throughout each year:

Georgia Portfolio                                       Class A Shares
--------------------------------------------------------------------------------
Year Ended March 31,                              1997       1996      1995(1)
--------------------------------------------------------------------------------
Net Asset Value, Beginning of Year               $12.50     $12.10     $12.00
--------------------------------------------------------------------------------
Income From Operations:
  Net investment income (2)                        0.69       0.70       0.62
  Net realized and unrealized gain (loss)          0.04       0.45       0.10#
--------------------------------------------------------------------------------
Total Income from Operations                       0.73       1.15       0.72
--------------------------------------------------------------------------------
Less Distributions From:
  Net investment income                           (0.67)     (0.70)     (0.62)
  Net realized gains                              (0.08)     (0.05)     --
--------------------------------------------------------------------------------
Total Distributions                               (0.75)     (0.75)     (0.62)
--------------------------------------------------------------------------------
Net Asset Value, End of Year                     $12.48     $12.50     $12.10
Total Return(P)                                    5.95%      9.67%      6.29%++
--------------------------------------------------------------------------------
Net Assets, End of Year (000s)                  $14,495     $9,744     $8,520
--------------------------------------------------------------------------------
Ratios to Average Net Assets:
  Expenses (2)(3)                                  0.48%      0.38%      0.28%+
  Net investment income                            5.49       5.57       5.43+
--------------------------------------------------------------------------------
Portfolio Turnover Rate                              81%        63%        34%
================================================================================
(1)  For the period from April 4, 1994 (inception date) to March 31, 1995.
(2)  The Manager has waived all or part of its fees for the years ended March
     31, 1997 and 1996 and the period ended March 31, 1995. In addition, the
     Manager has reimbursed expenses of $56,755 and $42,317 for the year ended
     March 31, 1996 and the period ended March 31, 1995, respectively. If such
     fees were not waived and expenses not reimbursed, the per share decrease of
     net investment income and the ratios of expenses to average net assets
     would have been:

                                                       Expense Ratios
                    Net Investment Income     Without Expense Reimbursements
                     Per Share Decreases              and Fee Waivers
                 ------------------------     ------------------------------
                 1997     1996      1995      1997       1996        1995
                 -----    -----     -----     -----      -----       -----
      Class A    $0.04    $0.11     $0.12     0.90%      1.23%      1.20%+

(3)  As a result of voluntary expense limitations, expense ratio would not
     exceed 0.80% for Class A shares.
#    Includes the net per share effect of shareholder sales and redemptions
     activity during the period, most of which occurred at a net asset value
     less than the net asset value at the beginning of the period.
(P)  Total returns do not reflect sales loads or contingent deferred sales
     charges.
++   Total return is not annualized as it may not be representative of the total
     return for the year.
+    Annualized.


                                                                               9
<PAGE>

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

For a share of beneficial interest outstanding throughout each year:

<TABLE>
<CAPTION>
Georgia Portfolio                            Class B Shares(1)        Class C Shares(2)
----------------------------------------------------------------------------------------------
Year Ended March 31,                      1997     1996    1995(3)   1997     1996   1995(4)
---------------------------------------------------------------------------------------------
<S>                                      <C>      <C>      <C>      <C>      <C>     <C>   
Net Asset Value, Beginning of Year       $12.50   $12.11   $12.27   $12.49   $12.09  $12.06
----------------------------------------------------------------------------------------------
Income From Operations:
  Net investment income (5)                0.62     0.64     0.49     0.62     0.63    0.55
  Net realized and unrealized gain (loss)  0.04     0.45    (0.16)#   0.03     0.46    0.04#
----------------------------------------------------------------------------------------------
Total Income from Operations               0.66     1.09     0.33     0.65     1.09    0.59
----------------------------------------------------------------------------------------------
Less Distributions From:
  Net investment income                   (0.61)   (0.65)   (0.49)   (0.60)   (0.64)  (0.56)
  Net realized gains                      (0.08)   (0.05)    --      (0.08)   (0.05)   --
----------------------------------------------------------------------------------------------
Total Distributions                       (0.69)   (0.70)   (0.49)   (0.68)   (0.69)  (0.56)
----------------------------------------------------------------------------------------------
Net Asset Value, End of Year             $12.47   $12.50   $12.11   $12.46   $12.49  $12.09
Total Return(P)                            5.33%    9.08%    2.88%++  5.28%    9.12%   5.11%++
----------------------------------------------------------------------------------------------
Net Assets, End of Year (000s)           $7,354   $5,461   $2,551   $3,221   $2,914  $1,295
----------------------------------------------------------------------------------------------
Ratios to Average Net Assets:
  Expenses (5)(6)                          1.00%    0.92%    0.85%+   1.04%    0.97%   0.90%+
  Net investment income                    4.97     5.20     5.37+    4.93     5.18    5.22+
----------------------------------------------------------------------------------------------
Portfolio Turnover Rate                      81%      63%      34%      81%      63%     34%
==============================================================================================
</TABLE>
(1)  On November 7, 1994, the former Class E shares were renamed Class B shares.
(2)  On November 7, 1994, the former Class B shares were renamed Class C shares.
(3)  For the period from June 15, 1994 (inception date) to March 31, 1995.
(4)  For the period from April 14, 1994 (inception date) to March 31, 1995.
(5)  The Manager has waived all or part of its fees for the years ended March
     31, 1997 and 1996 and the period ended March 31, 1995. In addition, the
     Manager has reimbursed expenses of $56,755 and $42,317 for the year ended
     March 31, 1996 and the period ended March 31, 1995, respectively. If such
     fees were not waived and expenses not reimbursed, the per share decrease of
     net investment income and the ratios of expenses to average net assets
     would have been:

                                                           Expense Ratios
                    Net Investment Income         Without Expense Reimbursements
                     Per Share Decreases                  and Fee Waivers
                 ---------------------------      ------------------------------
                 1997       1996       1995       1997       1996        1995
                 -----      -----      -----      -----      -----       -----
     Class B      $0.05      $0.10      $0.11      1.42%      1.77%       1.82%+
     Class C       0.05       0.10       0.12      1.46       1.82        1.85+

(6)  As a result of voluntary expense limitations, expense ratios would not
     exceed 1.30% and 1.35% for Class B and C shares, respectively.
#    Includes the net per share effect of shareholder sales and redemptions
     activity during the period, most of which occurred at a net asset value
     less than the net asset value at the beginning of the period.
(P)   Total returns do not reflect sales loads or contingent deferred sales
     charges.
++   Total return is not annualized as it may not be representative of the total
     return for the year.
+    Annualized.


10
<PAGE>

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

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

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

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

     Municipal bonds purchased for the Portfolio must, at the time of purchase,
be investment-grade municipal bonds and at least two-thirds of the Portfolio's
municipal bonds must be rated in the category of A or better. Investment-grade
bonds are those rated Aaa, Aa, A and Baa by Moody's Investors Service, Inc.
("Moody's") and AAA, AA, A and BBB by Standard & Poor's Ratings Group ("S&P") or
have an equivalent rating by any nationally recognized statistical rating
organization; pre-refunded bonds escrowed by U.S. Treasury obligations will be
considered AAA rated even though the issuer does not obtain a new rating. Up to
one-third of the assets of the Portfolio may be invested in municipal bonds
rated Baa 


                                                                              11
<PAGE>

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

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

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

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

     The Portfolio may purchase new issues of municipal obligations on a
when-issued basis, i.e. delivery and payment normally take place 15 to 45 days
after the 


12
<PAGE>

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

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

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

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

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


                                                                              13
<PAGE>

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

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

     RISK AND INVESTMENT CONSIDERATIONS

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

     The Fund is registered as a "non-diversified" company under the Investment
Company Act of 1940, as amended (the "1940 Act") in order for the Portfolio to
have the ability to invest more than 5% of its assets in the securities of any
issuer. The Portfolio intends to comply with Subchapter M of the Internal
Revenue Code of 1986, as amended (the "Code") which limits the aggregate value
of all holdings (except U.S. government and cash items, as defined in the Code)
that exceed 5% of the Portfolio's total assets to an aggregate amount of 50% of
such assets. Also, holdings of a single issuer (with the same exceptions) may
not exceed 25% of the 


14
<PAGE>

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

Portfolio's total assets. These limits are measured at the end of each quarter.
Under the Subchapter M limits, non-diversification allows up to 50% of the
Portfolio's total assets to be invested in as few as two single issuers. In the
event of decline in creditworthiness of, or default upon, the obligations of one
or more such issuers exceeding 5%, an investment in the Portfolio will entail
greater risk than in a portfolio having a policy of diversification because a
high percentage of the Portfolio's assets may be invested in municipal
obligations of one or two issuers. Furthermore, a high percentage of investments
among few issuers may result in a greater degree of fluctuation in the market
value of the assets of the Portfolio, and consequently a greater degree of
fluctuation of the Portfolio's net asset value, because the Portfolio will be
more susceptible to economic, political, or regulatory developments affecting
these securities than would be the case with a portfolio composed of varied
obligations of more issuers.

     RISK FACTORS AFFECTING GEORGIA

     Georgia's economy has experienced sustained economic expansion, a low debt
burden, conservative fiscal management and a generally strong financial
position. Since 1986, Georgia's employment gains substantially exceeded that of
the region and the U.S. Despite slower growth since the end of 1996, the
long-term rate of increase is still expected to exceed the national average.
While general obligation debt issuances have increased recently, debt burden
remains low and the retirement schedule is rapid. The Portfolio's ability to
achieve its investment objective is dependent upon the ability of the issuers of
Georgia obligations to meet their continuing obligations for the payment of
principal and interest. The Portfolio's concentration in Georgia obligations
involves certain additional risks that should be considered carefully by
investors. Certain Georgia constitutional and statutory limitations with respect
to indebtedness incurred by Georgia's governmental entities, departments and
agencies could result in certain adverse consequences affecting Georgia's
obligations and may have the effect of impairing the ability of certain issuers
of Georgia obligations to pay principal and interest on their obligations.

     Additional information regarding the state is included in the Statement of
Additional Information.

     PORTFOLIO TRANSACTIONS AND TURNOVER

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


                                                                              15
<PAGE>

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

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

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

     When, in the judgment of the pricing service, quoted bid prices for
investments are readily available and are representative of the bid side of the
market, these investments are valued at the mean between the quoted bid and
asked prices. Investments for which, in the judgment of the pricing service,
there are no readily obtainable market quotations (which may constitute a
majority of the portfolio securities) are carried at fair value of securities of
similar type, yield and maturity. Pricing services generally determine value by
reference to transactions in municipal obligations, quotations from municipal
bond dealers, market transactions in comparable securities and various
relationships between securities. Short-term instruments maturing within 60 days
will be valued at cost plus (minus) amortized discount (premium), if any, when
the Trustees have determined that amortized cost equals fair value. Securities
and other assets that are not priced by a pricing service and for which market
quotations are not available will be valued in good faith at fair value by or
under the direction of the Trustees. 

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

     DIVIDENDS AND DISTRIBUTIONS

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

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

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


16
<PAGE>

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

should notify First Data in writing at least five business days prior to the
payment date to permit the change to be entered in the shareholder's account.

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

     TAXES

     The Portfolio intends to qualify as a "regulated investment company" and to
meet the requirements for distributing "exempt-interest dividends" under the
Code so that no Federal income taxes will be payable by the Portfolio and
dividends representing net interest received on municipal obligations will not
be includable by shareholders in their gross income for Federal income tax
purposes. To the extent dividends are derived from taxable income from temporary
investments, market discounts or from the excess of net short-term capital gain
over net long-term capital loss, they are treated as ordinary income whether the
shareholder has elected to receive them in cash or in additional shares.
Capital gains distributions, if any, whether paid in cash or invested in shares
of the Portfolio, will be taxable to shareholders.

     Exempt-interest dividends allocable to interest received by the Portfolio
from the AMT-Subject Bonds in which the Portfolio may invest will be treated as
interest paid directly on such obligations and will give rise to an "item of tax
preference" that will increase a shareholder's alternative minimum taxable
income. In addition, for corporations, alternative minimum taxable income will
be increased by a percentage of the amount by which a special measure of income
(including exempt-interest dividends) exceeds the amount otherwise determined to
be alternative minimum taxable income. Accordingly, investment in the Portfolio
may cause shareholders to be subject to (or result in an increased liability
under) the AMT. The Fund will annually furnish to its shareholders a report
indicating the ratable portion of exempt-interest dividends attributable to
AMT-Subject Bonds.

     The Portfolio will be treated as a separate regulated investment company
for Federal tax purposes. Accordingly, the Portfolio's net investment income is
determined separately based on the income earned on its securities less its
costs of operations. The Portfolio's net long-term and short-term gain (loss)
realized on investments is determined after offsetting any capital loss
carryover of the Portfolio from prior periods.

     Under the Code, interest on indebtedness incurred or continued to purchase
or 


                                                                              17
<PAGE>

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

carry shares of the Portfolio will not be deductible to the extent that the
Portfolio's distributions are exempt from Federal income tax. In addition, any
loss realized upon the redemption of shares held less than six months will be
disallowed to the extent of any exempt-interest dividends received by the
shareholder during such period. Further, persons who may be "substantial users"
(or "related persons" of substantial users) of facilities financed by industrial
development bonds should consult their tax advisers concerning an investment in
the Portfolio.

     GEORGIA TAXES

     Dividends and distributions by the Portfolio to a Georgia resident that are
attributable to interest on Georgia municipal obligations or direct obligations
of the United States and its territories and possessions will not be subject to
the State of Georgia income tax. Dividends or other distributions by the
Portfolio which are attributable to other sources, including all distributions
that qualify as capital gains dividends for Federal income tax purposes, will be
subject to the State of Georgia income tax at the applicable rate. There is no
specific statutory or regulatory exception that would exempt shares of a
regulated investment company, including regulated investment companies that only
hold municipal obligations or other direct obligations of the United States and
its territories and possessions, from the Georgia intangibles tax. Except, the
Georgia Department of Revenue has now conceded that the intangibles tax does not
apply to shares of a mutual fund or a unit investment trust to the extent the
value of the shares reflects the value of U.S. government securities held by the
fund, if the fund or trust is organized as a business trust.

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

     The foregoing is only a brief summary of some of the important tax
considerations generally affecting the Portfolio and its shareholders.
Additional tax information of revelance to particular investors is contained in
the Statement of Additional Information. Investors are urged to consult their
tax advisers with specific reference to their own tax situation.


18
<PAGE>

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

     GENERAL

     The Portfolio offers four Classes of shares. Class A shares are sold to
investors with an initial sales charge and Class B and Class C shares are sold
without an initial sales charge but are subject to a CDSC payable upon certain
redemptions. Class Y shares are sold without an initial sales charge or CDSC and
are available only to investors investing a minimum of $5,000,000 (except for
purchases of Class Y shares by Smith Barney Concert Allocation Series Inc., for
which there is no minimum purchase amount). See "Prospectus Summary --
Alternative Purchase Arrangements" for a discussion of factors to consider in
selecting which Class of shares to purchase.

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

     Investors in Class A, Class B and Class C shares may open an account by
making an initial investment of at least $1,000 for each account in the
Portfolio. Investors in Class Y shares may open an account by making an initial
investment of $5,000,000. Subsequent investments of at least $50 may be made for
all Classes. For shareholders purchasing shares of the Portfolio through the
Systematic Investment Plan on a monthly basis, the minimum initial investment
requirement for Class A, Class B and Class C shares and the subsequent
investment requirement for all Classes is $25. For shareholders purchasing
shares of the Portfolio through the Systematic Investment Plan on a quarterly
basis, the minimum initial investment requirement for Class A, Class B and Class
C shares and the subsequent investment requirement for all Classes is $50.00.
There are no mini mum investment requirements in Class A for employees of
Travelers and its subsidiaries, including Smith Barney, and Trustees or
Directors of any of the Smith Barney Mutual Funds and their spouses and
children. The Fund reserves the right to waive or change minimums, to decline
any order to purchase its shares and to suspend the offering of shares from time
to time. Shares purchased will be held in the shareholder's account by the
Fund's transfer agent, First Data. Share certificates are issued only upon a
shareholder's written request to First Data. It is not recommended that the
Portfolio be used as a vehicle for Keogh, IRA or other qualified retirement
plans.

     The minimum initial investment requirement in the Portfolio for an account
established under the Uniform Gift to Minors Act is $250 and the subsequent
investment requirement is $50.

     Purchase orders received by the Fund or Smith Barney prior to the close of
regular trading on the NYSE on any day the Portfolio calculates its net asset
value 


                                                                              19
<PAGE>

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

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

     SYSTEMATIC INVESTMENT PLAN

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

     INITIAL SALES CHARGE ALTERNATIVE - CLASS A SHARES

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

================================================================================
                                       Sales Charge
                                       ------------               Dealer's
                                    % of        % of Amount  Reallowance as % of
   Amount of Investment        Offering Price    Invested      Offering Price
--------------------------------------------------------------------------------

   Less than $25,000                4.00%           4.17%           3.60%
    $25,000 - 49,999                3.50            3.63            3.15
     50,000 - 99,999                3.00            3.09            2.70
     100,000-249,999                2.50            2.56            2.25
     250,000-449,999                1.50            1.52            1.25
    500,000 and over*                  *               *               *
================================================================================
     * Purchases of Class A shares of $500,000 or more will be made at net asset
value without any initial sales charge, but will be subject to a CDSC of 1.00%
on redemptions made within 12 months of purchase. The CDSC on Class A shares is
payable to Smith Barney, which compensates Smith Barney Financial Consultants
and other dealers whose clients make purchases of $500,000 or more. The CDSC is
waived in the same circumstances in which the CDSC applicable to Class B and
Class C shares is waived. See "Deferred Sales Charge Alternatives" and "Waivers
of CDSC."


20
<PAGE>

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

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

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

     INITIAL SALES CHARGE WAIVERS

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

     RIGHT OF ACCUMULATION

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


                                                                              21
<PAGE>

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

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

     GROUP PURCHASES

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


22
<PAGE>

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

     LETTER OF INTENT

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

     Class Y Shares. A Letter of Intent may also be used as a way for investors
to meet the minimum investment requirement for Class Y shares. Such investors
must make an initial minimum purchase of $1,000,000 in Class Y shares of the
Portfolio and agree to purchase a total of $5,000,000 of Class Y shares of the
same Portfolio within six months from the date of the Letter. If a total
investment of $5,000,000 is not made within the six-month period, all Class Y
shares purchased to date will be transferred to Class A shares, where they will
be subject to all fees (including a service fee of 0.15%) and expenses
applicable to the Portfolio's Class A shares, which may include a CDSC of 1.00%.
Please contact a Smith Barney Financial Consultant or First Data for further
information.

     DEFERRED SALES CHARGE ALTERNATIVES

     "CDSC Shares" are sold at net asset value next determined without an
initial sales charge so that the full amount of an investor's purchase payment
may be immediately invested in the Portfolio. A CDSC, however, may be imposed on
certain redemptions of these shares. "CDSC Shares" are (a) Class B shares; (b)
Class C shares; and (c) Class A shares that were purchased without an initial
sales charge but subject to a CDSC.

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


                                                                              23
<PAGE>

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

(d) with respect to Class C shares and Class A shares that are CDSC Shares,
shares redeemed more than 12 months after their purchase.

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

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

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

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

     To provide an example, assume an investor purchased 100 Class B shares at
$10 per share for a cost of $1,000. Subsequently, the investor acquired five


24
<PAGE>

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

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

     WAIVERS OF CDSC

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

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

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

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


                                                                              25
<PAGE>

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

FUND NAME
--------------------------------------------------------------------------------

Growth Funds
      Smith Barney Aggressive Growth Fund Inc.
      Smith Barney Appreciation Fund Inc.
      Smith Barney Disciplined Small Cap Fund, Inc.
      Smith Barney Fundamental Value Fund Inc.
      Smith Barney Growth  Opportunity Fund
      Smith Barney Large Capitalization Growth Fund
      Smith Barney Managed Growth Fund
      Smith Barney Natural Resources Fund Inc.
      Smith Barney Special Equities Fund

Growth and Income Funds
      Concert Social Awareness Fund
      Smith Barney Convertible Fund
      Smith Barney Funds, Inc. -- Equity Income Portfolio
      Smith Barney Growth and Income Fund
      Smith Barney Premium Total Return Fund
      Smith Barney Utilities Fund

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

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


26
<PAGE>

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

      Smith Barney Oregon Municipals Fund
      Smith Barney Tax-Exempt Income Fund

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

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

Money Market Funds
    + Smith Barney Exchange Reserve Fund
  *** Smith Barney Money Funds, Inc. -- Cash Portfolio
  *** Smith Barney Money Funds, Inc. -- Government Portfolio

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

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

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

     Class A and Class Y Exchanges. Class A and Class Y shareholders of the


                                                                              27
<PAGE>

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

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

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

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

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

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

     If a shareholder holds shares in more than one Class, any request for
redemption must specify the Class being redeemed. In the event of a failure to
specify which Class, or if the investor owns fewer shares of the Class than


28
<PAGE>

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

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

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

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

     A written redemption request must (a) state the Class and number or dollar
amount of shares to be redeemed, (b) identify the shareholder's account number
and (c) be signed by each registered owner exactly as the shares are registered.
If the shares to be redeemed were issued in certificate form, the certificates
must be endorsed for transfer (or be accompanied by an endorsed stock power) and
must be submitted to First Data together with the redemption request. Any
signature appearing on a share certificate, stock power or written redemption
request in excess of $2,000 must be guaranteed by an eligible guarantor
institution such as a domestic bank, savings and loan institution, domestic
credit union, member bank of the Federal Reserve System or member firm of a
national securities exchange. Written redemption requests of $2,000 or less do
not require a signature guarantee unless more than one such redemption request
is made in any 10-day period. Redemption proceeds will be mailed to an
investor's address of record. First Data may require additional supporting
documents for redemptions made by corporations, executors, administrators,
trustees or guardians. A redemption request will not be deemed properly received
until First Data receives all required documents in proper form.

     AUTOMATIC CASH WITHDRAWAL PLAN

     The Portfolio offers shareholders an automatic cash withdrawal plan, under


                                                                              29
<PAGE>

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

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

     TELEPHONE REDEMPTION AND EXCHANGE PROGRAM

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

     Redemptions. Redemption requests of up to $10,000 of any class or classes
of the Portfolio's shares may be made by eligible shareholders by calling First
Data at 1-800-451-2010. Such requests may be made between 9:00 a.m. and 5:00
p.m. (New York City time) on any day the NYSE is open. Redemption requests
received after the close of regular trading on the NYSE are priced at the net
asset value next determined. Redemptions of shares (i) by retirement plans or
(ii) for which certificates have been issued are not permitted under this
program.

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


30
<PAGE>

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

     Exchanges. Eligible shareholders may make exchanges by telephone if the
account registration of the shares of the fund being acquired is identical to
the registration of the shares of the fund exchanged. Such exchange requests may
be made by calling First Data at 1-800-451-2010 between 9:00 a.m. and 5:00 p.m.
(New York City time) on any day on which the NYSE is open. Exchange requests
received after the close of regular trading on the NYSE are processed at the net
value next determined.

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

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

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

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

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


                                                                              31
<PAGE>

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

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

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

     TRUSTEES

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

     MANAGER

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

     SBMFM was incorporated in 1968 under the laws of Delaware. SBMFM, Holdings
and Smith Barney are each located at 388 Greenwich Street, New York, New York
10013. As of May 31, 1997, SBMFM had aggregate assets under management in excess
of $87 billion.

     SBMFM provides the Fund with investment management services and executive
and other personnel, pays the remuneration of Fund officers, provides the 


32
<PAGE>

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

Fund with office space and equipment, furnishes the Fund with bookkeeping,
accounting, administrative services and services relating to research,
statistical work and supervision of the Portfolio. For the services provided,
the management agreement provides that the Fund will pay SBMFM an annual fee
calculated at the rate of 0.45% of the Portfolio's average daily net assets for
each Class of shares. SBMFM waived a portion of its management fee for the
Portfolio for the fiscal year ended March 31, 1997. For the past fiscal year,
total operating expenses were 0.48% of the average daily net assets for Class
A shares; 1.00% of the average daily net assets for Class B shares; and 1.04% of
the average daily net assets for Class C shares. For the current fiscal year,
total operating expenses are anticipated to be 0.78% of the average daily net
assets for Class A shares; 1.30% of the average daily net assets of Class B
shares; and 1.34% of the average daily net assets of Class C shares. The
anticipated expenses for the current fiscal year reflect the current management
fee waiver in effect.

     PORTFOLIO MANAGEMENT

     Peter M. Coffey, a Managing Director of Smith Barney, has served as Vice
President of the Fund and portfolio manager of the Portfolio since it commenced
operations (April 4, 1994) and manages the day-to-day operations of the
Portfolio, including making all investment decisions. Mr. Coffey also serves as
the portfolio manager for many of the Fund's other non-money market Portfolios.

     Management's discussion and analysis, and additional performance
information regarding the Portfolio during the fiscal year ended March 31, 1997
is included in the Annual Report dated March 31, 1997. A copy of the Annual
Report may be obtained upon request and without charge from a Smith Barney
Financial Consultant or by writing or calling the Fund at the address or phone
number listed on page one of this Prospectus.

--------------------------------------------------------------------------------
Distributor
--------------------------------------------------------------------------------

     Smith Barney distributes shares of the Portfolio as principal underwriter
and as such conducts a continuous offering pursuant to a "best efforts"
arrangement requiring Smith Barney to take and pay for only such securities as
may be sold to the public. Pursuant to a plan of distribution adopted by the
Portfolio under Rule 12b-1 under the 1940 Act (the "Plan"), Smith Barney is paid
a service fee with respect to Class A, Class B and Class C shares of the
Portfolio at the annual rate of 0.15% of the average daily net assets
attributable to these Classes. Smith Barney is also paid a distribution fee with
respect to Class B and Class C shares at the annual rate of 0.50% and 0.55%,
respectively, of the average daily net assets attributable to these Classes.
Class B shares that automatically convert to Class A shares eight years after
the date of original purchase will no longer be subject to a distribution fee.
The fees are used by Smith Barney to pay its Financial Consultants for 


                                                                              33
<PAGE>

--------------------------------------------------------------------------------
Distributor (continued)
--------------------------------------------------------------------------------

servicing shareholder accounts and, in the case of Class B and Class C shares,
to cover expenses primarily intended to result in the sale of those shares.
These expenses include: advertising expenses; the cost of printing and mailing
prospectuses to potential investors; payments to and expenses of Smith Barney
Financial Consultants and other persons who provide support services in
connection with the distribution of shares; interest and/or carrying charges;
and indirect and overhead costs of Smith Barney associated with the sale of
Portfolio shares, including lease, utility, communications and sales promotion
expenses.

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

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

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

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


34
<PAGE>

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

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

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

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

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


                                                                              35
<PAGE>

                                                                    SMITH BARNEY
                                                                    ------------

                                                A Member of TravelersGroup[logo]

                                                                    Smith Barney
                                                                      Muni Funds
                                                               Georgia Portfolio

                                                            388 Greenwich Street
                                                        New York, New York 10013

                                                                    FD 0771 7/97
<PAGE>

PROSPECTUS

                                                                    SMITH BARNEY
                                                                      MUNI FUNDS

                                                                         Limited
                                                                            Term
                                                                       Portfolio

                                                                   July 29, 1997

                                                   Prospectus begins on page one


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

--------------------------------------------------------------------------------
Prospectus                                                         July 29, 1997
--------------------------------------------------------------------------------

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

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

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

     Additional information about the Portfolio is contained in a Statement of
Additional Information dated July 29, 1997, as amended or supplemented from time
to time, that is available upon request and without charge by calling or writing
the Fund at the telephone number or address set forth above or by contacting a
Smith Barney Financial Consultant. The Statement of Additional Information has
been filed with the Securities and Exchange Commission (the "SEC") and is
incorporated by reference into this Prospectus in its entirety.

SMITH BARNEY INC.
Distributor

SMITH BARNEY MUTUAL FUNDS MANAGEMENT INC.
Investment Manager


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


                                                                               1
<PAGE>

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

Prospectus Summary                                                           3
--------------------------------------------------------------------------------
Financial Highlights                                                         8
--------------------------------------------------------------------------------
Investment Objective and Management Policies                                10
--------------------------------------------------------------------------------
Valuation of Shares                                                         14
--------------------------------------------------------------------------------
Dividends, Distributions and Taxes                                          15
--------------------------------------------------------------------------------
Purchase of Shares                                                          17
--------------------------------------------------------------------------------
Exchange Privilege                                                          23
--------------------------------------------------------------------------------
Redemption of Shares                                                        25
--------------------------------------------------------------------------------
Minimum Account Size                                                        28
--------------------------------------------------------------------------------
Performance                                                                 28
--------------------------------------------------------------------------------
Management of the Fund                                                      29
--------------------------------------------------------------------------------
Distributor                                                                 31
--------------------------------------------------------------------------------
Additional Information                                                      32
--------------------------------------------------------------------------------


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


2
<PAGE>

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

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

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

     ALTERNATIVE PURCHASE ARRANGEMENTS The Portfolio offers three classes of
shares ("Classes") to investors designed to provide them with the flexibility of
selecting an investment best suited to their needs. The general public is
offered two Classes of shares: Class A shares and Class C shares, which differ
principally in terms of sales charges and rate of expenses to which they are
subject. A third Class of shares, Class Y shares, is offered only to investors
meeting an initial investment minimum of $5,000,000. See "Purchase of Shares"
and "Redemption of Shares."

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

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

     Class Y Shares. Class Y shares are available only to investors meeting an
initial investment minimum of $5,000,000. Class Y shares are sold at net asset
value with 


                                                                               3
<PAGE>

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

no initial sales charge or CDSC. They are not subject to any service
or distribution fees.

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

     Intended Holding Period. The decision as to which Class of shares is more
beneficial to an investor depends on the amount and intended duration of his or
her investment. Shareholders who are planning to establish a program of regular
investment may wish to consider Class A shares; as the investment accumulates
shareholders may qualify for purchase of shares without an initial sales charge
and the shares are subject to lower ongoing expenses over the term of the
investment. As an alter native, Class C shares are sold without any initial
sales charge so the entire purchase price is immediately invested in the
Portfolio. Any investment return on these additional invested amounts may
partially or wholly offset the higher annual expenses of this Class. Because the
Portfolio's future return cannot be predicted, however, there can be no
assurance that this would be the case. Finally, investors should consider the
effect of the CDSC period in the context of their own investment time frame.

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

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

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

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


4
<PAGE>

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

     INVESTMENT MINIMUMS Investors in Class A and Class C shares may open an
account by making an initial investment of at least $1,000 for each account.
Investors in Class Y shares may open an account for an initial investment of
$5,000,000. Subsequent investments of at least $50 may be made for all Classes.
The minimum investment requirements for purchases of Portfolio shares through
the Systematic Investment Plan are described below. There is no minimum
investment requirement in Class A shares for unitholders who invest
distributions from a unit investment trust ("UIT") sponsored by Smith Barney. It
is not recommended that the Portfolio be used as a vehicle for Keogh, IRA or
other qualified retirement plans. See "Purchase of Shares."

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

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

     MANAGEMENT OF THE PORTFOLIO Smith Barney Mutual Funds Management Inc.
("SBMFM" or the "Manager") serves as the Portfolio's investment manager. SBMFM
provides investment advisory and management services to investment companies
affiliated with Smith Barney. SBMFM is a wholly owned subsidiary of Smith Barney
Holdings Inc. ("Holdings"). Holdings is a wholly owned subsidiary of Travelers
Group Inc. ("Travelers"), a diversified financial services holding company
engaged, through its subsidiaries, principally in four business segments:
Investment Services, Consumer Finance Services, Life Insurance Services and
Property & Casualty Insurance Services. See "Management of the Fund."

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

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

     DIVIDENDS AND DISTRIBUTIONS Dividends from net investment income are
paid monthly. Distributions of net realized capital 


                                                                               5
<PAGE>

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

gains, if any, are paid annually. See "Dividends, Distributions and
Taxes."

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

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

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


Limited Term Portfolio                           Class A     Class C   Class Y**
--------------------------------------------------------------------------------
Shareholder Transaction Expenses
   Maximum sales charge imposed on purchases
   (as a percentage of offering price)            2.00%        None      None
   Maximum CDSC (as a percentage of original      
   cost or redemption proceeds,
   whichever is lower)                            None*        1.00%     None
                                                  
Annual Portfolio Operating Expenses               
(as a percentage of average net assets)           
   Management fees                                0.50%        0.50%     0.50%
   12b-1 fees***                                  0.15         0.35       --
   Other expenses                                0.10         0.12      0.10
                                                  -----        -----     -----
Total Portfolio Operating Expenses                0.75%        0.97%     0.60%
                                                  =====        =====     =====
--------------------------------------------------------------------------------

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

** For Class Y shares, "Other expenses" have been estimated because no Class Y
shares were outstanding for the year ended March 31, 1997.

*** Class C shares are subject to an ongoing distribution fee and, as a result,
long-term shareholders of Class C shares may pay more than the economic
equivalent of the maximum front-end sales charge permitted by the National
Association of Securities Dealers, Inc.

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


6
<PAGE>

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

your Smith Barney Financial Consultant.

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

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

Limited Term Portfolio                        1 Year  3 Years  5 Years  10 Years
--------------------------------------------------------------------------------
An investor would pay the following expenses 
 on a $1,000 investment, assuming (1) 5.00% 
 annual return and (2) redemption at the end
 of each time period:

      Class A...............................    $28      $43      $61     $111
      Class C...............................     20       31       54      119
      Class Y...............................      6       19       33       75

An investor would pay the following expenses
 on the same investment, assuming the same 
 annual return and no redemption:
      Class A...............................    $28      $43      $61     $111
      Class C...............................     10       31       54      119
      Class Y...............................      6       19       33       75
--------------------------------------------------------------------------------

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


                                                                               7
<PAGE>

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

      The following information has been audited by KPMG Peat Marwick LLP,
independent auditors, whose report thereon for the five-year period ended March
31, 1997 appear in the Fund's annual report dated March 31, 1997. The
information set out below should be read in conjunction with the financial
statements and related notes that also appear in the Fund's Annual Report to
Shareholders, which is incorporated by reference into the Statement of
Additional Information. As of March 31, 1997, no Class Y shares were outstanding
and, accordingly, no comparable information is available at this time for that
class.

<TABLE>
<CAPTION>

For a share of beneficial interest outstanding throughout each year:
Limited Term Portfolio                                               Class A Shares(1)
------------------------------------------------------------------------------------------------------------------
Year Ended March 31,              1997    1996     1995     1994      1993     1992     1991     1990     1989(2)
------------------------------------------------------------------------------------------------------------------
<S>                              <C>     <C>      <C>      <C>       <C>      <C>      <C>      <C>      <C>  
Net Asset Value,
Beginning of Year                $6.61   $6.54    $6.55    $6.68     $6.45    $6.38    $6.28    $6.20    $6.25
------------------------------------------------------------------------------------------------------------------
Income From Operations:
  Net investment income (3)       0.34    0.36     0.36     0.37      0.39     0.42     0.43     0.44     0.13
  Net realized and unrealized
  gain (loss)                    (0.06)   0.07      --     (0.13)     0.23     0.07     0.07     0.10    (0.05)
------------------------------------------------------------------------------------------------------------------
Total Income from  Operations     0.28    0.43     0.36     0.24      0.62     0.49     0.50     0.54     0.08
==================================================================================================================
Less Distributions From:
  Net investment income          (0.35)  (0.36)   (0.37)   (0.37)    (0.39)   (0.42)   (0.40)   (0.46)   (0.13)
------------------------------------------------------------------------------------------------------------------
Total Distributions              (0.35)  (0.36)   (0.37)   (0.37)    (0.39)   (0.42)   (0.40)   (0.46)   (0.13)
------------------------------------------------------------------------------------------------------------------
Net Asset Value, End of Year     $6.54   $6.61    $6.54    $6.55     $6.68    $6.45    $6.38    $6.28    $6.20
==================================================================================================================
Total Return(P)                   4.30%   6.65%    5.69%    3.65%     9.82%    7.99%    8.23%    9.07%    1.09%++
------------------------------------------------------------------------------------------------------------------
Net Assets, End of Year
  (millions)                     $ 260   $ 278    $ 245    $ 282     $ 242    $ 157    $  65    $  20    $   5
------------------------------------------------------------------------------------------------------------------
Ratios to Average Net Assets:
  Expenses (3)                    0.75%   0.75%    0.61%    0.53%     0.55%    0.49%    0.33%    0.30%    0.30%+
  Net Investment Income           5.16    5.43     5.61     5.53      5.90     6.42     6.77     6.98     6.58+
------------------------------------------------------------------------------------------------------------------
Portfolio Turnover Rate             46%     26%      22%      25%       25%      26%      15%      65%      14%
==================================================================================================================
</TABLE>

(1)  On October 10, 1994, the former Class C shares were exchanged into Class A
     shares.
(2)  For the period from November 28, 1988 (inception date) to March 31, 1989.
(3)  The Manager has waived all or a part of its fees for each of the years in
     the four-year period ended March 31, 1992. If such fees were not waived,
     the per share decrease of net investment income and the ratios of expenses
     to average net assets would have been:


<TABLE>
<CAPTION>
                                Net Investment Income                                 Expense Ratios
                                 Per Share Decrease                                 Without Fee Waivers
                        ----------------------------------                  ----------------------------------
                        1992      1991      1990      1989                  1992      1991      1990      1989
------------------------------------------------------------------------------------------------------------------
    <S>                <C>       <C>       <C>       <C>                    <C>       <C>       <C>      <C>   
    Class A            $0.003    $0.011    $0.018    $0.022                 0.56%     0.30%     0.30%    0.30%+
------------------------------------------------------------------------------------------------------------------
</TABLE>

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


8
<PAGE>

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

For a share of beneficial interest outstanding throughout each year:

<TABLE>
<CAPTION>

                                                                  Class C                             Class Y
Limited Term Portfolio                                           Shares (1)                           Shares
--------------------------------------------------------------------------------------------------------------
Year Ended March 31,                        1997        1996       1995        1994      1993 (2)     1996 (3)
--------------------------------------------------------------------------------------------------------------
<S>                                        <C>         <C>        <C>         <C>         <C>         <C>  
Net Asset Value,                           
Beginning of Year                          $6.61       $6.54      $6.54       $6.68       $6.62       $6.56
--------------------------------------------------------------------------------------------------------------
Income From Operations:                    
  Net investment income                     0.33        0.35       0.35        0.35        0.10        0.37
--------------------------------------------------------------------------------------------------------------
  Net realized and unrealized gain (loss)  (0.06)       0.06       0.00       (0.14)       0.05        0.06
--------------------------------------------------------------------------------------------------------------
Total Income from Operations                0.27        0.41       0.35        0.21        0.15        0.43
==============================================================================================================
Less Distributions From:                   
  Net investment income                    (0.34)      (0.34)     (0.35)      (0.35)      (0.09)      (0.37)
--------------------------------------------------------------------------------------------------------------
Total distributions                        (0.34)      (0.34)     (0.35)      (0.35)      (0.09)      (0.37)
--------------------------------------------------------------------------------------------------------------
Net Asset Value, End of Year               $6.54       $6.61      $6.54       $6.54       $6.68       $6.62
==============================================================================================================
Total Return(P)                             4.10%       6.45%      5.51%       3.15%       2.28%++     6.63%++
--------------------------------------------------------------------------------------------------------------
Net Assets, End of Year (millions)         $  28       $  29      $  27       $  27       $   6        $214
--------------------------------------------------------------------------------------------------------------
Ratios to Average Net Assets:              
  Expenses                                  0.97        0.96%      0.89%       0.88%       0.88%+      0.58%+
  Net investment income                     4.94        5.22       5.34%       5.10%       5.35%+      5.56%+
--------------------------------------------------------------------------------------------------------------
Portfolio Turnover Rate                       46%         26%        22%         25%         25%         26%
==============================================================================================================
</TABLE>                                 

(1)  On November 7, 1994 the former Class B Shares were renamed Class C Shares.
(2)  For the period from January 5, 1993 (inception date) to March 31, 1993.
(3)  For the period from April 4, 1995 (inception date) to March 31, 1996. 
(P)  Total returns do not reflect sales loads or contingent deferred sales
     charges.
++   Total return is not annualized, as it may not be representative of the
     total return for the year.
+    Annualized.


                                                                               9
<PAGE>

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

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

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

     The Portfolio will seek to be fully invested in obligations that are issued
by or on behalf of states, territories and possessions of the United States and
their political subdivisions, agencies and instrumentalities that were, in the
opinion of bond counsel to the issuer, exempt from Federal income taxes at the
time of their issuance. For certain shareholders, a portion of the Portfolio's
income may be subject to the alternative minimum tax ("AMT") on tax-exempt
income discussed below. Such obligations are issued to raise money for a variety
of public projects that enhance the quality of life including health facilities,
housing, airports, schools, highways and bridges.

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

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

     Municipal bonds purchased for the Portfolio must, at the time of purchase,
be investment-grade municipal bonds and at least two-thirds of the Portfolio's
municipal bonds must be rated in the category of A or better. Investment-grade
bonds are those rated Aaa, Aa, A and Baa by Moody's Investors Service, Inc.
("Moody's") or AAA, AA, A and BBB by Standard & Poor's Ratings Group ("S&P") or
have an equivalent rating by any nationally recognized statistical rating
organization; pre-refunded bonds escrowed by U.S. Treasury obligations will be


10
<PAGE>

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

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

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


                                                                              11
<PAGE>

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

     The Portfolio will not invest more than 10% of the value of its net assets
in illiquid securities, including those that are not readily marketable or for
which there is no established market.

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

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

     The Portfolio may invest in municipal bond index futures contracts
(currently traded on the Chicago Board of Trade) or in listed contracts based on
U.S. government securities as a hedging policy in pursuit of its investment
objective, provided that immediately thereafter not more than 331 1/43% of its
net assets would be hedged or the amount of margin deposits on the Portfolio's
existing futures contracts would not exceed 5% of the value of its total assets.
Since any income would be taxable, it is anticipated that such investments will
be made only in those circumstances when the Manager anticipates the possibility
of an extreme change in interest rates or market conditions but does not wish to
liquidate the Portfolio's securities. A further discussion of futures contracts
and their associated risks is contained in the Statement of Additional
Information.

     The Portfolio may invest in  zero coupon bonds. A zero coupon
bond pays no interest in cash to its holder during its life, although
interest is accrued during that period. Its value to an investor consists
of the difference between its face value at the time of maturity and
the price for which it was acquired, which is generally an amount
significantly less than its face value (sometimes referred to as a
"deep discount" price). Because such securities usually trade at a
deep discount, they will be subject to greater fluctuations of market
value in response to changing interest 


12
<PAGE>

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

rates than debt obligations of comparable maturities which make periodic
distributions of interest. On the other hand, because there are no periodic
interest payments to be reinvested prior to maturity, zero coupon securities
eliminate the reinvestment risk and lock in a rate of return to maturity.

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

     RISK AND INVESTMENT CONSIDERATIONS

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

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


                                                                              13
<PAGE>

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

affected. The Trustees would then reevaluate the Portfolios' investment
objectives and policies.

     PORTFOLIO TRANSACTIONS AND TURNOVER

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

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

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

     The Portfolio's net asset value per share is determined as of the close of
regular trading on the NYSE, on each day that the NYSE is open, by dividing the
value of the Portfolio's net assets attributable to each Class by the total
number of shares of the Class outstanding.

     When, in the judgment of the pricing service, quoted bid prices for
investments are readily available and are representative of the bid side of the
market, these investments are valued at the mean between the quoted bid and
asked prices. Investments for which, in the judgment of the pricing service,
there are no readily obtainable market quotations (which may constitute a
majority of the portfolio securities) are carried at fair value of securities of
similar type, yield and maturity. Pricing services generally determine value by
reference to transactions in municipal obligations, quotations from municipal
bond dealers, market transactions in comparable securities and various
relationships between securities. Short-term instruments maturing within 60 days
will be valued at cost plus (minus) amortized discount (premium), if any, when
the Trustees have determined that amortized cost equals fair value. Securities
and other assets that are not priced by a pricing service and for which market
quotations are not available will be valued in good faith at fair value by or
under the direction of the Trustees.


14
<PAGE>

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

     DIVIDENDS AND DISTRIBUTIONS

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

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

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

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

     TAXES

     The Portfolio intends to qualify as a "regulated investment company" and to
meet the requirements for distributing "exempt-interest dividends" under the
Internal Revenue Code of 1986, as amended (the "Code") so that no Federal income
taxes will be payable by the Portfolio and dividends representing net interest
received on municipal obligations will not be includable by shareholders in
their gross income for Federal income tax purposes. To the extent dividends are
derived from taxable income from temporary investments, from market discounts or
from the excess of net short-term capital gain over net long-term capital loss,
they are treated as ordinary income whether the shareholder has elected to
receive them in cash or in additional shares. No portion of such dividends would
qualify for the corporate dividends-received deduction. Distributions derived
from the excess of net long-term capital gain over net short-term capital loss
are treated as long-term capital gain regardless of the length of time a
shareholder has owned shares of the Portfolio and regardless of whether such
distributions are received in cash or in additional shares.

     Exempt-interest dividends allocable to interest received by the Portfolio
from the AMT-Subject Bonds in which the Portfolio may invest will be treated as
interest paid directly on such obligations and will give rise to an "item of tax
preference" 


                                                                              15
<PAGE>

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

that will increase a shareholder's alternative minimum taxable income. In
addition, for corporations, alternative minimum taxable income will be increased
by a percentage of the amount by which a special measure of income (including
exempt-interest dividends) exceeds the amount otherwise determined to be
alternative minimum taxable income. Accordingly, investment in the Portfolio may
cause shareholders to be subject to (or result in an increased liability under)
the AMT. The Fund will annually furnish to its shareholders a report indicating
the ratable portion of exempt-interest dividends attributable to AMT-Subject
Bonds.

     The Portfolio will be treated as a separate regulated investment company
for Federal tax purposes. Accordingly, the Portfolio's net investment income is
determined separately based on the income earned on its securities less its
costs of operations. The Portfolio's net long-term and short-term gain (loss)
realized on investments is determined separately and net capital gains
distributed by the Portfolio are determined after offsetting any capital loss
carryover of the Portfolio from prior periods.

     Under the Code, interest on indebtedness incurred or continued to purchase
or carry shares of the Portfolio will not be deductible to the extent that the
Portfolio's distributions are exempt from Federal income tax. In addition, any
loss realized upon the redemption of shares held less than six months will be
disallowed to the extent of any exempt-interest dividends received by the
shareholder during such period. However, this holding period may be shortened
by the Treasury Department to a period of not less than the greater of 31 days
or the period between regular dividend distributions. Further, persons who
may be "substantial users" (or "related persons" of substantial users) of
facilities financed by industrial development bonds should consult their
tax advisers before purchasing Portfolio shares.

     Distributions that are exempt for Federal income tax purposes will not
necessarily result in exemption under the income or other tax laws of any state
or local taxing authority. Generally, only interest earned on obligations issued
by the state or locality in which the investor resides will be exempt from state
and local taxes; however, the laws of the several states and local taxing
authorities vary with respect to the taxation of exempt-interest income paid by
investment companies and each shareholder should consult a tax adviser in that
regard.

     The foregoing is only a brief summary of some of the important tax
considerations generally affecting the Portfolio and its shareholders.
Additional tax information of relevance to particular investors is contained in
the Statement of Additional Information. Investors are urged to consult their
tax advisers with specific reference to their own tax situation.


16
<PAGE>

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

     GENERAL

     The Portfolio offers three Classes of shares. Class A shares are sold to
investors with an initial sales charge and Class C shares are sold without an
initial sales charge but are subject to a CDSC payable upon certain redemptions.
Class Y shares are sold without an initial sales charge or a CDSC and are
available only to investors investing a minimum of $5,000,000 (except for
purchases of Class Y shares by Smith Barney Concert Allocation Series Inc., for
which there is no minimum purchase amount). See "Prospectus Summary --
Alternative Purchase Arrangements" for a discussion of factors to consider in
selecting which Class of shares to purchase.

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

     Investors in Class A and Class C shares may open an account by making an
initial investment of at least $1,000 for each account in the Portfolio.
Investors in Class Y shares may open an account by making an initial investment
of $5,000,000. Subsequent investments of at least $50 may be made for all
Classes. For shareholders purchasing shares of the Portfolio through the
Systematic Investment Plan on a monthly basis, the minimum initial investment
requirement for Class A and Class C shares and the subsequent investment
requirement for all Classes is $25. For shareholders purchasing shares of the
Portfolio through the Systematic Investment Plan on a quarterly basis, the
minimum initial investment requirement for Class A and Class C shares and the
subsequent investment requirement for all Classes is $50. There are no minimum
investment requirements in Class A shares for employees of Travelers and its
subsidiaries, including Smith Barney, unitholders who invest distributions from
a UIT sponsored by Smith Barney, and Directors or Trustees of any of the Smith
Barney Mutual Funds and their spouses and children. The Fund reserves the right
to waive or change minimums, to decline any order to purchase its shares and to
suspend the offering of shares from time to time. Shares purchased will be held
in the shareholder's account by the Fund's transfer agent, First Data. Share
certificates are issued only upon a shareholder's written request to First
Data. It is not recommended that the Portfolio be used as a vehicle for Keogh,
IRA or other qualified retirement plans.

     The minimum initial investment requirement in the Portfolio for an account
established under the Uniform Gift to Minors Act is $250 and the subsequent
investment requirement is $50.


                                                                              17
<PAGE>

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

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

     SYSTEMATIC INVESTMENT PLAN

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

     INITIAL SALES CHARGE ALTERNATIVE - CLASS A SHARES 

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

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

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


18
<PAGE>

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

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

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

     INITIAL SALES CHARGE WAIVERS

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


                                                                              19
<PAGE>

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

     RIGHT OF ACCUMULATION

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

     GROUP PURCHASES

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


20
<PAGE>

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

net asset value is subject to the discretion of Smith Barney.

     LETTER OF INTENT

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

     Class Y Shares. A Letter of Intent may also be used as a way for investors
to meet the minimum investment requirement for Class Y shares. Such investors
must make an initial minimum purchase of $1,000,000 in Class Y shares of the
Portfolio and agree to purchase a total of $5,000,000 of Class Y shares of the
same Portfolio within six months from the date of the Letter. If a total
investment of $5,000,000 is not made within the six-month period, all Class Y
shares purchased to date will be transferred to Class A shares, where they will
be subject to all fees (including a service fee of 0.15%) and expenses
applicable to the Portfolio's Class A shares, which may include a CDSC of 1.00%.
Please contact a Smith Barney Financial Consultant or First Data for further
information.

     DEFERRED SALES CHARGE ALTERNATIVES

     "CDSC Shares" are sold at net asset value next determined without an
initial sales charge so that the full amount of an investor's purchase payment
may be immediately invested in the Fund. A CDSC, however, may be imposed on
certain redemptions of these shares. "CDSC Shares" are: (a) Class C shares; and
(b) Class A shares that were purchased without an initial sales charge but
subject to a CDSC.

     Any applicable CDSC will be assessed on an amount equal to the lesser of
the original cost of the shares being redeemed or their net asset value at the
time of redemption. CDSC Shares that are redeemed will not be subject to a CDSC
to the


                                                                              21
<PAGE>

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

extent that the value of such shares represents: (a) capital appreciation of
Portfolio assets; (b) reinvestment of dividends or capital gain distributions;
or (c) CDSC Shares redeemed more than 12 months after their purchase.

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

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

     WAIVERS OF CDSC

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


22
<PAGE>

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

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

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

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

Fund Name
--------------------------------------------------------------------------------
Growth Funds
    Smith Barney Aggressive Growth Fund Inc.
    Smith Barney Appreciation Fund Inc.
    Smith Barney Disciplined Small Cap Fund, Inc.
    Smith Barney Fundamental Value Fund Inc.
    Smith Barney Growth Opportunity Fund
    Smith Barney Large Capitalization Growth Fund
    Smith Barney Managed Growth Fund
    Smith Barney Natural Resources Fund Inc.
    Smith Barney Special Equities Fund

Growth and Income Funds
    Concert Social Awareness Fund
    Smith Barney Convertible Fund
    Smith Barney Funds, Inc. -- Equity Income Portfolio
    Smith Barney Growth and Income Fund
    Smith Barney Premium Total Return Fund
    Smith Barney Utilities Fund

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


                                                                              23
<PAGE>

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

    Smith Barney Managed Governments Fund Inc.

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

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

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

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

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


24
<PAGE>

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

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

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

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

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

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

     The Fund is required to redeem the shares of the Portfolio tendered to it,
as described below, at a redemption price equal to their net asset value per
share next determined after receipt of a written request in proper form at no
charge other than 


                                                                              25
<PAGE>

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

any applicable CDSC. Redemption requests received after the close of regular
trading on the NYSE are priced at the net asset value next determined.

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

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

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

     A written redemption request must (a) state the Class and number or dollar
amount of shares to be redeemed, (b) identify the shareholder's account number
and (c) be signed by each registered owner exactly as the shares are registered.
If the shares to be redeemed were issued in certificate form, the certificates
must be endorsed for transfer (or be accompanied by an endorsed stock power) and
must be submitted to First Data together with the redemption request. Any
signature appearing on a share certificate, stock power or written redemption
request in excess of $2,000 must be guaranteed by an eligible guarantor
institution such as a domestic bank, savings and loan institution, domestic
credit union, member bank of the Federal Reserve System or member firm of a
national securities exchange. Written redemption requests of $2,000 or less do
not require a signature guarantee unless more than one such redemption request
is made in any 10-day period. Redemption proceeds will be mailed to an
investor's address of record. First Data may require additional supporting
documents for redemptions made by 


26
<PAGE>

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

corporations, executors, administrators, trustees or guardians. A redemption
request will not be deemed properly received until First Data receives all
required documents in proper form.

     AUTOMATIC CASH WITHDRAWAL PLAN

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

     TELEPHONE REDEMPTION AND EXCHANGE PROGRAM

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

     Redemptions. Redemption requests of up to $10,000 of any class or classes
of the Portfolio's shares may be made by eligible shareholders by calling First
Data at 1-800-451-2010. Such requests may be made between 9:00 a.m. and 5:00
p.m. (New York City time) on any day the NYSE is open. Redemption requests
received after the close of regular trading on the NYSE are priced at the net
asset value next determined. Redemptions of shares (i) by retirement plans or
(ii) for which certificates have been issued are not permitted under this
program.

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


                                                                              27
<PAGE>

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

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

     Exchanges. Eligible shareholders may make exchanges by telephone if the
account registration of the shares of the fund being acquired is identical to
the registration of the shares of the fund exchanged. Such exchange requests may
be made by calling First Data at 1-800-451-2010 between 9:00 a.m. and 5:00 p.m.
(New York City time) on any day on which the NYSE is open. Exchange requests
received after the close of regular trading on the NYSE are processed at the net
asset value next determined.

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

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

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

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

     From time to time the Fund may include the Portfolio's yield, tax
equivalent yield, total return and average annual total return in
advertisements. In addition, in 


28
<PAGE>

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

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

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

     TRUSTEES

     Overall responsibility for management and supervision of the Fund rests
with the Fund's Trustees. The Trustees approve all significant agreements
between the Fund and the companies that furnish services to the Fund and the
Portfolio, 


                                                                              29
<PAGE>

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

including agreements with the Fund's distributor, investment manager, custodian
and transfer agent. The day-to-day operations of the Portfolio are delegated to
the Portfolio's investment manager. The Statement of Additional Information
contains background information regarding each Trustee and executive officer of
the Fund.

     MANAGER

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

     SBMFM was incorporated in 1968 under the laws of Delaware. SBMFM, Holdings
and Smith Barney are each located at 388 Greenwich Street, New York, New York
10013. As of May 31, 1997, SBMFM had aggregate assets under management in excess
of $87 billion.

     SBMFM provides the Portfolio with investment management services and
executive and other personnel, pays the remuneration of Fund officers, provides
the Fund with office space and equipment, furnishes the Fund with bookkeeping,
accounting, administrative services and services relating to research,
statistical work and supervision of the Portfolio. For the services provided,
the Management Agreement provides that the Portfolio will pay SBMFM a daily fee
based on the Portfolio's assets. At a Meeting of Shareholders of the Portfolio
held on December 15, 1995, the Shareholders approved a new management agreement
that increased the effective management fee paid by the Fund on behalf of the
Portfolio from 0.45% to 0.50% of the Portfolio's average daily net assets. The
new management agreement also provides that the Portfolio's investment manager
shall voluntarily reduce its fee to the extent that in any fiscal year the
aggregate expenses of the Portfolio, exclusive of taxes, brokerage, interest,
and extraordinary expenses, such as litigation and indemnification expenses,
exceed 0.70% of such Portfolio's average daily net assets. Certain
Class-specific expenses, such as 12b-1 fees, will also continue to be excluded
when determining whether the expense limitation applies. Previously, the expense
limitation was 0.65%. The change in the rate of the expense limitation
corresponds to the change in the rate of the management fee. The expense
limitation shall be in effect until it is terminated by notice to shareholders
and by supplement to the then-current prospectus. The increased management fee
and expense limitation became effective on December 18, 1995.

     For the last fiscal year total expenses were 0.75% of the average daily net
assets for Class A shares and 0.97% of the average daily net assets for Class C
shares.

     PORTFOLIO MANAGEMENT

     Lawrence J. McDermott, a Managing Director of Smith Barney, has served as
Vice President of the Fund and portfolio manager of the Portfolio since January


30
<PAGE>

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

1996 and manages the day-to-day operations of the Fund, including making all
investment decisions. Mr. McDermott also serves as the portfolio manager for
other tax-exempt bond funds sponsored by Smith Barney.

     Management's discussion and analysis, and additional performance
information regarding the Portfolio during the fiscal year ended March 31, 1997
is included in the Annual Report dated March 31, 1997. A copy of the Annual
Report may be obtained upon request and without charge from a

--------------------------------------------------------------------------------
Distributor
--------------------------------------------------------------------------------

     Smith Barney Financial Consultant or by writing or calling the Fund at the
address or phone number listed on page one of this Prospectus. Smith Barney
distributes shares of the Portfolio as principal underwriter and as such
conducts a continuous offering pursuant to a "best efforts" arrangement
requiring Smith Barney to take and pay for only such securities as may be sold
to the public. Pursuant to a plan of distribution adopted by the Portfolio under
Rule 12b-1 under the 1940 Act (the "Plan"), Smith Barney is paid a service fee
with respect to Class A and Class C shares of the Portfolio at the annual rate
of 0.15% of the average daily net assets attributable to these Classes. Smith
Barney is also paid a distribution fee with respect to Class C shares at the
annual rate of 0.20% of the average daily net assets attributable to these
shares. The fees are used by Smith Barney to pay its Financial Consultants for
servicing shareholder accounts and, in the case of Class C shares, to cover
expenses primarily intended to result in the sale of those shares. These
expenses include: advertising expenses; the cost of printing and mailing
prospectuses to potential investors; payments to and expenses of Smith Barney
Financial Consultants and other persons who provide support services in
connection with the distribution of shares; interest and/or carrying charges;
and indirect and overhead costs of Smith Barney associated with the sale of
Portfolio shares, including lease, utility, communications and sales promotion
expenses.

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

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


                                                                              31
<PAGE>

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

     The Fund, an open-end, non-diversified management investment company, is
organized as a "Massachusetts business trust" pursuant to a Declaration of Trust
dated August 14, 1985. Pursuant to the Declaration of Trust, the Trustees have
authorized the issuance of twenty series of shares, each representing shares in
one of twenty separate Portfolios. The assets of the Portfolio are segregated
and separately managed. Class A, Class C and Class Y shares of the Portfolio
represent interests in the assets of the Portfolio and have identical voting,
dividend, liquidation and other rights on the same terms and conditions, except
that expenses related to the shareholder service and distribution of Class A and
Class C shares are borne solely by the respective Class and each such Class of
shares has exclusive voting rights with respect to provisions of the Portfolio's
Rule 12b-1 distribution plan which pertain to that Class. It is the intention of
the Fund not to hold annual meetings of shareholders. The Trustees may call
meetings of shareholders for action by shareholder vote as may be required by
the 1940 Act or the Declaration of Trust, and shareholders are entitled to call
a meeting upon a vote of 10% of the Fund's outstanding shares for purposes of
voting on removal of a Trustee or Trustees. Shareholders will receive assistance
in communicating with other shareholders in connection with the removal of
Trustees as required by Section 16(c) of the 1940 Act. Shares do not have
cumulative voting rights or preemptive rights and have only such conversion or
exchange rights as the Trustees may grant in their discretion. When issued for
payment as described in this Prospectus, the Fund's shares will be fully paid
and transferable (subject to the Portfolio's minimum account size). Shares are
redeemable as set forth under "Redemption of Shares" and are subject to
involuntary redemption as set forth under "Minimum Account Size."

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

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

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


32
<PAGE>

                                                                    SMITH BARNEY
                                                                    ------------

                                           A Member of the TravelersGroup [LOGO]


                                                                    SMITH BARNEY
                                                                      MUNI FUNDS
                                                                         Limited
                                                                            Term
                                                                       Portfolio

                                                            388 Greenwich Street
                                                        New York, New York 10013


                                                                    FD 0664 7/97
<PAGE>

PROSPECTUS

                                                                    SMITH BARNEY
                                                                      MUNI FUNDS

                                                                        National
                                                                       Portfolio

                                                                   JULY 29, 1997

                                                   Prospectus begins on page one

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

--------------------------------------------------------------------------------
Prospectus                                                         July 29, 1997
--------------------------------------------------------------------------------

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

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

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

      Additional information about the Portfolio is contained in a Statement of
Additional Information dated July 29, 1997, as amended or supplemented from time
to time, that is available upon request and without charge by calling or writing
the Fund at the telephone number or address set forth above or by contacting a
Smith Barney Financial Consultant. The Statement of Additional Information has
been filed with the Securities and Exchange Commission (the "SEC") and is
incorporated by reference into this Prospectus in its entirety.

SMITH BARNEY INC.
Distributor

SMITH BARNEY MUTUAL FUNDS MANAGEMENT INC.
Investment Manager

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


                                                                               1
<PAGE>

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

Prospectus Summary                                                             3
--------------------------------------------------------------------------------
Financial Highlights                                                           9
--------------------------------------------------------------------------------
Investment Objective and Management Policies                                  11
--------------------------------------------------------------------------------
Valuation of Shares                                                           15
--------------------------------------------------------------------------------
Dividends, Distributions and Taxes                                            16
--------------------------------------------------------------------------------
Purchase of Shares                                                            17
--------------------------------------------------------------------------------
Exchange Privilege                                                            24
--------------------------------------------------------------------------------
Redemption of Shares                                                          27
--------------------------------------------------------------------------------
Minimum Account Size                                                          30
--------------------------------------------------------------------------------
Performance                                                                   30
--------------------------------------------------------------------------------
Management of the Fund                                                        31
--------------------------------------------------------------------------------
Distributor                                                                   32
--------------------------------------------------------------------------------
Additional Information                                                        33
--------------------------------------------------------------------------------

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


2
<PAGE>

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

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

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

      ALTERNATIVE PURCHASE ARRANGEMENTS The Portfolio offers several classes of
shares ("Classes") to investors designed to provide them with the flexibility of
selecting an investment best suited to their needs. The general public is
offered three Classes of shares: Class A shares, Class B shares and Class C
shares, which differ principally in terms of sales charges and rate of expenses
to which they are subject. A fourth Class of shares, Class Y shares, is offered
only to investors meeting an initial investment minimum of $5,000,000. See
"Purchase of Shares" and "Redemption of Shares."

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

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

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


                                                                               3
<PAGE>

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

Dividend Shares") will be converted at that time. See "Purchase of Shares --
Deferred Sales Charge Alternatives."

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

      Class Y Shares. Class Y shares are available only to investors meeting an
initial investment minimum of $5,000,000. Class Y shares are sold at net asset
value with no initial sales charge or CDSC. They are not subject to any service
or distribution fees.

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

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

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

      Reduced or No Initial Sales Charge. The initial sales charge on Class A
shares may be waived for certain eligible purchasers and the entire purchase
price would be immediately invested in the Portfolio. In addition, Class A share
purchases of $500,000 or more will be made at net asset value with no initial
sales charge, but will be subject to a CDSC of 1.00% on redemptions made within
12 months of 


4
<PAGE>

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

purchase. The $500,000 investment may be met by adding the purchase to the net
asset value of all Class A shares offered with a sales charge held in funds
sponsored by Smith Barney Inc. ("Smith Barney") listed under "Exchange
Privilege." Class A share purchases may also be eligible for a reduced initial
sales charge. See "Purchase of Shares." Because the ongoing expenses of Class A
shares may be lower than those for Class B and Class C shares, purchasers
eligible to purchase Class A shares at net asset value or at a reduced sales
charge should consider doing so.

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

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

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

      INVESTMENT MINIMUMS Investors in Class A, Class B and Class C shares may
open an account by making an initial investment of at least $1,000 for each
account. Investors in Class Y shares may open an account for an initial
investment of $5,000,000. Subsequent investments of at least $50 may be made for
all Classes. The minimum investment requirements for purchases of Portfolio
shares through the Systematic Investment Plan are described below. There is no
minimum investment requirement in Class A shares for unit holders who invest
distributions from a unit investment trust ("UIT") sponsored by Smith Barney. It
is not recommended that the Portfolio be used as a vehicle for Keogh, IRA or
other qualified retirement plans. See "Purchase of Shares."

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

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


                                                                               5
<PAGE>

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

      MANAGEMENT OF THE FUND Smith Barney Mutual Funds Management Inc. ("SBMFM"
or the "Manager") serves as the Portfolio's investment manager. SBMFM provides
investment advisory and management services to investment companies affiliated
with Smith Barney. SBMFM is a wholly owned subsidiary of Smith Barney Holdings
Inc. ("Holdings"). Holdings is a wholly owned subsidiary of Travelers Group Inc.
("Travelers"), a diversified financial services holding company engaged, through
its subsidiaries, principally in four business segments: Investment Services,
Consumer Finance Services, Life Insurance Services and Property & Casualty
Insurance Services. See "Management of the Fund."

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

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

      DIVIDENDS AND DISTRIBUTIONS Dividends from net investment income are
generally paid on the last Friday of each calendar month to shareholders of
record as of three business days prior thereto. Distributions of net realized
capital gains, if any, are paid annually. See "Dividends, Distributions and
Taxes."

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

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


6
<PAGE>

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

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

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

Annual Portfolio Operating Expenses
   (as a percentage of average net assets)
     Management fees .........................   0.45%     0.45%     0.45%     0.45%
     12b-1 fees*** ...........................   0.15      0.65      0.70        --
     Other expenses ..........................   0.10      0.10      0.12      0.10
                                                 ----      ----      ----      ----
     Total Portfolio Operating Expenses ......   0.70%     1.20%     1.27%     0.55%
                                                 ----      ----      ----      ----
----------------------------------------------------------------------------------------
</TABLE>

  * Purchases of Class A shares of $500,000 or more will be made at net asset
value with no sales charge, but will be subject to a CDSC of 1.00% on
redemptions made within 12 months of purchase.
 ** "Other expenses" for Class Y shares have been estimated because no Class Y
shares were outstanding during the fiscal year ended March 31, 1997. 
*** Upon conversion of Class B shares to Class A shares, such shares will no
longer be subject to a distribution fee. Class C shares do not have a conversion
feature and, therefore, are subject to an ongoing distribution fee. As a result,
long-term shareholders of Class C shares may pay more than the economic
equivalent of the maximum front-end sales charge permitted by the National
Association of Securities Dealers, Inc.

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

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


                                                                               7
<PAGE>

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

fee and a 0.15% service fee. "Other expenses" in the above table include fees
for shareholder services, custodial fees, legal and accounting fees, printing
costs and registration fees.

      EXAMPLE

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

National Portfolio                           1 Year  3 Years  5 Years  10 Years*
--------------------------------------------------------------------------------
An investor would pay the following expenses on
  a $1,000 investment, assuming (1) 5.00% annual 
  return and (2) redemption at the end of each 
  time period:

      Class A............................... $47     $61      $77      $124
      Class B...............................  57      68       76       132
      Class C...............................  23      40       70       153
      Class Y...............................   6      18       31        69

An investor would pay the following expenses on 
  the same investment, assuming the same annual 
  return and no redemption:

      Class A............................... $47     $61      $77      $124
      Class B...............................  12      38       66       132
      Class C...............................  13      40       70       153
      Class Y...............................   6      18       31        69
--------------------------------------------------------------------------------
      * Ten-year figures assume conversion of Class B shares to Class A shares
at the end of the eighth year following the date of purchase.

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


8
<PAGE>

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

      The following information has been audited by KPMG Peat Marwick LLP,
independent auditors, whose report thereon for the five-year period ended March
31, 1997 appears in the Fund's annual report dated March 31, 1997. The
information set out below should be read in conjunction with the financial
statements and related notes that also appear in the Fund's Annual Report to
Shareholders, which is incorporated by reference into the Statement of
Additional Information.

For a share of beneficial interest outstanding throughout each year:

<TABLE>
<CAPTION>
National Portfolio                                                            Class A Shares
------------------------------------------------------------------------------------------------------------------------------------

Year Ended
  March 31,                       1997      1996      1995      1994(1)   1993      1992      1991      1990      1989      1988
------------------------------------------------------------------------------------------------------------------------------------
<S>                             <C>       <C>       <C>       <C>       <C>       <C>       <C>       <C>       <C>       <C>   
Net Asset Value,
  Beginning of
  Year                          $13.67    $13.32    $13.35    $13.81    $12.95    $12.49    $12.24    $12.11    $11.82    $12.95
------------------------------------------------------------------------------------------------------------------------------------
  Net investment
  income(2)                       0.81      0.81      0.82      0.85      0.88      0.90      0.91      0.92      0.95      0.95
  Net realized and
  unrealized
  gain (loss)                    (0.09)     0.35     (0.01)    (0.39)     0.87      0.46      0.17      0.19      0.30     (1.12)
------------------------------------------------------------------------------------------------------------------------------------
Total from
  Operations                      0.72      1.16      0.81      0.46      1.75      1.36      1.08      1.11      1.25     (0.17)
====================================================================================================================================
Less Distributions From:
  Net investment
    income                       (0.79)    (0.81)    (0.84)    (0.86)    (0.89)    (0.90)    (0.83)    (0.98)    (0.96)    (0.94)
  Net realized gains                --        --        --     (0.06)       --        --        --        --        --     (0.02)
------------------------------------------------------------------------------------------------------------------------------------
Total Distributions              (0.79)    (0.81)    (0.84)    (0.92)    (0.89)    (0.90)    (0.83)    (0.98)    (0.96)    (0.96)
------------------------------------------------------------------------------------------------------------------------------------
Net Asset Value,
  End of Year                   $13.60    $13.67    $13.32    $13.35    $13.81    $12.95    $12.49    $12.24    $12.11    $11.82
====================================================================================================================================
Total Return(P)                   5.41%     8.83%     6.38%     3.17%    13.96%    11.21%     9.13%     9.60%    10.93%    (1.00%)
------------------------------------------------------------------------------------------------------------------------------------
Net Assets,
  End of Year
  (millions)                    $  351    $  378    $  401    $  413    $  383    $  261    $  200    $  160    $  109    $   83
------------------------------------------------------------------------------------------------------------------------------------
Ratios to Average Net Assets:
  Expenses(2)                     0.70%     0.70%     0.60%     0.52%     0.53%     0.50%     0.39%     0.35%     0.30%     0.35%
  Net investment
  income                          5.92      5.88      6.30      6.05      6.58      6.88      7.40      7.43      7.92      8.06
------------------------------------------------------------------------------------------------------------------------------------
Portfolio Turnover
  Rate                              31%       27%       54%       42%       53%       95%      103%       56%       82%      106%
====================================================================================================================================
</TABLE>

(1) On October 10, 1994, the former Class C shares were exchanged into Class A
    shares.
(2) The Manager has waived all or a part of its fees for each of the years in
    the five-year period ended March 31, 1992. If such fees were not waived,
    the per share decrease of net investment income and the ratios of expenses
    to average net assets would have been:

                 Net Investment Income                   Expense Ratios
                  Per Share Decrease                   Without Fee Waivers
          ----------------------------------   ---------------------------------
          1992    1991   1990   1989   1988    1992    1991   1990   1989   1988
--------------------------------------------------------------------------------

Class A  $.002   $.013  $.019  $.032  $.028.  0.52%   0.49%  0.50%  0.54%  0.58%
--------------------------------------------------------------------------------

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


                                                                               9
<PAGE>

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

For a share of beneficial interest outstanding throughout the year:

<TABLE>
<CAPTION>
National Portfolio                     Class B Shares                          Class C Shares
----------------------------------------------------------------------------------------------------------------

Year Ended March 31,             1997      1996      1995(1)     1997      1996      1995      1994(2)   1993(3)
----------------------------------------------------------------------------------------------------------------
<S>                            <C>       <C>       <C>         <C>       <C>       <C>       <C>       <C>   
Net Asset Value,
Beginning of Year              $13.67    $13.33    $12.41      $13.65    $13.32    $13.33    $13.80    $13.47
----------------------------------------------------------------------------------------------------------------
Income from Operations:
  Net investment income          0.74      0.73      0.33        0.73      0.73      0.74      0.76      0.22
  Net realized and unrealized
    gain (loss)                 (0.08)     0.35      0.91       (0.08)     0.34     (0.01)    (0.40)     0.31
----------------------------------------------------------------------------------------------------------------
Total from Operations            0.66      1.08      1.24        0.65      1.07      0.73      0.36      0.53
================================================================================================================
Less Distributions From:
  Net Investment Income         (0.72)    (0.74)    (0.32)      (0.71)    (0.74)    (0.74)    (0.77)    (0.20)
  Net Realized Gains               --        --        --          --        --        --     (0.06)       --
----------------------------------------------------------------------------------------------------------------
Total Distributions             (0.72)    (0.74)    (0.32)      (0.71)    (0.74)    (0.74)    (0.83)    (0.20)
----------------------------------------------------------------------------------------------------------------
Net Asset Value, End of Year   $13.61    $13.67    $13.33      $13.59    $13.65    $13.32    $13.33    $13.80
================================================================================================================
Total Return(P)                  4.95%     8.26%    10.11%++     4.90%     8.13%     5.80%     2.40%     3.98%++
----------------------------------------------------------------------------------------------------------------
Net Assets, End of Year
  (millions)                   $   13    $   12    $    7      $   15    $   17    $   19    $   18    $    6
----------------------------------------------------------------------------------------------------------------
Ratios to Average Net Assets:
  Expenses                       1.20%     1.19%     1.19%+      1.27%     1.27%     1.23%     1.22%     1.20%+
  Net Investment Income          5.42      5.37      5.75+       5.35      5.31      5.69      5.29      5.68+
----------------------------------------------------------------------------------------------------------------
Portfolio Turnover Rate            31%       27%       54%         31%       27%       54%       42%       53%
================================================================================================================
</TABLE>
(1) For the period from November 7, 1994 (inception date) to March 31, 1995.
(2) On November 7, 1994 the former Class B shares were renamed Class C shares.
(3) For the period from January 5, 1993 (inception date) to March 31, 1993.
(P) Total returns do not reflect sales loads or contingent deferred sales
    charges.
++  Total return is not annualized, as it may not be representative of the
    total return for the year.
+   Annualized.


10
<PAGE>

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

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

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

      The Portfolio will seek to be fully invested in obligations that are
issued by or on behalf of states, territories and possessions of the United
States and their political subdivisions, agencies and instrumentalities that
were, in the opinion of bond counsel to the issuer, exempt from Federal income
taxes at the time of their issuance. For certain shareholders, a portion of the
Portfolio's income may be subject to the alternative minimum tax ("AMT") on
tax-exempt income discussed below. Such obligations are issued to raise money
for a variety of public projects that enhance the quality of life including
health facilities, housing, airports, schools, highways and bridges.

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

      Municipal bonds purchased for the Portfolio must, at the time of purchase,
be investment-grade municipal bonds and at least two-thirds of the Portfolio's
municipal bonds must be rated in the category of A or better. Investment-grade
bonds are those rated Aaa, Aa, A and Baa by Moody's Investors Service, Inc.
("Moody's") or AAA, AA, A and BBB by Standard & Poor's Ratings Group ("S&P") or
have an equivalent rating by any nationally recognized statistical rating
organization; pre-refunded bonds escrowed by U.S. Treasury obligations will be


                                                                              11
<PAGE>

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

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

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

      The Portfolio will not invest more than 10% of the value of its net assets
in 


12
<PAGE>

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

illiquid securities, including those that are not readily marketable or for
which there is no established market.

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

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

      The Portfolio may invest in municipal bond index futures contracts
(currently traded on the Chicago Board of Trade) or in listed contracts based on
U.S. government securities as a hedging policy in pursuit of its investment
objective, provided that immediately thereafter not more than 331 1/43% of its
net assets would be hedged or the amount of margin deposits on the Portfolio's
existing futures contracts would not exceed 5% of the value of its total assets.
Since any income would be taxable, it is anticipated that such investments will
be made only in those circumstances when the Manager anticipates the possibility
of an extreme change in interest rates or market conditions but does not wish to
liquidate the Portfolio's securities. A further discussion of futures contracts
and their associated risks is contained in the Statement of Additional
Information.

      The Fund's Board of Trustees has approved the addition of zero coupon
bonds to the Portfolio's list of authorized investments. A zero coupon bond pays
no interest in cash to its holder during its life, although interest is accrued
during that period. Its value to an investor consists of the difference between
its face value at the time of maturity and the price for which it was acquired,
which is generally an amount significantly less than its face value (sometimes
referred to as a "deep discount" price). Because such securities usually trade
at a deep discount, they will be subject to greater fluctuations of market value
in response to changing interest rates than debt obligations of comparable
maturities which make periodic distributions of interest. On the other hand,
because there are no periodic interest 


                                                                              13
<PAGE>

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

payments to be reinvested prior to maturity, zero coupon securities eliminate
the reinvestment risk and lock in a rate of return to maturity.

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

      RISK AND INVESTMENT CONSIDERATIONS

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

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


14
<PAGE>

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

      PORTFOLIO TRANSACTIONS AND TURNOVER

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

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

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

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

      When, in the judgment of the pricing service, quoted bid prices for
investments are readily available and are representative of the bid side of the
market, these investments are valued at the mean between the quoted bid and
asked prices. Investments for which, in the judgment of the pricing service,
there are no readily obtainable market quotations (which may constitute a
majority of the portfolio securities) are carried at fair value of securities of
similar type, yield and maturity. Pricing services generally determine value by
reference to transactions in municipal obligations, quotations from municipal
bond dealers, market transactions in comparable securities and various
relationships between securities. Short-term instruments maturing within 60 days
will be valued at cost plus (minus) amortized discount (premium), if any, when
the Trustees have determined that amortized cost equals fair value. Securities
and other assets that are not priced by a pricing service and for which market
quotations are not available will be valued in good faith at fair value by or
under the direction of the Trustees.


                                                                              15
<PAGE>

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

      DIVIDENDS AND DISTRIBUTIONS

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

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

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

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

      TAXES

      The Portfolio intends to qualify as a "regulated investment company" and
to meet the requirements for distributing "exempt-interest dividends" under the
Internal Revenue Code of 1986, as amended (the "Code") so that no Federal income
taxes will be payable by the Portfolio and dividends representing net interest
received on municipal obligations will not be includable by shareholders in
their gross income for Federal income tax purposes. To the extent dividends are
derived from taxable income from temporary investments, market discounts or from
the excess of net short-term capital gain over net long-term capital loss, they
are treated as ordinary income whether the shareholder has elected to receive
them in cash or in additional shares. Capital gains distributions, if any,
whether paid in cash or invested in shares of the Port folio, will be taxable to
shareholders.

      Exempt-interest dividends allocable to interest received by the Portfolio
from the AMT-Subject Bonds in which the Portfolio may invest will be treated as
interest paid directly on such obligations and will give rise to an "item of tax
preference" that will increase a shareholder's alternative minimum taxable
income. In addition, for corporations, alternative minimum taxable income will
be increased by a percentage of the amount by which a special measure of income
(including exempt-interest dividends) exceeds the amount otherwise determined to
be alternative minimum taxable income. Accordingly, investment in the Portfolio
may cause 


16
<PAGE>

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

shareholders to be subject to (or result in an increased liability under) the
AMT. The Fund will annually furnish to its shareholders a report indicating the
ratable portion of exempt-interest dividends attributable to AMT-Subject Bonds.

      The Portfolio will be treated as a separate regulated investment company
for Federal tax purposes. Accordingly, the Portfolio's net investment income is
determined separately based on the income earned on its securities less its
costs of operations. The Portfolio's net long-term and short-term gain (loss)
realized on investments is determined after offsetting any capital loss
carryover of the Portfolio from prior periods.

      Under the Code, interest on indebtedness incurred or continued to purchase
or carry shares of the Portfolio will not be deductible to the extent that the
Portfolio's distributions are exempt from Federal income tax. In addition, any
loss realized upon the redemption of shares held less than six months will be
disallowed to the extent of any exempt-interest dividends received by the
shareholder during such period. However, this holding period may be shortened by
the Treasury Department to a period of not less than the greater of 31 days or
the period between regular dividend distributions. Further, persons who may be
"substantial users" (or "related persons" of substantial users) of facilities
financed by industrial development bonds should consult their tax advisers
before purchasing Portfolio shares.

      Distributions that are exempt for Federal income tax purposes will not
necessarily result in exemption under the income or other tax laws of any state
or local taxing authority. Generally, only interest earned on obligations issued
by the state or locality in which the investor resides will be exempt from state
and local taxes; however, the laws of the several states and local taxing
authorities vary with respect to the taxation of exempt-interest income paid by
investment companies, and each shareholder should consult a tax adviser in that
regard.

      The foregoing is only a brief summary of some of the important tax
considerations generally affecting the Portfolio and its shareholders.
Additional tax information of relevance to particular investors is contained in
the Statement of Additional Information. Investors are urged to consult their
tax advisers with specific reference to their own tax situation.

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

      GENERAL

      The Portfolio offers four Classes of shares. Class A shares are sold to
investors with an initial sales charge and Class B and Class C shares are sold
without an initial sales charge but are subject to a CDSC, payable upon certain
redemptions. Class Y shares are sold without an initial sales charge or CDSC and
are available 


                                                                              17
<PAGE>

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

only to investors investing a minimum of $5,000,000 (except for purchases of
Class Y shares by Smith Barney Concert Allocation Series Inc., for which there
is no minimum purchase amount). See "Prospectus Summary -- Alternative Purchase
Arrangements" for a discussion of factors to consider in selecting which Class
of shares to purchase.

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

      Investors in Class A, Class B and Class C shares may open an account by
making an initial investment of at least $1,000 for each account in the
Portfolio. Investors in Class Y shares may open an account by making an initial
investment of $5,000,000. Subsequent investments of at least $50 may be made for
all Classes. For shareholders purchasing shares of the Portfolio through the
Systematic Investment Plan on a monthly basis, the minimum initial investment
requirement for Class A, Class B and Class C shares and the subsequent
investment requirement for all Classes is $25. For shareholders purchasing
shares of the Portfolio through the Systematic Investment Plan on a quarterly
basis, the minimum initial investment requirement for Class A, Class B and Class
C shares and the subsequent investment requirement for all Classes is $50. There
are no minimum investment requirements for Class A shares for employees of
Travelers and its subsidiaries, including Smith Barney, a unit holder who
invests distributions from a UIT sponsored by Smith Barney, and Directors or
Trustees of any of the Smith Barney Mutual Funds and their spouses and children.
The Fund reserves the right to waive or change minimums, to decline any order to
purchase its shares and to suspend the offering of shares from time to time.
Shares purchased will be held in the shareholder's account by the Fund's
transfer agent, First Data. Share certificates are issued only upon a
shareholder's written request to First Data. It is not recommended that the
Portfolio be used as a vehicle for Keogh, IRA or other qualified retirement
plans.

      The minimum initial investment requirement in the Portfolio for an account
established under the Uniform Gift to Minors Act is $250 and the subsequent
investment requirement is $50.

      Purchase orders received by the Fund or Smith Barney prior to the close of
regular trading on the NYSE on any day the Portfolio calculates its net asset
value are priced according to the net asset value determined on that day (the
"trade date"). Orders received by dealers or Introducing Brokers prior to the
close of regular 


18
<PAGE>

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

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

      SYSTEMATIC INVESTMENT PLAN

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

      INITIAL SALES CHARGE ALTERNATIVE -- CLASS A SHARES

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

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

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

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


                                                                              19
<PAGE>

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

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

      INITIAL SALES CHARGE WAIVERS

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

      RIGHT OF ACCUMULATION

      Class A shares of a Portfolio may be purchased by "any person" (as defined
above) at a reduced sales charge or at net asset value determined by aggregating
the dollar amount of the new purchase and the total net asset value of all Class
A shares of the Portfolio and of funds sponsored by Smith Barney, which are
offered with a sales charge, listed under "Exchange Privilege" then held by such
person and applying the sales charge applicable to such aggregate. In order to
obtain such 


20
<PAGE>

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

discount, the purchaser must provide sufficient information at the time of
purchase to permit verification that the purchase qualifies for the reduced
sales charge. The right of accumulation is subject to modification or
discontinuance at any time with respect to all shares purchased thereafter.

      GROUP PURCHASES

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


                                                                              21
<PAGE>

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

      LETTER OF INTENT

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

      Class Y Shares. A Letter of Intent may also be used as a way for investors
to meet the minimum investment requirement for Class Y shares. Such investors
must make an initial minimum purchase of $1,000,000 in Class Y shares of the
Portfolio and agree to purchase a total of $5,000,000 of Class Y shares of the
same Portfolio within six months from the date of the Letter. If a total
investment of $5,000,000 is not made within the six-month period, all Class Y
shares purchased to date will be transferred to Class A shares, where they will
be subject to all fees (including a service fee of 0.15%) and expenses
applicable to the Portfolio's Class A shares, which may include a CDSC of 1.00%.
Please contact a Smith Barney Financial Consultant or First Data for further
information.

      DEFERRED SALES CHARGE ALTERNATIVES

      "CDSC Shares" are sold at net asset value next determined without an
initial sales charge so that the full amount of an investor's purchase payment
may be immediately invested in the Portfolio. A CDSC however, may be imposed on
certain redemptions of these shares. "CDSC Shares" are: (a) Class B shares;
(b) Class C shares; and (c) Class A shares that were purchased without an
initial sales charge but subject to a CDSC.

      Any applicable CDSC will be assessed on an amount equal to the lesser of
the original cost of the shares being redeemed or their net asset value at the
time of redemption. CDSC Shares that are redeemed will not be subject to a CDSC
to the extent that the value of such shares represents: (a) capital appreciation
of Portfolio assets; (b) rein vestment of dividends or capital gain
distributions; (c) with respect to Class B shares, shares redeemed more than
five years after their purchase; or


22
<PAGE>

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

(d) with respect to Class C shares and Class A shares that are CDSC Shares,
shares redeemed more than 12 months after their purchase.

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

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

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

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

      To provide an example, assume an investor purchased 100 Class B shares at


                                                                              23
<PAGE>

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

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

      WAIVERS OF CDSC

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

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

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

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


24
<PAGE>

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

Fund Name
Growth Funds
      Smith Barney Aggressive Growth Fund Inc.
      Smith Barney Appreciation Fund Inc.
      Smith Barney Disciplined Small Cap Fund, Inc.
      Smith Barney Fundamental Value Fund Inc.
      Smith Barney Large Capitalization Growth Fund
      Smith Barney Growth  Opportunity Fund
      Smith Barney Managed Growth Fund
      Smith Barney Natural Resources Fund Inc.
      Smith Barney Special Equities Fund

Growth and Income Funds
      Concert Social Awareness Fund
      Smith Barney Convertible Fund
      Smith Barney Funds, Inc. -- Equity Income Portfolio
      Smith Barney Growth and Income Fund
      Smith Barney Premium Total Return Fund
      Smith Barney Utilities Fund
Taxable Fixed-Income Funds
   ** Smith Barney Adjustable Rate Government Income Fund
      Smith Barney Diversified Strategic Income Fund
  *** Smith Barney Funds, Inc. -- Short-Term U.S. Treasury Securities Portfolio
      Smith Barney Funds, Inc. -- U.S. Government Securities Portfolio
      Smith Barney Government Securities Fund
      Smith Barney High Income Fund
      Smith Barney Investment Grade Bond Fund
      Smith Barney Managed Governments Fund Inc.

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


                                                                              25
<PAGE>

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

      Smith Barney Oregon Municipals Fund
      Smith Barney Tax-Exempt Income Fund
International Funds
      Smith Barney World Funds, Inc. -- Emerging Markets Portfolio
      Smith Barney World Funds, Inc. -- European Portfolio
      Smith Barney World Funds, Inc. -- Global Government Bond Portfolio
      Smith Barney World Funds, Inc. -- International Balanced Portfolio
      Smith Barney World Funds, Inc. -- International Equity Portfolio
      Smith Barney World Funds, Inc. -- Pacific Portfolio

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

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

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

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

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


26
<PAGE>

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

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

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

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

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

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


                                                                              27
<PAGE>

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

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

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

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

      A written redemption request must (a) state the Class and number or dollar
amount of shares to be redeemed, (b) identify the shareholder's account number
and (c) be signed by each registered owner exactly as the shares are registered.
If the shares to be redeemed were issued in certificate form, the certificates
must be endorsed for transfer (or be accompanied by an endorsed stock power) and
must be submitted to First Data together with the redemption request. Any
signature appearing on a share certificate, stock power or written redemption
request in excess of $2,000 must be guaranteed by an eligible guarantor
institution such as a domestic bank, savings and loan institution, domestic
credit union, member bank of the Federal Reserve System or member firm of a
national securities exchange. Written redemption requests of $2,000 or less do
not require a signature guarantee unless more than one such redemption request
is made in any 10-day period. Redemption proceeds will be mailed to an
investor's address of record. First Data may require additional supporting
documents for redemptions made by corporations, executors, administrators,
trustees or guardians. A redemption request will not be deemed properly received
until First Data receives all required documents in proper form.

      AUTOMATIC CASH WITHDRAWAL PLAN

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


28
<PAGE>

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

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

      TELEPHONE REDEMPTION AND EXCHANGE PROGRAM

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

      Redemptions. Redemption requests of up to $10,000 of any class or classes
of the Portfolio's shares may be made by eligible shareholders by calling First
Data at 1-800-451-2010. Such requests may be made between 9:00 a.m. and 5:00
p.m. (New York City time) on any day the NYSE is open. Redemption requests
received after the close of regular trading on the NYSE are priced at the net
asset value next determined. Redemption of shares (i) by retirement plans or
(ii) for which certificates have been issued are not permitted under this
program.

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

      Exchanges. Eligible shareholders may make exchanges by telephone if the
account registration of the shares of the fund being acquired is identical to
the 


                                                                              29
<PAGE>

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

registration of the shares of the fund exchanged. Such exchange requests may be
made by calling First Data at 1-800-451-2010 between 9:00 a.m. and 5:00 p.m.
(New York City time) on any day on which the NYSE is open. Exchange requests
received after the close of regular trading on the NYSE are processed at the net
asset value next determined.

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

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

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

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

      From time to time the Portfolio may include its yield, tax equivalent
yield, total return and average annual total return in advertisements. In
addition, in other types of sales literature, the Fund may also include the
Portfolio's distribution rate. These figures are computed separately for Class
A, Class B, Class C and Class Y shares of the Portfolio. These figures are based
on historical earnings and are not intended to indicate future performance. The
yield of a Portfolio Class refers to the net income earned by an investment in
the Class over a 30-day period ending at month end. This net income, which does
not include any element of non-tax exempt income if any, is then annualized,
i.e., the amount of income earned by the investment during that 30-day period
is assumed to be earned each 30-day period for 12 periods and is expressed as a
percentage of the investment. The net income earned on the investment for six
periods is also assumed to be rein vested at the end of the 


30
<PAGE>

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

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

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

      TRUSTEES

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

      MANAGER

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

      SBMFM was incorporated in 1968 under the laws of Delaware. SBMFM, Holdings
and Smith Barney are each located at 388 Greenwich Street, New York, New York
10013. As of May 31, 1997, SBMFM had aggregate assets under management in excess
of $87 billion.


                                                                              31
<PAGE>

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

      SBMFM provides the Fund with investment management services and executive
and other personnel, pays the remuneration of Fund officers, provides the Fund
with office space and equipment, furnishes the Fund with bookkeeping,
accounting, administrative services and services relating to research,
statistical work and supervision of the Portfolio. For the services provided,
the management agreement provides that the Fund will pay SBMFM a daily fee
based on the Portfolio's assets. For the Fund's last fiscal year the management
fee was 0.45% of the Portfolio's average net assets. For the last fiscal year
total operating expenses were 0.70% of the average daily net assets for Class A
shares; 1.20% of the average daily net assets for Class B shares; and 1.27% of
the average daily net assets for Class C shares. SBMFM has agreed to waive its
fee with respect to a Class to the extent that it is necessary if in any fiscal
year the aggregate expenses exclusive of 12b-1 fees, taxes, brokerage, interest
and extraordinary expenses, such as litigation costs, exceed 0.65% of such
Class' average net assets for that fiscal year. The expense limitations shall be
in effect until they are terminated by notice to shareholders and by supplement
to the then-current prospectus.

      PORTFOLIO MANAGEMENT

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

      Management's discussion and analysis, and additional performance
information regarding the Portfolio during the fiscal year ended March 31, 1997
is included in the Annual Report dated March 31, 1997. A copy of the Annual
Report may be obtained upon request and without charge from a Smith Barney
Financial Consultant or by writing or calling the Fund at the address or phone
number listed on page one of this Prospectus.

--------------------------------------------------------------------------------
Distributor
--------------------------------------------------------------------------------

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


32
<PAGE>

--------------------------------------------------------------------------------
Distributor (continued)
--------------------------------------------------------------------------------

      attributable to these Classes. Smith Barney is also paid a distribution
fee with respect to Class B and Class C shares at the annual rate of 0.50% and
0.55%, respectively, of the average daily net assets attributable to these
Classes. Class B shares that automatically convert to Class A shares eight years
after the date of original purchase will no longer be subject to a distribution
fee. The fees are used by Smith Barney to pay its Financial Consultants for
servicing shareholder accounts and, in the case of Class B and Class C shares,
to cover expenses primarily intended to result in the sale of those shares.
These expenses include: advertising expenses; the cost of printing and mailing
prospectuses to potential investors; payments to and expenses of Smith Barney
Financial Consultants and other persons who provide support services in
connection with the distribution of shares; interest and/or carrying charges;
and indirect and overhead costs of Smith Barney associated with the sale of
Portfolio shares, including lease, utility, communications and sales promotion
expenses.

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

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

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

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


                                                                              33
<PAGE>

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

shareholders are entitled to call a meeting upon a vote of 10% of the Fund's out
standing shares for purposes of voting on removal of a Trustee or Trustees and
the Fund will assist shareholders in calling such a meeting as required by
Section 16(c) of the 1940 Act. Shares do not have cumulative voting rights or
preemptive rights and have only such conversion or exchange rights as the
Trustees may grant in their discretion. When issued for payment as described in
this Prospectus, the Fund's shares will be fully paid and transferable (subject
to the Portfolio's minimum account size). Shares are redeemable as set forth
under "Redemption of Shares" and are subject to involuntary redemption as set
forth under "Minimum Account Size."

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

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

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


34
<PAGE>

                                                                    SMITH BARNEY
                                                                    ------------

                                               A Member of TravelersGroup [LOGO]

                                                                    Smith Barney
                                                                      Muni Funds
                                                              National Portfolio

                                                            388 Greenwich Street
                                                        New York, New York 10013

                                                                    FD 0663 7/97
<PAGE>

PROSPECTUS

                                                                    SMITH BARNEY
                                                                      MUNI FUNDS

                                                                            Ohio
                                                                       Portfolio

                                                                   JULY 29, 1997

                                                   Prospectus begins on page one

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

--------------------------------------------------------------------------------
Prospectus                                                         July 29, 1997
--------------------------------------------------------------------------------

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

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

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

      Additional information about the Portfolio is contained in a Statement of
Additional Information dated July 29, 1997, as amended or supplemented from time
to time, that is available upon request and without charge by calling or writing
the Fund at the telephone number or address set forth above or by contacting a
Smith Barney Financial Consultant. The Statement of Additional Information has
been filed with the Securities and Exchange Commission (the "SEC") and is
incorporated by reference into this Prospectus in its entirety.

SMITH BARNEY INC.
Distributor

SMITH BARNEY MUTUAL FUNDS MANAGEMENT INC.
Investment Manager

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


                                                                               1
<PAGE>

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

Prospectus Summary                                                             3
--------------------------------------------------------------------------------
Financial Highlights                                                           9
--------------------------------------------------------------------------------
Investment Objective and Management policies                                  11
--------------------------------------------------------------------------------
Valuation of Shares                                                           16
--------------------------------------------------------------------------------
Dividends, Distributions and Taxes                                            16
--------------------------------------------------------------------------------
Purchase of Shares                                                            18
--------------------------------------------------------------------------------
Exchange Privilege                                                            25
--------------------------------------------------------------------------------
Redemption of Shares                                                          28
--------------------------------------------------------------------------------
Minimum Account Size                                                          31
--------------------------------------------------------------------------------
Performance                                                                   31
--------------------------------------------------------------------------------
Management of the Fund                                                        32
--------------------------------------------------------------------------------
Distributor                                                                   33
--------------------------------------------------------------------------------
Additional Information                                                        34
--------------------------------------------------------------------------------

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


2
<PAGE>

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

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

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

      ALTERNATIVE PURCHASE ARRANGEMENTS The Portfolio offers several classes of
shares ("Classes") to current investors who have elected to reinvest their
income and capital gain distributions: Class A shares, Class B shares and Class
C shares, which differ principally in terms of sales charges and rate of
expenses to which they are subject and Class Y shares, which are offered only to
investors meeting an initial investment minimum of $5,000,000. Class A Shares.

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

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

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


                                                                               3
<PAGE>

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

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

      Class Y shares are available only to investors meeting an initial
investment minimum of $5,000,000. Class Y shares are sold at net asset value
with no initial sales charge or CDSC. They are not subject to any service or
distribution fees.

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

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

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

      Reduced or No Initial Sales Charge. The initial sales charge on Class A
shares may be waived for certain eligible purchasers and the entire purchase
price would be immediately invested in the Portfolio. In addition, Class A share
purchases of $500,000 or more will be made at net asset value with no initial
sales charge, but will be subject to a CDSC of 1.00% on redemptions made within
12 months of purchase. The $500,000 investment may be met by adding the purchase
to the net asset value of all Class A shares offered with a sales charge held in
funds sponsored


4
<PAGE>

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

by Smith Barney Inc. ("Smith Barney") listed under "Exchange Privilege." Class A
share purchases may also be eligible for a reduced initial sales charge. See
"Purchase of Shares." Because the ongoing expenses of Class A shares may be
lower than those for Class B and Class C shares, purchasers eligible to purchase
Class A shares at net asset value or at a reduced sales charge should consider
doing so.

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

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

      PURCHASE OF SHARES Shares are offered to current investors who have
elected to reinvest their income and capital gain distributions.

      INVESTMENT MINIMUMS Investors in Class A, Class B and Class C shares may
open an account by making an initial investment of at least $1,000 for each
account. Investors in Class Y shares may open an account for an initial
investment of $5,000,000. Subsequent investments of at least $50 may be made for
all Classes. The minimum investment requirements for purchases of Portfolio
shares through the Systematic Investment Plan are described below. It is not
recommended that the Portfolio be used as a vehicle for Keogh, IRA or other
qualified retirement plans. See "Purchase of Shares."

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

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

      MANAGEMENT OF THE PORTFOLIO Smith Barney Mutual Funds Management Inc.
("SBMFM" or the "Manager") serves as the Portfolio's investment manager. SBMFM
provides investment advisory and management services to investment companies
affiliated with Smith Barney. SBMFM is a wholly owned subsidiary of Smith Barney
Holdings Inc. ("Holdings"). Holdings is a wholly owned subsidiary of Travelers
Group Inc. ("Travelers"), a diversified financial services


                                                                               5
<PAGE>

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

holding company engaged, through its subsidiaries, principally in four business
segments: Investment Services, Consumer Finance Services, Life Insurance
Services and Property & Casualty Insurance Services. See "Management of the
Fund."

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

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

      DIVIDENDS AND DISTRIBUTIONS Dividends from net investment income are
generally paid on the last Friday of each calendar month to shareholders of
record as of three business days prior thereto. Distributions of net realized
capital gains, if any, are paid annually. See "Dividends, Distributions and
Taxes."

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

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


6
<PAGE>

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

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

Ohio Portfolio                               Class A  Class B  Class C  Class Y
--------------------------------------------------------------------------------
Shareholder Transaction Expenses
  Maximum sales charge imposed on purchases
    (as a percentage of offering price)        4.00%    None     None     None
  Maximum CDSC (as a percentage of original                            
    cost or redemption proceeds, whichever                             
    is lower)                                  None*    4.50%    1.00%    None
Annual Portfolio Operating Expenses**                                  
(as a percentage of average net assets)                                
  Management fees (after the fee waiver)       0.17%    0.17%    0.17%    0.17%
  12b-1 fees***                                0.15     0.65     0.70       --
  Other expenses (after reimbursement)****     0.46     0.48     0.47     0.46
                                              -----    -----    -----    -----
  Total Portfolio Operating Expenses           0.78%    1.30%    1.34%    0.63%
                                              =====    =====    =====    =====
--------------------------------------------------------------------------------
         * Purchases of Class A shares of $500,000 or more will be made at net 
asset value with no sales charge, but will be subject to a CDSC of 1.00% on
redemptions made within 12 months of purchase.
        ** "Management fees" have been restated to reflect the management fee
waiver currently in effect for the Portfolio. Absent the fee waiver, the
management fee would be incurred at the rate of 0.45% of each Class' average
daily net assets for the current fiscal period. Absent the fee waiver and
expense reimbursement, total expenses would be at the rates of 1.22%, 1.74%,
1.78% and 1.07% for Class A, Class B, Class C and Class Y shares, respectively.
       *** Upon conversion of Class B shares to Class A shares, such shares will
no longer be subject to a distribution fee. Class C shares do not have a
conversion feature and, therefore, are subject to an ongoing distribution fee.
As a result, long-term shareholders of Class C shares may pay more than the
economic equivalent of the maximum front-end sales charge permitted by the
National Association of Securities Dealers, Inc.
      **** For Class Y shares, "Other expenses" have been estimated because no
Class Y shares were outstanding for the year ended March 31, 1997.

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


                                                                               7
<PAGE>

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

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

EXAMPLE 

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

Ohio Portfolio                          1 Year   3 Years   5 Years   10 Years*
--------------------------------------------------------------------------------
An investor would pay the following 
expenses on a $1,000 investment 
assuming (1) 5.00% annual return and 
(2) redemption at the end of each 
time period:
  Class A ............................    $48       $64       $82       $133
  Class B ............................     58        71        81        142
  Class C ............................     24        42        73        161
  Class Y ............................      6        20        35         79
                                                                      
An investor would pay the following 
expenses on the same investment assuming 
the same annual return and no redemption:

  Class A ............................    $48       $64       $82       $133
  Class B ............................     13        41        71        142
  Class C ............................     14        42        73        161
  Class Y ............................      6        20        35         79
--------------------------------------------------------------------------------
      * Ten-year figures assume conversion of Class B shares to Class A shares
at the end of the eighth year following the date of purchase.

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


8
<PAGE>

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

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

For a share of beneficial interest outstanding throughout each year: 

Ohio Portfolio                                         Class A
--------------------------------------------------------------------------------
Year Ended March 31,                           1997     1996     1995(1)
--------------------------------------------------------------------------------
Net Asset Value, Beginning of Year            $12.20   $11.97     $12.00
--------------------------------------------------------------------------------
Income From Operations:                                          
  Net investment income(2)                      0.67     0.71       0.52
  Net realized and unrealized gain (loss)       0.05     0.19      (0.07)(3)
--------------------------------------------------------------------------------
Total Income from Operations                    0.72     0.90       0.45
--------------------------------------------------------------------------------
Less Distributions From:                                          
  Net investment income                        (0.67)   (0.67)     (0.48)
  Net realized gains                           (0.02)   (0.00)**      --
--------------------------------------------------------------------------------
Total Distributions                            (0.69)   (0.67)     (0.48)
--------------------------------------------------------------------------------
Net Asset Value, End of Year                  $12.23   $12.20     $11.97
--------------------------------------------------------------------------------
Total Return(P)                                 6.06%    7.65%      4.04%++
--------------------------------------------------------------------------------
Net Assets, End of Year (000s)                $3,056   $3,665     $2,766
--------------------------------------------------------------------------------
Ratios to Average Net Assets:                                    
  Expenses(2)(4)                                0.61%    0.30%      0.20%+
  Net investment income                         5.33     5.86       5.75+
--------------------------------------------------------------------------------
Portfolio Turnover Rate                           57%      42%        44%
================================================================================
(1) For the period from June 13, 1994 (inception date) to March 31, 1995.
(2) The Manager has waived all or part of its fees and reimbursed expenses of
    $13,636, $59,614 and $41,401 for the years ended March 31, 1997 and 1996 and
    the period ended March 31, 1995, respectively. If such fees were not waived
    and expenses not reimbursed, the per share decrease of net investment income
    and the ratios of expenses to average net assets would have been:

                                                   Expense Ratios
                  Net Investment Income     Without Expense Reimbursements
                    Per Share Decrease             and Fee Waivers
               --------------------------   ------------------------------
                1997      1996      1995      1997      1996      1995
               ------    ------    ------    ------    ------    ------
    Class A    $0.09     $0.16     $0.21     1.22%     1.58%     1.91%+

(3) Includes the net per share effect of shareholder sales and redemptions
    activity during the period, most of which occurred at a net asset value less
    than the net asset value at the beginning of the period.
(4) As a result of voluntary expense limitations, expense ratios would not
    exceed 0.80% for Class A shares.
**  Amount represents less than $0.01 per share.
(P) Total returns do not reflect sales loads or contingent deferred sales
    charges.
++  Total return is not annualized as it may not be representative of the total
    return for the year.
+   Annualized.


                                                                               9
<PAGE>

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

For a share of beneficial interest outstanding throughout each year:

<TABLE>
<CAPTION>
Ohio Portfolio                                    Class B(1)                       Class C
---------------------------------------------------------------------------------------------------------
Year Ended March 31,                        1997     1996      1995(2)      1997     1996      1995(2)
---------------------------------------------------------------------------------------------------------
<S>                                         <C>      <C>       <C>          <C>      <C>      <C>    
Net Asset Value, Beginning of Year         $12.18   $11.96     $12.02      $12.19   $11.96    $12.02
---------------------------------------------------------------------------------------------------------
Income From Operations:
  Net investment income(3)                   0.60     0.63       0.47        0.59     0.63      0.46
  Net realized and unrealized gain (loss)    0.06     0.21      (0.10)(4)    0.06     0.21     (0.09)(4)
---------------------------------------------------------------------------------------------------------
Total Income from Operations                 0.66     0.84       0.37        0.65     0.84      0.37
---------------------------------------------------------------------------------------------------------
Less Distributions From:
  Net investment income                     (0.62)   (0.62)     (0.43)      (0.61)   (0.61)    (0.43)
  Net realized gains                        (0.02)   (0.00)**      --       (0.02)   (0.00)**     --
---------------------------------------------------------------------------------------------------------
Total Distributions                         (0.64)   (0.62)     (0.43)      (0.63)   (0.61)    (0.43)
---------------------------------------------------------------------------------------------------------
Net Asset Value, End of Year               $12.20   $12.18      $11.96     $12.21   $12.19    $11.96
---------------------------------------------------------------------------------------------------------
Total Return(P)                              5.52%    7.10%       3.31%++    5.48%    7.14%     3.28%++
---------------------------------------------------------------------------------------------------------
Net Assets, End of Year (000s)             $3,607   $4,334      $2,041       $822     $895      $582
---------------------------------------------------------------------------------------------------------
Ratios to Average Net Assets:
  Expenses(3)(5)                             1.13%    0.83%       0.72%+     1.17%    0.89%     0.77%+
  Net investment income                      4.81     5.44        5.10+      4.77     5.37      5.09+
---------------------------------------------------------------------------------------------------------
Portfolio Turnover Rate                        57%      42%         44%        57%      42%       44%
=========================================================================================================
</TABLE>
(1) On November 7, 1994, the former Class E shares were renamed Class B shares.
(2) For the period from June 14, 1994 (inception date) to March 31, 1995.
(3) The Manager has waived all or part of its fees and reimbursed expenses of
    $13,636, $59,614 and $41,401 for the years ended March 31, 1997 and 1996 and
    the period ended March 31, 1995, respectively. If such fees were not waived
    and expenses not reimbursed, the per share decrease of net investment income
    and the ratios of expenses to average net assets would have been:

                                                   Expense Ratios
                  Net Investment Income     Without Expense Reimbursements
                    Per Share Decrease             and Fee Waivers
               --------------------------   ------------------------------
                1997      1996      1995      1997      1996      1995
               ------    ------    ------    ------    ------    ------
    Class B    $0.08     $0.11     $0.25      1.74%     2.14%     2.43%+
    Class C     0.08      0.16      0.25      1.78      2.20      2.48+

(4) Includes the net per share effect of shareholder sales and redemptions
    activity during the period, most of which occurred at a net asset value less
    than the net asset value at the beginning of the period.
(5) As a result of voluntary expense limitations, expense ratios would not
    exceed 1.30% and 1.35% for Class B and C shares, respectively.
**  Amount represents less than $0.01 per share.
(P) Total returns do not reflect sales loads or contingent deferred sales
    charges.
++  Total return is not annualized as it may not be representative of the total
    return for the year.
+   Annualized.


10
<PAGE>

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

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

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

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

      Municipal bonds purchased for the Portfolio must, at the time of purchase,
be investment-grade municipal bonds and at least two-thirds of the Portfolio's
municipal bonds must be rated in the category of A or better. Investment-grade
bonds are those rated Aaa, Aa, A and Baa by Moody's Investors Service, Inc.
("Moody's") and AAA, AA, A and BBB by Standard & Poor's Ratings Group ("S&P") or
have an equivalent rating by any nationally recognized statistical rating
organization; pre-refunded bonds escrowed by U.S. Treasury obligations will be
considered AAA rated even though the issuer does not obtain a new rating. Up to
one-third of the assets of the Portfolio may be invested in municipal bonds
rated Baa or BBB (this


                                                                              11
<PAGE>

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

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

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

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

      The Portfolio may purchase new issues of municipal obligations on a
when-issued basis, i.e. delivery and payment normally take place 15 to 45 days
after the 


12
<PAGE>

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

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

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

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

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


13
<PAGE>

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

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

      RISK AND INVESTMENT CONSIDERATIONS

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

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


14
<PAGE>

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

      RISK FACTORS AFFECTING OHIO

      Non-manufacturing industries now employ more than three-fourths of all
payroll employees in Ohio. However, due to the continued importance of
manufacturing industries (including auto-related and household appliance
manufacturing), economic activity in Ohio tends to be more cyclical than in some
other states and in the nation as a whole. Although Ohio's economy has improved
since the 1980-82 national recession, the state's economic problems and the
1990-91 national recession produced some significant changes in certain revenue
and expenditure levels for the 1992 fiscal year and have had varying effects on
the different geographic areas of the state and the political subdivisions
located within such geographic areas. The State administrations and both houses
of the General Assembly have been committed to and have taken actions that
provide a balance of general revenue fund resources and expenditures. From 1980
through 1996, all these bienniums ended with positive general revenue fund and
cash balances. Although revenue obligations of the State or its political
subdivisions may be payable from a specific project or source, including lease
rentals, there can be no assurance that future economic difficulties, and the
resulting impact on state and local government finances, will not adversely
affect the market value of Ohio obligations held in the Portfolio or the ability
of the respective obligors to make timely payments of principal and interest on
such obligations.

      Additional information regarding the state is included in the Statement of
Additional Information. 

      PORTFOLIO TRANSACTIONS AND TURNOVER

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

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


                                                                              15
<PAGE>

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

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

      When, in the judgement of the pricing service, quoted bid prices for
investments are readily available and are representative of the bid side of the
market, these investments are valued at the mean between the quoted bid and
asked prices. Investments for which, in the judgement of the pricing service,
there are no readily obtainable market quotations (which may constitute a
majority of the portfolio securities) are carried at fair value of securities of
similar type, yield and maturity. Pricing services generally determine value by
reference to transactions in municipal obligations, quotations from municipal
bond dealers, market transactions in comparable securities and various
relationships between securities. Short-term instruments maturing within 60 days
will be valued at cost plus (minus) amortized discount (premium), if any, when
the Trustees have determined that amortized cost equals fair value. Securities
and other assets that are not priced by a pricing service and for which market
quotations are not available will be valued in good faith at fair value by or
under the direction of the Trustees.

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

      DIVIDENDS AND DISTRIBUTIONS

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

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

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

      The per share dividends on Class B and Class C shares of the Portfolio may
be lower than the per share dividends on Class A and Class Y shares principally
as a result of the distribution fees applicable with respect to Class B and
Class C shares. The per share dividends on Class A shares of the Portfolio may
be lower than the per share dividends on Class Y shares principally as a result
of the service 


16
<PAGE>

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

fee applicable to Class A shares. Distributions of capital gains,
if any, will be in the same amount for Class A, Class B, Class C and Class Y
shares.

      TAXES

      The Portfolio intends to qualify as a "regulated investment company" and
to meet the requirements for distributing "exempt-interest dividends" under the
Code so that no Federal income taxes will be payable by the Portfolio and
dividends representing net interest received on municipal obligations will not
be includable by shareholders in their gross income for Federal income tax
purposes. To the extent dividends are derived from taxable income from temporary
investments, market discounts or from the excess of net short-term capital gain
over net long-term capital loss, they are treated as ordinary income whether the
shareholder has elected to receive them in cash or in additional shares. Capital
gains distributions, if any, whether paid in cash or invested in shares of the
Portfolio, will be taxable to shareholders.

      Exempt-interest dividends allocable to interest received by the Portfolio
from the AMT-Subject Bonds in which the Portfolio may invest will be treated as
interest paid directly on such obligations and will give rise to an "item of tax
preference" that will increase a shareholder's alternative minimum taxable
income. In addition, for corporations, alternative minimum taxable income will
be increased by a percentage of the amount by which a special measure of income
(including exempt-interest dividends) exceeds the amount otherwise determined to
be alternative minimum taxable income. Accordingly, investment in the Portfolio
may cause shareholders to be subject to (or result in an increased liability
under) the AMT. The Fund will annually furnish to its shareholders a report
indicating the ratable portion of exempt-interest dividends attributable to
AMT-Subject Bonds.

      The Portfolio will be treated as a separate regulated investment company
for Federal tax purposes. Accordingly, the Portfolio's net investment income is
determined separately based on the income earned on its securities less its
costs of operations. The Portfolio's net long-term and short-term gain (loss)
realized on investments is determined after offsetting any capital loss
carryover of the Portfolio from prior periods.

      Under the Code, interest on indebtedness incurred or continued to purchase
or carry shares of the Portfolio will not be deductible to the extent that the
Portfolio's distributions are exempt from Federal income tax. In addition, any
loss realized upon the redemption of shares held less than six months will be
disallowed to the extent of any exempt-interest dividends received by the
shareholder during such period. Further, persons who may be "substantial users"
(or "related persons" of substantial users) of facilities financed by industrial
development bonds should consult their tax advisers concerning an investment in
the Portfolio.


                                                                              17
<PAGE>

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

      OHIO TAXES

      Dividends by the Ohio Portfolio to an Ohio resident, or to a corporation
subject to the Ohio Corporation Franchise Tax, will not be subject to the Ohio
personal income tax or the net income basis of the Ohio Corporation Franchise
Tax to the extent that such dividends are attributable to income received by the
Portfolio as interest from Ohio municipal obligations as well as direct
obligations of the United States. Dividends or distributions paid by the
Portfolio to an Ohio resident, or to a corporation subject to the Ohio
Corporation Franchise Tax, that are attributable to most other sources are
subject to the Ohio personal income tax and are includable in the net income
basis of the Ohio Corporation Franchise Tax. The shares of the Portfolio will
not be subject to property taxation by the State of Ohio or its political
subdivisions, except when held by a "dealer in intangibles" (generally, a person
in the lending or brokerage business), a decedent's estate, an Ohio insurance
company, or a corporation taxed on the net worth basis of the Ohio Corporation
Franchise Tax.

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

      The foregoing is only a brief summary of some of the important tax
considerations generally affecting the Portfolio and its shareholders.
Additional tax information of relevance to particular investors is contained in
the Statement of Additional Information. Investors are urged to consult their
tax advisers with specific reference to their own tax situation.

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

      GENERAL

      The Portfolio offers four Classes of shares to current investors who have
elected to reinvest their income and capital gain distributions. Class A shares
are sold to investors with an initial sales charge and Class B and Class C
shares are sold without an initial sales charge but are subject to a CDSC
payable upon certain redemptions. Class Y shares are sold without an initial
sales charge or CDSC and are available only to investors investing a minimum of
$5,000,000. See "Prospectus Summary -- Alternative Purchase Arrangements" for a
discussion of factors to consider in selecting which Class of shares to
purchase.


18
<PAGE>

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

      Smith Barney and other broker-dealers may charge their customers an annual
account maintenance fee in connection with a brokerage account through which an
investor purchases or holds shares. Accounts held directly at First Data are not
subject to a maintenance fee. Investors in Class A, Class B and Class C shares
may open an account by making an initial investment of at least $1,000 for each
account in the Portfolio. 

      Investors in Class Y shares may open an account by making an initial
investment of $5,000,000. Subsequent investments of at least $50 may be made for
all Classes. For shareholders purchasing shares of the Portfolio through the
Systematic Investment Plan on a monthly basis, the minimum initial investment
requirement for Class A, Class B and Class C shares and the subsequent
investment requirement for all Classes is $25. For shareholders purchasing
shares of the Portfolio through the Systematic Investment Plan on a quarterly
basis, the minimum initial investment requirement for Class A, Class B and Class
C shares and the subsequent investment requirement for all Classes is $50. There
are no minimum investment requirements in Class A for employees of Travelers and
its subsidiaries, including Smith Barney, and Trustees or Directors of any of
the Smith Barney Mutual Funds and their spouses and children. The Fund reserves
the right to waive or change minimums, to decline any order to purchase its
shares and to suspend the offering of shares from time to time. Shares purchased
will be held in the shareholder's account by the Fund's transfer agent, First
Data. Share certificates are issued only upon a shareholder's written request to
First Data. It is not recommended that the Portfolio be used as a vehicle for
Keogh, IRA or other qualified retirement plans.

      The minimum initial investment requirement in the Portfolio for an account
established under the Uniform Gift to Minors Act is $250 and the subsequent
investment requirement is $50. 

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

      SYSTEMATIC INVESTMENT PLAN

      Shareholders may make additions to their accounts at any time by
purchasing shares through a service known as the Systematic Investment Plan.
Under the Systematic Investment Plan, Smith Barney or First Data is authorized
through pre-


                                                                              19
<PAGE>

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

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

      INITIAL SALES CHARGE ALTERNATIVE - CLASS A SHARES

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

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

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

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

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

      INITIAL SALES CHARGE WAIVERS

      Purchases of Class A shares may be made at net asset value without a sales
charge in the following circumstances: (a) sales to (i) Board members and
employees of Travelers and its subsidiaries and any of the Smith Barney Mutual


20
<PAGE>

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

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

      RIGHT OF ACCUMULATION

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

      GROUP PURCHASES

      Upon completion of certain automated systems, a reduced sales charge or
purchase at net asset value will also be available to employees (and partners)
of the same employer purchasing as a group, provided each participant makes the


                                                                              21
<PAGE>

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

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

      LETTER OF INTENT

      Class A Shares. A Letter of Intent for amounts of $50,000 or more provides
an opportunity for an investor to obtain a reduced sales charge by aggregating
investments over a 13-month period, provided that the investor refers to such
Letter when placing orders. For purposes of a Letter of Intent, the "Amount of
Investment" as referred to in the preceding sales charge table includes
purchases of all Class A shares of the Portfolio and other funds of the Smith
Barney Mutual Funds offered with a sales charge over the 13-month period based
on the total amount of intended purchases plus the value of all Class A shares
previously purchased and still owned. An alternative is to compute the 13-month
period starting up to 90 days before the date of execution of a Letter of
Intent. Each investment made during the period receives the reduced sales charge
applicable


22
<PAGE>

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

to the total amount of the investment goal. If the goal is not achieved within
the period, the investor must pay the difference between the sales charges
applicable to the purchases made and the charges previously paid, or an
appropriate number of escrowed shares will be redeemed. Please contact a Smith
Barney Financial Consultant or First Data to obtain a Letter of Intent
application.

      Class Y Shares. A Letter of Intent may also be used as a way for investors
to meet the minimum investment requirement for Class Y shares. Such investors
must make an initial minimum purchase of $1,000,000 in Class Y shares of the
Portfolio and agree to purchase a total of $5,000,000 of Class Y shares of the
same Portfolio within six months from the date of the Letter. If a total
investment of $5,000,000 is not made within the six-month period, all Class Y
shares purchased to date will be transferred to Class A shares, where they will
be subject to all fees (including a service fee of 0.15%) and expenses
applicable to the Portfolio's Class A shares, which may include a CDSC of 1.00%.
Please contact a Smith Barney Financial Consultant or First Data for further
information.

      DEFERRED SALES CHARGE ALTERNATIVES

      "CDSC Shares" are sold at net asset value next determined without an
initial sales charge so that the full amount of an investor's purchase payment
may be immediately invested in the Portfolio. A CDSC, however, may be imposed on
certain redemptions of these shares. "CDSC Shares" are: (a) Class B shares; (b)
Class C shares; and (c) Class A shares that were purchased without an initial
sales charge but subject to a CDSC.

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

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


                                                                              23
<PAGE>

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

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

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

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

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

      WAIVERS OF CDSC

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


24
<PAGE>

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

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

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

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

FUND NAME
--------------------------------------------------------------------------------
Growth Funds
    Smith Barney Aggressive Growth Fund Inc.
    Smith Barney Appreciation Fund Inc.
    Smith Barney Disciplined Small Cap Fund, Inc.
    Smith Barney Fundamental Value Fund Inc.
    Smith Barney Growth Opportunity Fund
    Smith Barney Large Capitalization Growth Fund
    Smith Barney Managed Growth Fund
    Smith Barney Natural Resources Fund Inc.
    Smith Barney Special Equities Fund

Growth and Income Funds
    Concert Social Awareness Fund
    Smith Barney Convertible Fund
    Smith Barney Funds, Inc. -- Equity Income Portfolio
    Smith Barney Growth and Income Fund
    Smith Barney Premium Total Return Fund
    Smith Barney Utilities Fund


                                                                              25
<PAGE>

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

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

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

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

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


                                                                              26
<PAGE>

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

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

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

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

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

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


                                                                              27
<PAGE>

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

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

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

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

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

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


                                                                              28
<PAGE>

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

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

      A written redemption request must (a) state the Class and number or dollar
amount of shares to be redeemed, (b) identify the shareholder's account number
and (c) be signed by each registered owner exactly as the shares are registered.
If the shares to be redeemed were issued in certificate form, the certificates
must be endorsed for transfer (or be accompanied by an endorsed stock power) and
must be submitted to First Data together with the redemption request. Any
signature appearing on a share certificate, stock power or written redemption
request in excess of $2,000 must be guaranteed by an eligible guarantor
institution such as a domestic bank, savings and loan institution, domestic
credit union, member bank of the Federal Reserve System or member firm of a
national securities exchange. Written redemption requests of $2,000 or less do
not require a signature guarantee unless more than one such redemption request
is made in any 10-day period. Redemption proceeds will be mailed to an
investor's address of record. First Data may require additional supporting
documents for redemptions made by corporations, executors, administrators,
trustees or guardians. A redemption request will not be deemed properly received
until First Data receives all required documents in proper form.

      AUTOMATIC CASH WITHDRAWAL PLAN

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

      TELEPHONE REDEMPTION AND EXCHANGE PROGRAM

      Shareholders who do not have a Smith Barney brokerage account may be
eligible to redeem and exchange Portfolio shares by telephone. To determine if a
shareholder is entitled to participate in this program, he or she should contact
First Data at 1-800-451-2010. Once eligibility is confirmed, the shareholder
must complete and return a 


                                                                              29
<PAGE>

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

Telephone/Wire Authorization Form, along with a signature guarantee, that will
be provided by First Data upon request. Alternatively, an investor may authorize
telephone redemptions on the new account application with the applicant's
signature guarantee when making his or her initial investment in the Portfolio.

      Redemptions. Redemption requests of up to $10,000 of any class or classes
of the Portfolio's shares may be made by eligible shareholders by calling First
Data at 1-800-451-2010. Such requests may be made between 9:00 a.m. and 5:00
p.m. (New York City time) on any day the NYSE is open. Redemption requests
received after the close of regular trading on the NYSE are priced at the net
asset value next determined. Redemptions of shares (i) by retirement plans or
(ii) for which certificates have been issued are not permitted under this
program.

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

      Exchanges. Eligible shareholders may make exchanges by telephone if the
account registration of the shares of the fund being acquired is identical to
the registration of the shares of the fund exchanged. Such exchange requests may
be made by calling First Data at 1-800-451-2010 between 9:00 a.m. and 5:00 p.m.
(New York City time) on any day on which the NYSE is open. Exchange requests
received after the close of regular trading on the NYSE are processed at the net
asset value next determined. 

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


30
<PAGE>

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

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

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

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


                                                                              31
<PAGE>

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

The Fund may also include comparative performance information in advertising or
marketing its shares. Such performance information may include data from Lipper
Analytical Services, Inc. and other financial publications.

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

      TRUSTEES

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

      MANAGER

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

      SBMFM was incorporated in 1968 under the laws of Delaware. SBMFM, Holdings
and Smith Barney are each located at 388 Greenwich Street New York, New York
10013. As of May 31, 1997, SBMFM had aggregate assets under management in excess
of $87 billion.

      SBMFM provides the Fund with investment management services and executive
and other personnel, pays the remuneration of Fund officers, provides the Fund
with office space and equipment, furnishes the Fund with bookkeeping,
accounting, administrative services and services relating to research,
statistical work and supervision of the Portfolio. For the services provided,
the management agreement provides that the Fund will pay SBMFM an annual fee
calculated at the rate of 0.45% of the Portfolio's average daily net assets,
paid monthly. SBMFM waived part of its management fee for the portfolio for the
period ended March 31, 1997. For the past fiscal year, total operating expenses
were 0.61% of the average daily net assets for Class A shares; 1.13% of the
average daily net assets for Class B shares; and 1.17% of the average daily net
assets for Class C shares. For the current fiscal year, total expenses are
anticipated to be 0.78% of the average daily net assets for Class A shares;
1.30% of the average daily net assets for Class B shares; and 1.34% of the
average daily net assets for class C shares. The anticipated expenses for the
current fiscal year reflect the current management fee waiver in effect.


32
<PAGE>

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

PORTFOLIO MANAGEMENT

      Lawrence T. McDermott, Managing Director of the Greenwich Street Advisors
division of SBMFM, has been primarily responsible for the management of the
Portfolio since it commenced operations on June 13, 1994, and for making all
investment decisions. Mr. McDermott presently serves as the portfolio manager
for other tax-exempt bond funds sponsored by Smith Barney.

      Management's discussion and analysis, and additional performance
information regarding the Portfolio during the fiscal year ended March 31, 1997
is included in the Annual Report dated March 31, 1997. A copy of the Annual
Report may be obtained upon request and without charge from a Smith Barney
Financial Consultant or by writing or calling the Fund at the address or phone
number listed on page one of this Prospectus. 

--------------------------------------------------------------------------------
Distributor
--------------------------------------------------------------------------------

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

      The payments to Smith Barney Financial Consultants for selling shares of a
Class include a commission or fee paid by the investor or Smith Barney at the
time 


                                                                              33
<PAGE>

--------------------------------------------------------------------------------
Distributor (continued)
--------------------------------------------------------------------------------

of sale and, with respect to Class A, Class B and Class C shares, a
continuing fee for servicing shareholder accounts for as long as a shareholder
remains a holder of that Class. Smith Barney Financial Consultants may receive
different levels of compensation for selling the different Classes of shares.

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

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

      The Fund, an open-end, non-diversified management investment company, is
organized as a "Massachusetts business trust" pursuant to a Declaration of Trust
dated August 14, 1985. Pursuant to the Declaration of Trust, the Trustees have
authorized the issuance of twenty series of shares, each representing shares in
one of twenty separate Portfolios. The assets of each Portfolio are segregated
and separately managed. Class A, Class B, Class C and Class Y shares of each
Portfolio represent interests in the assets of that Portfolio and have identical
voting, dividend, liquidation and other rights on the same terms and conditions,
except that expenses related to the shareholder service and distribution of
Class A, Class B and Class C shares are borne solely by the respective Class and
each such Class of shares has exclusive voting rights with respect to provisions
of the Fund's Rule 12b-1 distribution plan which pertain to that Class. It is
the intention of the Fund not to hold annual meetings of shareholders. The
Trustees may call meetings of shareholders for action by shareholder vote as may
be required by the 1940 Act or the Declaration of Trust, and shareholders are
entitled to call a meeting of shareholders upon a vote of 10% of the Fund's
outstanding shares for purposes of voting on removal of a Trustee or Trustees.
Shareholders will receive assistance in communicating with other shareholders in
connection with the removal of Trustees as required by Section 16(c) of the 1940
Act. Shares do not have cumulative voting rights or preemptive rights and have
only such conversion or exchange rights as the Trustees may grant in their
discretion. When issued for payment as described in this Prospectus, the Fund's
shares will be fully paid and transferrable (subject to the Portfolio's minimum
account size). Shares are redeemable as set forth under "Redemption of Shares"
and are subject to involuntary redemption as set forth under "Minimum Account
Size."

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


34
<PAGE>

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

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

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


                                                                              35
<PAGE>

                                                                    SMITH BARNEY
                                                                    ------------

                                               A Member of TravelersGroup [LOGO]

                                                                    Smith Barney
                                                                      Muni Funds
                                                                  Ohio Portfolio

                                                            388 Greenwich Street
                                                        New York, New York 10013

                                                                    FD 0561 7/97
<PAGE>

PROSPECTUS

                                                                    SMITH BARNEY
                                                                      MUNI FUNDS

                                                                        New York
                                                                       Portfolio

                                                                   JULY 29, 1997

                                                   Prospectus begins on page one

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

--------------------------------------------------------------------------------
Prospectus                                                         July 29, 1997
--------------------------------------------------------------------------------

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

      The New York Portfolio (the "Portfolio") is one of the investment
portfolios that currently comprise Smith Barney Muni Funds (the "Fund").

      The New York Portfolio seeks to pay its shareholders as high a level of
monthly income exempt from Federal income taxes and from New York State and City
personal income taxes as is consistent with prudent investing.

      The Portfolio may invest without limit in municipal obligations whose
interest is a tax-preference for purposes of the Federal alternative minimum
tax.

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

      Additional information about the Portfolio is contained in a Statement of
Additional Information dated July 29, 1997, as amended or supplemented from time
to time, that is available upon request and without charge by calling or writing
the Fund at the telephone number or address set forth above or by contacting a
Smith Barney Financial Consultant. The Statement of Additional Information has
been filed with the Securities and Exchange Commission (the "SEC") and is
incorporated by reference into this Prospectus in its entirety.

SMITH BARNEY INC.
Distributor

SMITH BARNEY MUTUAL FUNDS MANAGEMENT INC.
Investment Manager

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


                                                                               1
<PAGE>

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

Prospectus Summary                                                             3
--------------------------------------------------------------------------------
Financial Highlights                                                           9
--------------------------------------------------------------------------------
Investment Objective and Management Policies                                  12
--------------------------------------------------------------------------------
Valuation of Shares                                                           17
--------------------------------------------------------------------------------
Dividends, Distributions and Taxes                                            18
--------------------------------------------------------------------------------
Purchase of Shares                                                            20
--------------------------------------------------------------------------------
Exchange Privilege                                                            27
--------------------------------------------------------------------------------
Redemption of Shares                                                          29
--------------------------------------------------------------------------------
Minimum Account Size                                                          32
--------------------------------------------------------------------------------
Performance                                                                   32
--------------------------------------------------------------------------------
Management of the Fund                                                        33
--------------------------------------------------------------------------------
Distributor                                                                   35
--------------------------------------------------------------------------------
Additional Information                                                        35
--------------------------------------------------------------------------------

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


2
<PAGE>

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

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

      INVESTMENT OBJECTIVE The New York Portfolio seeks to pay its shareholders
as high a level of monthly income exempt from Federal income taxes and from New
York State and City personal income taxes as is consistent with prudent
investing. The Portfolio may invest without limit in municipal obligations whose
interest is a tax preference for purposes of the Federal alternative minimum
tax. See "Investment Objective and Management Policies."

      ALTERNATIVE PURCHASE ARRANGEMENTS The Portfolio offers several classes of
shares ("Classes") to investors designed to provide them with the flexibility of
selecting an investment best suited to their needs. The general public is
offered three Classes of shares: Class A shares, Class B shares and Class C
shares, which differ principally in terms of sales charges and rate of expenses
to which they are subject. A fourth Class of shares, Class Y shares, is offered
only to investors meeting an initial investment minimum of $5,000,000. See
"Purchase of Shares" and "Redemption of Shares."

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

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

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


                                                                               3
<PAGE>

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

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

      Class Y Shares. Class Y shares are available only to investors meeting an
initial investment minimum of $5,000,000. Class Y shares are sold at net asset
value with no initial sales charge or CDSC. They are not subject to any service
or distribution fees.

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

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

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

      Reduced or No Initial Sales Charge. The initial sales charge on Class A
shares may be waived for certain eligible purchasers and the entire purchase
price will be immediately invested in the Portfolio. In addition, Class A share
purchases of $500,000 or more will be made at net asset value with no initial
sales charge, but will be subject to a CDSC of 1.00% on redemptions made within
12 months of purchase. The $500,000 investment may be met by adding the purchase
to the net asset value of all Class A shares offered with a sales charge held in
funds sponsored 


4
<PAGE>

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

by Smith Barney Inc. ("Smith Barney") listed under "Exchange Privilege." Class A
share purchases may also be eligible for a reduced initial sales charge. See
"Purchase of Shares." Because the ongoing expenses of Class A shares may be
lower than those for Class B and Class C shares, purchasers eligible to purchase
Class A shares at net asset value or at a reduced sales charge should consider
doing so.

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

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

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

      INVESTMENT MINIMUMS Investors in Class A, Class B and Class C shares may
open an account by making an initial investment of at least $1,000 for each
account. Investors in Class Y shares may open an account for an initial
investment of $5,000,000. Subsequent investments of at least $50 may be made for
all Classes. The minimum investment requirements for purchases of Portfolio
shares through the Systematic Investment Plan are described below. It is not
recommended that the Portfolio be used as a vehicle for Keogh, IRA or other
qualified retirement plans. There is no minimum investment requirement in Class
A for unitholders who invest distributions from a unit investment trust ("UIT")
sponsored by Smith Barney. See "Purchase of Shares."

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

      REDEMPTION OF SHARES Shares may be redeemed on each day the New 


                                                                               5
<PAGE>

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

York Stock Exchange, Inc. ("NYSE") is open for business. See "Purchase of
Shares" and "Redemption of Shares."

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

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

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

      MANAGEMENT OF THE PORTFOLIO Smith Barney Mutual Funds Management Inc.
("SBMFM" or the "Manager") serves as the Portfolio's investment manager. SBMFM
provides investment advisory and management services to investment companies
affiliated with Smith Barney. SBMFM is a wholly owned subsidiary of Smith Barney
Holdings Inc. ("Holdings"). Holdings is a wholly owned subsidiary of Travelers
Group Inc. ("Travelers"), a diversified financial services holding company
engaged, through its subsidiaries, principally in four business segments:
Investment Services, Consumer Finance Services, Life Insurance Services and
Property & Casualty Insurance Services. See "Management of the Fund."

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

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


6
<PAGE>

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

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

New York Portfolio                         Class A  Class B   Class C  Class Y
--------------------------------------------------------------------------------
Shareholder Transaction Expenses
Maximum sales charge imposed on purchases
  (as a percentage of offering price) .... 4.00%     None      None    None
Maximum CDSC (as a  percentage of original         
  cost or redemption proceeds, whichever           
  is lower) .............................. None*     4.50%     1.00%    None
                                                   
Annual Portfolio Operating Expenses**                
(as a percentage of average net assets)            
   Management fees ....................... 0.50%     0.50%     0.50%    0.50%
   12b-1 fees*** ......................... 0.15      0.65      0.70     --
   Other expenses ........................ 0.10      0.12      0.12     0.10
                                           ----      ----      ----     ----
Total Portfolio Operating Expenses ....... 0.75%     1.27%     1.32%    0.60%
                                           ====      ====      ====     ====
--------------------------------------------------------------------------------

      * Purchases of Class A shares of $500,000 or more will be made at net
asset value with no sales charge, but will be subject to a CDSC of 1.00% on
redemptions made within 12 months of purchase.
      ** "Other expenses" for Class Y shares have been estimated because no
Class Y shares were outstanding for the fiscal year ended March 31, 1997.
      *** Upon conversion of Class B shares to Class A shares, such shares will
no longer be subject to a distribution fee. Class C shares do not have a
conversion feature and, therefore, are subject to an ongoing distribution fee.
As a result, long-term shareholders of Class C shares may pay more than the
economic equivalent of the maximum front-end sales charge permitted by the
National Association of Securities Dealers, Inc.

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

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


                                                                               7
<PAGE>

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

      EXAMPLE

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

New York Portfolio                          1 Year   3 Years  5 Years  10 Years*
--------------------------------------------------------------------------------
An investor would pay the following expenses on
   a $1,000 investment, assuming (1) 5.00% 
   annual return and (2) redemption at the 
   end of each time period:

      Class A............................... $47     $63      $80      $129
      Class B...............................  58      70       80       139
      Class C...............................  23      42       72       159
      Class Y...............................   6      19       33        75
--------------------------------------------------------------------------------
An investor would pay the following expenses on 
   the same investment, assuming the same annual 
   return and no redemption:

                                            1 Year   3 Years  5 Years  10 Years*
--------------------------------------------------------------------------------
      Class A............................... $47     $63      $80      $129
      Class B...............................  13      40       70       139
      Class C...............................  13      42       72       159
      Class Y...............................   6      19       33        75
--------------------------------------------------------------------------------

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

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


8
<PAGE>

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

      The following information has been audited by KPMG Peat Marwick LLP,
independent auditors, whose report for the five-year period ended March 31, 1997
thereon appears in the Fund's annual report dated March 31, 1997. 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 the Statement of
Additional Information. As of March 31, 1997, no Class Y shares were outstanding
and, accordingly, no comparable information is available at this time for that
class.

For a share of beneficial interest outstanding throughout each year:

<TABLE>
<CAPTION>
New York Portfolio                                                            Class A Shares
------------------------------------------------------------------------------------------------------------------------------------
Year Ended                                                                                                                          
  March 31,                 1997        1996       1995(1)    1994       1993       1992       1991       1990       1989     1988  
------------------------------------------------------------------------------------------------------------------------------------
<S>                     <C>         <C>         <C>        <C>        <C>        <C>        <C>        <C>        <C>       <C>     
Net Asset Value,                                                                                                                    
  Beginning of                                                                                                                      
  Year                  $  13.19    $  12.83    $ 12.83    $ 13.25    $ 12.33    $ 11.80    $ 11.67    $ 11.48    $ 11.25   $12.46  
------------------------------------------------------------------------------------------------------------------------------------
  Net investment                                                                                                                    
  income                    0.74        0.75       0.76       0.78       0.81       0.83       0.85       0.86       0.86     0.83  
  Net realized and                                                                                                                  
  unrealized                                                                                                                        
  gain (loss)              (0.03)       0.35       0.01*     (0.41)      0.92       0.51       0.13       0.20       0.23    (1.20) 
------------------------------------------------------------------------------------------------------------------------------------
Total from                                                                                                                          
  Operations                0.71        1.10       0.77       0.37       1.73       1.34       0.98       1.06       1.09    (0.37) 
====================================================================================================================================
Less Distributions From:                                                                                                            
  Net investment                                                                                                                    
  income                   (0.74)      (0.74)     (0.77)     (0.79)     (0.81)     (0.81)     (0.85)     (0.87)     (0.86)   (0.85) 
------------------------------------------------------------------------------------------------------------------------------------
Total Distributions        (0.74)      (0.74)     (0.77)     (0.79)     (0.81)     (0.81)     (0.85)     (0.87)     (0.86)   (0.85) 
------------------------------------------------------------------------------------------------------------------------------------
Net Asset Value,                                                                                                                    
  End of Year           $  13.16    $  13.19    $ 12.83    $ 12.83    $ 13.25    $ 12.33    $ 11.80    $ 11.67    $ 11.48   $11.25  
====================================================================================================================================
Total Return(P)             5.48%       8.71%      6.32%      2.66%     14.48%     11.98%      8.74%      9.28%     10.04%   (2.63)%
------------------------------------------------------------------------------------------------------------------------------------
Net Assets, End of                                                                                                                  
  Year (000's)          $530,827    $557,809    $82,768    $70,065    $61,532    $40,370    $33,158    $28,091    $12,022   $9,703  
------------------------------------------------------------------------------------------------------------------------------------
Ratios to Average                                                                                                                   
  Net Assets:                                                                                                                       
  Expenses(2)               0.75%       0.72%      0.63%      0.55%      0.55%      0.48%      0.28%      0.25%      0.24%    0.37% 
  Net investment                                                                                                                    
  income                    5.58        5.84       6.00       5.79       6.32       6.86       7.31       7.10       7.48     7.34  
------------------------------------------------------------------------------------------------------------------------------------
Portfolio Turnover                                                                                                                  
  Rate                        53%         36%        30%        20%        22%        24%        70%        25%        56%      63% 
====================================================================================================================================
</TABLE>       

(1) On October 10, 1994, the former Class C shares were exchanged into Class A
    shares.
(2) As a result of voluntary expense limitations, the expense ratio will not
    exceed 0.85% for Class A Shares.
*   Includes the net per share effect of shareholder sales and redemptions
    activity during the period, most of which occurred at a net asset value
    less than the net asset value at the beginning of the period. 
(P) Total returns do not reflect any sales loads or contingent deferred sales
    charges.


                                                                               9
<PAGE>

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

For a share of beneficial interest outstanding throughout each year:

New York Portfolio                                       Class B Shares
--------------------------------------------------------------------------------
Year Ended March 31,                               1997        1996      1995(2)
--------------------------------------------------------------------------------
Net Asset Value,
Beginning of Year                              $  13.18    $  12.84    $11.96   
--------------------------------------------------------------------------------
Income from Operations:                        
  Net investment income                            0.67        0.67      0.31
  Net realized and unrealized gain (loss)         (0.03)       0.35      0.86*
--------------------------------------------------------------------------------
Total Income from Operations                       0.64        1.02      1.17
================================================================================
Less Distributions From:                       
  Net investment income                           (0.67)      (0.68)    (0.29)
Total Distributions                               (0.67)      (0.68)    (0.29)
--------------------------------------------------------------------------------
Net Asset Value, End of Year                   $  13.15    $  13.18    $12.84
================================================================================
Total Return(P)                                    4.96%       8.05%     9.92%++
--------------------------------------------------------------------------------
Net Assets, End of Year (000's)                $184,916    $181,144    $3,813
--------------------------------------------------------------------------------
Ratios to Average Net Assets:                  
  Expenses(1)                                      1.27%       1.25%     1.27%+
  Net investment income                            5.06        5.45      5.76+
--------------------------------------------------------------------------------
Portfolio Turnover Rate                              53%         36%       30%
================================================================================
(1) As a result of voluntary expense limitations, the ratio of expenses to
    average net assets will not exceed 1.35% for Class B shares.
(2) For the period from November 11, 1994 (inception date) to March 31, 1995.
*   Includes the net per share effect of shareholder sales and redemptions
    activity during the period, most of which occurred at a net asset value
    less than the net asset value at the beginning of the period.
(P) Total returns do not reflect any sales loads or contingent deferred sales
    charges.
+   Annualized.
++  Total return is not annualized, as it may not be representative of the
    total return for the year.


10
<PAGE>

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

For a share of beneficial interest outstanding throughout each year:

<TABLE>
<CAPTION>
New York Portfolio                                           Class C Shares
---------------------------------------------------------------------------------------------
Year Ended March 31,                          1997      1996      1995(1)   1994      1993(2)
---------------------------------------------------------------------------------------------
<S>                                        <C>        <C>       <C>       <C>       <C>   
Net Asset Value,
Beginning of Year                          $ 13.17    $12.83    $12.82    $13.24    $12.84
---------------------------------------------------------------------------------------------
Income from Operations:
  Net investment income                       0.66      0.66      0.68      0.68      0.15
  Net realized and unrealized gain (loss)    (0.02)     0.36      0.01*    (0.40)     0.37
---------------------------------------------------------------------------------------------
Total Income from Operations                  0.64      1.02      0.69      0.28      0.52
=============================================================================================
Less Distributions From:
  Net investment income                      (0.67)    (0.68)    (0.68)    (0.70)    (0.12)
Total Distributions                          (0.67)    (0.68)    (0.68)    (0.70)    (0.12)
---------------------------------------------------------------------------------------------
Net Asset Value, End of Year               $ 13.14    $13.17    $12.83    $12.82    $13.24
=============================================================================================
Total Return(P)                               4.91%     8.07%     5.66%     1.96%     4.04%++
---------------------------------------------------------------------------------------------
Net Assets, End of Year (000's)            $10,055    $8,931    $5,896    $5,461    $1,368
---------------------------------------------------------------------------------------------
Ratios to Average Net Assets:
  Expenses(3)                                 1.32%     1.28%     1.28%     1.23%     1.23%+
  Net investment income                       5.01      5.02      5.38      4.98      5.37+
---------------------------------------------------------------------------------------------
Portfolio Turnover Rate                         53%       36%       30%       20%       22%
=============================================================================================
</TABLE>

(1) On November 7, 1994, the former Class B shares were renamed Class C
    shares.
(2) For the period from January 8, 1993 (inception date) to March 31, 1993.
(3) As a result of voluntary expense limitations, the expense ratio will not
    exceed 1.40% for Class C Shares.
+   Annualized.
++  Total return is not annualized, as it may not be representative of the
    total return for the year.
*   Includes the net per share effect of shareholder sales and redemptions
    activity during the period, most of which occurred at a net asset value
    less than the net asset value at the beginning of the period.
(P) Total returns do not reflect any sales loads or contingent deferred sales
    charges.


                                                                              11
<PAGE>

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

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

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

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

      Municipal bonds purchased for the Portfolio must, at the time of purchase,
be investment grade municipal bonds and at least two-thirds of the Portfolio's
municipal bonds must be rated in the category of A or better. Investment grade
bonds are those rated Aaa, Aa, A and Baa by Moody's Investors Service, Inc.
("Moody's") or AAA, AA, A and BBB by Standard & Poor's Ratings Group ("S&P") or
have an equivalent rating by any nationally recognized statistical rating
organization; pre-refunded bonds escrowed by U.S. Treasury obligations will be
considered AAA rated even though the issuer does not obtain a new rating. Up to
one third of the assets of the Portfolio may be invested in municipal bonds
rated 


12
<PAGE>

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

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

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

      The Portfolio will not invest more than 10% of the value of its net assets
in illiquid securities, including those that are not readily marketable or for
which there is no established market.


                                                                              13
<PAGE>

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

      The Portfolio may purchase new issues of municipal obligations on a
when-issued basis, i.e., delivery and payment normally take place 15 to 45 days
after the purchase date. The payment obligation and the interest rate to be
received are each fixed on the purchase date, although no interest accrues with
respect to a when-issued security prior to its stated delivery date. During the
period between purchase and settlement, assets consisting of cash or liquid high
grade debt securities, marked-to-market daily, of a dollar amount sufficient to
make payment at settlement will be segregated at the custodian bank. Interest
rates at settlement may be lower or higher than on the purchase date, which
would result in appreciation or depreciation, respectively. Although the
Portfolio will only purchase a municipal obligation on a when-issued basis with
the intention of actually acquiring the securities, the Portfolio may sell these
securities before the settlement date if it is deemed advisable.

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

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

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

      In each of the Fund's prior fiscal years, 100% of the Portfolio's
dividends were 


14
<PAGE>

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

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

      FACTORS AFFECTING NEW YORK

      The Portfolio's ability to achieve its investment objective is dependent
upon the ability of the issuers of New York obligations to meet their continuing
obligations for the payment of principal and interest. New York State and New
York City face long-term economic problems that could seriously affect their
ability and that of other issuers of New York obligations to meet their
financial obligations.

      Certain substantial issuers of New York obligations (including issuers
whose obligations may be acquired by the Portfolio) have experienced serious
financial difficulties in recent years. These difficulties have at times
jeopardized the credit standing and impaired the borrowing abilities of all New
York issuers and have generally contributed to higher interest costs for their
borrowings and fewer markets for their outstanding debt obligations. In recent
years, several different issues of municipal securities of New York State and
its agencies and instrumentalities and of New York City have been downgraded by
S&P and Moody's. On the other hand, strong demand for New York obligations has
more recently had the effect of permitting New York obligations to be issued
with yields relatively lower, and after issuance, to trade in the market at
prices relatively higher, than comparably rated municipal obligations issued by
other jurisdictions. A recurrence of the financial difficulties previously
experienced by certain issuers of New York obligations could result in defaults
or declines in the market values of those issuers' existing obligations and,
possibly, in the obligations of other issuers of New York obligations. Although
as of the date of this Prospectus, no issuers of New York obligations are in
default with respect to the payment of the municipal obligations, the occurrence
of any such default could affect adversely the market values and marketability
of all New York obligations and, consequently, the net asset value of the New
York Portfolio.


                                                                              15
<PAGE>

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

      For each of the 1981 through 1995 fiscal years, the City achieved balanced
operating results as reported in accordance with generally accepted accounting
principles. The City was required to close substantial budget gaps in recent
years in order to maintain balanced operating results, as required by laws of
the State. The City's ability to maintain balanced budgets in the future is
subject to numerous contingencies; therefore, even though the City has managed
to close substantial budget gaps in recent years in order to maintain balanced
operating results, there can be no assurance that the City will continue to
maintain a balanced budget as required by State law without additional tax or
other revenue increases or reduction in City services, which could adversely
affect the City's economic base. ("Appendix C" in the Statement of Additional
Information provides additional details.)

      RISK AND INVESTMENT CONSIDERATIONS

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

      The Fund is registered as a "non-diversified" company under the Investment
Company Act of 1940 (the "1940 Act"), in order for New York Portfolio to have
the ability to invest more than 5% of its assets in the securities of any
issuer. Each Portfolio intends to comply with Subchapter M of the Internal
Revenue Code (the "Code") that limits the aggregate value of all holdings
(except U.S. Government and cash items, as defined in the Code) that exceed 5%
of the Portfolio's total assets to an aggregate amount of 50% of such assets.
Also, holdings of a single issuer (with the same exceptions) may not exceed 25%
of the Portfolio's total assets. These limits are measured at the end of each
quarter. Under the Subchapter 


16
<PAGE>

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

M limits, "non-diversification" allows up to 50% of the Portfolio's total assets
to be invested in as few as two single issuers. In the event of decline of
creditworthiness or default upon the obligations of one or more such issuers
exceeding 5%, an investment in either Portfolio will entail greater risk than in
a portfolio having a policy of "diversification" because a high percentage of
the Portfolio's assets may be invested in municipal obligations of one or two
issuers. Furthermore, a high percentage of investments among few issuers may
result in a greater degree of fluctuation in the market value of the assets of
the Portfolio, and consequently a greater degree of fluctuation of the
Portfolio's net asset value, because the Portfolio will be more susceptible to
economic, political, or regulatory developments affecting these securities than
would be the case with a portfolio composed of varied obligations of more
issuers.

      PORTFOLIO TRANSACTIONS AND TURNOVER

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

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

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

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

      When, in the judgment of the pricing service, quoted bid prices for
investments are readily available and are representative of the bid side of the
market, these investments are valued at the mean between the quoted bid and
asked prices. Investments for which, in the judgment of the pricing service,
there is no readily obtainable market quotation (which may constitute a majority
of the portfolio 


                                                                              17
<PAGE>

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

securities) are carried at fair value of securities of similar type, yield and
maturity.

      Pricing services generally determine value by reference to transactions in
municipal obligations, quotations from municipal bond dealers, market
transactions in comparable securities and various relationships between
securities. Short-term instruments maturing within 60 days will be valued at
cost plus (minus) amortized discount (premium), if any, when the Trustees have
determined that amortized cost equals fair value. Securities and other assets
that are not priced by a pricing service and for which market quotations are not
available will be valued in good faith at fair value by or under the direction
of the Trustees.

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

      DIVIDENDS AND DISTRIBUTIONS

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

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

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

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

      TAXES

      The Portfolio intends to qualify as a "regulated investment company" and
to meet the requirements for distributing "exempt-interest dividends" under the
Internal Revenue Code (the "Code") so that no Federal income taxes will be
payable by each Portfolio and dividends representing net interest received on
municipal obligations 


                                       18
<PAGE>

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

will not be includable by shareholders in their gross income for Federal income
tax purposes. To the extent dividends are derived from taxable income from
temporary investments, market discounts or from the excess of net short-term
capital gain over net long-term capital loss, they are treated as ordinary
income whether the shareholder has elected to receive them in cash or in
additional shares. Capital gains distributions, if any, whether paid in cash or
invested in shares of the Portfolio, will be taxable to shareholders.

      Exempt-interest dividends allocable to interest received by the Portfolio
from the AMT-Subject Bonds in which the Portfolio may invest will be treated as
interest paid directly on such obligations and will give rise to an "item of tax
preference" that will increase a shareholder's alternative minimum taxable
income. In addition, for corporations, alternative minimum taxable income will
be increased by a percentage of the amount by which a special measure of income
(including exempt-interest dividends) exceeds the amount otherwise determined to
be alternative minimum taxable income. Accordingly, investment in the Portfolio
may cause shareholders to be subject to (or result in an increased liability
under) the AMT. The Fund will annually furnish to its shareholders a report
indicating the ratable portion of exempt-interest dividends attributable to
AMT-Subject Bonds.

      The Portfolio will be treated as a separate regulated investment company
for Federal tax purposes. Accordingly, the Portfolio's net investment income is
determined separately based on the income earned on its securities less its
costs of operations. The Portfolio's net long-term and short-term gain (loss)
realized on investments is determined after offsetting any capital loss
carryover of the Portfolio from prior periods.

      NEW YORK STATE AND CITY TAXES

      New York shareholders will not be subject to New York State and City
personal income tax on Portfolio dividends to the extent that such distributions
qualify as exempt-interest dividends under the Code and represent interest
income attributable to Federally tax-exempt obligations of the State of New York
and its political subdivisions (as well as certain other Federally tax-exempt
obligations the interest on which is exempt from New York State and City income
tax, such as certain obligations of U.S. Territories). To the extent that
distributions on the New York Portfolio are derived from taxable income,
including long or short-term capital gains, such distributions will not be
exempt from State or City personal income tax. Dividends on the Portfolio are
not excluded in determining New York State franchise or City business taxes on
corporations and financial institutions.

      Under the Code, interest on indebtedness incurred or continued to purchase
or carry shares of the Fund will not be deductible to the extent that the Fund's
distributions are exempt from Federal income tax. In addition, any loss realized
upon the redemption of shares held less than 6 months will be disallowed to the
extent 


                                                                              19
<PAGE>

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

of any exempt-interest dividends received by the shareholder during such period.
However, this holding period may be shortened by the Treasury Department to a
period of not less than the greater of 31 days or the period between regular
dividend distributions. Further, persons who may be "substantial users" (or
"related persons" of substantial users) of facilities financed by industrial
development bonds should consult their tax advisors concerning an investment in
the Fund.

      The foregoing is only a brief summary of some of the important tax
considerations generally affecting the Portfolio and its shareholders.
Additional tax information of relevance to particular investors is contained in
the Statement of Additional Information. Investors are urged to consult their
tax advisors with specific reference to their own tax situation.

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

      GENERAL

      The Portfolio offers four Classes of shares. Class A shares are sold to
investors with an initial sales charge and Class B and Class C shares are sold
without an initial sales charge but are subject to a CDSC payable upon certain
redemptions. Class Y shares are sold without an initial sales charge or CDSC and
are available only to investors investing a minimum of $5,000,000 (except for
purchases of Class Y shares by Smith Barney Concert Allocation Series Inc., for
which there is no minimum purchase amount). See "Prospectus Summary --
Alternative Purchase Arrangements" for a discussion of factors to consider in
selecting which Class of shares to purchase.

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

      Investors in Class A, Class B and Class C shares may open an account by
making an initial investment of at least $1,000 for each account. Investors in
Class Y shares may open an account by making an initial investment of
$5,000,000. Subsequent investments of at least $50 may be made for all Classes.
For shareholders purchasing shares of the Portfolio through the Systematic
Investment Plan on a monthly basis, the minimum initial investment requirement
for Class A, Class B and Class C shares and the subsequent investment
requirement for all 


20
<PAGE>

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

Classes is $25. For shareholders purchasing shares of the Portfolio through the
Systematic Investment Plan on a quarterly basis, the minimum initial investment
requirement for Class A, Class B and Class C shares and the subsequent
investment requirement for all Classes is $50. The minimum initial investment
requirement in the Portfolio for an account established under the Uniform Gift
to Minors Act is $250 and the subsequent investment requirement is $50. There
are no minimum investment requirements in Class A shares for employees of
Travelers and its subsidiaries, including Smith Barney, unitholders who invest
distributions from a UIT sponsored by Smith Barney, Directors or Trustees of any
of the Smith Barney Mutual Funds, and their spouses and children. The Fund
reserves the right to waive or change minimums, to decline any order to purchase
its shares and to suspend the offering of shares from time to time. Shares
purchased will be held in the shareholder's account by the Fund's transfer
agent, First Data. Share certificates are issued only upon a shareholder's
written request to First Data. It is not recommended that the Portfolio be used
as a vehicle for Keogh, IRA or other qualified plans.

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

      SYSTEMATIC INVESTMENT PLAN

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


                                                                              21
<PAGE>

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

      INITIAL SALES CHARGE ALTERNATIVE - CLASS A SHARES

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

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

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

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

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

      INITIAL SALES CHARGE WAIVERS

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


22
<PAGE>

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

Smith Barney), on the condition the purchase of Class A shares is made with the
proceeds of the redemption of shares of a mutual fund which (i) was sponsored by
the Financial Consultant's prior employer, (ii) was sold to the client by the
Financial Consultant and (iii) was subject to a sales charge; (d) purchases by
shareholders who have redeemed Class A shares in a Portfolio (or Class A shares
of another fund of the Smith Barney Mutual Funds that are offered with a sales
charge) and who wish to reinvest their redemption proceeds in the Portfolio,
provided the reinvesment is made within 60 calendar days of the redemption; (e)
purchases by accounts managed by registered investment advisory subsidiaries of
Travelers; (f) investments of distributions from a UIT sponsored by Smith
Barney; and (g) purchases by investors participating in a Smith Barney fee based
arrangement. In order to obtain such discounts, the purchaser must provide
sufficient information at the time of purchase to permit verification that the
purchase would qualify for the elimination of the sales charge.

      RIGHT OF ACCUMULATION

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

      GROUP PURCHASES

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


                                                                              23
<PAGE>

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

that Smith Barney will realize economies of sales efforts and sales related
expenses. An individual who is a member of a qualified group may also purchase
Class A shares at the reduced sales charge applicable to the group as a whole.
The sales charge is based upon the aggregate dollar value of Class A shares
offered with a sales charge that have been previously purchased and are still
owned by the group, plus the amount of the current purchase. A "qualified group"
is one which (a) has been in existence for more than six months, (b) has a
purpose other than acquiring Portfolio shares at a discount and (c) satisfies
uniform criteria which enable Smith Barney to realize economies of scale in its
costs of distributing shares. A qualified group must have more than 10 members,
must be available to arrange for group meetings between representatives of the
Portfolio and the members, and must agree to include sales and other materials
related to the Portfolio in its publications and mailings to members at no cost
to Smith Barney. In order to obtain such reduced sales charge or to purchase at
net asset value, the purchaser must provide sufficient information at the time
of purchase to permit verification that the purchase qualifies for the reduced
sales charge. Approval of group purchase reduced sales charge plans is subject
to the discretion of Smith Barney.

      LETTER OF INTENT

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

      Class Y Shares. A Letter of Intent may also be used as a way for investors
to meet the minimum investment requirement for Class Y shares. Such investors
must make an initial minimum purchase of $1,000,000 in Class Y shares of the
Portfolio and agree to purchase a total of $5,000,000 of Class Y shares of the
same Portfolio within six months from the date of the Letter. If a total
investment of $5,000,000 is not made within the six-month period, all Class Y
shares purchased to date will be transferred to Class A shares, where they will
be subject to all fees (including a 


24
<PAGE>

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

service fee of 0.15%) and expenses applicable to the Portfolio's Class A shares,
which may include a CDSC of 1.00%. Please contact a Smith Barney Financial
Consultant or First Data for further information.

      DEFERRED SALES CHARGE ALTERNATIVES

      "CDSC Shares" are sold at net asset value next determined without an
initial sales charge so that the full amount of an investor's purchase payment
may be immediately invested in a Portfolio. A CDSC, however, may be imposed on
certain redemptions of these shares. "CDSC Shares" are: (a) Class B shares; (b)
Class C shares; and (c) Class A shares that were purchased without an initial
sales charge but subject to a CDSC.

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

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

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

      Class B shares will convert automatically to Class A shares eight years
after the date on which they were purchased and thereafter will no longer be
subject to any distribution fees. There will also be converted at that time such
proportion of Class B Dividend Shares owned by the shareholder as the total
number of his or 


                                                                              25
<PAGE>

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

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

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

      To provide an example, assume an investor purchased 100 Class B shares at
$10 per share for a cost of $1,000. Subsequently, the investor acquired 5
additional shares through dividend reinvestment. During the fifteenth month
after the purchase, the investor decided to redeem $500 of his or her
investment. Assuming at the time of the redemption the net asset value had
appreciated to $12 per share, the value of the investor's shares would be $1,260
(105 shares at $12 per share). The CDSC would not be applied to the amount which
represents appreciation ($200) and the value of the reinvested dividend shares
($60). Therefore, $240 of the $500 redemption proceeds ($500 minus $260) would
be charged at a rate of 4.00% (the applicable rate for Class B shares) for a
total deferred sales charge of $9.60.

      WAIVERS OF CDSC

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


26
<PAGE>

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

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

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

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

Fund Name
--------------------------------------------------------------------------------

Growth Funds
      Smith Barney Aggressive Growth Fund Inc.
      Smith Barney Appreciation Fund Inc.
      Smith Barney Disciplined Small Cap Fund, Inc.
      Smith Barney Fundamental Value Fund Inc.
      Smith Barney Growth Opportunity Fund
      Smith Barney Large Capitalization Growth Fund Inc.
      Smith Barney Managed Growth Fund
      Smith Barney Natural Resources Fund Inc.
      Smith Barney Special Equities Fund

Growth and Income Funds
      Concert Social Awareness Fund
      Smith Barney Convertible Fund
      Smith Barney Funds, Inc. -- Equity Income Portfolio
      Smith Barney Growth and Income Fund
      Smith Barney Premium Total Return Fund
      Smith Barney Utilities Fund

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

Tax-Exempt Funds
      Smith Barney Arizona Municipals Fund Inc.


                                                                              27
<PAGE>

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

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

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

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

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

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

      Class B Exchanges. In the event a Class B shareholder wishes to exchange
all or a portion of his or her shares in any of the funds imposing a higher CDSC
than that imposed by the Portfolio, the exchanged Class B shares will be subject
to the higher applicable CDSC. Upon an exchange, the new Class B shares will be


28
<PAGE>

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

deemed to have been purchased on the same date as the Class B shares of the
Portfolio that have been exchanged.

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

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

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

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

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

      The Fund is required to redeem the shares of the Portfolio tendered to it,
as described below, at a redemption price equal to their net asset value per
share next 


                                                                              29
<PAGE>

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

determined after receipt of a written request in proper form at no charge other
than any applicable CDSC. Redemption requests received after the close of
regular trading on the NYSE are priced at the net asset value next determined.
If a shareholder holds shares in more than one Class, any request for redemption
must specify the Class being redeemed. In the event of a failure to specify
which Class, or if the investor owns fewer shares of the Class than specified,
the redemption request will be delayed until the Fund's transfer agent receives
further instructions from Smith Barney, or if the shareholder's account is not
with Smith Barney, from the shareholder directly. The redemption proceeds will
be remitted on or before the third business day following receipt of proper
tender, except on any days on which the NYSE is closed or as permitted under the
1940 Act in extraordinary circumstances. Generally, if the redemption proceeds
are remitted to a Smith Barney brokerage account, these funds will not be
invested for the shareholder's benefit without specific instruction and Smith
Barney will benefit from the use of temporarily uninvested funds. Redemption
proceeds for shares purchased by check, other than a certified or official bank
check, will be remitted upon clearance of the check, which may take up to ten
days or more.

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

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

      A written redemption request must (a) state the Class and number or dollar
amount of shares to be redeemed, (b) identify the shareholder's account number
and (c) be signed by each registered owner exactly as the shares are registered.
If the shares to be redeemed were issued in certificate form, the certificates
must be endorsed for transfer (or be accompanied by an endorsed stock power) and
must be submitted to First Data together with the redemption request. Any
signature appearing on a share certificate, stock power or written redemption
request in excess of $2,000 must be guaranteed by an eligible guarantor
institution such as a domestic bank, savings and loan institution, domestic
credit union, member bank of the Federal Reserve System or member firm of a
national securities exchange. Written redemption requests of $2,000 or less do
not require a signature guarantee unless more than one such redemption request
is made in any 10-day period. Redemption proceeds will be mailed to an
investor's address of record. First Data may require additional supporting
documents for redemptions made by corporations, executors, administrators,
trustees or guardians. A redemption request will not be deemed properly received
until First Data receives all required documents in proper form.


30
<PAGE>

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

      TELEPHONE REDEMPTION AND EXCHANGE PROGRAM

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

      Redemptions. Redemption requests of up to $10,000 of any class or classes
of the Portfolio's shares may be made by eligible shareholders by calling First
Data at 1-800-451-2010. Such requests may be made between 9:00 a.m. and 5:00
p.m. (New York City time) on any day the NYSE is open. Redemption requests
received after the close of regular trading on the NYSE are priced at the net
asset value next determined. Redemptions of shares (i) by retirement plans or
(ii) for which certificates have been issued are not permitted under this
program.

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

      Exchanges. Eligible shareholders may make exchanges by telephone if the
account registration of the shares of the fund being acquired is identical to
the registration of the shares of the fund exchanged. Such exchange requests may
be made by calling First Data at 1-800-451-2010 between 9:00 a.m. and 5:00 p.m.
(New York City time) on any day on which the NYSE is open. Exchange requests
received after the close of regular trading on the NYSE are processed at the net
asset value next determined.

      Additional Information regarding Telephone Redemption and Exchange
Program. Neither the Fund nor its agents will be liable for following
instructions communicated by telephone that are reasonably believed to be
genuine. The Fund and its agents will employ procedures designed to verify the
identity of the caller and legitimacy of instructions (for example, a
shareholder's name and account number will be required and phone calls may be
recorded). The Fund reserves the 


                                                                              31
<PAGE>

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

right to suspend, modify or discontinue the telephone redemption and exchange
program or to impose a charge for this service at any time following at least
seven (7) days prior notice to shareholders.

      AUTOMATIC CASH WITHDRAWAL PLAN

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

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

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

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

      From time to time the Portfolio may advertise its yield, tax equivalent
yield, total return and average annual total return in advertisements. In
addition, in other types of sales literature the Portfolio may include its
distribution rate. These figures are computed separately for Class A, Class B,
Class C and Class Y shares of the Portfolio. These figures are based on
historical earnings and are not intended to indicate future performance. The
yield of a Portfolio Class refers to the net income earned by investments in the
Class over a thirty-day period ending at month end. This net income is then
annualized, i.e., the amount of income earned by the investments during that
30-day period is assumed to be earned each 30-day period for twelve periods and
is expressed as a percentage of the 


                                                                              32
<PAGE>

--------------------------------------------------------------------------------
Performance (continued)
--------------------------------------------------------------------------------

investments. The tax equivalent yield is calculated similarly to the yield,
except that a stated income tax rate is used to demonstrate the taxable yield
necessary to produce an after-tax yield equivalent to the tax-exempt yield of
the Class. The yield and tax equivalent yield quotations are calculated
according to a formula prescribed by the SEC to facilitate comparison with
yields quoted by other investment companies. The distribution rate is calculated
by annualizing the latest monthly distribution and dividing the result by the
maximum offering price per share as of the end of the period to which the
distribution relates. The distribution rate is not computed in the same manner
as, and therefore can be significantly different from, the above described
yield. Total return is computed for a specified period of time assuming
deduction of the maximum sales charge, if any, from the initial amount invested
and reinvestment of all income dividends and capital gain distributions on the
reinvestment dates at prices calculated as stated in this Prospectus, then
dividing the value of the investment at the end of the period so calculated by
the initial amount invested and subtracting 100%. The standard average annual
total return, as prescribed by the SEC, is derived from this total return, which
provides the ending redeemable value. Such standard total return information may
also be accompanied with nonstandard total return information for differing
periods computed in the same manner but without annualizing the total return or
taking sales charges into account. The Portfolio may also include comparative
performance information in advertising or marketing its shares. Such performance
information may include data from Lipper Analytical Services, Inc. and other
financial publications.

--------------------------------------------------------------------------------
Management of the Fund
--------------------------------------------------------------------------------

      TRUSTEES

      Overall responsibility for management and supervision of the Fund rests
with the Fund's Trustees. The Trustees approve all significant agreements
between the Fund and the companies that furnish services to the Fund and the
Portfolio, including agreements with the Fund's distributor, investment manager,
custodian and transfer agent. The day-to-day operations of the Portfolio are
delegated to the Portfolio's investment manager. The Statement of Additional
Information contains background information regarding each Trustee and executive
officer of the Fund.

      MANAGER

      Smith Barney Mutual Funds Management Inc. ("SBMFM" or the "Manager")
manages the day-to-day operations of the Portfolio pursuant to a management
agreement entered into by the Fund on behalf of the Portfolio. SBMFM was
incorporated in 1968 under the laws of Delaware. SBMFM, Smith Barney Holdings
Inc. and Smith Barney are each located at 388 Greenwich Street, 


                                                                              33
<PAGE>

--------------------------------------------------------------------------------
Management of the Fund (continued)
--------------------------------------------------------------------------------

New York, New York 10013. As of June 30, 1997 SBMFM had aggregate assets under
management in excess of $89 billion.

      SBMFM provides the Portfolio with investment management services and
executive and other personnel, pays the remuneration of Fund officers, provides
the Fund with office space and equipment, furnishes the Fund with bookkeeping,
accounting, administrative services and services relating to research,
statistical work and supervision of the Portfolio. At a Meeting of Shareholders
of the Portfolio held on December 15, 1995, the shareholders approved a new
management agreement that increased the effective management fee paid by Smith
Barney Muni Funds on behalf of the Portfolio from 0.45% to 0.50% of the
Portfolio's average daily net assets. The new management agreement also provides
that the Portfolio's investment manager shall voluntarily reduce its fee to the
extent that in any fiscal year the aggregate expenses of the Portfolio,
exclusive of taxes, brokerage, interest, and extraordinary expenses, such as
litigation and indemnification expenses, exceed 0.70% of such Portfolio's
average daily net assets. (Certain Class specific expenses, such as 12b-1 fees,
will also continue to be excluded when determining whether the expense
limitation applies.) Previously, the expense limitation was 0.65%. The change in
the rate of the expense limitation corresponds to the change in the rate of the
management fee. The expense limitation shall be in effect until it is terminated
by notice to shareholders and by supplement to the current prospectus. The
increased management fee and expense limitation became effective on December 18,
1995.

      Total expenses for the Portfolio's average net assets for the last fiscal
year were: 0.75%, 1.27% and 1.32% for Class A, Class B and Class C shares,
respectively.

      PORTFOLIO MANAGEMENT

      Peter M. Coffey, a Managing Director of Smith Barney has served as Vice
President of the Fund and portfolio manager of the New York Portfolio since
their inception (January 16, 1987) and manages the day to day operations of the
Portfolio, including making all investment decisions. Mr. Coffey also serves as
the portfolio manager for many of the Fund's other non-money market Portfolios.

      Management's discussion and analysis, and additional performance
information regarding the Portfolio during the fiscal year ended March 31, 1997
is included in the Annual Report dated March 31, 1997. A copy of the Annual
Report may be obtained upon request and without charge from a Smith Barney
Financial Consultant or by writing or calling the Fund at the address or phone
number listed on page one of this Prospectus.


34
<PAGE>

--------------------------------------------------------------------------------
Distributor
--------------------------------------------------------------------------------

      Smith Barney distributes shares of the Portfolio as principal underwriter
and as such conducts a continuous offering pursuant to a "best efforts"
arrangement requiring Smith Barney to take and pay for only such securities as
may be sold to the public. Pursuant to a plan of distribution adopted by the
Portfolio under Rule 12b-1 under the 1940 Act (the "Plan"), Smith Barney is paid
a service fee with respect to Class A, Class B and Class C shares of the
Portfolio at the annual rate of 0.15% of the average daily net assets
attributable to these Classes. Smith Barney is also paid a distribution fee with
respect to Class B and Class C shares at the annual rate of 0.50% and 0.55%,
respectively, of the average daily net assets attributable to these Classes.
Class B shares that automatically convert to Class A shares eight years after
the date of original purchase, will no longer be subject to a distribution fee.
The fees are used by Smith Barney to pay its Financial Consultants for servicing
shareholder accounts and, in the case of Class B and Class C shares, to cover
expenses primarily intended to result in the sale of those shares. These
expenses include: advertising expenses; the cost of printing and mailing
prospectuses to potential investors; payments to and expenses of Smith Barney
Financial Consultants and other persons who provide support services in
connection with the distribution of shares; interest and/or carrying charges;
and indirect and overhead costs of Smith Barney associated with the sale of
Portfolio shares, including lease, utility, communications and sales promotion
expenses.

      The payments to Smith Barney Financial Consultants for selling shares of a
Class include a commission or fee paid by the investor or Smith Barney at the
time of sale and, with respect to Class A, Class B and Class C shares, a
continuing fee for servicing shareholder accounts for as long as a shareholder
remains a holder of that Class. Smith Barney Financial Consultants may receive
different levels of compensation for selling the different Classes of shares.

      Payments under the Plan with respect to Class B and Class C shares are not
tied exclusively to the distribution and shareholder services expenses actually
incurred by Smith Barney and the payments may exceed distribution expenses
actually incurred. The Fund's Trustees will evaluate the appropriateness of the
Plan and its payment terms on a continuing basis and in so doing will consider
all relevant factors, including expenses borne by Smith Barney, amounts received
under the Plan and proceeds of the CDSC.

--------------------------------------------------------------------------------
Additional Information
--------------------------------------------------------------------------------

      The Fund, an open-end, non-diversified management investment company, is
organized as a "Massachusetts business trust" pursuant to a Declaration of Trust
dated August 14, 1985. Pursuant to the Declaration of Trust, the Trustees have
authorized the issuance of twenty series of shares, each representing shares in
one 


                                                                              35
<PAGE>

--------------------------------------------------------------------------------
Additional Information (continued)
--------------------------------------------------------------------------------

of twenty separate Portfolios. The assets of each Portfolio are segregated and
separately managed. Class A, Class B, Class C and Class Y shares of the
Portfolio represent interests in the assets of the Portfolio and have identical
voting, dividend, liquidation and other rights on the same terms and conditions
except that expenses related to the shareholder service and distribution of
Class A, Class B and Class C shares are borne solely by the respective Class and
each such Class of shares has exclusive voting rights with respect to provisions
of the Fund's Rule 12b-1 distribution plan which pertain to that Class. (It is
the intention of the Fund not to hold annual meetings of shareholders. The
Trustees may call meetings of shareholders for action by shareholder vote as may
be required by the 1940 Act or the Declaration of Trust, and shareholders are
entitled to call a meeting upon a vote of 10% of the Fund's outstanding shares
for purposes of voting on removal of a Trustee or Trustee and the Fund will
assist shareholders in calling such a meeting as required by the 1940 Act.)
Shares do not have cumulative voting rights or preemptive rights and have only
such conversion or exchange rights as the Trustees may grant in their
discretion. When issued for payment as described in this Prospectus, the Fund's
shares will be fully paid and transferable (subject to the Portfolio's minimum
account size). Shares are redeemable as set forth under "Redemption of Shares"
and are subject to involuntary redemption as set forth under "Minimum Account
Size."

      PNC Bank, National Association, located at 17th and Chestnut Streets,
Philadelphia, PA 19103, serves as custodian of each Portfolio's investments.

      First Data, located at Exchange Place, Boston, Massachusetts 02109, serves
as the Fund's transfer agent.

      The Fund sends its shareholders a semi-annual report and an audited annual
report, which include listings of the investment securities held by the Fund at
the end of the period covered. In an effort to reduce the Fund's printing and
mailing costs, the Fund plans to consolidate the mailing of its semi-annual and
annual reports by household. This consolidation means that a household having
multiple accounts with the identical address of record will receive a single
copy of each report. Shareholders who do not want this consolidation to apply to
their account should contact their Smith Barney Financial Consultant or the
Fund's transfer agent.


36
<PAGE>

                                                                    SMITH BARNEY
                                                                    ------------

                                               A Member of TravelersGroup [LOGO]

                                                                    Smith Barney
                                                                      Muni Funds
                                                              New York Portfolio

                                                            388 Greenwich Street
                                                        New York, New York 10013

                                                                     FD0604 7/97


PROSPECTUS

                                                                    SMITH BARNEY
                                                                      MUNI FUNDS

                                                                    Pennsylvania
                                                                       Portfolio

                                                                   JULY 29, 1997

                                                   Prospectus begins on page one


[LOGO] Smith Barney Mutual Funds
       Investing for your future.
       Everyday.
<PAGE>

--------------------------------------------------------------------------------
Prospectus                                                         July 29, 1997
--------------------------------------------------------------------------------

     Smith Barney Muni Funds
     Pennsylvania Portfolio
     388 Greenwich Street
     New York, New York 10013
     1 800-451-2010

     The Pennsylvania Portfolio (the "Portfolio") is one of the investment
portfolios that currently comprise Smith Barney Muni Funds (the "Fund"). The
Portfolio seeks to pay its shareholders as high a level of income exempt from
Federal income taxes and Pennsylvania personal income taxes as is consistent
with prudent investing. The Portfolio will invest primarily in obligations
issued by the Commonwealth of Pennsylvania and its political subdivisions,
agencies and instrumentalities. The Portfolio may invest without limit in
municipal obligations whose interest is a tax-preference item for purposes of
the Federal alternative minimum tax.

     This Prospectus sets forth concisely certain information about the Fund and
the Portfolio, including sales charges, distribution and service fees and
expenses, that prospective investors will find helpful in making an investment
decision. Investors are encouraged to read this Prospectus carefully and retain
it for future reference.

     Additional information about the Portfolio is contained in a Statement of
Additional Information dated July 29, 1997, as amended or supplemented from time
to time, that is available upon request and without charge by calling or writing
the Fund at the telephone number or address set forth above or by contacting a
Smith Barney Financial Consultant. The Statement of Additional Information has
been filed with the Securities and Exchange Commission (the "SEC") and is
incorporated by reference into this Prospectus in its entirety.

SMITH BARNEY INC.
Distributor

SMITH BARNEY MUTUAL FUNDS  MANAGEMENT INC.
Investment Manager

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>

--------------------------------------------------------------------------------
Table of Contents
--------------------------------------------------------------------------------

Prospectus Summary                                                             3
--------------------------------------------------------------------------------

Financial Highlights                                                           9
--------------------------------------------------------------------------------

Investment Objective and Management Policies                                  11
--------------------------------------------------------------------------------

Valuation of Shares                                                           16
--------------------------------------------------------------------------------

Dividends, Distributions and Taxes                                            17
--------------------------------------------------------------------------------

Purchase of Shares                                                            19
--------------------------------------------------------------------------------

Exchange Privilege                                                            26
--------------------------------------------------------------------------------

Redemption of Shares                                                          29
--------------------------------------------------------------------------------

Minimum Account Size                                                          31
--------------------------------------------------------------------------------

Performance                                                                   31
--------------------------------------------------------------------------------

Management of the Fund                                                        33
--------------------------------------------------------------------------------

Distributor                                                                   34
--------------------------------------------------------------------------------

Additional Information                                                        35
--------------------------------------------------------------------------------

================================================================================
     No person has been authorized to give any information or to make any
representations in connection with this offering other than those contained in
this Prospectus and, if given or made, such other information and
representations must not be relied upon as having been authorized by the Fund or
the Distributor. This Prospectus does not constitute an offer by the Fund or the
Distributor to sell or a solicitation of an offer to buy any of the securities
offered hereby in any jurisdiction to any person to whom it is unlawful to make
such offer or solicitation in such jurisdiction.
================================================================================


2
<PAGE>

--------------------------------------------------------------------------------
Prospectus Summary
--------------------------------------------------------------------------------

     The following summary is qualified in its entirety by detailed information
appearing elsewhere in this Prospectus and in the Statement of Additional
Information. Cross references in this summary are to headings in the Prospectus.
See "Table of Contents."

     INVESTMENT OBJECTIVE The Portfolio seeks to pay its shareholders as high a
level of income exempt from Federal income taxes and Pennsylvania personal
income taxes as is consistent with prudent investing. The Portfolio will invest
primarily in obligations issued by the Commonwealth of Pennsylvania and its
political subdivisions, agencies and instrumentalities. The Portfolio may invest
without limit in municipal obligations whose interest is a tax-preference item
for purposes of the Federal alternative minimum tax. The Portfolio may invest
without limit in municipal obligations whose interest is a tax preference for
purposes of the Federal alternative minimum tax. See "Investment Objective and
Management Policies."

     ALTERNATIVE PURCHASE ARRANGEMENTS The Portfolio offers several classes of
shares ("Classes") to investors designed to provide them with the flexibility of
selecting an investment best suited to their needs. The general public is
offered three Classes of shares: Class A shares, Class B shares and Class C
shares, which differ principally in terms of sales charges and rate of expenses
to which they are subject. A fourth Class of shares, Class Y shares, is offered
only to investors meeting an initial investment minimum of $5,000,000. See
"Purchase of Shares" and "Redemption of Shares."

     Class A Shares. Class A shares are sold at net asset value plus an initial
sales charge of up to 4.00% and are subject to an annual service fee of 0.15% of
the average daily net assets of the Class. The initial sales charge may be
reduced or waived for certain purchases. Purchases of Class A shares of $500,000
or more will be made at net asset value with no initial sales charge, but will
be subject to a contingent deferred sales charge ("CDSC") of 1.00% on
redemptions made within 12 months of purchase. See "Prospectus Summary - Reduced
or No Initial Sales Charge."

     Class B Shares. Class B shares are offered at net asset value subject to a
maximum CDSC of 4.50% of redemption proceeds, declining by 0.50% the first year
after purchase and by 1.00% each year thereafter to zero. This CDSC may be
waived for certain redemptions. Class B shares are subject to an annual service
fee of 0.15% and an annual distribution fee of 0.50% of the average daily net
assets of the Class. The Class B shares' distribution fee may cause that Class
to have higher expenses and pay lower dividends than Class A shares.

     Class B Shares Conversion Feature. Class B shares will convert
automatically to Class A shares, based on relative net asset value, eight years
after the date of the original purchase. Upon conversion, these shares will no
longer be subject to an annual distribution fee. In addition, a certain portion
of Class B shares that have 


                                                                               3
<PAGE>

--------------------------------------------------------------------------------
Prospectus Summary (continued)
--------------------------------------------------------------------------------

been acquired through the reinvestment of dividends and distributions ("Class B
Dividend Shares") will be converted at that time. See "Purchase of Shares --
Deferred Sales Charge Alternatives."

     Class C Shares. Class C shares are sold at net asset value with no initial
sales charge. They are subject to an annual service fee of 0.15% and an annual
distribution fee of 0.55% of the average daily net assets of the Class, and
investors pay a CDSC of 1.00% if they redeem Class C shares within 12 months of
purchase. The CDSC may be waived for certain redemptions. The Class C shares'
distribution fee may cause that Class to have higher expenses and pay lower
dividends than Class A shares. Purchases of Portfolio shares, which when
combined with current holdings of Class C shares of the Portfolio equal or
exceed $500,000 in the aggregate, should be made in Class A shares at net asset
value with no sales charge, and will be subject to a CDSC of 1.00% on
redemptions made within 12 months of purchase.

     Class Y Shares. Class Y shares are available only to investors meeting an
initial investment minimum of $5,000,000. Class Y shares are sold at net asset
value with no initial sales charge or CDSC. They are not subject to any service
or distribution fees.

     In deciding which Class of Portfolio shares to purchase, investors should
consider the following factors, as well as any other relevant facts and
circumstances:

     Intended Holding Period. The decision as to which Class of shares is more
beneficial to an investor depends on the amount and intended length of his or
her investment. Shareholders who are planning to establish a program of regular
investment may wish to consider Class A shares; as the investment accumulates
shareholders may qualify for reduced sales charges and the shares are subject to
lower ongoing expenses over the term of the investment. As an alternative, Class
B and Class C shares are sold without any initial sales charge so the entire
purchase price is immediately invested in the Portfolio. Any investment return
on these additional invested amounts may partially or wholly offset the higher
annual expenses of these Classes. Because the Portfolio's future return cannot
be predicted, however, there can be no assurance that this would be the case.

     Finally, investors should consider the effect of the CDSC period and any
conversion rights of the Classes in the context of their own investment time
frame. For example, while Class C shares have a shorter CDSC period than Class B
shares, they do not have a conversion feature, and therefore, are subject to an
ongoing distribution fee. Thus, Class B shares may be more attractive than Class
C shares to investors with longer term investment outlooks.

     Reduced or No Initial Sales Charge. The initial sales charge on Class A
shares may be waived for certain eligible purchasers and the entire purchase
price will be immediately invested in the Portfolio. In addition, Class A share
purchases of $500,000 or more will be made at net asset value with no initial
sales charge, but will be subject to a CDSC of 1.00% on redemptions made within
12 months of 


4
<PAGE>

--------------------------------------------------------------------------------
Prospectus Summary (continued)
--------------------------------------------------------------------------------

purchase. The $500,000 investment may be met by adding the purchase to the net
asset value of all Class A shares offered with a sales charge held in funds
sponsored by Smith Barney Inc. ("Smith Barney") listed under "Exchange
Privilege." Class A share purchases may also be eligible for a reduced initial
sales charge. See "Purchase of Shares." Because the ongoing expenses of Class A
shares may be lower than those for Class B and Class C shares, purchasers
eligible to purchase Class A shares at net asset value or at a reduced sales
charge should consider doing so.

     Smith Barney Financial Consultants may receive different compensation for
selling different Classes of shares. Investors should understand that the
purpose of the CDSC on the Class B and Class C shares is the same as that of the
initial sales charge on the Class A shares.

     See "Purchase of Shares" and "Management of the Fund" for a complete
description of the sales charges and service and distribution fees for each
Class of shares and "Valuation of Shares," "Dividends, Distributions and Taxes"
and "Exchange Privilege" for other differences between the Classes of shares.

     PURCHASE OF SHARES Shares may be purchased through a brokerage account
maintained by Smith Barney. Shares may also be purchased through a broker that
clears securities transactions through Smith Barney on a fully disclosed basis
(an "Introducing Broker") or an investment dealer in the selling group. In
addition, certain investors, including certain institutional investors, may
purchase shares directly from the Fund through the Fund's transfer agent, First
Data Investor Services Group, Inc. ("First Data"). See "Purchase of Shares."

     INVESTMENT MINIMUMS Investors in Class A, Class B and Class C shares may
open an account by making an initial investment of at least $1,000 for each
account. Investors in Class Y shares may open an account for an initial
investment of $5,000,000. Subsequent investments of at least $50 may be made for
all Classes. The minimum investment requirements for purchases of Portfolio
shares through the Systematic Investment Plan are described below. It is not
recommended that the Portfolio be used as a vehicle for Keogh, IRA or other
qualified retirement plans.  There is no minium investment requirement in
Class A for unitholders who invest distributions from a unit investment trust
("UIT") sponsored by Smith Barney. See "Purchase of Shares."

     SYSTEMATIC INVESTMENT PLAN The Portfolio offers shareholders a Systematic
Investment Plan under which they may authorize the automatic placement of a
purchase order each month or quarter for Portfolio shares. The minimum initial
investment requirement for Class A, Class B and Class C shares and the
subsequent investment requirement for all Classes for shareholders purchasing
shares through the Systematic Investment Plan on a monthly basis is $25 and on a
quarterly basis is $50. See "Purchase of Shares."

     REDEMPTION OF SHARES Shares may be redeemed on each day the New York Stock
Exchange, Inc. ("NYSE") is open for business. See "Purchase of Shares" and
"Redemption of Shares."


                                                                               5
<PAGE>

--------------------------------------------------------------------------------
Prospectus Summary (continued)
--------------------------------------------------------------------------------

     MANAGEMENT OF THE PORTFOLIO Smith Barney Mutual Funds Management Inc.
("SBMFM" or the "Manager") serves as the Portfolio's investment manager. SBMFM
provides investment advisory and management services to investment companies
affiliated with Smith Barney. SBMFM is a wholly owned subsidiary of Smith Barney
Holdings Inc. ("Holdings"). Holdings is a wholly owned subsidiary of Travelers
Group Inc. ("Travelers"), a diversified financial services holding company
engaged, through its subsidiaries, principally in four business segments:
Investment Services, Consumer Finance Services, Life Insurance Services and
Property & Casualty Insurance Services. See "Management of the Fund."

     EXCHANGE PRIVILEGE Shares of a Class may be exchanged for shares of the
same Class of certain other funds of the Smith Barney Mutual Funds at the
respective net asset values next determined. See "Exchange Privilege."

     VALUATION OF SHARES Net asset value of the Portfolio for the prior day
generally is quoted daily in the financial section of most newspapers and is
also available from a Smith Barney Financial Consultant. See "Valuation of
Shares."

     DIVIDENDS AND DISTRIBUTIONS Dividends from net investment income are paid
monthly. Distributions of net realized capital gains, if any, are paid annually.
See "Dividends, Distributions and Taxes."

     REINVESTMENT OF DIVIDENDS Dividends and distributions paid on shares of a
Class will be reinvested automatically, unless otherwise specified by an
investor, in additional shares of the same Class at current net asset value.
Shares acquired by dividend and distribution reinvestments will not be subject
to any sales charge or CDSC. Class B shares acquired through dividend and
distribution reinvestments will become eligible for conversion to Class A shares
on a pro rata basis. See "Dividends, Distributions and Taxes."

     RISK FACTORS AND SPECIAL CONSIDERATIONS There can be no assurance that the
Portfolio's investment objective will be achieved. The Portfolio's concentration
in Pennsylvania obligations involves certain additional risks that should be
considered carefully by an investor. Additionally, the value of the Portfolio's
investments, and thus the net asset value of the Portfolio's shares, will
fluctuate in response to changes in market and economic conditions, as well as
the financial condition and prospects of issuers of municipal obligations
purchased by the Portfolio. The market value of long-term municipal bonds may be
adversely affected during periods of rising interest rates. Additionally,
changes in Federal income tax laws affecting the tax exemption for interest on
municipal obligations could affect the availability of tax exempt obligations
for purchase and the value of the Portfolio's securities would be affected. See
"Investment Objective and Management Policies."


6
<PAGE>

--------------------------------------------------------------------------------
Prospectus Summary (continued)
--------------------------------------------------------------------------------

     THE PORTFOLIO'S EXPENSES The following expense table lists the costs and
expenses an investor will incur either directly or indirectly as a shareholder
of the Portfolio, based on the maximum sales charge or maximum CDSC that may be
incurred at the time of purchase or redemption and, unless otherwise noted, the
Portfolio's operating expenses for its most recent fiscal year:

<TABLE>
<CAPTION>
Pennsylvania Portfolio                               Class A  Class B  Class C  Class Y
---------------------------------------------------------------------------------------
<S>                                                  <C>      <C>      <C>      <C>  
Shareholder Transaction Expenses
   Maximum sales charge imposed on purchases
     (as a percentage of offering price) ........    4.00%    None     None     None
   Maximum CDSC (as a percentage of original cost
     or redemption proceeds, whichever is lower)     None*    4.50%    1.00%    None

Annual Portfolio Operating Expenses**
(as a percentage of average net assets)
   Management fees (after fee waiver) ...........    0.38%    0.38%    0.38%    0.38%
   12b-1 fees*** ................................    0.15     0.65     0.70       --
   Other expenses ...............................    0.22     0.23     0.24     0.22
                                                     ----     ----     ----     ----
Total Portfolio Operating Expenses ..............    0.75%    1.26%    1.32%    0.60%
                                                     ====     ====     ====     ====
</TABLE>

     * Purchases of Class A shares of $500,000 or more will be made at net asset
value with no sales charge, but will be subject to a CDSC of 1.00% on
redemptions made within 12 months of purchase.
     ** "Management fees" have been restated to reflect the management fee
waiver currently in effect for the Portfolio. Absent the fee waiver, the
management fee would be incurred at the rate of 0.45% of each Class' average
daily net assets for the current fiscal period. Absent the fee waiver, total
expenses would be at the rates of 0.82%, 1.33%, 1.39% and 0.67% for Class A,
Class B, Class C and Class Y shares, respectively. For Class Y shares "Other
expenses" have been estimated because no Class Y shares were outstanding during
the period ended March 31, 1997.
     *** Upon conversion of Class B shares to Class A shares, such shares will
no longer be subject to a distribution fee. Class C shares do not have a
conversion feature and, therefore, are subject to an ongoing distribution fee.
As a result, long-term shareholders of Class C shares may pay more than the
economic equivalent of the maximum front-end sales charge permitted by the
National Association of Securities Dealers, Inc.

     Class A shares of the Portfolio purchased through the Smith Barney AssetOne
Program will be subject to an annual asset-based fee, payable quarterly, in lieu
of the initial sales charge. The fee will vary to a maximum of 1.50%, depending
on the amount of assets held through the Program. For more information, please
call your Smith Barney Financial Consultant.

     The sales charge and CDSC set forth in the above table are the maximum
charges imposed on purchases or redemptions of Portfolio shares and investors
may actually pay lower or no charges, depending on the amount purchased and, in
the 


                                                                               7
<PAGE>

--------------------------------------------------------------------------------
Prospectus Summary (continued)
--------------------------------------------------------------------------------

case of Class B, Class C and certain Class A shares, the length of time the
shares are held. See "Purchase of Shares" and "Redemption of Shares." Smith
Barney receives an annual 12b-1 service fee of 0.15% of the value of average
daily net assets of Class A shares. Smith Barney also receives with respect to
Class B shares an annual 12b-1 fee of 0.65% of the value of average daily net
assets of that Class, consisting of a 0.50% distribution fee and a 0.15% service
fee. With respect to Class C shares, Smith Barney also receives an annual 12b-1
fee of 0.70% of the value of average daily net assets of that Class, consisting
of a 0.55% distribution fee and a 0.15% service fee. "Other expenses" in the
above table include fees for shareholder services, custodial fees, legal and
accounting fees, printing costs and registration fees.

     EXAMPLE

     The following example is intended to assist an investor in understanding
the various costs that an investor in the Portfolio will bear directly or
indirectly. The example assumes payment by the Portfolio of operating expenses
at the levels set forth in the table above. See "Purchase of Shares,"
"Redemption of Shares" and "Management of the Fund."


Pennsylvania Portfolio                       1 Year  3 Years  5 Years  10 Years*
--------------------------------------------------------------------------------
An investor would pay the following expenses 
  on a $1,000 investment, assuming (1) 5.00% 
  annual return and (2) redemption at the end 
  of each time period:
      Class A................................  $47     $63      $80       $129
      Class B................................   58      70       79        138
      Class C................................   23      42       72        159
      Class Y................................    6      19       33         75
                                                                       
An investor would pay the following expenses                           
  on the same investment, assuming the same                            
  annual return and no redemption:                                     
      Class A................................  $47     $63      $80       $129
      Class B................................   13      40       69        138
      Class C................................   13      42       72        159
      Class Y................................    6      19       33         75
--------------------------------------------------------------------------------

     *Ten-year figures assume conversion of Class B shares to Class A shares at
the end of the eighth year following the date of purchase.

     The example also provides a means for the investor to compare expense
levels of funds with different fee structures over varying investment periods.
To facilitate such comparison, all funds are required to utilize a 5.00% annual
return assumption. However, the Portfolio's actual return will vary and may be
greater or less than 5.00%. This example should not be considered a
representation of past or future expenses. Actual expenses may be greater or
less than those shown.


8
<PAGE>

--------------------------------------------------------------------------------
Financial Highlights
--------------------------------------------------------------------------------

     The following information has been audited by KPMG Peat Marwick LLP,
independent auditors, whose report thereon appears in the Fund's annual report
dated March 31, 1997. 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 the Statement of Additional Information. As of March 31, 1997, no Class Y
shares were outstanding and, accordingly, no comparable information is available
at this time for that class. 

For a share of beneficial interest outstanding throughout each year:

<TABLE>
<CAPTION>
                                          Class A Shares                        Class B Shares
                                  -------------------------------      -------------------------------
Pennsylvania Portfolio            1997      1996(1)     1995(2)(3)     1997      1996(1)     1995(4)(5)
===========================================================================================================
<S>                             <C>        <C>         <C>           <C>        <C>         <C>    
Net Asset Value,
  Beginning of Year             $ 12.62    $ 12.40     $ 12.00       $ 12.61    $ 12.39     $ 12.35
-----------------------------------------------------------------------------------------------------------
Income From Operations:
  Net investment income (6)        0.71       0.70        0.67          0.65       0.64        0.51
  Net realized and
  unrealized gain                  0.04       0.29        0.35*         0.03       0.29        0.01*
-----------------------------------------------------------------------------------------------------------
Total Income From Operations       0.75       0.99        1.02          0.68       0.93        0.52
-----------------------------------------------------------------------------------------------------------
Less Distributions From:
  Net investment income           (0.71)     (0.72)      (0.62)        (0.65)     (0.66)      (0.48)
  Net realized gains                            --       (0.05)           --      (0.05)         --
-----------------------------------------------------------------------------------------------------------
Total Distributions               (0.71)     (0.77)      (0.62)        (0.65)     (0.71)      (0.48)
-----------------------------------------------------------------------------------------------------------
Net Asset Value,
  End of Year                   $ 12.66    $ 12.62     $ 12.40       $ 12.64    $ 12.61     $ 12.39
-----------------------------------------------------------------------------------------------------------
Total Return                       6.11%      8.08%       8.82%++       5.56%      7.61%       4.48%++
-----------------------------------------------------------------------------------------------------------
Net Assets,
  End of Year (000s)            $15,152    $11,847     $ 7,974       $15,559    $13,131     $ 4,850
-----------------------------------------------------------------------------------------------------------
Ratios to Average Net Assets:
  Expenses (6)#                    0.37%      0.38%       0.29%+        0.88%      0.88%       0.82%+
  Net investment income            5.66       5.57        5.76+         5.15       5.07        5.31+
-----------------------------------------------------------------------------------------------------------
Portfolio Turnover Rate             122%        88%         38%          122%        88%         38%
===========================================================================================================
</TABLE>

(1)  Per share amounts have been calculated using the monthly average shares
     method rather than the undistributed net investment income method because
     it more accurately reflects the per share data for the period.
(2)  On October 10, 1994, the former Class C shares were exchanged into Class A
     shares.
(3)  For the period from April 4, 1994 (inception date) to March 31, 1995.
(4)  On November 7, 1994, the former Class E shares were renamed Class B shares.
(5)  For the period from June 20, 1994 (inception date) to March 31, 1995.
(6)  The manager has waived all of its fees for the years ended March 31, 1997
     and 1996 and the period ended March 31, 1995. In addition, the Manager
     reimbursed expenses of $23,433 and $32,063 for the year ended March 31,
     1996 and the period ended March 31,1995, respectively. If such fees were
     not waived and expenses not reimbursed, the effect on net investment income
     and expense ratios would have been as follows:

                                                  Expense Ratios
                  Net Investment Income      Without Fee Waivers and/or
                   Per Share Decreases        Expense Reimbursements#
                 ------------------------    ------------------------
                  1997     1996     1995     1997     1996     1995
                  -----    -----    -----    -----    -----    -----
     Class A      $0.06    $0.07    $0.09    0.82%    0.93%    1.03%+
     Class B       0.06     0.07     0.08    1.33     1.44     1.58+

*    Includes the net per share effect of shareholder sales and redemptions
     activity during the period, most of which occurred at a net asset value
     less than the net asset value at the beginning of the period.
#    As a result of voluntary expense limitations, expense ratios would not
     exceed 0.80% and 1.30% for Class A and B shares, respectively.
++   Total return is not annualized, as it may not be representative of the
     total return for the year.
+    Annualized.


                                                                               9
<PAGE>

--------------------------------------------------------------------------------
Financial Highlights (continued)
--------------------------------------------------------------------------------

For a share of beneficial interest outstanding throughout each year:

                                                  Class C Shares
                                    ---------------------------------------
Pennsylvania Portfolio               1997         1996(1)        1995(2)(3)
================================================================================
Net Asset Value, Beginning of Year  $12.61       $12.39         $12.00
--------------------------------------------------------------------------------
Income From Operations:
  Net investment income (4)           0.64         0.64           0.59
  Net realized and unrealized gain    0.04         0.29           0.36*
--------------------------------------------------------------------------------
Total Income From Operations          0.68         0.93           0.95
--------------------------------------------------------------------------------
Less Distributions From:
  Net investment income              (0.65)       (0.66)         (0.56)
  Net realized gains                    --        (0.05)            --
--------------------------------------------------------------------------------
Total Distributions                  (0.65)       (0.71)         (0.56)
--------------------------------------------------------------------------------
Net Asset Value, End of Year        $12.64       $12.61         $12.39
--------------------------------------------------------------------------------
Total Return                          5.51%        7.56%          8.14%++
--------------------------------------------------------------------------------
Net Assets, End of Year (000s)      $5,731       $4,682         $3,337
--------------------------------------------------------------------------------
Ratios to Average Net Assets:
  Expenses (4)#                       0.94%        0.94%          0.86%+
  Net investment income               5.09         5.00           5.04+
--------------------------------------------------------------------------------
Portfolio Turnover Rate                122%          88%            38%
================================================================================

(1)  Per share amounts have been calculated using the monthly average shares
     method rather than the undistributed net investment income method, because
     it more accurately reflects the per share data for the period.
(2)  On November 7, 1994, the former Class B shares were renamed Class C shares.
(3)  For the period from April 5, 1994 (inception date) to March 31, 1995.
(4)  The manager has waived all of its fees for the years ended March 31, 1997
     and 1996 and the period ended March 31, 1995. In addition, the Manager
     reimbursed expenses of $23,433 and $32,063 for the year ended March 31,
     1996 and the period ended March 31,1995, respectively. If such fees were
     not waived and expenses not reimbursed, the effect on net investment income
     and expense ratios would have been as follows:

                                                  Expense Ratios
                  Net Investment Income      Without Fee Waivers and/or
                   Per Share Decreases        Expense Reimbursements#
                 ------------------------    ------------------------
                  1997     1996     1995     1997     1996     1995
                  -----    -----    -----    -----    -----    -----
     Class C      $0.06    $0.07    $0.09    1.39%    1.49%    1.56%+

*    Includes the net per share effect of shareholder sales and redemptions
     activity during the period, most of which occurred at a net asset value
     less than the net asset value at the beginning of the period.
#    As a result of voluntary expense limitations, expense ratios would not
     exceed 1.35% for Class C shares.
++   Total return is not annualized, as it may not be representative of the
     total return for the year.
+    Annualized.


10
<PAGE>

--------------------------------------------------------------------------------
Investment Objective and Management Policies
--------------------------------------------------------------------------------

     The Portfolio seeks as high a level of income exempt from Federal income
taxes and from the personal income taxes of the Commonwealth of Pennsylvania, as
is consistent with prudent investing. The Portfolio will invest primarily in
obligations of the Commonwealth of Pennsylvania and its political subdivisions,
agencies and instrumentalities, the interest from which is, in the opinion of
bond counsel for the various issuers, exempt from the state's as well as Federal
income taxes at the time of their issuance. (For certain shareholders, a portion
of the Portfolio's income may be subject to the alternative minimum tax ("AMT")
on tax-exempt income discussed below.) Such obligations are issued to raise
money for a variety of public projects that enhance the quality of life
including health facilities, housing, airports, schools, highways and bridges.
The Portfolio invests its assets in securities of ranging maturities, without
limitation, depending on market conditions. Typically, the remaining maturity of
municipal bonds will range between 5 and 30 years.

     The two principal classifications of municipal obligations are "general
obligation" and "revenue". General obligations are secured by a municipal
issuer's pledge of its full faith, credit, and taxing power for the payment of
principal and interest. Revenue obligations are payable only from the revenues
derived from a particular facility or class of facilities or, in some cases from
the proceeds of a special excise tax or other specific revenue source. Please
see the Statement of Additional Information for a more detailed discussion about
the different types of municipal obligations.

     Under the Tax Reform Act of 1986, interest income from municipal
obligations issued to finance certain "private activities" ("AMT-Subject Bonds")
becomes an item of "tax preference" which is subject to the AMT when received by
a person in a tax year during which he is subject to that tax. Such private
activity bonds include bonds issued to finance such projects as certain solid
waste disposal facilities, student loan programs, and water and sewage projects.
Because interest income on AMT-Subject Bonds is taxable to certain investors, it
is expected, although there can be no guarantee, that such municipal obligations
generally will provide somewhat higher yields than other municipal obligations
of comparable quality and maturity. There is no limitation on the percent or
amount of the Portfolio's assets that may be invested in AMT-Subject Bonds.

     Municipal bonds purchased for the Portfolio must, at the time of purchase,
be investment grade municipal bonds and at least two-thirds of the Portfolio's
municipal bonds must be rated in the category of A or better. Investment grade
bonds are those rated Aaa, Aa, A and Baa by Moody's Investors Service, Inc.
("Moody's") and AAA, AA, A and BBB by Standard & Poor's Ratings Group ("S&P") or
have an equivalent rating by any nationally recognized statistical rating
organization; pre-refunded bonds escrowed by U.S. Treasury obligations will be
considered AAA rated even though the issuer does not obtain a new rating. Up to


                                                                              11
<PAGE>

--------------------------------------------------------------------------------
Investment Objective and Management Policies (continued)
--------------------------------------------------------------------------------

one-third of the assets of the Portfolio may be invested in municipal bonds
rated Baa or BBB (this grade, while regarded as having an adequate capacity to
pay interest and repay principal, is considered to be of medium quality and has
speculative characteristics) or in unrated municipal bonds if, based upon credit
analysis by the Manager, it is believed that such securities are at least of
comparable quality to those securities in which the Portfolio may invest. In
determining the suitability of an investment in an unrated municipal bond, the
Manager will take into consideration debt service coverage, the purpose of the
financing, history of the issuer, existence of other rated securities of the
issuer and other general conditions as may be relevant, including comparability
to other issues. After the Portfolio purchases a municipal bond, the issue may
cease to be rated or its rating may be reduced below the minimum required for
purchase. Such an event would not require the elimination of the issue from the
Portfolio but the Manager will consider such an event in determining whether the
Portfolio should continue to hold the security.

     The Portfolio's short-term municipal obligations will be limited to high
grade obligations (obligations that are secured by U.S. Government Securities or
are rated MIG 1 or MIG 2, VMIG 1 or VMIG 2 or Prime-1 or Aa or better by Moody's
or SP-1+, SP-1, SP-2, or A-1 or AA or better by S&P or have an equivalent rating
by any nationally recognized statistical rating organization or obligations
determined by the Manager to be equivalent). Among the types of short-term
instruments in which the Portfolio may invest are floating or variable rate
demand instruments, tax-exempt commercial paper (generally having a maturity of
less than nine months), and other types of notes generally having maturities of
less than three years, such as Tax Anticipation Notes, Revenue Anticipation
Notes, Tax and Revenue Anticipation Notes and Bond Anticipation Notes. Demand
instruments usually have an indicated maturity of over one year, but contain a
demand feature that enables the holder to redeem the investment on no more than
30 days' notice; variable rate demand instruments provide for automatic
establishment of a new interest rate on set dates; floating rate demand
instruments provide for automatic adjustment of their interest rates whenever
some other specified interest rate changes (e.g., the prime rate). The Portfolio
may purchase participation interests in variable rate tax-exempt securities
(such as Industrial Development Bonds) owned by banks. Participations are
frequently backed by an irrevocable letter of credit or guarantee of a bank that
the Manager has determined meets the prescribed quality standards for the
Portfolio. Participation interests will be purchased only if management believes
interest income on such interests will be tax-exempt when distributed as
dividends to shareholders.

     The Portfolio will not invest more than 15% of the value of its net assets
in illiquid securities, including those that are not readily marketable or for
which there is no established market.


12
<PAGE>

--------------------------------------------------------------------------------
Investment Objective and Management Policies (continued)
--------------------------------------------------------------------------------

     The Portfolio may purchase new issues of municipal obligations on a
when-issued basis, i.e. delivery and payment normally take place 15 to 45 days
after the purchase date. The payment obligation and the interest rate to be
received are each fixed on the purchase date, although no interest accrues with
respect to a when-issued security prior to its stated delivery date. During the
period between purchase and settlement, assets consisting of cash or liquid high
grade debt securities, marked-to-market daily, of a dollar amount sufficient to
make payment at settlement will be segregated at the custodian bank. Interest
rates at settlement may be lower or higher than on the purchase date, which
would result in appreciation or depreciation, respectively. Although a Portfolio
will only purchase a municipal obligation on a when-issued basis with the
intention of actually acquiring the securities, the Portfolio may sell these
securities before the settlement date if it is deemed advisable.

     Portfolio transactions will be undertaken primarily to accomplish the
Portfolio's objective in relation to anticipated movements in the general level
of interest rates, but the Portfolio may also engage in short-term trading
consistent with its objective.

     The Portfolio may invest in zero coupon bonds. A zero coupon bond pays no
interest in cash to its holder during its life, although interest is accrued
during that period. Its value to an investor consists of the difference between
its face value at the time of maturity and the price for which it was acquired,
which is generally an amount significantly less than its face value (sometimes
referred to as a "deep discount" price). Because such securities usually trade
at a deep discount, they will be subject to greater fluctuations of market value
in response to changing interest rates than debt obligations of comparable
maturities which make periodic distributions of interest. On the other hand,
because there are no periodic interest payments to be reinvested prior to
maturity, zero coupon securities eliminate the reinvestment risk and lock in a
rate of return to maturity.

     The Portfolio may invest in municipal bond index futures contracts
(currently traded on the Chicago Board of Trade) or in listed contracts based on
U.S. Government securities as a hedging policy in pursuit of its investment
objective; provided that immediately thereafter not more than 33 1/3% of its net
assets would be hedged or the amount of margin deposits on the Portfolio's
existing futures contracts would not exceed 5% of the value of its total assets.
Since any income would be taxable, it is anticipated that such investments will
be made only in those circumstances when the Manager anticipates the possibility
of an extreme change in interest rates or market conditions but does not wish to
liquidate the Portfolio's securities. A further discussion of futures contracts
and their associated risks is contained in the Statement of Additional
Information.

     It is a fundamental policy that under normal market conditions, the
Portfolio will seek to invest 100% of its assets - and the Portfolio will invest
not less than 80% of its 


                                                                              13
<PAGE>

--------------------------------------------------------------------------------
Investment Objective and Management Policies (continued)
--------------------------------------------------------------------------------

assets - in municipal obligations the interest on which is exempt from Federal
income taxes (other than the alternative minimum tax). It is also a fundamental
policy that under normal market conditions, the Portfolio will invest at least
65% of its assets in municipal obligations the interest on which is also exempt
from the personal income taxes of the Commonwealth of Pennsylvania in the
opinion of bond counsel to the issuers. The Portfolio may invest up to 20% of
its assets in taxable fixed-income securities, but only in obligations issued or
guaranteed by the full faith and credit of the United States, and may invest
more than 20% of its assets in U.S. Government securities during periods when in
the Manager's opinion a temporary defensive posture is warranted, including any
period when the Portfolio's monies available for investment exceed the municipal
obligations available for purchase that meet the Portfolio's rating, maturity
and other investment criteria. To the extent the Portfolio is so invested, the
investment objective may not be achieved.

     RISK AND INVESTMENT CONSIDERATIONS

     Investors should realize that risk of loss is inherent in the ownership of
any securities and that the Portfolio's net asset value will fluctuate,
reflecting fluctuations in the market value of its portfolio positions. In
addition, the ability of the Portfolio to achieve its investment objective is
dependent on a number of factors, including the skills of the Manager in
purchasing municipal obligations whose issuers have the continuing ability to
meet their obligations for the payment of interest and principal when due. The
ability to achieve a high level of income is dependent on the yields of the
securities in the portfolio. Yields on municipal obligations are the product of
a variety of factors, including the general conditions of the municipal bond
markets, the size of a particular offering, the maturity of the obligation and
the rating of the issue. In general, the longer the maturity of a municipal
obligation, the higher the rate of interest it pays. However, a longer average
maturity is generally associated with a higher level of volatility in the market
value of a municipal obligation. During periods of falling interest rates, the
values of long-term, municipal obligations generally rise. Conversely, during
periods of rising interest rates, the values of such securities generally
decline. Changes in the value of portfolio securities will not affect interest
income derived from those securities but will affect the Portfolio's net asset
value. Since the Portfolio's objective is to provide high current income, it
will invest in municipal obligations with an emphasis on income rather than
stability of net asset value.

     The Fund is registered as a "non-diversified" company under the Investment
Company Act of 1940 ( the "1940 Act"), in order for the Portfolio to have the
ability to invest more than 5% of its assets in the securities of any issuer.
The Portfolio intends to comply with Subchapter M of the Internal Revenue Code
(the "Code") that limits the aggregate value of all holdings (except U.S.
Government and cash items, as defined in the Code) that exceed 5% of the
Portfolio's total assets to an aggregate 


14
<PAGE>

--------------------------------------------------------------------------------
Investment Objective and Management Policies (continued)
--------------------------------------------------------------------------------

amount of 50% of such assets. Also, holdings of a single issuer (with the same
exceptions) may not exceed 25% of the Portfolio's total assets. These limits are
measured at the end of each quarter. Under the Subchapter M limits,
"non-diversification" allows up to 50% of the Portfolio's total assets to be
invested in as few as two single issuers. In the event of decline of
creditworthiness or default upon the obligations of one or more such issuers
exceeding 5%, an investment in the Portfolio will entail greater risk than in a
portfolio having a policy of "diversification" because a high percentage of the
Portfolio's assets may be invested in municipal obligations of one or two
issuers. Furthermore, a high percentage of investments among few issuers may
result in a greater degree of fluctuation in the market value of the assets of
the Portfolio, and consequently a greater degree of fluctuation of the
Portfolio's net asset value, because the Portfolio will be more susceptible to
economic, political, or regulatory developments affecting these securities than
would be the case with a portfolio composed of varied obligations of more
issuers.

     RISK FACTORS AFFECTING PENNSYLVANIA

     Potential purchasers of shares of the Portfolio should consider the fact
that the Portfolio consists primarily of securities issued by the Commonwealth
of Pennsylvania (the "Commonwealth"), its municipalities and authorities and
should realize the substantial risks associated with an investment in such
securities. Although the General Fund of the Commonwealth (the principal
operating fund of the Commonwealth) experienced deficits in fiscal 1990 and
1991, tax increases and spending decreases helped return the General Fund
balance to a surplus in 1992 and 1993. Financial performance continued to
improve during the 1993 and 1994 fiscal years. An unreserved-undesignated fund
balance of $334.7 million was recorded for fiscal 1994 year end. Fiscal 1995 was
the fourth consecutive fiscal year the Commonwealth reported an increase in the
fiscal year-end unappropriated balance. The fiscal 1995 closing unappropriated
surplus was $540 million, an increase of $204.2 million over the fiscal 1994
closing unappropriated surplus prior to transfers.

     Pennsylvania's economy historically has been dependent upon heavy industry,
but has diversified recently into various services, particularly into medical
and health services, education and financial services. Agricultural industries
continue to be an important part of the economy, including not only the
production of diversified food and livestock products, but substantial economic
activity in agribusiness and food-related industries. Service industries
currently employ the greatest share of non-agricultural workers, followed by the
categories of trade and manufacturing. Future economic difficulties in any of
these industries could have an adverse impact on the finances of the
Commonwealth or its municipalities, and could adversely affect the market value
of the municipal obligations in the Portfolio or the ability of the respective
obligors to make payments of interest and principal due on such municipal
obligations.


                                                                              15
<PAGE>

--------------------------------------------------------------------------------
Investment Objective and Management Policies (continued)
--------------------------------------------------------------------------------

     Additional information regarding the Commonwealth is included in the
Statement of Additional Information.

     PORTFOLIO TRANSACTIONS AND TURNOVER

     The Portfolio securities ordinarily are purchased from and sold to parties
acting as either principal or agent. Newly issued securities ordinarily are
purchased directly from the issuer or from an underwriter; other purchases and
sales usually are placed with those dealers from which it appears that the best
price or execution will be obtained. Usually no brokerage commissions, as such,
are paid by the Portfolio for purchases and sales undertaken through principal
transactions, although the price paid usually includes an undisclosed
compensation to the dealer as agent.

     The Portfolio cannot accurately predict its portfolio turnover rate, but
anticipates that the annual turnover will not exceed 100%. An annual turnover
rate of 100% would occur when all of the securities held by the Portfolio are
replaced one time during a period of one year. The Manager will not consider
turnover rate a limiting factor in making investment decisions consistent with
the investment objective and policies of the Portfolio. See "Financial
Highlights" for the Portfolio's annual turnover rate during each year since
inception.

--------------------------------------------------------------------------------
Valuation of Shares
--------------------------------------------------------------------------------

     The Portfolio's net asset value per share is determined as of the close of
regular trading on the NYSE, which is currently 4:00 P.M. New York City time on
each day that the NYSE is open, by dividing the Portfolio's net assets
attributable to each Class by the total number of shares of the Class
outstanding.

     When, in the judgment of the pricing service, quoted bid prices for
investments are readily available and are representative of the bid side of the
market, these investments are valued at the mean between the quoted bid and
asked prices. Investments for which, in the judgment of the pricing service,
there is no readily obtainable market quotation (which may constitute a majority
of the portfolio securities) are carried at fair value of securities of similar
type, yield and maturity. Pricing services generally determine value by
reference to transactions in municipal obligations, quotations from municipal
bond dealers, market transactions in comparable securities and various
relationships between securities. Short-term instruments maturing within 60 days
will be valued at cost plus (minus) amortized discount (premium), if any, when
the Trustees have determined that amortized cost equals fair value. Securities
and other assets that are not priced by a pricing service and for which market
quotations are not available will be valued in good faith at fair value by or
under the direction of the Trustees.


16
<PAGE>

--------------------------------------------------------------------------------
Dividends, Distributions And Taxes
--------------------------------------------------------------------------------

     DIVIDENDS AND DISTRIBUTIONS

     Dividends from the Portfolio's net investment income are
declared and paid monthly and any realized capital gain are declared and
distributed annually.

     If a shareholder does not otherwise instruct, dividends and capital gain
distributions will be reinvested automatically in additional shares of the same
Class at net asset value, subject to no sales charge or CDSC.

     Income dividends and capital gains distributions that are invested are
credited to shareholders' accounts in additional shares at the net asset value
as of the close of business on the payment date. A shareholder may change the
option at any time by notifying his or her Smith Barney Financial Consultant.
Accounts held directly by the Fund's transfer agent, First Data Investor
Services Group, Inc. ("First Data") should notify First Data in writing at least
five business days prior to the payment date to permit the change to be entered
in the shareholder's account.

     The per share dividends on Class B and Class C shares of the Portfolio may
be lower than the per share dividends on Class A and Class Y shares principally
as a result of the distribution fee applicable with respect to Class B and Class
C shares. The per share dividends on Class A shares of the Portfolio may be
lower than the per share dividends on Class Y shares principally as a result of
the service fee applicable to Class A shares. Distributions of capital gains, if
any, will be in the same amount for Class A, Class B, Class C and Class Y
shares.

     The Portfolio intends to qualify as a "regulated investment company" and to
meet the requirements for distributing "exempt-interest dividends" under the
Internal Revenue Code (the "Code") so that no Federal income taxes will be
payable by the Portfolio and dividends representing net interest received on
municipal obligations will not be includable by shareholders in their gross
income for Federal income tax purposes. To the extent dividends are derived from
taxable income from temporary investments, market discounts or from the excess
of net short-term capital gain over net long-term capital loss, they are treated
as ordinary income whether the shareholder has elected to receive them in cash
or in additional shares. Capital gains distributions, if any, whether paid in
cash or invested in shares of the Portfolio, will be taxable to shareholders.

     Exempt-interest dividends allocable to interest received by the Portfolio
from the AMT-Subject Bonds in which the Portfolio may invest will be treated as
interest paid directly on such obligations and will give rise to an "item of tax
preference" that will increase a shareholder's alternative minimum taxable
income. In addition, for corporations, alternative minimum taxable income will
be increased by a percentage of the amount by which a special measure of income
(including exempt-interest dividends) exceeds the amount otherwise determined to
be alternative minimum taxable income. Accordingly, investment in the Portfolio
may cause 


                                                                              17
<PAGE>

--------------------------------------------------------------------------------
Dividends, Distributions and Taxes (continued)
--------------------------------------------------------------------------------

shareholders to be subject to (or result in an increased liability under) the
AMT. The Fund will annually furnish to its shareholders a report indicating the
ratable portion of exempt-interest dividends attributable to AMT-Subject Bonds.

     The Portfolio will be treated as a separate regulated investment company
for Federal tax purposes. Accordingly, the Portfolio's net investment income is
determined separately based on the income earned on its securities less its
costs of operations. The Portfolio's net long-term and short-term gain (loss)
realized on investments is determined after offsetting any capital loss
carryover of the Portfolio from prior periods.

     Under the Code, interest on indebtedness incurred or continued to purchase
or carry shares of the Portfolio will not be deductible to the extent that the
Portfolio's distributions are exempt from Federal income tax. In addition, any
loss realized upon the redemption of shares held less than 6 months will be
disallowed to the extent of any exempt-interest dividends received by the
shareholder during such period. Further, persons who may be "substantial users"
(or "related persons" of substantial users) of facilities financed by industrial
development bonds should consult their tax advisors concerning an investment in
the Portfolio.

     PENNSYLVANIA TAXES

     Dividends distributed by the Pennsylvania Portfolio will not be subject to
the Pennsylvania personal income tax, the corporate net income tax or to the
Philadelphia school district investment income tax to the extent that the
dividends are attributable to interest received by the Portfolio from its
investments in Pennsylvania municipal obligations and U.S. Government
obligations, including obligations issued by U.S. possessions. Dividends or
distributions by the Portfolio to a Pennsylvania resident that are attributable
to most other sources may be subject to the Pennsylvania personal income tax,
the corporate net income tax and (for residents of Philadelphia) to the
Philadelphia school district investment income tax. Shares of the Portfolio will
be exempt from Pennsylvania county personal property taxes and (as to residents
of Pittsburgh) from personal property taxes imposed by the City of Pittsburgh
and the School District of Pittsburgh to the extent that the Portfolio consists
of Pennsylvania municipal obligations and U.S. Government obligations, including
obligations issued by U.S. possessions.

     Investors purchasing municipal obligations of their state of residence, or
a fund comprised of such obligations, should recognize that the benefits of the
exemption from local taxes, in addition to the exemption from Federal taxes,
necessarily limits the fund's ability to diversify geographically. Each
Portfolio will make available annually to its shareholders information
concerning the tax status of its distributions, including the amount of its
dividends designated as exempt-interest dividends and as capital gain dividends.


18
<PAGE>

--------------------------------------------------------------------------------
Dividends, Distributions and Taxes (continued)
--------------------------------------------------------------------------------

     The foregoing is only a brief summary of some of the important tax
considerations generally affecting each Portfolio and its shareholders.
Additional tax information of relevance to particular investors is contained in
the Statement of Additional Information. Investors are urged to consult their
tax advisors with specific reference to their own tax situation.

--------------------------------------------------------------------------------
Purchase of Shares
--------------------------------------------------------------------------------

     GENERAL

     The Portfolio offers four Classes of shares. Class A shares are sold to
investors with an initial sales charge and Class B and Class C shares are sold
without an initial sales charge but are subject to a CDSC payable upon certain
redemptions. Class Y shares are sold without an initial sales charge or CDSC and
are available only to investors investing a minimum of $5,000,000 (except for
purchases of Class Y shares by Smith Barney Concert Allocation Series Inc., for
which there is no minimum purchase amount). See "Prospectus Summary -
Alternative Purchase Arrangements" for a discussion of factors to consider in
selecting which Class of shares to purchase.

     Purchases of Portfolio shares must be made through a brokerage account
maintained with Smith Barney, an Introducing Broker or an investment dealer in
the selling group. In addition, certain investors, including certain
institutional investors, may purchase shares directly from the Fund through
First Data. When purchasing shares of the Portfolio, investors must specify
whether the purchase is for Class A, Class B, Class C or Class Y shares. Smith
Barney and other broker/dealers may charge their customers an annual account
maintenance fee in connection with a brokerage account through which an investor
purchases or holds shares. Accounts held directly at First Data are not subject
to a maintenance fee.

     Investors in Class A, Class B and Class C shares may open an account by
making an initial investment of at least $1,000 for each account. Investors in
Class Y shares may open an account by making an initial investment of
$5,000,000. Subsequent investments of at least $50 may be made for all Classes.
For shareholders purchasing shares of the Portfolio through the Systematic
Investment Plan on a monthly basis, the minimum initial investment requirement
for Class A, Class B and Class C shares and the subsequent investment
requirement for all Classes is $25. For shareholders purchasing shares of the
Portfolio through the Systematic Investment Plan on a quarterly basis, the
minimum initial investment requirement for Class A, Class B and Class C shares
and the subsequent investment requirement for all Classes is $50. The minimum
initial investment requirement in the Portfolio for an account established under
the Uniform Gift to Minors Act is $250 and the subsequent investment requirement
is $50. There are no minimum 


                                                                              19
<PAGE>

--------------------------------------------------------------------------------
Purchase of Shares (continued)
--------------------------------------------------------------------------------

investment requirements in Class A shares for employees of Travelers and its
subsidiaries, including Smith Barney, Directors or Trustees of any of the Smith
Barney Mutual Funds, and their spouses and children. The Fund reserves the right
to waive or change minimums, to decline any order to purchase its shares and to
suspend the offering of shares from time to time. Shares purchased will be held
in the shareholder's account by the Fund's transfer agent, First Data. Share
certificates are issued only upon a shareholder's written request to First Data.
It is not recommended that the Portfolio be used as a vehicle for Keogh, IRA or
other qualified plans.

     Purchase orders received by the Fund or Smith Barney prior to the close of
regular trading on the NYSE, on any day the Portfolio calculates its net asset
value, are priced according to the net asset value determined on that day (the
"trade date"). Orders received by dealers or Introducing Brokers prior to the
close of regular trading on the NYSE on any day the Portfolio calculates its net
asset value, are priced according to the net asset value determined on that day,
provided the order is received by the Fund or Smith Barney prior to Smith
Barney's close of business. For shares purchased through Smith Barney or
Introducing Brokers purchasing through Smith Barney, payment for Portfolio
shares is due on the third business day (the "settlement date") after the trade
date. In all other cases, payment must be made with the purchase order.

     SYSTEMATIC INVESTMENT PLAN

     Shareholders may make additions to their accounts at any time by purchasing
shares through a service known as the Systematic Investment Plan. Under the
Systematic Investment Plan, Smith Barney or First Data is authorized through
preauthorized transfers of at least $25 on a monthly basis or at least $50 on a
quarterly basis to charge the regular bank account or other financial
institution indicated by the shareholder to provide systematic additions to the
shareholder's Portfolio account. A shareholder who has insufficient funds to
complete the transfer will be charged a fee of up to $25 by Smith Barney or
First Data. The Systematic Investment Plan also authorizes Smith Barney to apply
cash held in the shareholder's Smith Barney brokerage account or redeem the
shareholder's shares of a Smith Barney money market fund to make additions to
the account. Additional information is available from the Fund or a Smith Barney
Financial Consultant.

     INITIAL SALES CHARGE ALTERNATIVE - CLASS A SHARES

     The sales charges applicable to purchases of Class A shares of the
Portfolio are as follows:


20
<PAGE>

--------------------------------------------------------------------------------
Purchase of Shares (continued)
--------------------------------------------------------------------------------

================================================================================
                                          Sales Charge                Dealers'
                                 -------------------------------    Reallowance
                                      % of            % of            as % of
  Amount of Investment           Offering Price  Amount Invested  Offering Price
--------------------------------------------------------------------------------
  Less than      $25,000              4.00%           4.17%            3.60%
  $  25,000  --   49,999              3.50            3.63             3.15
     50,000  --   99,999              3.00            3.09             2.70
    100,000  --  249,999              2.50            2.56             2.25
    250,000  --  499,999              1.50            1.52             1.35
    500,000     and over                *               *                *
================================================================================

     * Purchases of Class A shares of $500,000 or more will be made at net asset
value without any initial sales charge, but will be subject to a CDSC of 1.00%
on redemptions made within 12 months of purchase. The CDSC on Class A shares is
payable to Smith Barney, which compensates Smith Barney Financial Consultants
and other dealers whose clients make purchases of $500,000 or more. The CDSC is
waived in the same circumstances in which the CDSC applicable to Class B and
Class C shares is waived. See "Deferred Sales Charge Alternatives" and "Waivers
of CDSC."

     Members of the selling group may receive up to 90% of the sales charge and
may be deemed to be underwriters of the Fund as defined in the Securities Act of
1933, as amended.

     The reduced sales charges shown above apply to the aggregate of purchases
of Class A shares of the Portfolio made at one time by "any person," which
includes an individual and his or her immediate family, or a trustee or other
fiduciary of a single trust estate or single fiduciary account.

     INITIAL SALES CHARGE WAIVERS

     Purchases of Class A shares may be made at net asset value without a sales
charge in the following circumstances: (a) sales to (i) Board members and
employees of Travelers and its subsidiaries and any of the Smith Barney Mutual
Funds (including retired Board Members and employees); the immediate families of
such persons (including the surviving spouse of a deceased Board Member or
employee); and to a pension, profit-sharing or other benefit plan for such
persons and (ii) employees of members of the National Association of Securities
Dealers, Inc., provided such sales are made upon the assurance of the purchaser
that the purchase is made for investment purposes and that the securities will
not be resold except through redemption or repurchase; (b) offers of Class A
shares to any other investment company to effect the combination of such company
with the Portfolio by merger, acquisition of assets or otherwise; (c) purchases
of Class A shares by any client of a newly employed Smith Barney Financial
Consultant (for a period up to 90 days from the commencement of the Financial
Consultant's employment with Smith Barney), on the condition the purchase of
Class A shares is made with the proceeds of the redemption of shares of a mutual
fund which (i) was sponsored by 


                                                                              21
<PAGE>

--------------------------------------------------------------------------------
Purchase of Shares (continued)
--------------------------------------------------------------------------------

the Financial Consultant's prior employer, (ii) was sold to the client by the
Financial Consultant and (iii) was subject to a sales charge; (d) purchases by
shareholders who have redeemed Class A shares in the Portfolio (or Class A
shares of another fund of the Smith Barney Mutual Funds that are sold with a
sales charge) and who wish to reinvest their redemption proceeds in the
Portfolio, provided the reinvestment is made within 60 calendar days of the
redemption; (e) purchases by accounts managed by registered investment advisory
subsidiaries of Travelers; (f) investments of distributions from a UIT
sponsored by Smith Barney and (g) purchases by investors participating in a
Smith Barney fee-based arrangement. In order to obtain such discounts, the
purchaser must provide sufficient information at the time of purchase to permit
verification that the purchase would qualify for the elimination of the sales
charge.

     RIGHT OF ACCUMULATION

     Class A shares of a Portfolio may be purchased by "any person" (as defined
above) at a reduced sales charge or at net asset value determined by aggregating
the dollar amount of the new purchase and the total net asset value of all Class
A shares of the Portfolio and of funds sponsored by Smith Barney which are
offered with a sales charge, listed under "Exchange Privilege" then held by such
person and applying the sales charge applicable to such aggregate. In order to
obtain such discount, the purchaser must provide sufficient information at the
time of purchase to permit verification that the purchase qualifies for the
reduced sales charge. The right of accumulation is subject to modification or
discontinuance at any time with respect to all shares purchased thereafter.

     GROUP PURCHASES

     Upon completion of certain automated systems, a reduced sales charge or
purchase at net asset value will also be available to employees (and partners)
of the same employer purchasing as a group, provided each participant makes the
minimum initial investment required. The sales charge applicable to purchases by
each member of such a group will be determined by the table set forth above
under "Initial Sales Charge Alternative -- Class A Shares," and will be based
upon the aggregate sales of Class A shares of Smith Barney Mutual Funds offered
with a sales charge to, and share holdings of, all members of the group. To be
eligible for such reduced sales charges or to purchase at net asset value, all
purchases must be pursuant to an employer- or partnership-sanctioned plan
meeting certain requirements. One such requirement is that the plan must be open
to specified partners or employees of the employer and its subsidiaries, if any.
Such plan may, but is not required to, provide for payroll deductions. Smith
Barney may also offer a reduced sales charge or net asset value purchase for
aggregating related fiduciary accounts under such conditions that Smith Barney
will realize economies of sales efforts and sales related expenses. An
individual who is a 


22
<PAGE>

--------------------------------------------------------------------------------
Purchase of Shares (continued)
--------------------------------------------------------------------------------

member of a qualified group may also purchase Class A shares at the reduced
sales charge applicable to the group as a whole. The sales charge is based upon
the aggregate dollar value of Class A shares offered with a sales charge that
have been previously purchased and are still owned by the group, plus the amount
of the current purchase. A "qualified group" is one which (a) has been in
existence for more than six months, (b) has a purpose other than acquiring
Portfolio shares at a discount and (c) satisfies uniform criteria which enable
Smith Barney to realize economies of scale in its costs of distributing shares.
A qualified group must have more than 10 members, must be available to arrange
for group meetings between representatives of the Portfolio and the members, and
must agree to include sales and other materials related to the Portfolio in its
publications and mailings to members at no cost to Smith Barney. In order to
obtain such reduced sales charge or to purchase at net asset value, the
purchaser must provide sufficient information at the time of purchase to permit
verification that the purchase qualifies for the reduced sales charge. Approval
of group purchase reduced sales charge plans is subject to the discretion of
Smith Barney.

     LETTER OF INTENT

     Class A Shares. A Letter of Intent for amounts of $50,000 or more provides
an opportunity for an investor to obtain a reduced sales charge by aggregating
investments over a 13 month period, provided that the investor refers to such
Letter when placing orders. For purposes of a Letter of Intent, the "Amount of
Investment" as referred to in the preceding sales charge table includes
purchases of all Class A shares of the Portfolio and other funds of the Smith
Barney Mutual Funds offered with a sales charge over the 13 month period based
on the total amount of intended purchases plus the value of all Class A shares
previously purchased and still owned. An alternative is to compute the 13 month
period starting up to 90 days before the date of execution of a Letter of
Intent. Each investment made during the period receives the reduced sales charge
applicable to the total amount of the investment goal. If the goal is not
achieved within the period, the investor must pay the difference between the
sales charges applicable to the purchases made and the charges previously paid,
or an appropriate number of escrowed shares will be redeemed. Please contact a
Smith Barney Financial Consultant or First Data to obtain a Letter of Intent
application.

     Class Y Shares. A Letter of Intent may also be used as a way for investors
to meet the minimum investment requirement for Class Y shares. Such investors
must make an initial minimum purchase of $1,000,000 in Class Y shares of the
Portfolio and agree to purchase a total of $5,000,000 of Class Y shares of the
same Portfolio within six months from the date of the Letter. If a total
investment of $5,000,000 is not made within the six-month period, all Class Y
shares purchased to date will be transferred to Class A shares, where they will
be subject to all fees (including a 


                                                                              23
<PAGE>

--------------------------------------------------------------------------------
Purchase of Shares (continued)
--------------------------------------------------------------------------------

service fee of 0.15%) and expenses applicable to the Portfolio's Class A shares,
which may include a CDSC of 1.00%. Please contact a Smith Barney Financial
Consultant or First Data for further information.

     DEFERRED SALES CHARGE ALTERNATIVES

     "CDSC Shares" are sold at net asset value next determined without an
initial sales charge so that the full amount of an investor's purchase payment
may be immediately invested in the Portfolio. A CDSC, however, may be imposed on
certain redemptions of these shares. "CDSC Shares" are: (a) Class B shares; (b)
Class C shares; and (c) Class A shares that were purchased without an initial
sales charge but subject to a CDSC.

     Any applicable CDSC will be assessed on an amount equal to the lesser of
the original cost of the shares being redeemed or their net asset value at the
time of redemption. CDSC Shares that are redeemed will not be subject to a CDSC
to the extent that the value of such shares represents: (a) capital appreciation
of Portfolio assets; (b) reinvestment of dividends or capital gain
distributions; (c) with respect to Class B shares, shares redeemed more than
five years after their purchase; or (d) with respect to Class C shares and Class
A shares that are CDSC Shares, shares redeemed more than 12 months after their
purchase.

     Class C shares and Class A shares that are CDSC Shares are subject to a
1.00% CDSC if redeemed within 12 months of purchase. In circumstances in which
the CDSC is imposed on Class B shares, the amount of the charge will depend on
the number of years since the shareholder made the purchase payment from which
the amount is being redeemed. Solely for purposes of determining the number of
years since a purchase payment, all purchase payments made during a month will
be aggregated and deemed to have been made on the last day of the preceding
Smith Barney statement month. The following table sets forth the rates of the
charge for redemptions of Class B shares by shareholders:

         Year Since Purchase
         Payment Was Made                           CDSC
         -------------------------------------------------
         First                                      4.50%
         Second                                     4.00
         Third                                      3.00
         Fourth                                     2.00
         Fifth                                      1.00
         Sixth and thereafter                       0.00
         -------------------------------------------------

     Class B shares will convert automatically to Class A shares eight years
after the date on which they were purchased and thereafter will no longer be
subject to any distribution fees. There will be converted at that time such
proportion of his or her Class B Dividend Shares owned by the shareholder as the
total number of his 


24
<PAGE>

--------------------------------------------------------------------------------
Purchase of Shares (continued)
--------------------------------------------------------------------------------

or her Class B shares converting at the time bears to the total number of
outstanding Class B shares (other than Class B Dividend Shares) owned by the
shareholder. See "Prospectus Summary -- Alternative Purchase Arrangements --
Class B Shares Conversion Feature."

     In determining the applicability of any CDSC, it will be assumed that a
redemption is made first of shares representing capital appreciation, next of
shares representing the reinvestment of dividends and capital gain distributions
and finally of other shares held by the shareholder for the longest period of
time. The length of time that CDSC Shares acquired through an exchange have been
held will be calculated from the date that the shares exchanged were initially
acquired in one of the other Smith Barney Mutual Funds, and Portfolio shares
being redeemed will be considered to represent, as applicable, capital
appreciation or dividend and capital gain distribution reinvestments in such
other funds. For Federal income tax purposes, the amount of the CDSC will reduce
the gain or increase the loss, as the case may be, on the amount realized on
redemption. The amount of any CDSC will be paid to Smith Barney.

     To provide an example, assume an investor purchased 100 Class B shares at
$10 per share for a cost of $1,000. Subsequently, the investor acquired 5
additional shares through dividend reinvestment. During the fifteenth month
after the purchase, the investor decided to redeem $500 of his or her
investment. Assuming at the time of the redemption the net asset value had
appreciated to $12 per share, the value of the investor's shares would be $1,260
(105 shares at $12 per share). The CDSC would not be applied to the amount which
represents appreciation ($200) and the value of the reinvested dividend shares
($60). Therefore, $240 of the $500 redemption proceeds ($500 minus $260) would
be charged at a rate of 4.00% (the applicable rate for Class B shares) for a
total deferred sales charge of $9.60.

     WAIVERS OF CDSC

     The CDSC will be waived on: (a) exchanges (see "Exchange Privilege"); (b)
automatic cash withdrawals in amounts equal to or less than 1.00% per month of
the value of the shareholder's shares at the time the withdrawal plan commences
(see "Automatic Cash Withdrawal Plan") (provided, however, that automatic cash
withdrawals in amounts equal to or less than 2.00% per month of the value of the
shareholder's shares will be permitted for withdrawal plans that were
established prior to November 7, 1994); (c) redemptions of shares within twelve
months following the death or disability of the shareholder; (d) involuntary
redemptions; and (e) redemptions of shares to effect a combination of the
Portfolio with any investment company by merger, acquisition of assets or
otherwise. In addition, a shareholder who has redeemed shares from other funds
of the Smith Barney Mutual Funds may, under certain circumstances, reinvest all
or part of the redemption proceeds within 60 days and receive pro rata credit
for any CDSC 


                                                                              25
<PAGE>

--------------------------------------------------------------------------------
Purchase of Shares (continued)
--------------------------------------------------------------------------------

imposed on the prior redemption.

     CDSC waivers will be granted subject to confirmation (by Smith Barney in
the case of shareholders who are also Smith Barney clients or by First Data in
the case of all other shareholders) of the shareholder's status or holdings, as
the case may be.

--------------------------------------------------------------------------------
Exchange Privilege
--------------------------------------------------------------------------------

     Except as otherwise noted below, shares of each Class may be exchanged for
shares of the same Class in the following funds of the Smith Barney Mutual
Funds, to the extent shares are offered for sale in the shareholder's state of
residence. Exchanges of Class A, Class B and Class C shares are subject to
minimum investment requirements and all shares are subject to the other
requirements of the fund into which exchanges are made.

Fund Name
--------------------------------------------------------------------------------
Growth Funds
      Smith Barney Aggressive Growth Fund Inc.
      Smith Barney Appreciation Fund Inc.
      Smith Barney Disciplined Small Cap Fund, Inc.
      Smith Barney Fundamental Value Fund Inc.
      Smith Barney Growth  Opportunity Fund
      Smith Barney Large Capitalization Growth Fund
      Smith Barney Managed Growth  Fund
      Smith Barney Natural Resources Fund Inc.
      Smith Barney Special Equities Fund

Growth and Income Funds
      Concert Social Awareness Fund
      Smith Barney Convertible Fund
      Smith Barney Funds, Inc. -- Equity Income Portfolio
      Smith Barney Growth and Income Fund
      Smith Barney Premium Total Return Fund
      Smith Barney Utilities Fund

Taxable Fixed-Income Funds
   ** Smith Barney Adjustable Rate Government Income Fund
      Smith Barney Diversified Strategic Income Fund
  *** Smith Barney Funds, Inc. -- Short-Term U.S. Treasury Securities Portfolio
      Smith Barney Funds, Inc. -- U.S. Government Securities Portfolio
      Smith Barney Government Securities Fund
      Smith Barney High Income Fund
      Smith Barney Investment Grade Bond Fund
      Smith Barney Managed Governments Fund Inc.


26
<PAGE>

--------------------------------------------------------------------------------
Exchange Privilege (continued)
--------------------------------------------------------------------------------

Tax-Exempt Funds
      Smith Barney Arizona Municipals Fund Inc.
      Smith Barney California Municipals Fund Inc.
    * Smith Barney Intermediate Maturity California Municipals Fund
    * Smith Barney Intermediate Maturity New York Municipals Fund
      Smith Barney Managed Municipals Fund Inc.
      Smith Barney Massachusetts Municipals Fund
      Smith Barney Muni Funds -- Florida Portfolio
      Smith Barney Muni Funds -- Georgia Portfolio
    * Smith Barney Muni Funds -- Limited Term Portfolio
      Smith Barney Muni Funds -- National Portfolio
      Smith Barney Muni Funds -- New York Portfolio
      Smith Barney New Jersey Municipals Fund Inc.
      Smith Barney Oregon Municipals Fund
      Smith Barney Tax-Exempt Income Fund

International Funds
      Smith Barney World Funds, Inc. -- Emerging Markets Portfolio
      Smith Barney World Funds, Inc. -- European Portfolio
      Smith Barney World Funds, Inc. -- Global Government Bond Portfolio
      Smith Barney World Funds, Inc. -- International Balanced Portfolio
      Smith Barney World Funds, Inc. -- International Equity Portfolio
      Smith Barney World Funds, Inc. -- Pacific Portfolio

Smith Barney Concert Allocation Series Inc.
      Smith Barney Concert Allocation Series Inc. -- Balanced Portfolio
      Smith Barney Concert Allocation Series Inc. -- Conservative Portfolio
      Smith Barney Concert Allocation Series Inc. -- Growth Portfolio
      Smith Barney Concert Allocation Series Inc. -- High Growth Portfolio
      Smith Barney Concert Allocation Series Inc. -- Income Portfolio

Money Market Funds
    + Smith Barney Exchange Reserve Fund
  *** Smith Barney Money Funds, Inc. -- Cash Portfolio
  *** Smith Barney Money Funds, Inc. -- Government Portfolio
   ++ Smith Barney Money Funds, Inc. -- Retirement Portfolio
  *** Smith Barney Municipal Money Market Fund, Inc.
  *** Smith Barney Muni Funds -- California Money Market Portfolio
  *** Smith Barney Muni Funds -- New York Money Market Portfolio

----------
*    Available for exchange with Class A, Class C and Class Y shares of the
     Portfolio.
**   Available for exchange with Class A and Class B shares of the Portfolio.
***  Available for exchange with Class A and Class Y shares of the Portfolio. 
+    Available for exchange with Class B and Class C shares of the Portfolio.
++   Available for exchange with Class A shares of the Portfolio.


                                                                              27
<PAGE>

--------------------------------------------------------------------------------
Exchange Privilege (continued)
--------------------------------------------------------------------------------

     Class B Exchanges. In the event a Class B shareholder wishes to exchange
all or a portion of his or her shares in any of the funds imposing a higher CDSC
than that imposed by the Portfolio, the exchanged Class B shares will be subject
to the higher applicable CDSC. Upon an exchange, the new Class B shares will be
deemed to have been purchased on the same date as the Class B shares of the
Portfolio that have been exchanged.

     Class C Exchanges. Upon an exchange, the new Class C shares will be deemed
to have been purchased on the same date as the Class C shares of the Portfolio
that have been exchanged.

     Class A and Class Y Exchanges. Class A and Class Y shareholders of the
Portfolio who wish to exchange all or a portion of their shares for shares of
the respective Class in any of the funds identified above may do so without
imposition of any charge.

     Additional Information Regarding the Exchange Privilege. Although the
exchange privilege is an important benefit, excessive exchange transactions can
be detrimental to the Portfolio's performance and its shareholders. The
investment manager may determine that a pattern of frequent exchanges is
excessive and contrary to the best interests of the Portfolio's other
shareholders. In this event, the Fund may, at its discretion, decide to limit
additional purchases and/or exchanges by the shareholder. Upon such a
determination, the Fund will provide notice in writing or by telephone to the
shareholder at least 15 days prior to suspending the exchange privilege and
during the 15 day period the shareholder will be required to (a) redeem his or
her shares in the Portfolio or (b) remain invested in the Portfolio or exchange
into any of the funds of the Smith Barney Mutual Funds ordinarily available,
which position the shareholder would be expected to maintain for a significant
period of time. All relevant factors will be considered in determining what
constitutes an abusive pattern of exchanges.

     Certain shareholders may be able to exchange shares by telephone. See
"Redemption of Shares -- Telephone Redemption and Exchange Program." Exchanges
will be processed at the net asset value next determined. Redemption procedures
discussed below are also applicable for exchanging shares, and exchanges will be
made upon receipt of all supporting documents in proper form. If the account
registration of the shares of the fund being acquired is identical to the
registration of the shares of the fund exchanged, no signature guarantee is
required. A capital gain or loss for tax purposes will be realized upon the
exchange, depending upon the cost or other basis of shares redeemed. Before
exchanging shares, investors should read the current prospectus describing the
shares to be acquired. The Portfolio reserves the right to modify or discontinue
exchange privileges upon 60 days' prior notice to shareholders.


28
<PAGE>

--------------------------------------------------------------------------------
Redemption of Shares
--------------------------------------------------------------------------------

     The Fund is required to redeem the shares of the Portfolio tendered to it,
as described below, at a redemption price equal to their net asset value per
share next determined after receipt of a written request in proper form at no
charge other than any applicable CDSC. Redemption requests received after the
close of regular trading on the NYSE are priced at the net asset value next
determined. If a shareholder holds shares in more than one Class, any request
for redemption must specify the Class being redeemed. In the event of a failure
to specify which Class, or if the investor owns fewer shares of the Class than
specified, the redemption request will be delayed until the Fund's transfer
agent receives further instructions from Smith Barney, or if the shareholder's
account is not with Smith Barney, from the shareholder directly. The redemption
proceeds will be remitted on or before the third business day following receipt
of proper tender, except on any days on which the NYSE is closed or as permitted
under the 1940 Act in extraordinary circumstances. Generally, if the redemption
proceeds are remitted to a Smith Barney brokerage account, these funds will not
be invested for the shareholder's benefit without specific instruction and Smith
Barney will benefit from the use of temporarily uninvested funds. Redemption
proceeds for shares purchased by check, other than a certified or official bank
check, will be remitted upon clearance of the check, which may take up to ten
days or more.

     Shares held by Smith Barney as custodian must be redeemed by submitting a
written request to a Smith Barney Financial Consultant. Shares other than those
held by Smith Barney as custodian may be redeemed through an investor's
Financial Consultant, Introducing Broker or dealer in the selling group or by
submitting a written request for redemption to:

     Smith Barney Muni Funds/Pennsylvania Portfolio
     Class A, B, C or Y (please specify) 
     c/o First Data Investor Services Group, Inc.
     P.O. Box 5128
     Boston, Massachusetts 01581-5128

     A written redemption request must (a) state the Class and number or dollar
amount of shares to be redeemed, (b) identify the shareholder's account number
and (c) be signed by each registered owner exactly as the shares are registered.
If the shares to be redeemed were issued in certificate form, the certificates
must be endorsed for transfer (or be accompanied by an endorsed stock power) and
must be submitted to First Data together with the redemption request. Any
signature appearing on a share certificate, stock power or written redemption
request in excess of $2,000 must be guaranteed by an eligible guarantor
institution such as a domestic bank, savings and loan institution, domestic
credit union, member bank of the Federal Reserve System or member firm of a
national securities exchange. Written redemption requests of $2,000 or less do
not require a signature guarantee unless more than one such redemption request
is made in any 10-day period.


                                                                              29
<PAGE>

--------------------------------------------------------------------------------
Redemption of Shares (continued)
--------------------------------------------------------------------------------

Redemption proceeds will be mailed to an investor's address of record. First
Data may require additional supporting documents for redemptions made by
corporations, executors, administrators, trustees or guardians. A redemption
request will not be deemed properly received until First Data receives all
required documents in proper form.

     TELEPHONE REDEMPTION AND EXCHANGE PROGRAM

     Shareholders who do not have a Smith Barney brokerage account may be
eligible to redeem and exchange portfolio shares by telephone. To determine if a
shareholder is entitled to participate in this program, he or she should contact
First Data at 1-800-451-2010. Once eligibility is confirmed, the shareholder
must complete and return a Telephone/Wire Authorization Form, including a
signature guarantee, that will be provided by First Data upon request.
(Alternatively, an investor may authorize telephone redemptions on the new
account application with the applicant's signature guarantee when making his/her
initial investment in the Portfolio.

     Redemptions. Redemption requests of up to $10,000 of any class or classes
of the Portfolio's shares, may be made by eligible shareholders by calling First
Data at 1-800-451-2010. Such requests may be made between 9:00 a.m. and 5:00
p.m. (New York City time) on any day the NYSE is open. Redemption requests
received after the close of regular trading on the NYSE are priced at the net
asset value next determined. Redemptions of shares (i) by retirement plans or
(ii) for which certificates have been issued are not permitted under this
program.

     A shareholder will have the option of having the redemption proceeds mailed
to his/her address of record or wired to a bank account predesignated by the
shareholder. Generally, redemption proceeds will be mailed or wired, as the case
may be, on the next business day following the redemption request. In order to
use the wire procedures, the bank receiving the proceeds must be a member of the
Federal Reserve System or have a correspondent relationship with a member bank.
The Fund reserves the right to charge shareholders a nominal fee for each wire
redemption. Such charges, if any, will be assessed against the shareholder's
account from which shares were redeemed. In order to change the bank account
designated to receive redemption proceeds, a shareholder must complete a new
Telephone/Wire Authorization Form and, for the protection of the shareholder's
assets, will be required to provide a signature guarantee and certain other
documentation.

     Exchanges. Eligible shareholders may make exchanges by telephone if the
account registration of the shares of the fund being acquired is identical to
the registration of the shares of the fund exchanged. Such exchange requests may
be made by calling First Data at 1-800-451-2010 between 9:00 a.m. and 5:00 p.m.
(New York City time) on any day on which the NYSE is open.


30
<PAGE>

--------------------------------------------------------------------------------
Redemption of Shares (continued)
--------------------------------------------------------------------------------

     Additional Information regarding Telephone Redemption and Exchange Program.
Neither the Fund nor its agents will be liable for following instructions
communicated by telephone that are reasonably believed to be genuine. The Fund
and its agents will employ procedures designed to verify the identity of the
caller and legitimacy of instructions (for example, a shareholder's name and
account number will be required and phone calls may be recorded). The Fund
reserves the right to suspend, modify or discontinue the telephone redemption
and exchange program or to impose a charge for this service at any time
following at least seven (7) days' prior notice to shareholders.

     AUTOMATIC CASH WITHDRAWAL PLAN

     The Portfolio offers shareholders an automatic cash withdrawal plan, under
which shareholders who own shares with a value of at least $10,000 may elect to
receive cash payments of at least $50 monthly or quarterly. The withdrawal plan
will be carried over on exchanges between funds or Classes of the Portfolio. Any
applicable CDSC will not be waived on amounts withdrawn by a shareholder that
exceed 1.00% per month of the value of the shareholder's shares subject to the
CDSC at the time the withdrawal plan commences. (With respect to withdrawal
plans in effect prior to November 7, 1994, any applicable CDSC will be waived on
amounts withdrawn that do not exceed 2.00% per month of the value of the
shareholder's shares subject to the CDSC). For further information regarding the
automatic cash withdrawal plan, shareholders should contact a Smith Barney
Financial Consultant.

--------------------------------------------------------------------------------
Minimum Account Size
--------------------------------------------------------------------------------

     The Fund reserves the right to involuntarily liquidate any shareholder's
account if the aggregate value of the shares held in a Portfolio account is less
than $500. (If a shareholder has more than one account in this Portfolio, each
account must satisfy the minimum account size.) The Fund, however, will not
redeem shares based solely on market reductions in net asset value. Before the
Fund exercises such right, shareholders will receive written notice and will be
permitted 60 days to bring the account up to the minimum to avoid involuntary
liquidation.

--------------------------------------------------------------------------------
Performance
--------------------------------------------------------------------------------

     From time to time the Portfolio may advertise its yield, tax equivalent
yield, total return and average annual total return in advertisements. In
addition, in other types of sales literature the Portfolio may also include its
distribution rate. These figures are computed separately for Class A, Class B,
Class C and Class Y shares of 


                                                                              31
<PAGE>

--------------------------------------------------------------------------------
Performance (continued)
--------------------------------------------------------------------------------

the Portfolio. These figures are based on historical earnings and are not
intended to indicate future performance. The yield of a Portfolio Class refers
to the net income earned by investments in the Class over a thirty-day period
ending at month end. This net income is then annualized, i.e., the amount of
income earned by the investments during that 30-day period is assumed to be
earned each 30-day period for twelve periods and is expressed as a percentage of
the investments. The tax equivalent yield is calculated similarly to the yield,
except that a stated income tax rate is used to demonstrate the taxable yield
necessary to produce an after-tax yield equivalent to the tax-exempt yield of
the Class. The yield and tax equivalent yield quotations are calculated
according to a formula prescribed by the SEC to facilitate comparison with
yields quoted by other investment companies. The distribution rate is calculated
by annualizing the latest monthly distribution and dividing the result by the
maximum offering price per share as of the end of the period to which the
distribution relates. The distribution rate is not computed in the same manner
as, and therefore can be significantly different from, the above described
yield. Total return is computed for a specified period of time assuming
deduction of the maximum sales charge, if any, from the initial amount invested
and reinvestment of all income dividends and capital gain distributions on the
reinvestment dates at prices calculated as stated in this Prospectus, then
dividing the value of the investment at the end of the period so calculated by
the initial amount invested and subtracting 100%. The standard average annual
total return, as prescribed by the SEC is derived from this total return, which
provides the ending redeemable value. Such standard total return information may
also be accompanied with nonstandard total return information for differing
periods computed in the same manner but without analyzing the total return or
taking sales charges into account. The Portfolio may also include comparative
performance information in advertising or marketing its shares. Such performance
information may include data from Lipper Analytical Services, Inc. and other
financial publications.


32
<PAGE>

--------------------------------------------------------------------------------
Management of the Fund
--------------------------------------------------------------------------------

     TRUSTEES

     Overall responsibility for management and supervision of the Fund rests
with the Fund's Trustees. The Trustees approve all significant agreements
between the Fund and the companies that furnish services to the Fund and the
Portfolio, including agreements with the Fund's distributor, investment manager,
custodian and transfer agent. The day-to-day operations of the Portfolio are
delegated to the Portfolio's investment manager. The Statement of Additional
Information contains background information regarding each Trustee and executive
officer of the Fund.

     MANAGER

     Smith Barney Mutual Funds Management Inc. ("SBMFM" or the "Manager"),
manages the day-to-day operations of the Portfolio pursuant to a management
agreement entered into by the Fund on behalf of the Portfolio.

     SBMFM was incorporated in 1968 under the laws of Delaware. SBMFM, Holdings
and Smith Barney are each located at 388 Greenwich Street, New York, New York
10013. As of June 30, 1997, SBMFM had aggregate assets under management in
excess of $89 billion.

     SBMFM provides the Fund with investment management services and executive
and other personnel, pays the remuneration of Fund officers, provides the Fund
with office space and equipment, furnishes the Fund with bookkeeping,
accounting, administrative services and services relating to research,
statistical work and supervision of the Portfolio. For the services provided,
the management agreement provides that the Fund will pay SBMFM an annual fee
calculated at the rate of 0.45% of the Portfolio's average daily net assets,
paid monthly. SBMFM waived its management fee for the Portfolio for the fiscal
year March 31, 1997. For the past fiscal year, total operating expenses were
0.37% of the average daily assets for Class A shares; 0.88% of the average daily
net assets for Class B shares; and 0.94% of the average daily net assets for
Class C shares. For the current fiscal year, total operating expenses are
anticipated to be 0.75% of the average daily net assets for Class A shares;
1.26% of the average daily net assets for Class B shares; and 1.32% of the
average daily net assets for Class C shares. The anticipated expenses for the
current fiscal year reflect the current management fee waiver in effect.

     PORTFOLIO MANAGEMENT

     Peter M. Coffey, a Managing Director of Smith Barney, has served as Vice
President of the Fund and portfolio manager of the Portfolio since it commenced
operation (April 4, 1994) and manages the day-to-day operations of the Portfolio
including making all investment decisions. Mr. Coffey also serves as the
portfolio manager for many of the Fund's other non-money market Portfolios.

     Management's discussion and analysis, and additional performance
information regarding the Portfolio during the fiscal year ended March 31, 1997
is included 


                                                                              33
<PAGE>

--------------------------------------------------------------------------------
Management of the Fund (continued)
--------------------------------------------------------------------------------

in the Annual Report dated March 31, 1997. A copy of the Annual Report may be
obtained upon request and without charge from a Smith Barney Financial
Consultant or by writing or calling the Fund at the address or phone number
listed on page one of this Prospectus.

--------------------------------------------------------------------------------
Distributor
--------------------------------------------------------------------------------

     Smith Barney distributes shares of the Portfolio as principal underwriter
and as such conducts a continuous offering pursuant to a "best efforts"
arrangement requiring Smith Barney to take and pay for only such securities as
may be sold to the public. Pursuant to a plan of distribution adopted by the
Portfolio under Rule 12b-1 under the 1940 Act (the "Plan"), Smith Barney is paid
a service fee with respect to Class A, Class B and Class C shares of the
Portfolio at the annual rate of 0.15% of the average daily net assets
attributable to these Classes. Smith Barney is also paid a distribution fee with
respect to Class B and Class C shares at the annual rate of 0.50% and 0.55%,
respectively, of the average daily net assets attributable to these Classes.
Class B shares that automatically convert to Class A shares eight years after
the date of original purchase, will no longer be subject to a distribution fee.
The fees are used by Smith Barney to pay its Financial Consultants for servicing
shareholder accounts and, in the case of Class B and Class C shares, to cover
expenses primarily intended to result in the sale of those shares. These
expenses include: advertising expenses; the cost of printing and mailing
prospectuses to potential investors; payments to and expenses of Smith Barney
Financial Consultants and other persons who provide support services in
connection with the distribution of shares; interest and/or carrying charges;
and indirect and overhead costs of Smith Barney associated with the sale of
Portfolio shares, including lease, utility, communications and sales promotion
expenses.

     The payments to Smith Barney Financial Consultants for selling shares of a
Class include a commission or fee paid by the investor or Smith Barney at the
time of sale and, with respect to Class A, Class B and Class C shares, a
continuing fee for servicing shareholder accounts for as long as a shareholder
remains a holder of that Class. Smith Barney Financial Consultants may receive
different levels of compensation for selling the different Classes of Shares.

     Payments under the Plan with respect to Class B and Class C shares are not
tied exclusively to the distribution and shareholder services expenses actually
incurred by Smith Barney and the payments may exceed distribution expenses
actually incurred. The Fund's Trustees will evaluate the appropriateness of the
Plan and its payment terms on a continuing basis and in so doing will consider
all relevant factors, including expenses borne by Smith Barney, amounts received
under the Plan and proceeds of the CDSC.


34
<PAGE>

--------------------------------------------------------------------------------
Additional Information
--------------------------------------------------------------------------------

     The Fund, an open-end, non-diversified management investment company, is
organized as a "Massachusetts business trust" pursuant to a Declaration of Trust
dated August 14, 1985. Pursuant to the Declaration of Trust, the Trustees have
authorized the issuance of twenty series of shares, each representing shares in
one of twenty separate Portfolios. The assets of each Portfolio are segregated
and separately managed. Class A, Class B, Class C and Class Y shares of each
Portfolio represent interests in the assets of that Portfolio and have identical
voting, dividend, liquidation and other rights on the same terms and conditions,
except that expenses related to the shareholder service and distribution of
Class A, Class B and Class C shares are borne solely by the respective Class and
each such Class of shares has exclusive voting rights with respect to provisions
of the Fund's Rule 12b-1 distribution plan which pertains to that Class. It is
the intention of the Fund not to hold annual meetings of shareholders. The
Trustees may call meetings of shareholders for action by shareholder vote as may
be required by the 1940 Act or the Declaration of Trust, and shareholders are
entitled to call a meeting of shareholders upon a vote of 10% of the Fund's
outstanding shares for purposes of voting on removal of a Trustee or Trustees.
Shareholders will receive assistance in communicating with other shareholders in
connection with the removal of Trustees as required by Section 16(c) of the 1940
Act. Shares do not have cumulative voting rights or preemptive rights and have
only such conversion or exchange rights as the Trustees may grant in their
discretion. When issued for payment as described in this Prospectus, the Fund's
shares will be fully paid and transferrable (subject to the Portfolio's minimum
account size). Shares are redeemable as set forth under "Redemption of Shares"
and are subject to involuntary redemption as set forth under "Minimum Account
Size."

     PNC Bank, National Association, located at 17th and Chestnut Streets,
Philadelphia, PA 19103 serves as custodian of the Portfolio's investments.

     First Data, located at Exchange Place, Boston, Massachusetts 02109, serves
as the Fund's transfer agent.

     The Fund sends its shareholders a semi-annual report and an audited annual
report, which include listings of the investment securities held by the
Portfolio at the end of the period covered. In an effort to reduce the Fund's
printing and mailing costs, the Fund plans to consolidate the mailing of its
semi-annual and annual reports by household. This consolidation means that a
household having multiple accounts with the identical address of record will
receive a single copy of each report. Shareholders who do not want this
consolidation to apply to their account should contact their Smith Barney
Financial Consultant or the Fund's transfer agent.


                                                                              35
<PAGE>

                                                                    Smith Barney
                                                                    ------------

                                                A Member of TravelersGroup[LOGO]

                                                                    Smith Barney
                                                                      Muni Funds
                                                                    Pennsylvania
                                                                       Portfolio

                                                            388 Greenwich Street
                                                        New York, New York 10013

                                                                     FD0772 7/97


P R O S P E C T U S

   
                                                    SMITH BARNEY MUNI FUNDS     
   
                                          California Money Market Portfolio     
   
                                                              JULY 29, 1997     
 
                                                   PROSPECTUS BEGINS ON PAGE ONE

[LOGO]  SMITH BARNEY MUTUAL FUNDS
        Investing for your future.
        Every day.
<PAGE>
 
   
PROSPECTUS                                                   JULY 29, 1997     
   
Smith Barney Muni Funds     
   
California Money Market Portfolio     
   
388 Greenwich Street New York, New York 10013 (800) 451-2010     
   
  The California Money Market Portfolio (the "Portfolio") is one of nine
investment portfolios that currently comprise Smith Barney Muni Funds (the
"Fund"). The Portfolio seeks to provide its shareholders with income exempt
from both Federal income taxes (other than the alternative minimum tax) and
California personal income taxes from a portfolio of high quality short-term
California municipal obligations selected for liquidity and stability of prin-
cipal.     
   
  THE PORTFOLIO MAY INVEST A SIGNIFICANT PERCENTAGE OF ITS ASSETS IN A SINGLE
ISSUER AND THEREFORE INVESTMENT IN THE PORTFOLIO MAY BE RISKIER THAN AN INVEST-
MENT IN OTHER TYPES OF MONEY MARKET FUNDS.     
 
  SHARES OF THE PORTFOLIO ARE NOT INSURED OR GUARANTEED BY THE U.S. GOVERNMENT.
THERE IS NO ASSURANCE THAT THE PORTFOLIO WILL BE ABLE TO MAINTAIN A STABLE NET
ASSET VALUE OF $1.00 PER SHARE.
 
  This Prospectus sets forth concisely certain information about the Fund and
the Portfolio, including service fees and expenses, that prospective investors
will find helpful in making an investment decision. Investors are encouraged to
read this Prospectus carefully and retain it for future reference.
   
  Additional information about the Portfolio is contained in a Statement of
Additional Information dated July 29, 1997, as amended or supplemented from
time to time, that is available upon request and without charge by calling or
writing the Fund at the telephone number or address set forth above or by con-
tacting a Smith Barney Financial Consultant. The Statement of Additional Infor-
mation has been filed with the Securities and Exchange Commission (the "SEC")
and is incorporated by reference into this Prospectus in its entirety.     
 
SMITH BARNEY INC.
Distributor
 
SMITH BARNEY MUTUAL FUNDS MANAGEMENT INC.
Investment Manager
 
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.
 
                                                                               1
<PAGE>
 
TABLE OF CONTENTS
 
<TABLE>   
<S>                                           <C>
FEE TABLE                                       3
-------------------------------------------------
FINANCIAL HIGHLIGHTS                            4
-------------------------------------------------
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES    5
-------------------------------------------------
VALUATION OF SHARES                            10
-------------------------------------------------
DIVIDENDS, AUTOMATIC REINVESTMENT AND TAXES    10
-------------------------------------------------
PURCHASE OF SHARES                             12
-------------------------------------------------
REDEMPTION OF SHARES                           14
-------------------------------------------------
EXCHANGE PRIVILEGE                             17
-------------------------------------------------
MINIMUM ACCOUNT SIZE                           20
-------------------------------------------------
YIELD INFORMATION                              20
-------------------------------------------------
MANAGEMENT OF THE FUND                         20
-------------------------------------------------
DISTRIBUTOR                                    21
-------------------------------------------------
ADDITIONAL INFORMATION                         22
-------------------------------------------------
</TABLE>    
 
--------------------------------------------------------------------------------
   
  No person has been authorized to give any information or to make any
representations in connection with this offering other than those contained in
this Prospectus and, if given or made, such other information and
representations must not be relied upon as having been authorized by the
Portfolio or the Distributor. This Prospectus does not constitute an offer by
the Portfolio or the Distributor to sell or a solicitation of an offer to buy
any of the securities offered hereby in any jurisdiction to any person to whom
it is unlawful to make such offer or solicitation in such jurisdiction.     
 
--------------------------------------------------------------------------------
 
2
<PAGE>
 
FEE TABLE
 
  The following expense table lists the costs and expenses an investor will
incur either directly or indirectly as a shareholder of the Portfolio based,
unless otherwise noted, on its operating expenses for its most recent fiscal
year:
 
<TABLE>   
<CAPTION>
  CALIFORNIA MONEY MARKET PORTFOLIO        CLASS A CLASS Y
----------------------------------------------------------
  <S>                                      <C>     <C>
  SHAREHOLDER TRANSACTION EXPENSES
    Sales Charge Imposed on Purchases       None    None
    Contingent Deferred Sales Charge        None*   None
----------------------------------------------------------
  ANNUAL PORTFOLIO OPERATING EXPENSES
  (AS A PERCENTAGE OF AVERAGE NET ASSETS)
    Management fees                         0.50%   0.50%
    12b-1 fees                              0.10%     --
    Other expenses**                        0.07%   0.06%
----------------------------------------------------------
  TOTAL PORTFOLIO OPERATING EXPENSES        0.67%   0.56%
----------------------------------------------------------
</TABLE>    
 * Class A shares acquired as part of an exchange privilege transaction, which
   were originally acquired in one of the other Smith Barney Mutual Funds at
   net asset value subject to a contingent deferred sales charge ("CDSC"),
   remain subject to the original fund's CDSC while held in the Portfolio.
   
** "Other expenses" in the above table include fees for shareholder services,
   custodial fees, legal and accounting fees, printing costs and registration
   fees.     
          
  Class A shares of the Portfolio purchased through the Smith Barney AssetOne
Program will be subject to an annual asset-based fee, payable quarterly, in
lieu of the initial sales charge. The fee will vary to a maximum of 1.50%,
depending on the amount of assets held through the Program. For more informa-
tion, please call your Smith Barney Financial Consultant.     
 
 EXAMPLE
  The following example is intended to assist an investor in understanding the
various costs that an investor in the Portfolio will bear directly or indi-
rectly. The example assumes payment by the Portfolio of operating expenses at
the levels set forth in the table above. See "Purchase of Shares," "Redemption
of Shares," "Management of the Fund," and "Distributor."
 
<TABLE>   
<CAPTION>
  CALIFORNIA MONEY MARKET PORTFOLIO             1 YEAR 3 YEARS 5 YEARS 10 YEARS
-------------------------------------------------------------------------------
  <S>                                           <C>    <C>     <C>     <C>
  An investor would pay the following expenses
  on a $1,000 investment, assuming (1) 5.00%
  annual return and (2) redemption at the end
  of each time period:
    Class A                                      $ 7     $21     $37     $83
    Class Y                                      $ 6     $18     $31     $70
-------------------------------------------------------------------------------
</TABLE>    
 
  The example also provides a means for the investor to compare expense levels
of funds with different fee structures over varying investment periods. To
facilitate such comparison, all funds are required to utilize a 5.00% annual
return assumption. However, the Portfolio's actual return will vary and may be
greater or less than 5.00%. THIS EXAMPLE SHOULD NOT BE CONSIDERED A
REPRESENTATION OF PAST OR FUTURE EXPENSES. ACTUAL EXPENSES MAY BE GREATER OR
LESS THAN THOSE SHOWN.
 
                                                                              3
<PAGE>
 
FINANCIAL HIGHLIGHTS
   
  The following information has been audited by KPMG Peat Marwick LLP, inde-
pendent auditors, whose report for the five-year period ended March 31, 1997
thereon appears in the Fund's annual report dated March 31, 1997. The informa-
tion set out below should be read in conjunction with the financial statements
and related notes that also appear in the Fund's Annual Report to Sharehold-
ers, which is incorporated by reference into the Statement of Additional
Information.     
   
FOR A SHARE OF BENEFICIAL INTEREST OUTSTANDING THROUGHOUT EACH YEAR:     
 
<TABLE>   
<CAPTION>
                                                                                    CLASS Y
                                          CLASS A SHARES                            SHARES
                         -------------------------------------------------------    -------
CALIFORNIA MONEY MARKET
PORTFOLIO                 1997    1996    1995    1994    1993    1992   1991(1)    1997(2)
---------------------------------------------------------------------------------------------
<S>                      <C>     <C>     <C>     <C>     <C>     <C>     <C>        <C>
NET ASSET VALUE,
 BEGINNING OF YEAR        $1.00   $1.00   $1.00   $1.00   $1.00   $1.00   $1.00      $1.00
---------------------------------------------------------------------------------------------
INCOME FROM
 INVESTMENT OPERATIONS:
 Net investment
  income(3)               0.028   0.032   0.026   0.018   0.021   0.035   0.044      0.020
---------------------------------------------------------------------------------------------
Total Income from
 Investment Operations    0.028   0.032   0.026   0.018   0.021   0.035   0.044      0.020
---------------------------------------------------------------------------------------------
LESS DISTRIBUTIONS:
 Dividends from net
  investment income      (0.028) (0.032) (0.026) (0.018) (0.021) (0.035) (0.044)    (0.020)
---------------------------------------------------------------------------------------------
Total Distributions      (0.028) (0.032) (0.026) (0.018) (0.021) (0.035) (0.044)    (0.020)
---------------------------------------------------------------------------------------------
NET ASSET VALUE, END
 OF YEAR                  $1.00   $1.00   $1.00  $ 1.00   $1.00  $ 1.00  $ 1.00      $1.00
---------------------------------------------------------------------------------------------
TOTAL RETURN               2.79%   3.22%   2.66%   1.84%   2.05%   3.51%   4.49%++    2.04%++
---------------------------------------------------------------------------------------------
NET ASSETS, END
 OF YEAR (MILLIONS)      $1,400  $1,346  $  953  $  190  $  160  $  167  $  136         $8
---------------------------------------------------------------------------------------------
RATIOS TO AVERAGE
 NET ASSETS:
 Expenses (3)              0.67%   0.64%   0.61%   0.64%   0.67%   0.60%   0.46%+     0.56%+
 Net investment income     2.75    3.15    3.02    1.82    2.05    3.46    4.73+      2.77+
---------------------------------------------------------------------------------------------
</TABLE>    
   
(1) For the period from May 10, 1990 (inception date) to March 31, 1991.     
   
(2) For the period from July 9, 1996 (inception date) to March 31, 1997.     
       
          
(3) The Manager has waived all or part of its fees for the period ended March
    31, 1991 and the two-year period ended March 31, 1996. If such fees were
    not waived, the per share decreases in net investment income and the
    ratios of expenses to average net assets would be as follows:     
 
<TABLE>   
<CAPTION>
         PER SHARE DECREASES       EXPENSE RATIOS
CLASS  IN NET INVESTMENT INCOME  WITHOUT FEE WAIVERS
  A    ----------------------------------------------
         1996    1995    1991    1996   1995   1991
       -------- ---------------------- ------ -------
<S>    <C>      <C>     <C>     <C>    <C>    <C>
         $.000*   $.002   $.001  0.65%  0.63%  0.60%+
</TABLE>    
   
 ++Total return is not annualized, as the result may not be representative of
   the total return for the year.     
   
 + Annualized.     
 * Amount represents less than $.001.
 
4
<PAGE>
 
   
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES     
   
  The Portfolio seeks to provide income exempt from both Federal income taxes
and California personal income taxes from a portfolio of high quality short-
term municipal obligations selected for liquidity and stability of principal.
The Portfolio seeks to be fully invested in obligations that are issued by the
State of California and its political subdivisions, agencies and instrumentali-
ties, the interest from which in the opinion of counsel for the various
issuers, is exempt from California as well as Federal income taxes. (For cer-
tain shareholders, a portion of the Portfolio's income may be subject to the
alternative minimum tax.)     
 
  Opinions relating to the validity of municipal obligations and to the exemp-
tion of interest thereon from Federal income taxes and from California personal
income taxes are rendered by bond counsel to the respective issuers at the time
of issuance. Neither the Portfolio nor its investment adviser will review the
proceedings relating to the issuance of municipal obligations or the basis for
such opinions.
   
  The two principal classifications of municipal obligations are "general obli-
gation" and "revenue." General obligations are secured by a municipal issuer's
pledge of its full faith, credit, and taxing power for the payment of principal
and interest. Revenue obligations are payable only from the revenues derived
from a particular facility or class of facilities or, in some cases from the
proceeds of a special excise tax or other specific revenue source. Please see
the Statement of Additional Information for a more detailed discussion about
the different types of municipal obligations.     
   
  All of the Portfolio's investments will be in securities that at the time of
investment have or are deemed by Smith Barney Mutual Funds Management Inc.
("SBMFM" or the "Manager") to have remaining maturities of 13 months or less
and the dollar-weighted average maturity of the Portfolio will be 90 days or
less. The Portfolio will seek to maintain a constant net asset value of $1.00
per share, although no assurance can be given that this goal will be achieved.
Except for temporary defensive purposes, it is a fundamental policy that at
least 80% of the Portfolio's assets will be invested in securities that produce
income that is exempt from Federal income taxes (other than the alternative
minimum tax) and from California personal income taxes in the opinion of bond
counsel for the various issuers.     
   
  The Portfolio's investments will be limited to obligations that the Fund's
Trustees' delegates determine present minimal credit risks and that (i) are
secured by the full faith and credit of the United States or (ii) are "Eligible
Securities," as defined by the Investment Company Act of 1940 (the "1940 Act"),
at the time of acquisition by the Portfolio. The term "Eligible Securities"
includes securities rated by the "Requisite NRSROs" in one of the two highest
short-term rating categories, securities of issuers that have received such
ratings with respect to other short-term debt securities and comparable unrated
securities. "Requisite NRSROs" means any nationally recognized statistical rat-
ing organizations ("NRSROs") that have issued     
 
                                                                               5
<PAGE>
 
   
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)     
   
ratings with respect to a security or class of debt obligations of an issuer.
Currently, there are six NRSROs: Standard & Poor's Ratings Group, Moody's
Investors Service, Inc., Fitch Investors Services, Inc., Duff and Phelps Inc.,
IBCA Limited and its affiliate, IBCA, Inc. and Thomson BankWatch. The Portfolio
may also invest in unrated securities if they are of comparable quality as
determined by the Manager in accordance with criteria established by the Fund's
Trustees.     
 
  Municipal obligations, which are issued by states, municipalities and their
agencies, fall into two major categories--bonds and notes. Among the types of
obligations in which the Portfolio invests are "puts," such as floating or
variable rate instruments subject to demand features ("demand instruments");
tax-exempt commercial paper; and notes such as Tax Anticipation Notes, Revenue
Anticipation Notes, Tax and Revenue Anticipation Notes and Bond Anticipation
Notes. Demand instruments usually have an indicated maturity of more than 13
months but contain a demand feature (a "put") that entitles the holder to
receive the principal amount of the underlying security and may be exercised
either (a) at any time on no more than 30 days' notice; or (b) at specified
intervals not exceeding one year and upon no more than 30 days' notice. Demand
instruments are generally supported by letters of credit which are issued by
both domestic and foreign banks. A variable rate instrument provides for
adjustment of its interest rate on set dates and upon such adjustment can rea-
sonably be expected to have a market value that approximates its par value; a
floating rate instrument provides for adjustment of its interest rate whenever
a specific interest rate (e.g., the prime rate) changes and at any time can
reasonably be expected to have a market value that approximates its par value.
   
  The Portfolio may invest without limit in private activity bonds. Interest
income on certain types of private activity bonds issued after August 7, 1986
to finance non-governmental activities is a specific tax preference item for
purposes of the Federal individual and corporate alternative minimum taxes.
Individual and corporate shareholders may be subject to a Federal alternative
minimum tax to the extent the Portfolio's dividends are derived from interest
on these bonds. These private activity bonds are included in the term "munici-
pal obligations" for purposes of determining compliance with the 80% test
described above. Dividends derived from interest income on all municipal obli-
gations are a component of the "current earnings" adjustment item for purposes
of the Federal corporate alternative minimum tax.     
 
  The Portfolio may invest up to 20% of the value of its assets in one or more
of the three principal types of derivative product structures described below.
Derivative products are typically structured by a bank, broker-dealer or other
financial institution. A derivative product generally consists of a trust or
partnership through which the Portfolio holds an interest in one or more under-
lying bonds coupled with a conditional right to sell ("put") the Portfolio's
interest in the underlying bonds at par plus accrued interest to a financial
institution (a "Liquidity Provider"). Typically, a derivative product is struc-
tured as a trust or partnership which provides for
 
6
<PAGE>
 
   
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)     
   
pass-through tax-exempt income. There are currently three principal types of
derivative structures: (1) "Tender Option Bonds," which are instruments which
grant the holder thereof the right to put an underlying bond at par plus
accrued interest at specified intervals to a Liquidity Provider; (2) "Swap
Products," in which the trust or partnership swaps the payments due on an
underlying bond with a swap counterparty who agrees to pay a floating munici-
pal money market interest rate; and (3) "Partnerships," which allocate to the
partners income, expenses, capital gains and losses in accordance with a gov-
erning partnership agreement.     
 
  Investments in derivative products raise certain tax, legal, regulatory and
accounting issues which may not be presented by investments in other municipal
bonds. There is some risk that certain issues could be resolved in a manner
which could adversely impact the performance of the Portfolio. For example,
the tax-exempt treatment of the interest paid to holders of derivative prod-
ucts is premised on the legal conclusion that the holders of such derivative
products have an ownership interest in the underlying bonds. While the Portfo-
lio receives an opinion of legal counsel to the effect that the income from
each derivative product is tax-exempt to the same extent as the underlying
bond, the Internal Revenue Service (the "IRS") has not issued a ruling on this
subject. Were the IRS to issue an adverse ruling, there is a risk that the
interest paid on such derivative products would be deemed taxable.
 
  The Portfolio intends to limit the risk of derivative products by purchasing
only those derivative products that are consistent with the Portfolio's
investment objective and policies. The Portfolio will not use such instruments
to leverage securities. Hence, derivative products' contributions to the over-
all market risk characteristics of a Portfolio will not materially alter its
risk profile and will be fully representative of the Portfolio's maturity
guidelines.
          
  The Portfolio will not invest more than 10% of the value of its total assets
in illiquid securities, which will include: (i) under certain circumstances,
derivative products; (ii) floating- or variable-rate demand instruments as to
which the Portfolio cannot exercise the demand feature on not more than seven
days' notice if there is no secondary market available for these instruments;
(iii) other securities that are not readily marketable; and (iv) any repur-
chase transactions that do not mature within seven days.     
 
 RISK AND PORTFOLIO MANAGEMENT
 
  There can be no assurance that the Portfolio will achieve its investment
objective. The ability of the Portfolio to achieve its investment objective is
dependent on a number of factors, including the skills of the Manager in pur-
chasing municipal obligations whose issuers have the continuing ability to
meet their obligations for
 
                                                                              7
<PAGE>
 
   
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)     
 
the payment of interest and principal when due. The ability to achieve a high
level of income is dependent on the yields of the securities in the portfolio.
Yields on municipal obligations are the product of a variety of factors,
including the general conditions of the money market, of the municipal bond and
municipal note markets, the size of a particular offering, the maturity of the
obligation and the rating of the issue. Municipal obligations with longer matu-
rities tend to produce higher yields and are generally subject to potentially
greater price fluctuations than obligations with shorter maturities.
 
  The Portfolio's concentration in California obligations involves certain
additional risks that should be considered carefully by investors. Certain Cal-
ifornia constitutional amendments, legislative measures, executive orders,
administrative regulations, court decisions and voter initiatives could result
in certain adverse consequences affecting California obligations. In particu-
lar, there are risks resulting from certain recent amendments to the California
Constitution and other statutes that limit the taxing and spending authority of
California governmental entities, and these may have the effect of impairing
the ability of certain issuers of California obligations to pay principal and
interest on their obligations. See the Statement of Additional Information for
a more detailed description of these and other risks relating to the Portfo-
lio's investments in California obligations.
   
  When-Issued Purchase Commitments. New issues of municipal obligations are
often offered on a "when-issued" basis, i.e., delivery and payment normally
take place 15 to 45 days after the purchase date. The payment obligation and
the interest rate to be received on the securities are fixed at the time the
buyer enters into the commitment, although no interest accrues with respect to
a when-issued security prior to its stated delivery date. The Portfolio will
only make commitments to purchase such securities with the intention of actu-
ally acquiring the securities, but the Portfolio may sell these securities
before the settlement date if it is deemed advisable as a matter of investment
strategy. A segregated account of the Portfolio consisting of cash or debt
securities of any grade having a value equal to or greater than the Portfolio's
purchase commitments, provided such securities have been determined by the Man-
ager to be liquid and unencumbered and are marked to market daily pursuant to
guidelines established by the Trustees, will be maintained with PNC Bank,
National Association (the "Custodian") and monitored on a daily basis so that
the market value of the account will equal or exceed the amount of such commit-
ments by the Portfolio.     
   
  Securities purchased on a when-issued basis are subject to changes in market
value prior to delivery based not only upon the public's perception of the
creditworthiness of the issuer but also changes in the level of interest rates,
i.e., appreciating when interest rates decline and depreciating when interest
rates rise. Therefore, if in order to achieve higher interest income the Port-
folio remains substantially fully invested at the same time that it has pur-
chased securities on a when-issued basis,     
 
8
<PAGE>
 
   
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)     
   
there will be a greater possibility that the market value of the Portfolio's
assets will vary from $1.00 per share. See "Determination of Net Asset Value."
There will also be a greater potential for the realization of capital gains,
which are not exempt from Federal or state income taxes.     
   
  Stand-By Commitments. The Portfolio may acquire "stand-by commitments" with
respect to municipal obligations held in its portfolio. Under a stand-by com-
mitment a dealer agrees to purchase, at the Portfolio's option, specified
municipal obligations at a specified price. The Portfolio intends to enter into
stand-by commitments only with dealers, banks and broker-dealers which, in the
opinion of the Manager, present minimal credit risks. In evaluating the credit-
worthiness of the issuer of a stand-by commitment, the Manager will review
periodically the issuer's assets, liabilities, contingent claims and other rel-
evant financial information. The Portfolio will acquire stand-by commitments
solely to facilitate portfolio liquidity and does not intend to exercise its
rights thereunder for trading purposes.     
 
  Other Factors to be Considered. Investors purchasing municipal obligations of
their state of residence, or a fund comprised of such obligations, should rec-
ognize that the benefits of the exemption from state and local taxes, in addi-
tion to the exemption from Federal taxes, necessarily limits the fund's ability
to diversify geographically.
 
  The Portfolio anticipates being as fully invested as practicable in Califor-
nia municipal obligations and generally expects to invest the proceeds received
from the sale of shares in California municipal obligations as soon as reasona-
bly possible, which is generally within one day. At no time will more than 20%
of the Portfolio's net assets be invested in taxable investments except when
the Portfolio has adopted a temporary defensive investment policy.
 
  The Portfolio may engage in short-term trading to attempt to take advantage
of short-term market variations or may dispose of a portfolio security prior to
its maturity if it believes such disposition advisable or it needs to generate
cash to satisfy redemptions. In such cases, the Portfolio may realize a gain or
loss.
   
  The Fund is registered as a "non-diversified" company under the 1940 Act, in
order for the Portfolio to have the ability to invest more than 5% of its
assets in the securities of any issuer. The Portfolio intends to comply with
Subchapter M of the Internal Revenue Code of 1986, as amended (the "Code")
which limits the aggregate value of all holdings (except U.S. government and
cash items, as defined in the Code) that exceed 5% of the Portfolio's total
assets to an aggregate amount of 50% of such assets. Also, holdings of a single
issuer (with the same exceptions) may not exceed 25% of the Portfolio's total
assets. These limits are measured at the end of each quarter. Under the
Subchapter M limits, non-diversification allows up to 50% of the Portfolio's
total assets to be invested in as few as two single issuers. In the event of
decline in creditworthiness of, or default upon, the obligations of one or     
 
                                                                               9
<PAGE>
 
   
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)     
   
more such issuers exceeding 5%, an investment in the Portfolio will entail
greater risk than in a portfolio having a policy of diversification because a
high percentage of the Portfolio's assets may be invested in municipal obliga-
tions of one or two issuers. Furthermore, a high percentage of investments
among few issuers may result in a greater degree of fluctuation in the market
value of the assets of the Portfolio, and consequently a greater degree of
fluctuation of the Portfolio's net asset value, because the Portfolio will be
more susceptible to economic, political, or regulatory developments affecting
these securities than would be the case with a portfolio composed of varied
obligations of more issuers.     
   
  Because the Portfolio invests in securities backed by banks and other finan-
cial institutions, changes in the credit quality of these institutions could
cause losses to the Portfolio and affect its share price.     
 
  From time to time, proposals have been introduced before Congress for the
purpose of restricting or eliminating the Federal income tax exemption for
interest on municipal obligations and similar proposals may be introduced in
the future. If one of these proposals were enacted, the availability of tax
exempt obligations for investment by the Portfolio and the value of the Port-
folio securities would be affected. The Trustees would then reevaluate the
Portfolio's investment objective and policies.
 
VALUATION OF SHARES
 
 
  The Portfolio's net asset value per share is determined as of the close of
regular trading on each day that the New York Stock Exchange ("NYSE") is open.
The net asset value per share is computed by dividing the Portfolio's net
assets attributable to each class (i.e., the value of its assets less liabili-
ties) by the total number of its shares of the class outstanding. The Portfo-
lio may also determine net asset value per share on days when the NYSE is not
open, but when the settlement of securities may otherwise occur. The Portfolio
employs the "amortized cost method" of valuing portfolio securities and
intends to use its best efforts to continue to maintain a constant net asset
value of $1.00 per share.
 
DIVIDENDS, AUTOMATIC REINVESTMENT AND TAXES
 
 
 DIVIDENDS AND AUTOMATIC REINVESTMENT
 
  The Portfolio declares dividends daily from its net investment income on
each day the NYSE is open. Net investment income includes interest accrued and
discount earned and is less premium amortized and expenses accrued (the amount
of discount or premium on portfolio investments is fixed at the time of pur-
chase). Unless the shareholder has elected to receive monthly distributions of
income, such
 
10
<PAGE>
 
DIVIDENDS, AUTOMATIC REINVESTMENT AND TAXES (CONTINUED)
   
dividends will automatically be reinvested in Portfolio shares of the same
Class at net asset value. If a shareholder redeems an account in full between
payment dates, all dividends declared up to and including the date of liquida-
tion will be paid with the proceeds from the redemption of shares. The per
share dividends of Class A shares of the Portfolio may be less than the per
share dividends of the Class Y shares, principally as a result of the service
fee applicable to Class A shares.     
 
 TAXES
   
  Federal Income Taxes. Under Subchapter M of the Code with which the Portfolio
intends to comply, no Federal income taxes will ordinarily be payable by the
Portfolio. Distributions by the Portfolio of interest income from tax exempt
obligations are not taxable to shareholders and will not be includable in their
gross income for Federal income tax purposes (see discussion of alternative
minimum tax above). Realized gains and losses are reflected in the Portfolio's
net assets and are not included in net investment income. Capital gain distri-
butions, if any, whether paid in cash or invested in shares of the Portfolio,
will be taxable to shareholders.     
 
  California State Taxes. California shareholders will not be subject to Cali-
fornia state personal income tax on Portfolio dividends to the extent that such
distributions qualify as exempt-interest dividends under the Code and Califor-
nia law and provided that, at the close of each quarter of the Portfolio's tax-
able year, at least 50% of the Portfolio's total assets are invested in munici-
pal obligations of California issuers. To the extent that distributions are
derived from taxable income, including long or short-term capital gains, such
distributions will not be exempt from California state personal income tax.
Dividends on the Portfolio are not excluded in determining California state
franchise taxes on corporations and financial institutions.
   
  Under the Code, interest on indebtedness incurred or continued to purchase or
carry shares of the Portfolio will not be deductible to the extent that the
Portfolio's distributions are exempt from Federal income tax. In addition, any
loss realized upon the redemption of shares held less than six months will be
disallowed to the extent of any exempt-interest dividends received by the
shareholder during such period. However, this holding period may be shortened
by the Treasury Department to a period of not less than the greater of 31 days
or the period between regular dividend distributions. Further, persons who may
be "substantial users" (or "related persons" of substantial users) of facili-
ties financed by industrial development bonds should consult their tax advisers
before purchasing Portfolio shares.     
   
  The foregoing is only a brief summary of some of the important tax considera-
tions generally affecting the Portfolio and its shareholders. Additional tax
information of relevance to particular investors is contained in the Statement
of Additional Information. Investors are urged to consult their tax advisers
with specific reference to their own tax situation.     
 
                                                                              11
<PAGE>
 
PURCHASE OF SHARES
 
  Purchases of Portfolio shares may be made through a brokerage account main-
tained with Smith Barney Inc. ("Smith Barney"), with a broker that clears
securities transactions through Smith Barney on a fully disclosed basis (an
"Introducing Broker") or an investment dealer in the selling group. No mainte-
nance fee will be charged by the Portfolio in connection with a brokerage
account through which an investor purchases or holds shares.
   
  Investors in Class A may open an account by making an initial investment of
at least $1,000 for each Portfolio account. Investors in Class Y may open an
account by making an initial investment of at least $5,000,000. Subsequent
investments of at least $50 may be made for either Class. There are no minimum
investment requirements in Class A for employees of Travelers Group Inc.
("Travelers") and its subsidiaries, including Smith Barney, and Trustees or
Directors of any of the Smith Barney Mutual Funds, and their spouses and chil-
dren. The Portfolio reserves the right to waive or change minimums, to decline
any order to purchase its shares and to suspend the offering of shares from
time to time. Share certificates are issued only upon a shareholder's written
request to the Fund's transfer agent, First Data Investor Services Group, Inc.
("First Data").     
   
  For investors who maintain a brokerage account with Smith Barney, Smith Bar-
ney has advised the Portfolio that depending on the type of securities
account, its clients' free credit balances (i.e., immediately available funds)
will be invested automatically in full shares of the Portfolio either on a
daily or weekly basis. In addition to this "sweep" service, shareholders who
open a Smith Barney FMA PLUSSM account, which is a full service investment
account, will also be able to take advantage of, among other things: a free
Individual Retirement Account, free dividend reinvestment, unlimited checking,
100 free ATM withdrawals each year, free gain/loss analysis and online com-
puter access to account information. Smith Barney clients should contact their
Financial Consultant for more complete information. A complete record of Port-
folio dividends, purchases and redemptions will be included on such sharehold-
ers' regular Smith Barney statements.     
   
  The minimum initial investment requirement in the Portfolio for an account
established under the Uniform Gift to Minors Act is $250 and the subsequent
investment requirement is $50.     
 
  The Portfolio's shares are sold continuously at their net asset value next
determined after a purchase order is received and becomes effective. A pur-
chase order becomes effective when the Fund, Smith Barney or an Introducing
Broker receives, or converts the purchase amount into, Federal funds (i.e.,
monies of member banks within the Federal Reserve System held on deposit at a
Federal Reserve Bank). When orders for the purchase of Portfolio shares are
paid for in Federal funds, or are placed by an investor with sufficient Fed-
eral funds or cash balance in the investor's brokerage account with Smith Bar-
ney or the Introducing Broker, the order
 
12
<PAGE>
 
PURCHASE OF SHARES (CONTINUED)
   
becomes effective on the day of receipt if received prior to the close of reg-
ular trading on the NYSE on any day the Portfolio calculates its net asset
value. See "Valuation of Shares." Purchase orders received after the close of
regular trading on the NYSE on any business day are effective as of the time
the net asset value is next determined. When orders for the purchase of Port-
folio shares are paid for other than in Federal funds, Smith Barney or the
Introducing Broker, acting on behalf of the investor, will complete the con-
version into, or itself advance, Federal funds, and the order will become
effective on the day following its receipt by the Fund, Smith Barney or the
Introducing Broker. Shares purchased directly through First Data begin to
accrue income dividends on the day that the purchase order becomes effective.
All other shares begin to accrue income dividends on the next business day
following the day that the purchase order becomes effective.     
 
 SYSTEMATIC INVESTMENT PLAN
   
  Upon completion of certain automated systems, shareholders may make addi-
tions to their accounts at any time by purchasing shares through a service
known as the Systematic Investment Plan. Under the Systematic Investment Plan,
Smith Barney or First Data is authorized through preauthorized transfers to
charge the regular bank account or other financial institution indicated by
the shareholder on a monthly or quarterly basis to provide systematic addi-
tions to the shareholder's Portfolio account. For shareholders purchasing
shares of the Portfolio through the Systematic Investment Plan on a monthly
basis, the minimum initial investment requirement for Class A shares and the
minimum subsequent investment requirement for both Classes is $25. For share-
holders purchasing shares of the Portfolio through the Systematic Investment
Plan on a quarterly basis, the minimum initial investment requirement for
Class A shares and the minimum subsequent investment requirement for both
Classes is $50. A shareholder who has insufficient funds to complete the
transfer will be charged a fee of up to $25 by Smith Barney or First Data.
Additional information is available from the Fund or a Smith Barney Financial
Consultant.     
 
 LETTER OF INTENT
 
  Class Y Shares. A Letter of Intent provides an opportunity for investors to
meet the minimum investment requirement for Class Y shares by aggregating
investments over a six-month period. Such investors must make an initial mini-
mum purchase of $1,000,000 in Class Y shares of the Portfolio and agree to
purchase a total of $5,000,000 of Class Y shares of the same Portfolio within
six months from the date of the Letter. If a total investment of $5,000,000 is
not made within the six-month period, all Class Y shares purchased to date
will be transferred to Class A shares, where they will be subject to all fees
(including a service fee of 0.10%) and expenses applicable to the Portfolio's
Class A shares, which may include a CDSC of 1.00%. Please contact a Smith Bar-
ney Financial Consultant or First Data for further information.
 
                                                                             13
<PAGE>
 
REDEMPTION OF SHARES
   
  Shareholders may redeem their shares without charge on any day the Portfolio
calculates its net asset value. See "Valuation of Shares." Redemption requests
received in proper form before the close of regular trading are priced at the
net asset value as next determined on that day. Redemption requests received
after the close of regular trading are priced at the net asset value as next
determined.     
 
  The Portfolio normally transmits redemption proceeds on the business day
following receipt of a redemption request but, in any event, payment will be
made no later than the third business day after a redemption is made, except
on days on which the NYSE is closed and the settlement of securities does not
otherwise occur, or as permitted under the 1940 Act in extraordinary circum-
stances. Generally, if the redemption proceeds are remitted to a Smith Barney
brokerage account, these funds will not be invested for the shareholder's ben-
efit without specific instruction and Smith Barney will benefit from the use
of temporarily uninvested funds. A shareholder who pays for Portfolio shares
by personal check will be credited with the proceeds of a redemption of those
shares only after the purchase check has been collected, which may take up to
ten days or more. A shareholder who anticipates the need for more immediate
access to his or her investment should purchase shares with Federal funds, by
bank wire or with a certified or cashier's check.
   
  Shareholders who purchase securities through Smith Barney or an Introducing
Broker may take advantage of special redemption procedures under which Class A
shares of the Portfolio will be redeemed automatically to the extent necessary
to satisfy debit balances arising in the shareholder's account with Smith Bar-
ney or the Introducing Broker. One example of how an automatic redemption may
occur involves the purchase of securities. If a shareholder purchases securi-
ties but does not pay for them by the settlement date, the number of Portfolio
shares necessary to cover the debit will be redeemed automatically as of the
settlement date, which usually occurs three business days after the trade
date. Class A shares that are subject to a CDSC (see "Redemption of Shares--
Contingent Deferred Sales Charge") are not eligible for such automatic redemp-
tion and will only be redeemed upon specific request. If the shareholder does
not request redemption of such shares, the shareholder's account with Smith
Barney or the Introducing Broker may be margined to satisfy debit balances if
sufficient Portfolio shares that are not subject to any applicable CDSC are
unavailable. No fee is currently charged with respect to these automatic
transactions. Shareholders not wishing to participate in these arrangements
should notify a Smith Barney Financial Consultant.     
 
  Redemption requests must be made through Smith Barney, an Introducing Broker
or the securities dealer through whom the shares were purchased. A shareholder
desiring to redeem shares represented by certificates also must present the
certificates to Smith Barney or the Introducing Broker endorsed for transfer
(or accompanied by an endorsed stock power), signed exactly as the shares are
registered.
 
14
<PAGE>
 
REDEMPTION OF SHARES (CONTINUED)
 
Redemption requests involving shares represented by certificates will not be
deemed received until the certificates are received by First Data in proper
form.
 
  A written redemption request must (a) state the Class and number or dollar
amount of shares to be redeemed, (b) identify the shareholder's account number
and (c) be signed by each registered owner exactly as the shares are regis-
tered. If the shares to be redeemed were issued in certificate form, the cer-
tificates must be endorsed for transfer (or be accompanied by an endorsed stock
power) and must be submitted to First Data together with the redemption
request. Any signature appearing on a share certificate, stock power or written
redemption request in excess of $2,000 must be guaranteed by an eligible guar-
antor institution such as a domestic bank, savings and loan institution, domes-
tic credit union, member bank of the Federal Reserve System or member firm of a
national securities exchange. Written redemption requests of $2,000 or less do
not require a signature guarantee unless more than one such redemption request
is made in any 10-day period. Redemption proceeds will be mailed to an invest-
or's address of record. First Data may require additional supporting documents
for redemptions made by corporations, executors, administrators, trustees or
guardians. A redemption request will not be deemed properly received until
First Data receives all required documents in proper form.
 
 TELEPHONE REDEMPTION AND EXCHANGE PROGRAM
   
  Shareholders who do not have a Smith Barney brokerage account may be eligible
to redeem and exchange Fund shares by telephone. To determine if a shareholder
is entitled to participate in this program, he or she should contact First Data
at 1-800-451-2010. Once eligibility is confirmed, the shareholder must complete
and return a Telephone/Wire Authorization Form, along with a signature guaran-
tee that will be provided by First Data upon request. Alternatively, an
investor may authorize telephone redemptions on the new account application
with the applicant's signature guarantee when making his or her initial invest-
ment in the Fund.     
   
  Redemptions. Redemption requests of up to $10,000 of any class or classes of
the Fund's shares may be made by eligible shareholders by calling First Data at
1-800-451-2010. Such requests may be made between 9:00 a.m. and 5:00 p.m. (New
York City time) on any day the NYSE is open. Redemptions of shares (i) by
retirement plans or (ii) for which certificates have been issued are not per-
mitted under this program.     
   
  A shareholder will have the option of having the redemption proceeds mailed
to his or her address of record or wired to a bank account predesignated by the
shareholder. Generally, redemption proceeds will be mailed or wired, as the
case may be, on the next business day following the redemption request. In
order to use the wire procedures, the bank receiving the proceeds must be a
member of the Federal Reserve System or have a correspondent relationship with
a member bank. The     
 
                                                                              15
<PAGE>
 
REDEMPTION OF SHARES (CONTINUED)
 
Fund reserves the right to charge shareholders a nominal fee for each wire
redemption. Such charges, if any, will be assessed against the shareholder's
account from which shares were redeemed. In order to change the bank account
designated to receive redemption proceeds, a shareholder must complete a new
Telephone/Wire Authorization Form and, for the protection of the shareholder's
assets, will be required to provide a signature guarantee and certain other
documentation.
 
  Exchanges. Eligible shareholders may make exchanges by telephone if the
account registration of the shares of the fund being acquired is identical to
the registration of the shares of the fund exchanged. Such exchange requests
may be made by calling First Data at 1-800-451-2010 between 9:00 a.m. and 5:00
p.m. (New York City time) on any day on which the NYSE is open. See "Exchange
Privilege" for more information.
   
  Additional Information regarding Telephone Redemption and Exchange
Program. Neither the Fund nor its agents will be liable for following instruc-
tions communicated by telephone that are reasonably believed to be genuine.
The Fund and its agents will employ procedures designed to verify the identity
of the caller and legitimacy of instructions (for example, a shareholder's
name and account number will be required and phone calls may be recorded). The
Fund reserves the right to suspend, modify or discontinue the telephone
redemption and exchange program or to impose a charge for this service at any
time following at least seven days' prior notice to shareholders.     
 
 CONTINGENT DEFERRED SALES CHARGE
 
  Class A shares of the Portfolio acquired as part of an exchange privilege
transaction, which were originally acquired in one of the other Smith Barney
Mutual Funds at net asset value subject to a CDSC, continue to be subject to
any applicable CDSC of the original fund. Therefore, such Class A shares that
are redeemed within 12 months of the date of purchase of the original fund may
be subject to a CDSC of 1.00%. The amount of any CDSC will be paid to and
retained by Smith Barney. The CDSC will be assessed based on an amount equal
to the net asset value at the time of redemption. Accordingly, no CDSC will be
imposed on increases in net asset value above the initial purchase price in
the original fund. In addition, no charge will be assessed on shares derived
from reinvestment of dividends or capital gain distributions.
 
  In determining the applicability of any CDSC, it will be assumed that a
redemption is made first of shares representing capital appreciation, next of
shares representing the reinvestments of dividends and capital gain distribu-
tions and finally of other shares held by the shareholder for the longest
period of time. The length of time that Class A shares have been held will be
calculated from the date the shares were initially acquired in one of the
other Smith Barney Mutual Funds and such shares being redeemed will be consid-
ered to represent, as applicable, capital appre-
 
16
<PAGE>
 
REDEMPTION OF SHARES (CONTINUED)
 
ciation or dividend and capital gain distribution reinvestments in such other
funds. For Federal income tax purposes, the amount of the CDSC will reduce the
gain or increase the loss, as the case may be, on the amount realized on
redemption.
   
  The CDSC on Class A shares will be waived on (a) exchanges (see "Exchange
Privilege"); (b) redemptions of shares within 12 months following the death or
disability of the shareholder; (c) involuntary redemptions; and (d) redemptions
of shares to effect a combination of the Portfolio with any investment company
by merger, acquisition of assets or otherwise. In addition, a shareholder who
has redeemed shares from other funds of the Smith Barney Mutual Funds may,
under certain circumstances, reinvest all or part of the redemption proceeds
within 60 days and receive pro rata credit for any CDSC imposed on the prior
redemption.     
 
  CDSC waivers will be granted subject to confirmation (by Smith Barney in the
case of shareholders who are also Smith Barney clients or by First Data in the
case of all other shareholders) of the shareholder's status or holdings, as the
case may be.
 
EXCHANGE PRIVILEGE
   
  Except as otherwise noted below, shares of each Class may be exchanged for
shares of the same Class in the following funds of the Smith Barney Mutual
Funds, to the extent shares are offered for sale in the shareholder's state of
residence. Exchanges of Class A shares are subject to minimum investment
requirements and all shares are subject to the other requirements of the fund
into which exchanges are made and a sales charge may apply.     
 
 FUND NAME
 
  Growth Funds
    Smith Barney Aggressive Growth Fund Inc.
    Smith Barney Appreciation Fund Inc.
       
    Smith Barney Disciplined Small Cap Fund, Inc.     
    Smith Barney Fundamental Value Fund Inc.
    Smith Barney Growth Opportunity Fund
       
    Smith Barney Large Capitalization Growth Fund     
    Smith Barney Managed Growth Fund
    Smith Barney Natural Resources Fund Inc.
    Smith Barney Special Equities Fund
 
  Growth and Income Funds
       
    Concert Social Awareness Fund     
    Smith Barney Convertible Fund
    Smith Barney Funds, Inc.--Equity Income Portfolio
    Smith Barney Growth and Income Fund
    Smith Barney Premium Total Return Fund
         
    Smith Barney Utilities Fund
 
                                                                              17
<PAGE>
 
EXCHANGE PRIVILEGE (CONTINUED)
 
  Taxable Fixed-Income Funds
      Smith Barney Adjustable Rate Government Income Fund
      Smith Barney Diversified Strategic Income Fund
           
      Smith Barney Funds, Inc.--Short-Term U.S. Treasury Securities Port-
    folio
      Smith Barney Funds, Inc.--U.S. Government Securities Portfolio
      Smith Barney Government Securities Fund
      Smith Barney High Income Fund
      Smith Barney Investment Grade Bond Fund
      Smith Barney Managed Governments Fund Inc.
 
  Tax-Exempt Funds
      Smith Barney Arizona Municipals Fund Inc.
      Smith Barney California Municipals Fund Inc.
      Smith Barney Intermediate Maturity California Municipals Fund
      Smith Barney Intermediate Maturity New York Municipals Fund
      Smith Barney Managed Municipals Fund Inc.
      Smith Barney Massachusetts Municipals Fund
           
      Smith Barney Muni Funds--Florida Portfolio
      Smith Barney Muni Funds--Georgia Portfolio
      Smith Barney Muni Funds--Limited Term Portfolio
      Smith Barney Muni Funds--National Portfolio
      Smith Barney Muni Funds--New York Portfolio
           
      Smith Barney Muni Funds--Pennsylvania Portfolio
      Smith Barney New Jersey Municipals Fund Inc.
      Smith Barney Oregon Municipals Fund
      Smith Barney Tax-Exempt Income Fund
 
  International Funds
      Smith Barney World Funds, Inc.--Emerging Markets Portfolio
      Smith Barney World Funds, Inc.--European Portfolio
      Smith Barney World Funds, Inc.--Global Government Bond Portfolio
      Smith Barney World Funds, Inc.--International Balanced Portfolio
      Smith Barney World Funds, Inc.--International Equity Portfolio
      Smith Barney World Funds, Inc.--Pacific Portfolio
     
  Smith Barney Concert Allocation Series Inc.     
         
      Smith Barney Concert Allocation Series Inc.--Balanced Portfolio     
       
      Smith Barney Concert Allocation Series Inc.--Conservative Portfolio
           
      Smith Barney Concert Allocation Series Inc.--Growth Portfolio     
       
      Smith Barney Concert Allocation Series Inc.--High Growth Portfolio
           
      Smith Barney Concert Allocation Series Inc.--Income Portfolio     
 
 
18
<PAGE>
 
EXCHANGE PRIVILEGE (CONTINUED)
 
  Money Market Funds
      Smith Barney Money Funds, Inc.--Cash Portfolio
      Smith Barney Money Funds, Inc.--Government Portfolio
      *Smith Barney Money Funds, Inc.--Retirement Portfolio
      Smith Barney Muni Funds--New York Money Market Portfolio
      Smith Barney Municipal Money Market Fund, Inc.
--------------------------------------------------------------------------------
*  Available for exchange with Class A shares of the Portfolio.
       
          
  Class A Exchanges. Class A shares of the Portfolio will be subject to the
appropriate sales charge upon the exchange of such shares for Class A shares of
another fund of the Smith Barney Mutual Funds sold with a sales charge. If no
sales charge was imposed upon the initial purchase of the shares, any shares
obtained through automatic reinvestment will be subject to a sales charge dif-
ferential upon exchange.     
   
  Class Y Exchanges. Class Y shareholders of the Portfolio who wish to exchange
all or a portion of their Class Y shares for Class Y shares in any of the funds
identified above may do so without imposition of any charge.     
   
  Additional Information Regarding the Exchange Privilege. Although the
exchange privilege is an important benefit, excessive exchange transactions can
be detrimental to the Portfolio's performance and its shareholders. The Manager
may determine that a pattern of frequent exchanges is excessive and contrary to
the best interests of the Portfolio's other shareholders. In this event the
Fund may, at its discretion, decide to limit additional purchases and/or
exchanges by the shareholder. Upon such a determination, the Fund will provide
notice in writing or by telephone to the shareholder at least 15 days prior to
suspending the exchange privilege and during the 15 day period the shareholder
will be required to (a) redeem his or her shares in the Portfolio or (b) remain
invested in the Portfolio or exchange into any of the funds of the Smith Barney
Mutual Funds ordinarily available, which position the shareholder would be
expected to maintain for a significant period of time. All relevant factors
will be considered in determining what constitutes an abusive pattern of
exchanges.     
   
  Certain shareholders may be able to exchange shares by telephone. See "Re-
demption of Shares--Telephone Redemption and Exchange Program." Exchanges will
be processed at the net asset value next determined plus any applicable sales
charge. Redemption procedures discussed above are also applicable for exchang-
ing shares, and exchanges will be made upon receipt of all supporting documents
in proper form. If the account registration of the shares of the fund being
acquired is identical to the registration of the shares of the fund exchanged,
no signature guarantee is required. A capital gain or loss for tax purposes
will be realized upon the exchange, depending upon the cost or other basis of
shares redeemed. Before exchanging shares, investors should read the current
prospectus describing the shares to be acquired. The Portfolio reserves the
right to modify or discontinue exchange privileges upon 60 days' prior notice
to shareholders.     
 
                                                                              19
<PAGE>
 
MINIMUM ACCOUNT SIZE
   
  The Fund reserves the right to involuntarily liquidate any shareholder's
account if the aggregate net asset value of the shares held in the account is
less than $500. If a shareholder has more than one account in the Portfolio,
each account must satisfy the minimum account size. Before the Fund exercises
such right, shareholders will receive written notice and will be permitted 60
days to bring the account up to the minimum to avoid involuntary liquidation.
    
YIELD INFORMATION
 
 
  From time to time the Portfolio may advertise its yield, effective yield and
tax equivalent yield. These figures are computed separately for Class A and
Class Y shares of the Portfolio. These yield figures will be based on histori-
cal earnings and are not intended to indicate future performance. The yield of
the Portfolio refers to the net investment income generated by an investment
in the Portfolio over a specific seven-day period (which will be stated in the
advertisement). This net investment income is then annualized. The effective
yield is calculated similarly but, when annualized, the income earned by an
investment in the Portfolio is assumed to be reinvested. The effective yield
will be slightly higher than the yield because of the compounding effect of
the assumed reinvestment. The tax equivalent yield also is calculated simi-
larly to the yield, except that a stated income tax rate is used to demon-
strate the taxable yield necessary to produce an after-tax yield equivalent to
the tax-exempt yield of the Portfolio.
 
MANAGEMENT OF THE FUND
 
 
 TRUSTEES
  Overall responsibility for management and supervision of the Fund rests with
the Fund's Trustees. The Trustees approve all significant agreements between
the Fund and the companies that furnish services to the Fund and the Portfo-
lio, including agreements with the Fund's distributor, investment manager,
custodian and transfer agent. The day-to-day operations of the Fund are dele-
gated to the Fund's investment manager. The Statement of Additional Informa-
tion contains background information regarding each Trustee and executive
officer of the Fund.
 
 MANAGER
   
  The Manager manages the day to day operations of the Portfolio pursuant to a
Management Agreement entered into on behalf of the Portfolio. SBMFM is a sub-
sidiary of Smith Barney Holdings Inc. ("Holdings"), the parent company of
Smith Barney (the "Distributor"). Holdings is a wholly owned subsidiary of
Travelers, which is a financial services holding company engaged, through its
subsidiaries, principally in four business segments: Investment Services, Con-
sumer Finance Services, Life Insurance Services and Property & Casualty Insur-
ance Services.     
 
20
<PAGE>
 
MANAGEMENT OF THE FUND (CONTINUED)
   
SBMFM, Holdings and Smith Barney are each located at 388 Greenwich Street, New
York, New York 10013. SBMFM renders investment advice to investment companies
that had aggregate assets under management as of May 31, 1997 of approximately
$87 billion.     
   
  SBMFM provides the Fund with investment management services, executive and
other personnel, pays the remuneration of Fund officers, provides the Fund
with office space and equipment, furnishes the Fund with bookkeeping, account-
ing, administrative services and services relating to research, statistical
work and supervision of the Portfolio. For the services provided, the Portfo-
lio pays SBMFM a daily fee calculated at the annual rate of 0.50% of the Port-
folio's average net assets. For the last fiscal year the total expenses for
Class A shares were 0.67% of average net assets. SBMFM has agreed to waive its
fee with respect to a Class to the extent that it is necessary if in any fis-
cal year the aggregate expenses of such Class exclusive of 12b-1 fees, taxes,
brokerage, interest and extraordinary expenses, such as litigation costs,
exceed 0.70% of its average daily net assets for that fiscal year. The 0.70%
expense limitation shall be in effect until it is terminated by notice to
shareholders and by supplement to the then-current prospectus.     
 
  The term "Smith Barney" in the title of the Fund has been adopted by permis-
sion of Smith Barney and is subject to the right of Smith Barney to elect that
the Fund stop using the term in any form or combination of its name.
 
DISTRIBUTOR
 
 
  Smith Barney distributes shares of the Portfolio as principal underwriter
and as such conducts a continuous offering pursuant to a "best efforts"
arrangement requiring Smith Barney to take and pay for only such securities as
may be sold to the public. Pursuant to a plan of distribution adopted by the
Portfolio under Rule 12b-1 under the 1940 Act (the "Plan"), Smith Barney is
paid an annual service fee with respect to Class A shares of the Portfolio at
the annual rate of 0.10% of the average daily net assets of Class A shares.
The fee is used by Smith Barney to pay its Financial Consultants for servicing
Class A shareholder accounts for as long as a shareholder remains a holder of
the Class. The service fee is also spent by Smith Barney on the following
types of expenses: (1) the pro rata share of other employment costs of such
financial consultants (e.g., FICA, employee benefits, etc.); (2) employment
expenses of home office personnel primarily responsible for providing service
to Class A shareholders and (3) the pro rata share of branch office fixed
expenses (including branch overhead allocations). Shareholder servicing
expenses incurred by Smith Barney but not reimbursed by Class A in any year
will not be a continuing liability of the Class in subsequent years.
 
  Smith Barney also advises profit-sharing and pension accounts. Smith Barney
and its affiliates may in the future act as investment advisers for other
accounts.
 
                                                                             21
<PAGE>
 
ADDITIONAL INFORMATION
   
  The Fund, an open-end, non-diversified management investment company, is
organized as a "Massachusetts business trust" pursuant to a Declaration of
Trust dated August 14, 1985. Pursuant to the Declaration of Trust, the Trustees
have authorized the issuance of twenty series of shares, each representing
shares in one of twenty separate Portfolios. The assets of each Portfolio are
segregated and separately managed. Each share of a Portfolio represents an
equal proportionate interest in the net assets of that Portfolio with each
other share of the same Portfolio and is entitled to such dividends and distri-
butions out of the net income of that Portfolio as are declared in the discre-
tion of the Trustees. Shareholders are entitled to one vote for each share held
and will vote by individual Portfolio except as otherwise permitted by the 1940
Act. It is the intention of the Fund not to hold annual meetings of sharehold-
ers. The Trustees may call meetings of shareholders for action by shareholder
vote as may be required by the 1940 Act or the Declaration of Trust, and share-
holders are entitled to call a meeting upon a vote of 10% of the Fund's out-
standing shares for purposes of voting on removal of a Trustee or Trustees. The
Fund will assist shareholders in calling such a meeting as required by the 1940
Act. Shares do not have cumulative voting rights or preemptive rights and have
only such conversion or exchange rights as the Trustees may grant in their dis-
cretion. When issued for payment as described in this Prospectus, the Fund's
shares will be fully paid and transferrable (subject to the Portfolio's minimum
account size). Shares are redeemable as set forth under "Redemption of Shares"
and are subject to involuntary liquidation as set forth under "Minimum Account
Size."     
 
  PNC Bank, National Association, located at 17th and Chestnut Streets, Phila-
delphia, PA 19103, serves as custodian of the Portfolio's investments.
 
  First Data, located at Exchange Place, Boston, Massachusetts 02109, serves as
the Fund's transfer agent.
   
  The Fund sends its shareholders a semi-annual report and an audited annual
report, which include listings of the investment securities held by the Portfo-
lio at the end of the period covered. In an effort to reduce the Fund's print-
ing and mailing costs, the Fund plans to consolidate the mailing of its semi-
annual and annual reports by household. This consolidation means that a house-
hold having multiple accounts with the identical address of record will receive
a single copy of each report. Shareholders who do not want this consolidation
to apply to their account should contact their Smith Barney Financial Consul-
tants or the Fund's transfer agent.     
 
22
<PAGE>
 
                                              SMITH BARNEY
                                              ----------------------------------
                                              A Member of TravelersGroup [LOGO]
                     
                  SMITH BARNEY MUNI FUNDS CALIFORNIA MONEY MARKET PORTFOLIO     
 
 
                                                           388 Greenwich Street
                                                       New York, New York 10013
                                                                  
                                                               FD 0773 7/97     
<PAGE>
 
P R O S P E C T U S

   
                                                    SMITH BARNEY MUNI FUNDS     
   
                                            New York Money Market Portfolio     
   
                                                              JULY 29, 1997     
 
                                                   PROSPECTUS BEGINS ON PAGE ONE


[LOGO]  SMITH BARNEY MUTUAL FUNDS
        Investing for your future.
        Every day.
<PAGE>
 
   
PROSPECTUS                                                  July 29, 1997      
   
Smith Barney Muni Funds     
   
New York Money Market Portfolio     
   
388 Greenwich Street New York, New York 10013 (800) 451-2010     
   
  The New York Money Market Portfolio (the "Portfolio") is one of nine invest-
ment portfolios that currently comprise Smith Barney Muni Funds (the "Fund").
The Portfolio seeks to provide its shareholders with income exempt from both
Federal income taxes (other than the alternative minimum tax) and New York
State and City personal income taxes from a portfolio of high quality short-
term New York municipal obligations selected for liquidity and stability of
principal.     
   
  THE PORTFOLIO MAY INVEST A SIGNIFICANT PERCENTAGE OF ITS ASSETS IN A SINGLE
ISSUER AND THEREFORE INVESTMENT IN THE PORTFOLIO MAY BE RISKIER THAN AN INVEST-
MENT IN OTHER TYPES OF MONEY MARKET FUNDS.     
 
  SHARES OF THE PORTFOLIO ARE NOT INSURED OR GUARANTEED BY THE U.S. GOVERNMENT.
THERE IS NO ASSURANCE THAT THE PORTFOLIO WILL BE ABLE TO MAINTAIN A STABLE NET
ASSET VALUE OF $1.00 PER SHARE.
 
  This Prospectus sets forth concisely certain information about the Fund and
the Portfolio, including service fees and expenses, that prospective investors
will find helpful in making an investment decision. Investors are encouraged to
read this Prospectus carefully and retain it for future reference.
   
  Additional information about the Portfolio is contained in a Statement of
Additional Information dated July 29, 1997, as amended or supplemented from
time to time, that is available upon request and without charge by calling or
writing the Fund at the telephone number or address set forth above or by con-
tacting a Smith Barney Financial Consultant. The Statement of Additional Infor-
mation has been filed with the Securities and Exchange Commission (the "SEC")
and is incorporated by reference into this Prospectus in its entirety.     
 
SMITH BARNEY INC.
Distributor
 
SMITH BARNEY MUTUAL FUNDS MANAGEMENT INC.
Investment Manager
 
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.
 
                                                                               1
<PAGE>
 
TABLE OF CONTENTS
 
<TABLE>   
<S>                                           <C>
FEE TABLE                                       3
-------------------------------------------------
FINANCIAL HIGHLIGHTS                            4
-------------------------------------------------
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES    5
-------------------------------------------------
VALUATION OF SHARES                            11
-------------------------------------------------
DIVIDENDS, AUTOMATIC REINVESTMENT AND TAXES    11
-------------------------------------------------
PURCHASE OF SHARES                             12
-------------------------------------------------
REDEMPTION OF SHARES                           14
-------------------------------------------------
EXCHANGE PRIVILEGE                             18
-------------------------------------------------
MINIMUM ACCOUNT SIZE                           20
-------------------------------------------------
YIELD INFORMATION                              21
-------------------------------------------------
MANAGEMENT OF THE FUND                         21
-------------------------------------------------
DISTRIBUTOR                                    22
-------------------------------------------------
ADDITIONAL INFORMATION                         23
-------------------------------------------------
</TABLE>    
 
--------------------------------------------------------------------------------
   
  No person has been authorized to give any information or to make any
representations in connection with this offering other than those contained in
this Prospectus and, if given or made, such other information and
representations must not be relied upon as having been authorized by the
Portfolio or the Distributor. This Prospectus does not constitute an offer by
the Portfolio or the Distributor to sell or a solicitation of an offer to buy
any of the securities offered hereby in any jurisdiction to any person to whom
it is unlawful to make such offer or solicitation in such jurisdiction.     
 
--------------------------------------------------------------------------------
 
2
<PAGE>
 
FEE TABLE
 
  The following expense table lists the costs and expenses an investor will
incur either directly or indirectly as a shareholder of the Portfolio based,
unless otherwise noted, on its operating expenses for its most recent fiscal
year:
 
<TABLE>   
<CAPTION>
  NEW YORK MONEY MARKET PORTFOLIO            CLASS A CLASS Y**
--------------------------------------------------------------
  <S>                                        <C>     <C>
  SHAREHOLDER TRANSACTION EXPENSES
    Sales Charge Imposed on Purchases         None     None
    Contingent Deferred Sales Charge          None*    None
--------------------------------------------------------------
  ANNUAL PORTFOLIO OPERATING EXPENSES
    (as a percentage of average net assets)
    Management fees                           0.50%    0.50%
    12b-1 fees                                0.10%    None
    Other expenses***                         0.07%    0.07%
--------------------------------------------------------------
  TOTAL PORTFOLIO OPERATING EXPENSES          0.67%    0.57%
--------------------------------------------------------------
</TABLE>    
  * Class A shares acquired as part of an exchange privilege transaction, which
    were originally acquired in one of the other Smith Barney Mutual Funds at
    net asset value subject to a contingent deferred sales charge ("CDSC"),
    remain subject to the original fund's CDSC while held in the Portfolio.
   
 ** The expenses of Class Y are estimated based on expenses incurred by Class A
    shares because there were no Class Y shares outstanding during the fiscal
    year ended March 31, 1997.     
*** "Other expenses" in the above table include fees for shareholder services,
    custodial fees, legal and accounting fees, printing costs and registration
    fees.
   
  Class A shares of the Portfolio purchased through the Smith Barney AssetOne
Program will be subject to an annual asset-based fee, payable quarterly, in
lieu of the initial sales charge. The fee will vary to a maximum of 1.50%,
depending on the amount of assets held through the Program. For more informa-
tion, please call your Smith Barney Financial Consultant.     
 
 EXAMPLE
  The following example is intended to assist an investor in understanding the
various costs that an investor in the Portfolio will bear directly or indirect-
ly. The example assumes payment by the Portfolio of operating expenses at the
levels set forth in the table above. See "Purchase of Shares," "Redemption of
Shares," "Management of the Fund" and "Distributor."
 
<TABLE>   
<CAPTION>
  NEW YORK MONEY MARKET PORTFOLIO               1 YEAR 3 YEARS 5 YEARS 10 YEARS
-------------------------------------------------------------------------------
  <S>                                           <C>    <C>     <C>     <C>
  An investor would pay the following expenses
  on a $1,000 investment, assuming (1) 5.00%
  annual return and (2) redemption at the end
  of each time period:
    Class A                                      $ 7     $21     $37     $83
    Class Y                                      $ 6     $18     $32     $71
-------------------------------------------------------------------------------
</TABLE>    
 
  The example also provides a means for the investor to compare expense levels
of funds with different fee structures over varying investment periods. To
facilitate such comparison, all funds are required to utilize a 5.00% annual
return assumption. However, the Portfolio's actual return will vary and may be
greater or less than 5.00%. THIS EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTA-
TION OF PAST OR FUTURE EXPENSES. ACTUAL EXPENSES MAY BE GREATER OR LESS THAN
THOSE SHOWN.
 
                                                                               3
<PAGE>
 
FINANCIAL HIGHLIGHTS
   
  The following information has been audited by KPMG Peat Marwick LLP, inde-
pendent auditors, whose report thereon appears in the Fund's annual report
dated March 31, 1997. The information set out below should be read in conjunc-
tion with the financial statements and related notes that also appear in the
Fund's Annual Report to Shareholders, which is incorporated by reference into
the Statement of Additional Information.     
   
FOR A SHARE OF BENEFICIAL INTEREST OUTSTANDING THROUGHOUT EACH YEAR:     
 
<TABLE>   
<CAPTION>
NEW YORK MONEY MARKET
PORTFOLIO                         1997      1996      1995     1994  1993(1)
-------------------------------------------------------------------------------
<S>                           <C>       <C>       <C>       <C>      <C>
NET ASSET VALUE, BEGINNING
  OF YEAR                     $   1.00  $   1.00  $   1.00  $  1.00  $  1.00
-------------------------------------------------------------------------------
INCOME FROM INVESTMENT
  OPERATIONS:
 Net investment income (2)       0.028     0.038     0.025    0.018    0.010
-------------------------------------------------------------------------------
Total Income from Investment
  Operations                     0.028     0.038     0.025    0.018    0.010
-------------------------------------------------------------------------------
LESS:
 Dividends from net
   investment income            (0.028)   (0.038)   (0.025)  (0.018)  (0.010)
-------------------------------------------------------------------------------
Total Distributions             (0.028)   (0.038)   (0.025)  (0.018)  (0.010)
-------------------------------------------------------------------------------
NET ASSET VALUE, END OF YEAR  $   1.00  $   1.00  $   1.00  $  1.00  $  1.00
-------------------------------------------------------------------------------
TOTAL RETURN                      2.85%     3.17%     2.49%    1.77%    1.01%++
-------------------------------------------------------------------------------
NET ASSETS, END OF YEAR
  (000S)                      $937,115  $882,492  $708,391  $82,459  $59,510
-------------------------------------------------------------------------------
RATIOS TO AVERAGE NET
  ASSETS:
 Expenses(2)                      0.67%     0.67%     0.68%    0.60%    0.56%+
 Net investment income            2.80      3.11      2.94     1.73     1.84+
-------------------------------------------------------------------------------
</TABLE>    
   
(1) For the period from September 17, 1992 (inception date) to March 31, 1993.
           
(2) The manager has waived all or part of its fees for the year ended March
    31, 1994 and the period ended March 31, 1993. If such fees were not
    waived, the per share decrease of net investment income would have been
    $0.001 and $0.001 for the year ended March 31, 1994 and the period
    ended March 31, 1993, respectively, and the ratio of expenses to
    average net  assets would have been 0.67% and 0.69%, respectively.     
 ++Total return is not annualized, as the result may not be representative of
   the total return for the year.
   
 + Annualized.     
 
4
<PAGE>
 
   
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES     
   
  The New York Money Market Portfolio seeks to provide income exempt from both
Federal income taxes and New York State and New York City personal income
taxes from a portfolio of high quality short-term municipal obligations
selected for liquidity and stability of principal. The Portfolio will seek to
be fully invested in obligations that are issued by the State of New York and
its political subdivisions, agencies and instrumentalities, the interest from
which, in the opinion of counsel for the various issuers, is exempt from New
York State and City as well as Federal income taxes. (For certain sharehold-
ers, a portion of the Portfolio's income may be subject to the alternative
minimum tax.)     
   
  Opinions relating to the validity of municipal obligations and to the exemp-
tion of interest thereon from Federal income taxes and from New York State and
New York City personal income taxes are rendered by bond counsel to the
respective issuers at the time of issuance. Neither the Portfolio nor its
investment adviser will review the proceedings relating to the issuance of
municipal obligations or the basis for such opinions.     
   
  The two principal classifications of municipal obligations are "general
obligation" and "revenue." General obligations are secured by a municipal
issuer's pledge of its full faith, credit and taxing power for the payment of
principal and interest. Revenue obligations are payable only from the revenues
derived from a particular facility or class of facilities or, in some cases,
from the proceeds of a special excise tax or other specific revenue source.
Please see the Statement of Additional Information for a more detailed discus-
sion about the different types of municipal obligations.     
   
  All of the Portfolio's investments will be in securities that at the time of
investment have or are deemed by Smith Barney Mutual Funds Management Inc.
("SBMFM" or the "Manager") to have remaining maturities of 13 months or less
and the dollar-weighted average maturity of the Portfolio will be 90 days or
less. The Portfolio will seek to maintain a constant net asset value of $1.00
per share, although no assurance can be given that this goal will be achieved.
Except for temporary defensive purposes, it is a fundamental policy that at
least 80% of the Portfolio's assets will be invested in securities that pro-
duce income that is exempt from Federal income taxes (other than the alterna-
tive minimum tax) and from State and City personal income taxes in the opinion
of bond counsel for the various issuers.     
   
  The Portfolio's investments will be limited to obligations that the Fund's
Trustees' delegates determine present minimal credit risks and that (i) are
secured by the full faith and credit of the United States or (ii) are "Eligi-
ble Securities," as defined by the Investment Company Act of 1940, as amended
(the "1940 Act"), at the time of acquisition by the Portfolio. The term "Eli-
gible Securities" includes securities rated by the "Requisite NRSROs" in one
of the two highest short-term rating     
 
                                                                              5
<PAGE>
 
   
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)     
   
categories, securities of issuers that have received such ratings with respect
to other short-term debt securities and comparable unrated securities. "Requi-
site NRSROs" means any nationally recognized statistical rating organizations
("NRSROs") that have issued ratings with respect to a security or class of debt
obligations of an issuer. Currently, there are six NRSROs: Standard & Poor's
Ratings Group, Moody's Investors Service, Inc., Fitch Investors Services, Inc.,
Duff and Phelps Inc., IBCA Limited and its affiliate, IBCA, Inc. and Thomson
BankWatch. The Portfolio may also invest in unrated securities if they are of
comparable quality as determined by the Manager in accordance with criteria
established by the Fund's Trustees.     
 
  Municipal obligations, which are issued by states, municipalities and their
agencies, fall into two major categories--bonds and notes. Among the types of
obligations in which the Portfolio invests are "puts," such as floating or
variable rate instruments subject to demand features ("demand instruments");
tax-exempt commercial paper; and notes such as Tax Anticipation Notes, Revenue
Anticipation Notes, Tax and Revenue Anticipation Notes and Bond Anticipation
Notes. Demand instruments usually have an indicated maturity of more than 13
months but contain a demand feature (a "put") that entitles the holder to
receive the principal amount of the underlying security and may be exercised
either (a) at any time on no more than 30 days' notice; or (b) at specified
intervals not exceeding one year and upon no more than 30 days' notice. Demand
instruments are generally supported by letters of credit which are issued by
both domestic and foreign banks. A variable rate instrument provides for
adjustment of its interest rate on set dates and upon such adjustment can rea-
sonably be expected to have a market value that approximates its par value; a
floating rate instrument provides for adjustment of its interest rate whenever
a specific interest rate (e.g., the prime rate) changes and at any time can
reasonably be expected to have a market value that approximates its par value.
   
  The Portfolio may invest without limit in private activity bonds. Interest
income on certain types of private activity bonds issued after August 7, 1986
to finance non-governmental activities is a specific tax preference item for
purposes of the Federal individual and corporate alternative minimum taxes.
Individual and corporate shareholders may be subject to a Federal alternative
minimum tax to the extent the Portfolio's dividends are derived from interest
on these bonds. These private activity bonds are included in the term "munici-
pal obligations" for purposes of determining compliance with the 80% test
described above. Dividends derived from interest income on all municipal obli-
gations are a component of the "current earnings" adjustment item for purposes
of the Federal corporate alternative minimum tax.     
 
  The Portfolio may invest up to 20% of the value of its assets in one or more
of the three principal types of derivative product structures described below.
Derivative products are typically structured by a bank, broker-dealer or other
financial
 
6
<PAGE>
 
   
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)     
   
institution. A derivative product generally consists of a trust or partnership
through which the Portfolio holds an interest in one or more underlying bonds
coupled with a conditional right to sell ("put") the Portfolio's interest in
the underlying bonds at par plus accrued interest to a financial institution
(a "Liquidity Provider"). Typically, a derivative product is structured as a
trust or partnership which provides for pass-through tax-exempt income. There
are currently three principal types of derivative structures: (1) "Tender
Option Bonds," which are instruments which grant the holder thereof the right
to put an underlying bond at par plus accrued interest at specified intervals
to a Liquidity Provider; (2) "Swap Products," in which the trust or partner-
ship swaps the payments due on an underlying bond with a swap counterparty who
agrees to pay a floating municipal money market interest rate; and (3) "Part-
nerships," which allocate to the partners income, expenses, capital gains and
losses in accordance with a governing partnership agreement.     
 
  Investments in derivative products raise certain tax, legal, regulatory and
accounting issues which may not be presented by investments in other municipal
bonds. There is some risk that certain issues could be resolved in a manner
which could adversely impact the performance of the Portfolio. For example,
the tax-exempt treatment of the interest paid to holders of derivative prod-
ucts is premised on the legal conclusion that the holders of such derivative
products have an ownership interest in the underlying bonds. While the Portfo-
lio receives an opinion of legal counsel to the effect that the income from
each derivative product is tax-exempt to the same extent as the underlying
bond, the Internal Revenue Service (the "IRS") has not issued a ruling on this
subject. Were the IRS to issue an adverse ruling, there is a risk that the
interest paid on such derivative products would be deemed taxable.
 
  The Portfolio intends to limit the risk of derivative products by purchasing
only those derivative products that are consistent with the Portfolio's
investment objective and policies. The Portfolio will not use such instruments
to leverage securities. Hence, derivative products' contributions to the over-
all market risk characteristics of a Portfolio will not materially alter its
risk profile and will be fully representative of the Portfolio's maturity
guidelines.
          
  The Portfolio will not invest more than 10% of the value of its total assets
in illiquid securities, which will include: (i) under certain circumstances,
derivative products; (ii) floating- or variable-rate demand instruments as to
which the Portfolio cannot exercise the demand feature on not more than seven
days' notice if there is no secondary market available for these instruments;
(iii) other securities that are not readily marketable; and (iv) any repur-
chase transactions that do not mature within seven days.     
 
                                                                              7
<PAGE>
 
   
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)     
 
 
 RISK AND PORTFOLIO MANAGEMENT
 
  There can be no assurance that the Portfolio will achieve its investment
objective. The ability of the Portfolio to achieve its investment objective is
dependent on a number of factors, including the skills of the Manager in pur-
chasing municipal obligations whose issuers have the continuing ability to meet
their obligations for the payment of interest and principal when due. The abil-
ity to achieve a high level of income is dependent on the yields of the securi-
ties in the portfolio. Yields on municipal obligations are the product of a
variety of factors, including the general conditions of the money market, of
the municipal bond and municipal note markets, the size of a particular offer-
ing, the maturity of the obligation and the rating of the issue. Municipal
obligations with longer maturities tend to produce higher yields and are gener-
ally subject to potentially greater price fluctuations than obligations with
shorter maturities.
   
  The Portfolio's concentration in New York State and New York City obligations
involves certain additional risks that should be considered carefully by
investors. In certain prior fiscal years, the State has failed to enact a bud-
get prior to the beginning of the State's fiscal year. A delay in the adoption
of the State's budget beyond the statutory April 1 deadline and the resultant
delay in the State's Spring borrowing has in certain prior years delayed the
projected receipt by the City of State aid, and there can be no assurance that
State budgets in the future fiscal years will be adopted by the April 1 statu-
tory deadline.     
 
  The State has noted that its forecasts of tax receipts have been subject to
variance in recent fiscal years. As a result of these uncertainties and other
factors, actual results could differ materially and adversely from the State's
current projections and the State's projections could be materially and
adversely changed from time to time. There can be no assurance that the State
will not face substantial potential budget gaps in future years resulting from
a significant disparity between tax revenues projected from a lower recurring
receipts base and the spending required to maintain State programs at current
levels. To address any potential budgetary imbalance, the State may need to
take significant actions to align recurring receipts and disbursements in
future fiscal years. Because the State, the City, the State's other political
subdivisions and the State Authorities, all of which borrow money, are or are
perceived in the marketplace to be financially interdependent, any financial
difficulty experienced by one can adversely affect the market value and market-
ability of obligations issued by others. The State's credit is presently
involved with the indebtedness of the Authorities because of the State's guar-
antee or other support. This indebtedness is a substantial amount. The Authori-
ties are likely to require further financial assistance from the State. After
nearly five years of decline, the City appears to be on the verge of a broad-
based recovery which will lift many sectors of the local economy. Most of the
recent local recovery can be attributed to the continued improvement in the
U.S. economy, but a great deal of
 
8
<PAGE>
 
   
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)     
 
the strength expected in the City economy will be due to local factors, such
as the heavy concentration of the securities and banking industries in the
City.
   
  For each of the 1981 through 1995 fiscal years, the City achieved
balanced operating results as reported in accordance with generally
accepted accounting principles. The City was required to close
substantial budget gaps in recent years in order to maintain balanced
operating results, as required by the laws of the State. See the Statement of
Additional Information for a more detailed description of these and other
risks relating to the Portfolio's investments in New York obligations.     
 
  Investors purchasing municipal obligations of their state of residence, or a
fund comprised of such obligations, should recognize that the benefits of the
exemption from state and local taxes, in addition to the exemption from Fed-
eral taxes, necessarily limits the fund's ability to diversify geographically.
   
  When-Issued Purchase Commitments. New issues of municipal obligations are
often offered on a "when-issued" basis, i.e., delivery and payment normally
take place 15 to 45 days after the purchase date. The payment obligation and
the interest rate to be received on the securities are fixed at the time the
buyer enters into the commitment, although no interest accrues with respect to
a when-issued security prior to its stated delivery date. The Portfolio will
only make commitments to purchase such securities with the intention of actu-
ally acquiring the securities, but the Portfolio may sell these securities
before the settlement date if it is deemed advisable as a matter of investment
strategy. A segregated account of the Portfolio consisting of cash or debt
securities of any grade having a value equal to or greater than the Portfo-
lio's purchase commitments, provided such securities have been determined by
the Manager to be liquid and unencumbered and are marked to market daily pur-
suant to guidelines established by the Trustees, will be maintained with PNC
Bank, National Association (the "Custodian") and monitored on a daily basis so
that the market value of the account will equal or exceed the amount of such
commitments by the Portfolio.     
 
  Securities purchased on a "when-issued" basis are subject to changes in mar-
ket value prior to delivery based not only upon the public's perception of the
creditworthiness of the issuer but also changes in the level of interest
rates, i.e., appreciating when interest rates decline and depreciating when
interest rates rise. Therefore,
if in order to achieve higher interest income the Portfolio remains
substantially fully invested at the same time that it has purchased securities
on a "when-issued" basis, there will be a greater possibility that the market
value of the Portfolio's assets will vary from $1.00 per share. (See
"Determination of Net Asset Value.") And there will be a greater potential for
the realization of capital gains, which are not exempt from Federal or state
income taxes.
 
                                                                              9
<PAGE>
 
   
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)     
   
  Stand-By Commitments. The Portfolio may acquire "stand-by commitments" with
respect to municipal obligations held in its portfolio. Under a stand-by com-
mitment a dealer agrees to purchase, at the Portfolio's option, specified
municipal obligations at a specified price. The Portfolio intends to enter into
stand-by commitments only with dealers, banks and broker-dealers which, in the
opinion of the Manager, present minimal credit risks. In evaluating the credit-
worthiness of the issuer of a stand-by commitment, the Manager will review
periodically the issuer's assets, liabilities, contingent claims and other rel-
evant financial information. The Portfolio will acquire stand-by commitments
solely to facilitate portfolio liquidity and does not intend to exercise its
rights thereunder for trading purposes.     
 
  Other Factors to be Considered. The Portfolio anticipates being as fully
invested as practicable in New York municipal obligations and generally expects
to invest the proceeds received from the sale of shares in New York municipal
obligations as soon as reasonably possible, which is generally within one day.
At no time will more than 20% of the Portfolio's net assets be invested in tax-
able investments except when the Portfolio has adopted a temporary defensive
investment policy.
 
  The Portfolio may engage in short-term trading to attempt to take advantage
of short-term market variations or may dispose of a portfolio security prior to
its maturity if it believes such disposition advisable or it needs to generate
cash to satisfy redemptions. In such cases, the Portfolio may realize a gain or
loss.
   
  The Fund is registered as a "non-diversified" company under the 1940 Act in
order for the Portfolio to have the ability to invest more than 5% of its
assets in the securities of any issuer. The Portfolio intends to comply with
Subchapter M of the Internal Revenue Code of 1986, as amended (the "Code")
which limits the aggregate value of all holdings (except U.S. government and
cash items, as defined in the Code) that exceed 5% of the Portfolio's total
assets to an aggregate amount of 50% of such assets. Also, holdings of a single
issuer (with the same exceptions) may not exceed 25% of the Portfolio's total
assets. These limits are measured at the end of each quarter. Under the
Subchapter M limits, non-diversification allows up to 50% of the Portfolio's
total assets to be invested in as few as two single issuers. In the event of a
decline in creditworthiness of, or default upon, the obligations of one or more
such issuers exceeding 5%, an investment in the Portfolio will entail greater
risk than in a portfolio having a policy of diversification because a high per-
centage of the Portfolio's assets may be invested in municipal obligations of
one or two issuers. Furthermore, a high percentage of investments among few
issuers may result in a greater degree of fluctuation in the market value of
the assets of the Portfolio, and consequently a greater degree of fluctuation
of the Portfolio's net asset value, because the Portfolio will be more suscep-
tible to economic, political, or regulatory developments affecting these secu-
rities than would be the case with a portfolio composed of varied obligations
of more issuers.     
 
10
<PAGE>
 
   
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)     
   
  Because the Portfolio invests in securities backed by banks and other finan-
cial institutions, changes in the credit quality of these institutions could
cause losses to the Portfolio and affect its share price.     
 
  From time to time, proposals have been introduced before Congress for the
purpose of restricting or eliminating the Federal income tax exemption for
interest on municipal obligations and similar proposals may be introduced in
the future. If one of these proposals were enacted, the availability of tax
exempt obligations for investment by the Portfolio and the value of the Port-
folio securities would be affected. The Trustees would then reevaluate the
Portfolio's investment objective and policies.
 
VALUATION OF SHARES
 
 
  The Portfolio's net asset value per share is determined as of the close of
regular trading on each day that the New York Stock Exchange ("NYSE") is open.
The net asset value per share is computed by dividing the Portfolio's net
assets attributable to each Class (i.e., the value of its assets less liabili-
ties) by the total number of its shares of the Class outstanding. The Portfo-
lio may also determine net asset value per share on days when the NYSE is not
open, but when the settlement of securities may otherwise occur. The Portfolio
employs the "amortized cost method" of valuing portfolio securities and
intends to use its best efforts to continue to maintain a constant net asset
value of $1.00 per share.
 
DIVIDENDS, AUTOMATIC REINVESTMENT AND TAXES
 
 
 DIVIDENDS AND AUTOMATIC REINVESTMENT
   
  The Portfolio declares dividends daily from its net investment income on
each day the NYSE is open. Net investment income includes interest accrued and
discount earned and is less premium amortized and expenses accrued (the amount
of discount or premium on portfolio investments is fixed at the time of pur-
chase). Unless the shareholder has elected to receive monthly distributions of
income, such dividends will automatically be reinvested in Portfolio shares of
the same Class at net asset value. If a shareholder redeems an account in full
between payment dates, all dividends declared up to and including the date of
liquidation will be paid with the proceeds from the redemption of shares. The
per share dividends on Class A shares of the Portfolio may be lower than the
per share dividends on Class Y shares, principally as a result of the service
fee applicable to Class A shares.     
 
 TAXES
   
  Federal Income Taxes. Under Subchapter M of the Code, with which the Portfo-
lio intends to comply, no Federal income taxes will ordinarily be payable by
the Portfolio. Distributions by the Portfolio of interest income from tax
exempt obliga     -
 
                                                                             11
<PAGE>
 
DIVIDENDS, AUTOMATIC REINVESTMENT AND TAXES (CONTINUED)
 
tions are not taxable to shareholders and will not be includable in their gross
income for Federal income tax purposes (see discussion of alternative minimum
tax above). Realized gains and losses are reflected in the Portfolio's net
assets and are not included in net investment income. Capital gain distribu-
tions, if any, whether paid in cash or invested in shares of the Portfolio,
will be taxable to shareholders.
   
  New York State and City Taxes. New York shareholders will not be subject to
New York State and City personal income tax on Portfolio dividends to the
extent that such distributions qualify as exempt-interest dividends under the
Code and represent interest income attributable to Federally tax-exempt obliga-
tions of the State of New York and its political subdivisions (as well as cer-
tain other Federally tax-exempt obligations the interest on which is exempt
from New York State and City income tax, such as certain obligations of U.S.
Territories). To the extent that distributions on the Portfolio are derived
from taxable income, including long or short-term capital gains, such distribu-
tions will not be exempt from New York State or City personal income tax. Divi-
dends on the Portfolio are not excluded in determining New York State franchise
or New York City business taxes on corporations and financial institutions.
       
  Under the Code, interest on indebtedness incurred or continued to purchase or
carry shares of the Portfolio will not be deductible to the extent that the
Portfolio's distributions are exempt from Federal income tax. In addition, any
loss realized upon the redemption of shares held less than six months will be
disallowed to the extent of any exempt-interest dividends received by the
shareholder during such period. However, this holding period may be shortened
by the Treasury Department to a period of not less than the greater of 31 days
or the period between regular dividend distributions. Further, persons who may
be "substantial users" (or "related persons" of substantial users) of facili-
ties financed by industrial development bonds should consult their tax advisers
before purchasing Portfolio shares.     
   
  The foregoing is only a brief summary of some of the important tax considera-
tions generally affecting the Portfolio and its shareholders. Additional tax
information of relevance to particular investors is contained in the Statement
of Additional Information. Investors are urged to consult their tax advisers
with specific reference to their own tax situation.     
 
PURCHASE OF SHARES
 
 
  Purchases of Portfolio shares may be made through a brokerage account main-
tained with Smith Barney Inc. ("Smith Barney"), with a broker that clears secu-
rities transactions through Smith Barney on a fully disclosed basis (an "Intro-
ducing Broker") or an investment dealer in the selling group. No maintenance
fee will be charged by the Portfolio in connection with a brokerage account
through which an investor purchases or holds shares.
 
12
<PAGE>
 
PURCHASE OF SHARES (CONTINUED)
   
  Investors in Class A may open an account by making an initial investment of
at least $1,000 for each Portfolio account. Investors in Class Y may open an
account by making an initial investment of at least $5,000,000 (except for
purchases of Class Y shares by Smith Barney Concert Allocation Series Inc.,
for which there is no minimum purchase amount). Subsequent investments of at
least $50 may be made for either Class. There are no minimum investment
requirements in Class A for employees of Travelers Group Inc. ("Travelers")
and its subsidiaries, including Smith Barney, and Trustees or Directors of any
of the Smith Barney Mutual Funds, and their spouses and children. The Portfo-
lio reserves the right to waive or change minimums, to decline any order to
purchase its shares and to suspend the offering of shares from time to time.
Share certificates are issued only upon a shareholder's written request to the
Fund's transfer agent, First Data Investor Services Group, Inc. ("First
Data").     
   
  For investors who maintain a brokerage account with Smith Barney, Smith Bar-
ney has advised the Portfolio that depending on the type of securities
account, its clients' free credit balances (i.e., immediately available funds)
may be invested automatically in full shares of the Portfolio either on a
daily or weekly basis. In addition to this "sweep" service, shareholders who
open a Smith Barney FMA PLUS SM account, which is a full service investment
account, will also be able to take advantage of, among other things: a free
Individual Retirement Account, free dividend reinvestment, unlimited checking,
100 free ATM withdrawals each year, free gain/loss analysis and online com-
puter access to account information. Smith Barney clients should contact their
Financial Consultant for more complete information. A complete record of Port-
folio dividends, purchases and redemptions will be included on such sharehold-
ers' regular Smith Barney statements.     
   
  The minimum initial investment requirement in the Portfolio for an account
established under the Uniform Gift to Minors Act is $250 and the subsequent
investment requirement is $50.     
   
  The Portfolio's shares are sold continuously at their net asset value next
determined after a purchase order is received and becomes effective. A pur-
chase order becomes effective when the Portfolio, Smith Barney or an Introduc-
ing Broker receives, or converts the purchase amount into, Federal funds
(i.e., monies of member banks within the Federal Reserve System held on
deposit at a Federal Reserve Bank). When orders for the purchase of Portfolio
shares are paid for in Federal funds, or are placed by an investor with suffi-
cient Federal funds or cash balance in the investor's brokerage account with
Smith Barney or the Introducing Broker, the order becomes effective on the day
of receipt if received prior to the close of regular trading on the NYSE on
any day the Portfolio calculates its net asset value. See "Valuation of
Shares." Purchase orders received after the close of regular trading on the
NYSE on any business day are effective as of the time the net asset value is
    
                                                                             13
<PAGE>
 
PURCHASE OF SHARES (CONTINUED)
 
next determined. When orders for the purchase of Portfolio shares are paid for
other than in Federal funds, Smith Barney or the Introducing Broker, acting on
behalf of the investor, will complete the conversion into, or itself advance,
Federal funds, and the order will become effective on the day following its
receipt by the Fund, Smith Barney or the Introducing Broker. Shares purchased
directly through First Data begin to accrue income dividends on the day that
the purchase order becomes effective. All other shares begin to accrue income
dividends on the next business day following the day that the purchase order
becomes effective.
 
 SYSTEMATIC INVESTMENT PLAN
   
  Upon completion of certain automated systems, shareholders may make additions
to their accounts at any time by purchasing shares through a service known as
the Systematic Investment Plan. Under the Systematic Investment Plan, Smith
Barney or First Data is authorized through preauthorized transfers to charge
the regular bank account or other financial institution indicated by the share-
holder on a monthly or quarterly basis to provide systematic additions to the
shareholder's Portfolio account. For shareholders purchasing shares of the
Portfolio through the Systematic Investment Plan on a monthly basis, the mini-
mum initial investment requirement for Class A shares and the minimum subse-
quent investment requirement for both Classes is $25. For shareholders purchas-
ing shares of the Portfolio through the Systematic Investment Plan on a quar-
terly basis, the minimum initial investment requirement for Class A shares and
the minimum subsequent investment requirement for both Classes is $50. A share-
holder who has insufficient funds to complete the transfer will be charged a
fee of up to $25 by Smith Barney or First Data. Additional information is
available from the Fund or a Smith Barney Financial Consultant.     
 
 LETTER OF INTENT
 
  Class Y Shares. A Letter of Intent provides an opportunity for investors to
meet the minimum investment requirement for Class Y shares by aggregating
investments over a six-month period. Such investors must make an initial mini-
mum purchase of $1,000,000 in Class Y shares of the Portfolio and agree to pur-
chase a total of $5,000,000 of Class Y shares of the same Portfolio within six
months from the date of the Letter. If a total investment of $5,000,000 is not
made within the six-month period, all Class Y shares purchased to date will be
transferred to Class A shares, where they will be subject to all fees (includ-
ing a service fee of 0.10%) and expenses applicable to the Portfolio's Class A
shares, which may include a CDSC of 1.00%. Please contact a Smith Barney Finan-
cial Consultant or First Data for further information.
 
REDEMPTION OF SHARES
 
 
  Shareholders may redeem their shares without charge on any day the Portfolio
calculates its net asset value. See "Valuation of Shares." Redemption requests
 
14
<PAGE>
 
REDEMPTION OF SHARES (CONTINUED)
   
received in proper form before the close of regular trading on the NYSE are
priced at the net asset value as next determined on that day. Redemption
requests received after the close of regular trading on the NYSE are priced at
the net asset value as next determined.     
 
  The Portfolio normally transmits redemption proceeds on the business day
following receipt of a redemption request but, in any event, payment will be
made no later than the third business day after a redemption request is made,
except on days on which the NYSE is closed and the settlement of securities
does not otherwise occur, or as permitted under the 1940 Act in extraordinary
circumstances. Generally, if the redemption proceeds are remitted to a Smith
Barney brokerage account, these funds will not be invested for the sharehold-
er's benefit without specific instruction and Smith Barney will benefit from
the use of temporarily uninvested funds. A shareholder who pays for Portfolio
shares by personal check will be credited with the proceeds of a redemption of
those shares only after the purchase check has been collected, which may take
up to ten days or more. A shareholder who anticipates the need for more imme-
diate access to his or her investment should purchase shares with Federal
funds, by bank wire or with a certified or cashier's check.
   
  Shareholders who purchase securities through Smith Barney or an Introducing
Broker may take advantage of special redemption procedures under which Class A
shares of the Portfolio will be redeemed automatically to the extent necessary
to satisfy debit balances arising in the shareholder's account with Smith Bar-
ney or the Introducing Broker. One example of how an automatic redemption may
occur involves the purchase of securities. If a shareholder purchases securi-
ties but does not pay for them by the settlement date, the number of Portfolio
shares necessary to cover the debit will be redeemed automatically as of the
settlement date, which usually occurs three business days after the trade
date. Class A shares that are subject to a CDSC (see "Redemption of Shares--
Contingent Deferred Sales Charge") are not eligible for such automatic redemp-
tion and will only be redeemed upon specific request. If the shareholder does
not request redemption of such shares, the shareholder's account with Smith
Barney or the Introducing Broker may be margined to satisfy debit balances if
sufficient Portfolio shares that are not subject to any applicable CDSC are
unavailable. No fee is currently charged with respect to these automatic
transactions. Shareholders not wishing to participate in these arrangements
should notify a Smith Barney Financial Consultant.     
 
  Redemption requests must be made through Smith Barney, an Introducing Broker
or the securities dealer through whom the shares were purchased. A shareholder
desiring to redeem shares represented by certificates also must present the
certificates to Smith Barney or the Introducing Broker endorsed for transfer
(or accompanied by an endorsed stock power), signed exactly as the shares are
registered. Redemption requests involving shares represented by certificates
will not be deemed received until the certificates are received by First Data
in proper form.
 
                                                                             15
<PAGE>
 
REDEMPTION OF SHARES (CONTINUED)
 
 
  A written redemption request must (a) state the Class and number or dollar
amount of shares to be redeemed, (b) identify the shareholder's account number
and (c) be signed by each registered owner exactly as the shares are regis-
tered. If the shares to be redeemed were issued in certificate form, the cer-
tificates must be endorsed for transfer (or be accompanied by an endorsed stock
power) and must be submitted to First Data together with the redemption
request. Any signature appearing on a share certificate, stock power or written
redemption request in excess of $2,000 must be guaranteed by an eligible guar-
antor institution such as a domestic bank, savings and loan institution, domes-
tic credit union, member bank of the Federal Reserve System or member firm of a
national securities exchange. Written redemption requests of $2,000 or less do
not require a signature guarantee unless more than one such redemption request
is made in any 10-day period. Redemption proceeds will be mailed to an invest-
or's address of record. First Data may require additional supporting documents
for redemptions made by corporations, executors, administrators, trustees or
guardians. A redemption request will not be deemed properly received until
First Data receives all required documents in proper form.
 
 TELEPHONE REDEMPTION AND EXCHANGE PROGRAM
   
  Shareholders who do not have a Smith Barney brokerage account may be eligible
to redeem and exchange Portfolio shares by telephone. To determine if a share-
holder is entitled to participate in this program, he or she should contact
First Data at 1-800-451-2010. Once eligibility is confirmed, the shareholder
must complete and return a Telephone/Wire Authorization Form, along with a sig-
nature guarantee, that will be provided by First Data upon request. Alterna-
tively, an investor may authorize telephone redemptions on the new account
application with the applicant's signature guarantee when making his or her
initial investment in the Fund.     
   
  Redemptions. Redemption requests of up to $10,000 of any class or classes of
the Fund's shares may be made by eligible shareholders by calling First Data
at1-800-451-2010. Such requests may be made between 9:00 a.m. and 5:00 p.m.
(New York City time) on any day the NYSE is open. Redemptions of shares (i) by
retirement plans or (ii) for which certificates have been issued are not per-
mitted under this program.     
   
  A shareholder will have the option of having the redemption proceeds mailed
to his or her address of record or wired to a bank account predesignated by the
shareholder. Generally, redemption proceeds will be mailed or wired, as the
case may be, on the next business day following the redemption request. In
order to use the wire procedures, the bank receiving the proceeds must be a
member of the Federal Reserve System or have a correspondent relationship with
a member bank. The Fund reserves the right to charge shareholders a nominal fee
for each wire redemption. Such charges, if any, will be assessed against the
shareholder's account from which shares were redeemed. In order to change the
bank account designated to     
 
16
<PAGE>
 
REDEMPTION OF SHARES (CONTINUED)
 
receive redemption proceeds, a shareholder must complete a new Telephone/Wire
Authorization Form and, for the protection of the shareholder's assets, will
be required to provide a signature guarantee and certain other documentation.
 
  Exchanges. Eligible shareholders may make exchanges by telephone if the
account registration of the shares of the fund being acquired is identical to
the registration of the shares of the fund exchanged. Such exchange requests
may be made by calling First Data at 1-800-451-2010 between 9:00 a.m. and 5:00
p.m. (New York City time) on any day on which the NYSE is open. See "Exchange
Privilege" for more information.
   
  Additional Information regarding Telephone Redemption and Exchange Program.
Neither the Fund nor its agents will be liable for following instructions com-
municated by telephone that are reasonably believed to be genuine. The Fund
and its agents will employ procedures designed to verify the identity of the
caller and legitimacy of instructions (for example, a shareholder's name and
account number will be required and phone calls may be recorded). The Fund
reserves the right to suspend, modify or discontinue the telephone redemption
and exchange program or to impose a charge for this service at any time fol-
lowing at least seven days' prior notice to shareholders.     
 
 CONTINGENT DEFERRED SALES CHARGE
 
  Class A shares of the Portfolio acquired as part of an exchange privilege
transaction, which were originally acquired in one of the other Smith Barney
Mutual Funds at net asset value subject to a CDSC, continue to be subject to
any applicable CDSC of the original fund. Therefore, such Class A shares that
are redeemed within 12 months of the date of purchase of the original fund may
be subject to a CDSC of 1.00%. The amount of any CDSC will be paid to and
retained by Smith Barney. The CDSC will be assessed based on an amount equal
to the net asset value at the time of redemption. Accordingly, no CDSC will be
imposed on increases in net asset value above the initial purchase price in
the original fund. In addition, no charge will be assessed on shares derived
from reinvestment of dividends or capital gain distributions.
 
  In determining the applicability of any CDSC, it will be assumed that a
redemption is made first of shares representing capital appreciation, next of
shares representing the reinvestments of dividends and capital gain distribu-
tions and finally of other shares held by the shareholder for the longest
period of time. The length of time that Class A shares have been held will be
calculated from the date the shares were initially acquired in one of the
other Smith Barney Mutual Funds and such shares being redeemed will be consid-
ered to represent, as applicable, capital appreciation or dividend and capital
gain distribution reinvestments in such other funds. For Federal income tax
purposes, the amount of the CDSC will reduce the gain or increase the loss, as
the case may be, on the amount realized on redemption.
 
                                                                             17
<PAGE>
 
REDEMPTION OF SHARES (CONTINUED)
   
  The CDSC on Class A shares will be waived on (a) exchanges (see "Exchange
Privilege"); (b) redemptions of shares within 12 months following the death or
disability of the shareholder; (c) involuntary redemptions; and (d) redemptions
of shares to effect a combination of the Portfolio with any investment company
by merger, acquisition of assets or otherwise. In addition, a shareholder who
has redeemed shares from other funds of the Smith Barney Mutual Funds may,
under certain circumstances, reinvest all or part of the redemption proceeds
within 60 days and receive pro rata credit for any CDSC imposed on the prior
redemption.     
 
  CDSC waivers will be granted subject to confirmation (by Smith Barney in the
case of shareholders who are also Smith Barney clients or by First Data in the
case of all other shareholders) of the shareholder's status or holdings, as the
case may be.
 
EXCHANGE PRIVILEGE
   
  Except as otherwise noted below, shares of each Class may be exchanged for
shares of the same Class in the following funds of the Smith Barney Mutual
Funds, to the extent shares are offered for sale in the shareholder's state of
residence. Exchanges of Class A shares are subject to minimum investment
requirements and all shares are subject to the other requirements of the fund
into which exchanges are made and a sales charge may apply.     
 
 FUND NAME
  Growth Funds
    Smith Barney Aggressive Growth Fund Inc.
    Smith Barney Appreciation Fund Inc.
       
    Smith Barney Disciplined Small Cap Fund, Inc.     
    Smith Barney Fundamental Value Fund Inc.
    Smith Barney Growth Opportunity Fund
       
    Smith Barney Large Capitalization Growth Fund     
    Smith Barney Managed Growth Fund
    Smith Barney Natural Resources Fund Inc.
    Smith Barney Special Equities Fund
 
  Growth and Income Funds
       
    Concert Social Awareness Fund     
    Smith Barney Convertible Fund
    Smith Barney Funds, Inc.--Equity Income Portfolio
    Smith Barney Growth and Income Fund
    Smith Barney Premium Total Return Fund
           
    Smith Barney Utilities Fund
 
  Taxable Fixed-Income Funds
    Smith Barney Adjustable Rate Government Income Fund
    Smith Barney Diversified Strategic Income Fund
           
    Smith Barney Funds, Inc.--Short-Term U.S. Treasury Securities
    Portfolio
    Smith Barney Funds, Inc.--U.S. Government Securities Portfolio
 
18
<PAGE>
 
EXCHANGE PRIVILEGE (CONTINUED)
 
    Smith Barney Government Securities Fund
    Smith Barney High Income Fund
    Smith Barney Investment Grade Bond Fund
    Smith Barney Managed Governments Fund Inc.
 
  Tax-Exempt Funds
    Smith Barney Arizona Municipals Fund Inc.
    Smith Barney California Municipals Fund Inc.
    Smith Barney Intermediate Maturity California Municipals Fund
    Smith Barney Intermediate Maturity New York Municipals Fund
    Smith Barney Managed Municipals Fund Inc.
    Smith Barney Massachusetts Municipals Fund
           
    Smith Barney Muni Funds--Florida Portfolio
    Smith Barney Muni Funds--Georgia Portfolio
    Smith Barney Muni Funds--Limited Term Portfolio
    Smith Barney Muni Funds--National Portfolio
    Smith Barney Muni Funds--New York Portfolio
           
    Smith Barney Muni Funds--Pennsylvania Portfolio
    Smith Barney New Jersey Municipals Fund Inc.
    Smith Barney Oregon Municipals Fund
    Smith Barney Tax-Exempt Income Fund
 
  International Funds
    Smith Barney World Funds, Inc.--Emerging Markets Portfolio
    Smith Barney World Funds, Inc.--European Portfolio
    Smith Barney World Funds, Inc.--Global Government Bond Portfolio
    Smith Barney World Funds, Inc.--International Balanced Portfolio
    Smith Barney World Funds, Inc.--International Equity Portfolio
    Smith Barney World Funds, Inc.--Pacific Portfolio
     
  Smith Barney Concert Allocation Series Inc.     
       
    Smith Barney Concert Allocation Series Inc.--Balanced Portfolio     
       
    Smith Barney Concert Allocation Series Inc.--Conservative Portfolio
           
    Smith Barney Concert Allocation Series Inc.--Growth Portfolio     
       
    Smith Barney Concert Allocation Series Inc.--High Growth Portfolio
           
    Smith Barney Concert Allocation Series Inc.--Income Portfolio     
 
  Money Market Funds
    Smith Barney Money Funds, Inc.--Cash Portfolio
    Smith Barney Money Funds, Inc.--Government Portfolio
    *Smith Barney Money Funds, Inc.--Retirement Portfolio
    Smith Barney Municipal Money Market Fund, Inc.
    Smith Barney Muni Funds--California Money Market Portfolio
--------------------------------------------------------------------------------
* Available for exchange with Class A shares of the Portfolio.
 
                                                                              19
<PAGE>
 
EXCHANGE PRIVILEGE (CONTINUED)
          
  Class A Exchanges. Class A shares of the Portfolio will be subject to the
appropriate sales charge upon the exchange of such shares for Class A shares of
another fund of the Smith Barney Mutual Funds sold with a sales charge. If no
sales charge was imposed upon the initial purchase of the shares, any shares
obtained through automatic reinvestment will be subject to a sales charge dif-
ferential upon exchange.     
   
  Class Y Exchanges. Class Y shareholders of the Portfolio who wish to exchange
all or a portion of their Class Y shares for Class Y shares in any of the funds
identified above may do so without imposition of any charge.     
   
  Additional Information Regarding the Exchange Privilege. Although the
exchange privilege is an important benefit, excessive exchange transactions can
be detrimental to the Portfolio's performance and its shareholders. The Manager
may determine that a pattern of frequent exchanges is excessive and contrary to
the best interests of the Portfolio's other shareholders. In this event the
Fund may, at its discretion, decide to limit additional purchases and/or
exchanges by the shareholder. Upon such a determination, the Fund will provide
notice in writing or by telephone to the shareholder at least 15 days prior to
suspending the exchange privilege and during the 15-day period the shareholder
will be required to (a) redeem his or her shares in the Portfolio or (b) remain
invested in the Portfolio or exchange into any of the funds of the Smith Barney
Mutual Funds ordinarily available, which position the shareholder would be
expected to maintain for a significant period of time. All relevant factors
will be considered in determining what constitutes an abusive pattern of
exchanges.     
   
  Certain shareholders may be able to exchange shares by telephone. See "Re-
demption of Shares--Telephone Redemption and Exchange Program." Exchanges will
be processed at the net asset value next determined plus any applicable sales
charge. Redemption procedures discussed above are also applicable for exchang-
ing shares, and exchanges will be made upon receipt of all supporting documents
in proper form. If the account registration of the shares of the fund being
acquired is identical to the registration of the shares of the fund exchanged,
no signature guarantee is required. A capital gain or loss for tax purposes
will be realized upon the exchange, depending upon the cost or other basis of
shares redeemed. Before exchanging shares, investors should read the current
prospectus describing the shares to be acquired. The Portfolio reserves the
right to modify or discontinue exchange privileges upon 60 days' prior notice
to shareholders.     
 
MINIMUM ACCOUNT SIZE
   
  The Fund reserves the right to involuntarily liquidate any shareholder's
account if the aggregate net asset value of the shares held in the account is
less than $500.     
 
20
<PAGE>
 
   
MINIMUM ACCOUNT SIZE (CONTINUED)     
   
If a shareholder has more than one account in this Portfolio, each account
must satisfy the minimum account size. Before the Fund exercises such right,
shareholders will receive written notice and will be permitted 60 days to
bring the account up to the minimum to avoid involuntary liquidation.     
 
YIELD INFORMATION
   
  From time to time the Portfolio may advertise its yield, effective yield and
tax equivalent yield. These figures are computed separately for Class A and
Class Y shares of the Portfolio. These yield figures are based on historical
earnings and are not intended to indicate future performance. The yield of the
Portfolio refers to the net investment income generated by an investment in
the Portfolio over a specific seven-day period (which will be stated in the
advertisement). This net investment income is then annualized. The effective
yield is calculated similarly but, when annualized, the income earned by an
investment in the Portfolio is assumed to be reinvested. The effective yield
will be slightly higher than the yield because of the compounding effect of
the assumed reinvestment. The tax equivalent yield also is calculated simi-
larly to the yield, except that a stated income tax rate is used to demon-
strate the taxable yield necessary to produce an after-tax yield equivalent to
the tax-exempt yield of the Portfolio.     
 
MANAGEMENT OF THE FUND
 
 
 TRUSTEES
   
  Overall responsibility for management and supervision of the Portfolio rests
with the Fund's Trustees. The Trustees approve all significant agreements
between the Fund and the companies that furnish services to the Fund and the
Portfolio, including agreements with the Fund's distributor, investment manag-
er, custodian and transfer agent. The day-to-day operations of the Fund are
delegated to the Fund's investment manager. The Statement of Additional Infor-
mation contains background information regarding each Trustee and executive
officer of the Fund.     
 
 MANAGER
   
  The Manager manages the day-to-day operations of the Portfolio pursuant to a
Management Agreement entered into on behalf of the Portfolio. SBMFM is a sub-
sidiary of Smith Barney Holdings Inc. ("Holdings"), the parent company of
Smith Barney (the "Distributor"). Holdings is a wholly owned subsidiary of
Travelers, which is a financial services holding company engaged, through its
subsidiaries, principally in four business segments: Investment Services, Con-
sumer Finance Services, Life Insurance Services and Property & Casualty Insur-
ance Services.     
 
                                                                             21
<PAGE>
 
MANAGEMENT OF THE FUND (CONTINUED)
   
SBMFM, Holdings and Smith Barney are each located at 388 Greenwich Street, New
York, New York 10013. SBMFM renders investment advice to investment companies
that had aggregate assets under management as of May 31, 1997 of approximately
$87 billion.     
   
  SBMFM provides the Fund with investment management services, executive and
other personnel, pays the remuneration of Fund officers, provides the Fund with
office space and equipment, furnishes the Fund with bookkeeping, accounting,
administrative services and services relating to research, statistical work and
supervision of the Portfolio. For the services provided, the Portfolio pays
SBMFM a daily fee calculated at the annual rate of 0.50% of the Portfolio's
average net assets. For the last fiscal year the total expenses of the Portfo-
lio's Class A shares were 0.67% of average net assets. SBMFM has agreed to
waive its fee with respect to a Class to the extent that it is necessary if in
any fiscal year the aggregate expenses of such Class exclusive of 12b-1 fees,
taxes, brokerage, interest and extraordinary expenses, such as litigation
costs, exceed 0.70% of its average daily net assets for that fiscal year. The
0.70% expense limitation shall be in effect until it is terminated by notice to
shareholders and by supplement to the then-current prospectus. The term "Smith
Barney" in the title of the Fund has been adopted by permission of Smith Barney
and is subject to the right of Smith Barney to elect that the Fund stop using
the term in any form or combination of its name.     
 
DISTRIBUTOR
 
 
  Smith Barney distributes shares of the Portfolio as principal underwriter and
as such conducts a continuous offering pursuant to a "best efforts" arrangement
requiring Smith Barney to take and pay for only such securities as may be sold
to the public. Pursuant to a plan of distribution adopted by the Portfolio
under Rule 12b-1 under the 1940 Act (the "Plan"), Smith Barney is paid an
annual service fee with respect to Class A shares of the Portfolio at the
annual rate of 0.10% of the average daily net assets of Class A shares. The fee
is used by Smith Barney to pay its Financial Consultants for servicing Class A
shareholder accounts for as long as a shareholder remains a holder of the
Class. The service fee is also spent by Smith Barney on the following types of
expenses: (1) the pro rata share of other employment costs of such financial
consultants (e.g., FICA, employee benefits, etc.); (2) employment expenses of
home office personnel primarily responsible for providing service to Class A
shareholders and (3) the pro rata share of branch office fixed expenses (in-
cluding branch overhead allocations). Shareholder servicing expenses incurred
by Smith Barney but not reimbursed by Class A in any year will not be a contin-
uing liability of the Class in subsequent years.
 
  Smith Barney also advises profit-sharing and pension accounts. Smith Barney
and its affiliates may in the future act as investment advisers for other
accounts.
 
22
<PAGE>
 
       
ADDITIONAL INFORMATION
   
  The Fund, an open-end, non-diversified management investment company, is
organized as a "Massachusetts business trust" pursuant to a Declaration of
Trust dated August 14, 1985. Pursuant to the Declaration of Trust, the Trustees
have authorized the issuance of twenty series of shares, each representing
shares in one of twenty separate Portfolios. The assets of each Portfolio are
segregated and separately managed. Each share of a Portfolio represents an
equal proportionate interest in the net assets of that Portfolio with each
other share of the same Portfolio and is entitled to such dividends and distri-
butions out of the net income of that Portfolio as are declared in the discre-
tion of the Trustees. Shareholders are entitled to one vote for each share held
and will vote by individual Portfolio except as otherwise permitted by the 1940
Act. It is the intention of the Fund not to hold annual meetings of sharehold-
ers. The Trustees may call meetings of shareholders for action by shareholder
vote as may be required by the 1940 Act or the Declaration of Trust, and share-
holders are entitled to call a meeting upon a vote of 10% of the Fund's out-
standing shares for purposes of voting on removal of a Trustee or Trustees. The
Fund will assist shareholders in calling such a meeting as required by the 1940
Act. Shares do not have cumulative voting rights or preemptive rights and have
only such conversion or exchange rights as the Trustees may grant in their dis-
cretion. When issued for payment as described in this Prospectus, the Fund's
shares will be fully paid and transferrable (subject to the Portfolio's minimum
account size). Shares are redeemable as set forth under "Redemption of Shares"
and are subject to automatic liquidation as set forth under "Minimum Account
Size."     
 
  PNC Bank, National Association, located at 17th and Chestnut Streets, Phila-
delphia, PA 19103, serves as custodian of the Portfolio's investments.
 
  First Data, located at Exchange Place, Boston, Massachusetts 02109, serves as
the Fund's transfer agent.
   
  The Fund sends its shareholders a semi-annual report and an audited annual
report, which include listings of the investment securities held by the Portfo-
lio at the end of the period covered. In an effort to reduce the Fund's print-
ing and mailing costs, the Fund plans to consolidate the mailing of its semi-
annual and annual reports by household. This consolidation means that a house-
hold having multiple accounts with the identical address of record will receive
a single copy of each report. Shareholders who do not want this consolidation
to apply to their account should contact their Smith Barney Financial Consul-
tant or the Fund's transfer agent.     
 
                                                                              23
<PAGE>
 
                                              SMITH BARNEY
                                              ----------------------------------
                                              A Member of TravelersGroup [LOGO]


                       
                    SMITH BARNEY MUNI FUNDS NEW YORK MONEY MARKET PORTFOLIO     
 
 
                                                            388 Greenwich Street
                                                        New York, New York 10013
                                                                   
                                                                FD0774 7/97     


PART B
Smith Barney Muni Funds
388 Greenwich Street
New York, NY 10013

Statement of Additional 
Information
   July 29, 1997    


	Shares of Smith Barney Muni Funds (the "Fund") are offered 
currently with a choice of    nine     Portfolios, the National 
Portfolio, the Limited Term Portfolio,        the Florida 
Portfolio, the Georgia Portfolio, the New York Portfolio, the Ohio 
Portfolio, the Pennsylvania Portfolio, the California Money Market 
Portfolio and the New York Money Market Portfolio (collectively 
referred to as "Portfolios" and individually as "Portfolio"):

	The National Portfolio and the Limited Term Portfolio each 
seeks as high a level of income exempt from Federal income taxes 
as is consistent with prudent investing.

	The Florida Portfolio    seeks     to pay its shareholders 
as high a level of income exempt from Federal income taxes as is 
consistent with prudent investing.

	The Georgia Portfolio seeks as high a level of income exempt 
from Federal income taxes and from Georgia personal income taxes 
as is consistent with prudent investing.

	The New York Portfolio seeks as high a level of income 
exempt from Federal income taxes and from New York State and New 
York City personal income taxes as is consistent with prudent 
investing.

	The Ohio Portfolio seeks to pay its shareholders as high a 
level of income exempt from both Federal income taxes and Ohio 
personal income taxes as is consistent with prudent investing.

	The Pennsylvania Portfolio seeks to pay its shareholders as 
high a level of income exempt from both Federal income taxes and 
Pennsylvania personal income taxes as is consistent with prudent 
investing.

	The California Money Market Portfolio seeks to provide 
income exempt from Federal income taxes and from California 
personal income taxes from a portfolio of high quality short-term 
municipal obligations selected for liquidity and stability.

	The New York Money Market Portfolio seeks to provide its 
shareholders with income exempt from both Federal income taxes and 
New York State and New York City personal income taxes from a 
portfolio of high quality short-term New York municipal 
obligations selected for liquidity and stability.

	The National Portfolio, Florida Portfolio, Georgia 
Portfolio, New York Portfolio, Ohio Portfolio and Pennsylvania 
Portfolio each offer four classes ("Classes") of shares:  Class A, 
Class B, Class C and Class Y.  The Limited Term Portfolio         
offers three classes of shares:  Class A, Class C and Class Y.  
Class A shares are sold to investors with an initial sales charge 
and Class B and Class C shares are sold without an initial sales 
charge but with higher ongoing expenses and a Contingent Deferred 
Sales Charge ("CDSC") payable upon certain redemptions.  Class Y 
shares are sold without an initial sales charge and are available 
only to investors investing a minimum of $5,000,000. The 
California Money Market Portfolio and the New York Money Market 
Portfolio each offer two classes of shares:  Class A and Class Y. 
Class A shares of each of the California Money Market and New York 
Money Market Portfolios are sold without an initial sales charge. 
These alternatives are designed to provide investors with the 
flexibility of selecting an investment best suited to his or her 
needs based on the amount of purchase, the length of time the 
investor expects to hold the shares and other circumstances.

	This Statement of Additional Information is not a 
prospectus.  It is intended to provide more detailed information 
about the Fund as well as matters already discussed in each 
Prospectus and therefore should be read in conjunction with the 
appropriate Prospectus which may be obtained from the Fund or a 
Smith Barney Financial Consultant.

   
TABLE OF CONTENTS
<TABLE>
<S>							<C>
							Page
Trustees and Officers					2
Additional Information Regarding Investment Policies	5
Additional Tax Information				8
Investment Restrictions					9
Performance Information					11
Valuation of Shares					13
The Management Agreement				14
Distribution						15
Custodian						16
Independent Auditors					16
The Fund						16
Voting Rights						17
Financial Statements					20
Appendix A						21
Appendix B						23
Appendix C						31
Appendix D						39
Appendix E						44
Appendix F						45
Appendix G						52
</TABLE>
    

TRUSTEES AND OFFICERS
   
JOSEPH H. FLEISS, Trustee
Retired, 3849 Torrey Pines Blvd., Sarasota, Florida  34238.  
Trustee or director of ten investment companies associated with 
Smith Barney, Inc. ("Smith Barney").  Formerly, Senior Vice 
President of Citibank, Manager of Citibank's Bond Investment 
Portfolio and Money Management Desk and a Trustee of Citicorp 
Securities Co., Inc.;  80.

DONALD R. FOLEY, Trustee
Retired, 3668 Freshwater Drive, Jupiter, Florida  33477.  Trustee 
or director of  ten investment companies associated with Smith 
Barney.  Formerly, Vice President of Edwin Bird Wilson, 
Incorporated (advertising); 74.

PAUL HARDIN, Trustee
Interim President of University of Alabama at Birmingham; 
Professor of Law at University of North Carolina at Chapel Hill, 
103 S. Building, Chapel Hill, North Carolina 27599. Trustee or 
director of  12 investment companies associated with Smith Barney; 
and a Director of The Summit Bancorporation.  Formerly, Chancellor 
of the University of North Carolina at Chapel Hill; 66.

FRANCIS P. MARTIN, Trustee
Practicing physician, 2000 North Village Avenue, Rockville Centre, 
New York 11570.  Trustee or director of ten investment companies 
associated with Smith Barney.  Formerly, President of the Nassau 
Physicians' Fund, Inc.;  73.

*HEATH B. MCLENDON, Chairman of the Board and Chief Executive 
Officer
Managing Director of Smith Barney; Trustee or director of 41 
investment companies associated with Smith Barney; President of 
Smith Barney Mutual Fund Management Inc. ("SBMFM" or the 
"Manager"); Chairman of Smith Barney Strategy Advisers Inc.; prior 
to July 1993, Senior Executive Vice President of Shearson Lehman 
Brothers, Inc.; Vice Chairman of Shearson Asset Management; 64.

RODERICK C. RASMUSSEN, Trustee
Investment Counselor, 9 Cadence Court, Morristown, NJ 07960.  
Trustee or director of ten investment companies associated with 
Smith Barney.  Formerly, Vice President of Dresdner and Company 
Inc. (investment counselors);  71.

JOHN P. TOOLAN, Trustee
Retired, 13 Chadwell Place, Morristown, New Jersey, 07960.  
Trustee or director of ten investment companies associated with 
Smith Barney. Formerly, Director and Chairman of Smith Barney 
Trust Company, Director of Smith Barney Holdings Inc. and the 
Manager and Senior Executive Vice President, Director and Member 
of the Executive Committee of Smith Barney;  66. 

C. RICHARD YOUNGDAHL, Trustee Emeritus
Retired, 339 River Drive, Tequesta, Florida 33469.  Trustee or 
director of ten investment companies associated with Smith Barney.  
Formerly Chairman of the Board of Pensions of the Lutheran Church 
in America and Chairman of the Board and Chief Executive Officer 
of Aubrey G.  Lanston & Co.  (dealers in U.S. government 
securities) and President of the Association of Primary Dealers in 
U.S. Government Securities; 81.

*LEWIS E. DAIDONE, Senior Vice President and Treasurer
Managing Director of Smith Barney; Senior Vice President and 
Treasurer of 41 investment companies associated with Smith Barney, 
and Director and Senior Vice President of the Manager; 39.

*PETER M. COFFEY, Vice President and Investment Officer
Managing Director of Smith Barney and Portfolio Manager.  Prior to 
August, 1993, Managing Director and Portfolio Manager of Shearson 
Lehman Brothers Inc. Managing Director of Smith Barney and Vice 
President of the Manager and five investment companies associated 
with Smith Barney; 53.

*IRVING DAVID, Controller and Assistant Secretary
Vice President of Smith Barney and the Manager.  Prior to March, 
1994, Assistant Treasurer of First Investment Management Company; 
35.

*LAWRENCE MCDERMOTT, Vice President and Investment Officer
Managing Director of Smith Barney and Vice President of the Fund 
and six investment companies associated with Smith Barney; 49.

*JOSEPH BENEVENTO; Vice President and Investment Officer
Vice President of Smith Barney and Vice President of the Fund and 
four investment companies associated with Smith Barney; 30.

*MICHAEL MAHER; Investment Officer
Director of Smith Barney and Investment Officer of the Fund.  
Prior to August, 1993, Vice President of Shearson Lehman Brothers 
Inc; 38.

*THOMAS M. REYNOLDS, Controller
Director of Smith Barney and Controller of the Fund and 36 
investment companies associated with Smith Barney; 35.

*CHRISTINA T. SYDOR, Secretary
Managing Director of Smith Barney and Secretary of 41 investment 
companies associated with Smith Barney; Secretary and General 
Counsel of the Manager; 46.
    
__________________
* Designates an "interested person" as defined in the Investment 
Company Act of 1940, as amended, whose business address is 388 
Greenwich Street, New York, NY  10013 is 388 Greenwich Street, New 
York, NY  10013.  Such person is not separately compensated as a 
Fund officer or Trustee.


	The following table shows the compensation paid by the Fund 
to each Trustee during the Fund's last fiscal year.  None of the 
officers of the Fund received any compensation from the Fund for 
such period.  Officers and interested Trustees of the Fund are 
compensated by Smith Barney.


COMPENSATION TABLE
   
<TABLE>
<CAPTION>
								
				Pension or			
				Retirement	Compensation	Total Number
				Benefits		from Fund	of Funds for
		Aggregate	Accrued		and Fund	Which Trustee 
		Compensation	as part of	Complex Paid	Serves Within
Name of Person	from Fund	Fund Expenses	to Trustees	Fund Complex
<S>		<C>		<C>		<C>		<C>
Joseph H.
Fleiss		$10,273		0		$58,600		10

Donald R.
Foley		10,273		0		58,600		10

Paul Hardin	9,772		0		74,150		12

Francis P.
Martin		10,273		0		58,600		10

Heath B.
McLendon*	0		0		0		41

Roderick C.
Rasmussen	10,273		0		58,600		10

John P.
Toolan		10,273		0		58,600		10

C. Richard
Youngdahl**	9,351		0		45,300		10
</TABLE>

*	Designates an "interested Trustee."
**	Upon attainment of age 72 the Fund's current Trustees may 
elect to change to emeritus status.  Any Trustees elected or 
appointed to the Board in the future will be required to change 
to emeritus status upon attainment of age 80.  Trustees Emeritus 
are entitled to serve in emeritus status for a maximum of 10 
years durring which time they are paid 50% of the annual 
retainer fee and meeting fees other wise applicable to the Fund 
Trustees, together with reasonable out-of-pocket  expenses for 
each meeting attended.  During the Fund's last fiscal year, 
aggregate compensation paid by the Fund to Trustees achieving 
emeritus status totaled $922.
    

	On    July 1, 1997    , the Trustees and officers owned in 
the aggregate less than 1% of the outstanding shares of each 
Portfolio of  the Fund, except for Mr. Toolan        , who owned 
in excess of 1% of Class A shares of the Florida Portfolio.

ADDITIONAL INFORMATION REGARDING INVESTMENT POLICIES

	In general, municipal obligations are debt obligations 
(bonds or notes) issued by or on behalf of states, territories and 
possessions of the United States and their political subdivisions, 
agencies and instrumentalities the interest on which is exempt 
from Federal income tax in the opinion of bond counsel to the 
issuer.  Municipal obligations are issued to obtain funds for 
various public purposes that enhance the quality of life, 
including the construction of a wide range of public facilities, 
such as airports, bridges, highways, housing, hospitals, mass 
transportation, schools, streets, water and sewer works and gas 
and electric utilities.  They may also be issued to refund 
outstanding obligations, to obtain funds for general operating 
expenses, or to obtain funds to loan to other public institutions 
and facilities and in anticipation of the receipt of revenue or 
the issuance of other obligations.  In addition, the term 
"municipal obligations" includes certain types of industrial 
development bonds ("IDBs") issued by public authorities to obtain 
funds to provide various privately-operated facilities for 
business and manufacturing, housing, sports, convention or trade 
show facilities, airport, mass transit, port and parking 
facilities, air or water pollution control facilities, and certain 
facilities for water supply, gas, electricity or sewerage or solid 
waste disposal.

	The two principal classifications of municipal obligations 
are "general obligation" and "revenue."  General obligations are 
secured by a municipal issuer's pledge of its full faith, credit, 
and taxing power for the payment of principal and interest.  
Revenue obligations are payable only from the revenues derived 
from a particular facility or class of facilities or, in some 
cases, from the proceeds of a special excise  tax or other 
specific revenue source.  Although IDBs are issued by municipal 
authorities, they are generally secured by the revenues derived 
from payments of the industrial user.  The payment of the 
principal and interest on IDBs is dependent solely on the ability 
of the user of the facilities financed by the bonds to meet its 
financial obligations and the pledge, if any, of real and personal 
property so financed as security for such payment.  Currently, the 
majority of each Portfolio's municipal obligations are revenue 
bonds.

	For purposes of diversification and concentration under the 
Investment Company Act of 1940 (the "1940 Act"), the 
identification of the issuer of municipal obligations depends on 
the terms and conditions of the obligation.  If the assets and 
revenues of an agency, authority, instrumentality or other 
political subdivision are separate from those of the government 
creating the subdivision and the obligation is backed only by the 
assets and revenues of the subdivision, such subdivision is 
regarded as the sole issuer.  Similarly, in the case of an IDB or 
a pollution control revenue bond, if the bond is backed only by 
the assets and revenues of the non-governmental user, the non-
governmental user is regarded as the sole issuer.  If in either 
case the creating government or another entity guarantees an 
obligation, the guaranty is regarded as a separate security and 
treated as an issue of such guarantor.

	Among the types of short-term instruments in which each 
Portfolio may invest are floating- or variable-rate demand 
instruments, tax-exempt commercial paper (generally having a 
maturity of less than nine months), and other types of notes 
generally having maturities of less than three years, such as Tax 
Anticipation Notes, Revenue Anticipation Notes, Tax and Revenue 
Anticipation Notes and Bond Anticipation Notes.  Demand 
instruments usually have an indicated maturity of more than one 
year, but contain a demand feature that enables the holder to 
redeem the investment on no more than 30 days' notice; variable-
rate demand instruments provide for automatic establishment of a 
new interest rate on set dates; floating-rate demand instruments 
provide for automatic adjustment of their interest rates whenever 
some other specified interest rate changes (e.g., the prime rate).  
Each Portfolio may purchase participation interest in variable-
rate tax-exempt securities (such as Industrial Development Bonds) 
owned by banks.  Participations are frequently backed by an 
irrevocable letter of credit or guarantee of a bank that the 
Manager has determined meets the prescribed quality standards for 
the Portfolio.  Participation interests will be purchased only, if 
management believes interest income on such interests will be tax-
exempt when distributed as dividends to shareholders.

	Investments in participation interests in variable-rate tax-
exempt securities (such as IDBs) purchased from banks give the 
purchaser an undivided interest in the tax-exempt security in the 
proportion that the Portfolio participation interest bears to the 
total principal amount of the tax-exempt security with a demand 
repurchase feature.  Participation interest are frequently backed 
by an irrevocable letter of credit or guarantee of a bank that the 
Manager, under the supervision of the Trustees, has determined 
meets the prescribed quality standards for the Portfolio .  A 
Portfolio has the right to sell the instrument back to the bank 
and draw on the letter of credit on demand on seven days' notice 
or less, for all or any part of the Portfolio's participation 
interest in the tax-exempt security, plus accrued interest.  Each 
Portfolio intends to exercise the demand under the letter of 
credit only (1) upon a default under the terms of the documents of 
the tax-exempt security, (2) as needed to provide liquidity in 
order to meet redemptions, or (3) to maintain a high quality 
investment portfolio.  Banks will retain a service and letter of 
credit fee and a fee for issuing repurchase commitments in an 
amount equal to the excess of the interest paid on the tax-exempt 
securities over the negotiated yield at which the instruments were 
purchased by a Portfolio.  The Manager will monitor the pricing, 
quality and liquidity of the variable-rate demand instruments held 
by each Portfolio, including the IDBs supported by bank letters of 
credit or guarantees, on the basis of published financial 
information, reports of rating agencies and other bank analytical 
services to which the Manager may subscribe.

	The yields on municipal obligations are dependent on a 
variety of factors, including general market conditions, supply 
and demand, general conditions of the municipal market, size of a 
particular offering, the maturity of the obligation and the rating 
of the issue.  The rating of Moody's Investment Service, Inc. and 
Standard & Poor's Ratings Group represent their opinion as to the 
quality to the municipal obligations that they undertake to rate.  
It should be emphasized, however, that such ratings are general 
and are not absolute standards of quality.  Consequently, 
municipal obligations with the same maturity, coupon and rating 
may have different yields when purchased in the open market, while 
municipal obligations of the same maturity and coupon with 
different ratings may have the same yield.

	Municipal obligations purchased on a when-issued basis as 
well as the securities held in each Portfolio are generally 
subject to similar changes in market value based upon the public's 
perception of the creditworthiness of the issuer and changes in 
the level of interest rates (i.e., both experiencing appreciation 
when interest rates decline and depreciation when interest rates 
rise).  Therefore, to the extent a Portfolio remains substantially 
fully invested at the same time that it has purchased securities 
on a when-issued basis, there will be a greater possibility that 
the market value of a Portfolio's assets will fluctuate.  
Purchasing a tax-exempt security on a when-issued basis involves 
the risk that the yields available in the market when the delivery 
takes place may be higher than those obtained on the security so 
purchased.  A separate account of each Portfolio consisting of 
cash or        debt securities    of any grade     equal to the 
amount of the when-issued commitments will be established with PNC 
Bank, National Association (the "Custodian") and marked-to-market 
daily pursuant to guidelines established by the Trustees, with 
additional cash or debt securities added when necessary.  When the 
time comes to pay for when-issued securities, the Portfolios will 
meet their respective obligations from then-available cash flow, 
sale of securities held in the separate account, sale of other 
securities or, although they would not normally expect to do so, 
from the sale of the when-issued securities themselves (which may 
have a value greater or lesser than the Portfolios' payment 
obligations).  Sale of securities to meet such obligations carries 
with it a greater potential for the realization of capital gain, 
which is not exempt from Federal income tax (see "Dividends, 
Distributions and Taxes" in the Prospectus).

	Portfolios may invest in municipal bond index futures 
contracts or in listed contracts based on U.S. government 
securities.  Such investments will be made solely for the purpose 
of hedging against changes in the value of portfolio securities 
due to anticipated changes in interest rates and market conditions 
and not for purposes of speculation.  The acquisition or sale of a 
futures contract could enable the Fund to protect a Portfolio's 
assets from fluctuations in rates on tax-exempt securities without 
actually buying or selling securities.  The municipal bond index 
futures contract is based on an index of long-term, tax-exempt 
municipal bonds.  The contract obligates the buyer or seller to 
take or make delivery, respectively, of an amount of cash equal to 
the difference between the value of the index upon liquidation of 
the contract and the price at which the index contract was 
originally purchased or sold.  In connection with the use of 
futures contracts as a hedging device, there can be no assurance 
that there will be a precise or even a positive correlation 
between price movement in the futures contracts with that of the 
municipal bonds that are the subject of the hedge, consequently, a 
Portfolio may realize a profit on a futures contract that is less 
than the loss in the price of the municipal bonds being hedged or 
may even incur a loss.  A Portfolio also may not be able to close 
a futures position in the event of adverse price movements or in 
the event an active market does not exist for the hedging contract 
on the exchange or board of trade on which the contract is traded.  
The successful use of these investments is dependent on the 
ability of the Manager to predict price or interest rate movements 
or the correlation of futures and cash markets, or both.

	Each Portfolio may invest in securities the disposition of 
which is subject to legal or contractual restrictions.  The sale 
of restricted securities often requires more time and results in 
higher dealer discounts or other selling expenses than does the 
sale of securities that are not subject to restrictions on resale.  
Restricted securities often sell at a price lower than similar 
securities that are not subject to restrictions on resale.

	Securities may be sold in anticipation of a market decline 
(a rise in interest rates) or purchased in anticipation of a 
market rise (a decline in interest rates).  In addition, a 
security may be sold and another purchased at approximately the 
same time to take advantage of what the Manager believes to be a 
temporary disparity in the normal yield relationship between the 
two securities.  The Fund believes that, in general, the secondary 
market for tax-exempt securities in each of the Fund's Portfolios 
may be less liquid than that for taxable fixed-income securities.  
Accordingly, the ability of a Portfolio to make purchases and 
sales of securities in the foregoing manner may be limited.  Yield 
disparities may occur for reasons not directly related to the 
investment quality of particular issues or the general movement of 
interest rates, but instead due to such factors as changes in the 
overall demand for or supply of various types of tax-exempt 
securities or changes in the investment objectives of investors.

	Portfolio turnover rate for a fiscal year is the ratio of 
the lesser of purchases or sales (including maturities and calls) 
of portfolio securities to the monthly average of the value of 
portfolio securities including long-term U.S. government 
securities but excluding securities with maturities at acquisition 
of one year or less.  The Fund effects portfolio transactions with 
a view towards attaining the investment objective of each 
Portfolio and is not limited to a predetermined rate of portfolio 
turnover.  A high portfolio turnover results in correspondingly 
greater transaction costs.  The Fund anticipates that each 
Portfolio's annual turnover rate generally will not exceed 100%.

	Though not obligated to do so, the Fund will normally 
provide upon request a listing of portfolio  holdings as of a 
recent date.

ADDITIONAL TAX INFORMATION

	Capital gain distributions, if any, are taxable to 
shareholders, and are declared and paid at least annually.  On 
   March 31, 1997,      the unused capital loss carryovers of the 
Fund by Portfolio were approximately as follows:    National 
Portfolio, $1,485,000; New York Portfolio, $6,386,000; Florida 
Portfolio, $192,000; Limited Term Portfolio, $5,452,000; 
California Money Market Portfolio, $187,000; New York Money Market 
Portfolio $262,000 and the Pennsylvania Portfolio, $9,700.       
For Federal income tax purposes theses amounts are available to be 
applied against future securities gains, if any, realized.  The 
carryovers expire as follows:

   
<TABLE>
<CAPTION>

	March 31:							
PORTFOLIO	1998	1999 	2000 	2001	 2002	2003	2004	2005
(in thousands)								
<S>		<C>	<C>	<C>	<C>	<C>	<C>	<C>	<C>
National		--	--	--	--	--	$1,445	$40	--
Florida		--	--	--	--	--	192	--	--
New York	--	--	--	$714	$4,701	366	--	$605
Georgia		--	--	--	--	--	--	--	--
Ohio		--	--	--	--	--	--	--	--
Pennsylvania	--	--	--	--	--	--	--	10
Limited Term	--	--	--	289	577	2,846	1,740	--
CA Money	--	$55	$9	83	800*	1	38	--
NY Money	--	--	262	--	--	--	--	--

*  Not expressed in thousands.
</TABLE>
    

	Generally, interest on municipal obligations is exempt from 
Federal income tax.  However, interest on municipal obligations 
that are considered to be IDBs (as defined in the Internal Revenue 
Code of 1986, as amended (the "Code"), will not be exempt from 
Federal income tax to any shareholder who is considered to be a 
"substantial user" of any facility financed by the proceeds of 
such obligations (or a "related person" to such "substantial user" 
as defined in the Code).

	In addition, interest on municipal obligations may subject 
certain investors' Social Security benefits to Federal income 
taxation.  Section 86 of the Internal Revenue Code provides that 
the amount of Social Security benefits subject to inclusion in 
gross income for a taxable year is the lesser of (a) one-half of 
the Social Security benefits or (b) one-half of the amount by 
which the sum of "modified adjusted gross income" plus one-half of 
the Social Security benefits exceeds a "base amount."  The base 
amount is $25,000 for unmarried taxpayers, $32,000 for married 
taxpayers filling a joint return and zero for married taxpayers 
not living apart who file separate returns.  Modified adjusted 
gross income is adjusted gross income determined without regard to 
certain otherwise allowable deductions and exclusions from gross 
income, plus tax-exempt interest on municipal obligations.  To the 
extent that Social Security benefits are included in gross income 
they will be treated as any other item of gross income and 
therefore may be taxable.  Tax-exempt interest is included in 
modified adjusted gross income solely for the purpose of 
determining what portion, if any, of Social Security benefits will 
be included in gross income; no tax-exempt interest, including 
that received from the Fund, will be subject to Federal income tax 
for most investors.

	Additionally, the Tax Reform Act of 1986 (the "Tax Reform 
Act") provides that interest on certain municipal obligations 
(i.e. certain private activity bonds) issued after August 7, 1986 
will be treated as a preference item for purposes of both the 
corporate and individual alternative minimum tax.  Under Treasury 
regulations, that portion of the Portfolio's exempt-interest 
dividend which is to be treated as a preference item for 
shareholders will be based on the proportionate share of the 
interest received by the Portfolio from the specified private 
activity bonds.  In addition, the Tax Reform Act provides 
generally that tax preference items for corporations for 1987-1989 
will include one-half the amount by which adjusted net book income 
(which would include tax-exempt interest) of the taxpayer exceeds 
the alternative minimum taxable income of the taxpayer before any 
amount is added to alternative minimum taxable income because of 
this preference.

	A similar provision based on adjusted earnings and profits 
would apply after 1989.  Investors should consult their tax 
advisers before investing in shares of the Fund.

	From time to time, proceedings have been introduced before 
Congress for the purpose of restricting or eliminating the Federal 
income tax exemption for interest on municipal obligations.  It 
may be expected that similar proposals may be introduced in the 
future.  If such proposals were to be enacted, the ability of the 
Fund to pay "exempt interest" dividends could be adversely 
affected and the Fund would then need to reevaluate its investment 
objectives and policies and consider changes in its structure.


INVESTMENT RESTRICTIONS

	The Fund has adopted the following restrictions as 
fundamental policies that cannot be changed without approval by 
the holders of a majority of the outstanding voting securities of 
each Portfolio affected by the matters as defined in the 1940 Act 
(see "Voting Rights").

	Without the approval of a majority of their outstanding 
voting securities, the National Portfolio and the New York 
Portfolio each may not:

	(1) borrow money, except from banks for temporary purposes 
(such as facilitating redemptions or for extraordinary or 
emergency purposes) in an amount not to exceed 10% of the value of 
its total assets at the time the borrowing is made (not including 
the amount borrowed) and no investment will be made while 
borrowing exceeds 5% of total assets; (2) mortgage or pledge any 
of its assets, except to secure borrowings permitted under (1) 
above; (3) invest more than 25% of total assets taken at market 
value in any one industry, except that municipal obligations and 
securities of the U.S. Government, its agencies and 
instrumentalities and municipal obligations of New York State with 
respect to the New York Portfolio are not considered an industry 
for purposes of this limitation; (4) the National Portfolio may 
not with respect to 75% of the value of its total assets, purchase 
securities of any issuer if immediately thereafter more than 5% of 
total assets at market value would be invested in the securities 
of any issuer (except that this limitation does not apply to 
obligations issued or guaranteed as to principal and interest 
either by the U.S. Government or its agencies or instrumentalities 
or by New York State or its political subdivisions with respect to 
the New York Portfolio); (5) invest in securities issued by other 
investment companies, except as  permitted by Section 12(d)(1) of 
the 1940 Act or to effect a merger, consolidation, acquisition or 
reorganization; (6) purchase or hold any real estate, except that 
a Portfolio may invest in securities secured by real estate or 
interest therein or issued by persons (other than real estate 
investment trusts) who deal in real estate or interests therein; 
(7) purchase or hold the securities of any issuer, if to its 
knowledge, Trustees or officers of the Fund individually owning 
beneficially more than 0.5% of the securities of that issuer own 
in the aggregate more than 5% of such securities; (8) write or 
purchase put, call, straddle or spread options; purchase 
securities on margin or sell "short"; (9) underwrite the 
securities of other issuers; (10) purchase or sell commodities and 
commodity contracts, except that each Portfolio may invest in or 
sell municipal bond index future contracts; provided that 
immediately thereafter not more than 33 1/3% of its net assets 
would be hedged or the amount of margin deposits on the 
Portfolio's existing futures contracts would not exceed 5% of the 
value of its total assets; or (11) make loans, except to the 
extent the purchase of bonds or other evidences of indebtedness or 
the entry into repurchase agreements or deposits with banks, 
including the Fund's Custodian, may be considered loans (and the 
Fund has no present intention of entering into repurchase 
agreements).

	Without the approval of a majority of its outstanding voting 
securities, the Limited Term Portfolio, the Florida Portfolio, the 
Georgia Portfolio, the Pennsylvania Portfolio and the Ohio 
Portfolio each may not:

	(1) borrow money, except from banks for temporary purposes 
(such as facilitating redemptions or for extraordinary or 
emergency purposes) in an amount not to exceed 10% of the value of 
its total assets at the time the borrowing is made (not including 
the amount borrowed) and no investments will be made while 
borrowing exceeds 5% of total assets; (2) mortgage or pledge any 
of its assets, except to secure borrowings permitted under (1) 
above; (3) invest more than 25% of total assets taken at market 
value in any one industry; except that municipal obligations and 
securities of the U.S. government, its agencies and 
instrumentalities and municipal obligations of Georgia with 
respect to the Georgia Portfolio, municipal obligations of 
Pennsylvania with respect to the Pennsylvania Portfolio and 
municipal obligations of Florida with respect to the Florida 
Portfolio are not considered an industry for purposes of this 
limitation; (4) purchase or hold any real estate, except that the 
Portfolio may invest in securities secured by real estate or 
interests therein or issued by persons (other than real estate 
investment trusts) which deal in real estate or interests therein; 
(5) write or purchase put, call, straddle or spread options; 
purchase securities on margin or sell "short"; (6) underwrite the 
securities of other issuers: (7) purchase or sell commodities and 
commodity contracts, except that the Portfolio may invest in or 
sell municipal bond index futures contracts, provided that 
immediately thereafter not more than 33 1/3% of its net assets 
would be hedged or the amount of margin deposits on the 
Portfolio's existing futures contracts would not exceed 5% of the 
value of its total assets; or (8) make loans, except to the extent 
the purchase of bonds or other evidences of indebtedness or the 
entry into repurchase agreements or deposits with banks, including 
the Funds' Custodian, may be considered loans.

	Without the approval of a majority of its outstanding voting 
securities, the California Money Market Portfolio and the New York 
Money Market Portfolio each may not:

	(1)  borrow money, except from banks for temporary purposes 
(such as facilitating redemptions or for extraordinary or 
emergency purposes) in an amount not to exceed 10% of the value of 
its total assets at the time the borrowing is made (not including 
the amount borrowed) and no investments will be made while 
borrowings exceed 5% of total assets; (2)  mortgage or pledge any 
of its assets, except to secure borrowings permitted under (1) 
above; (3)  invest more than 25% of total assets taken at market 
value in any one industry; except that municipal obligations and 
securities of the U.S. government, its agencies and 
instrumentalities and municipal obligations of California with 
respect to the California Money Market Portfolio and municipal 
obligations of New York with respect to the New York Money Market 
Portfolio are not considered an industry for purposes of this 
limitation; (4)  purchase or hold any real estate, except that the 
Portfolio may invest in securities secured by real estate or 
interests therein or issued by persons (other than real estate 
investment trusts) which deal in real estate or interests therein; 
(5)  write or purchase put, call, straddle or spread options; 
purchase securities on margin or sell "short"; (6)  Underwrite the 
securities of other issuers;  (7)  Purchase or sell commodities 
and commodity contracts; or (8)  Make loans, except to the extent 
the purchase of bonds or other evidences of indebtedness or the 
entry into repurchase agreements or deposits with banks, including 
the Fund's Custodian, may be considered loans.

	In order to comply with certain state statutes and policies, 
none of the Portfolios will, as a matter of operating policy:

	(1) purchase oil, gas or other mineral leases, rights or 
royalty contracts or exploration or development programs, except 
that each Portfolio may invest in the securities of issuers which 
operate, invest in, or sponsor such programs; (2) invest more than 
5% of their assets in unseasoned issuers, including their 
predecessors, which have been in operation for less than three 
years.

	The foregoing percentage restrictions apply at the time an 
investment is made; a subsequent increase or decrease in 
percentage may result from changes in values or net assets.

PERFORMANCE INFORMATION

	From time to time, in advertisements and other types of 
sales literature, each Portfolio may compare its performance to 
that of other mutual funds with similar investment objectives, to 
appropriate indices or rankings such as those compiled by Lipper 
Analytical Services, Inc. or to other financial alternatives.

	Each Portfolio, other than the California Money Market 
Portfolio and the New York Money Market Portfolio, computes the 
average annual total return during specified periods that would 
equate the initial amount invested to the ending redeemable value 
of such investment by adding one to the computed average annual 
total return, raising the sum to a power equal to the number of 
years covered by the computation and multiplying the result by one 
thousand dollars which represents the hypothetical initial 
investment.  The calculation assumes deduction of the maximum 
sales charge from the initial amount invested and reinvestment of 
all income dividends and capital gains distributions on the 
reinvestment dates at prices calculated as stated in the 
Prospectus.  The ending redeemable value is determined by assuming 
a complete redemption at the end of the period(s) covered by the 
average annual total return computation.  Such standard total 
return information may also be accompanied with nonstandard total 
return information for differing periods computed in the same 
manner but without annualizing the total return or taking sales 
charges into account.

	Each Portfolio's average annual total return with respect to 
its Class A shares for the one-year period, five- and ten-year 
periods, if any, and for the life of the Portfolio ended    March 
31, 1997     is as follows:

   
<TABLE>
<CAPTION>
PORTFOLIO	One Year	Five Years	Ten Years	Life	Inception Date
<S>		<C>		<C>		<C>		<C>	<C>
National		1.19%		6.61%		7.25%		7.50%	8/20/86
Limited Term	2.29		5.58		--		6.49	11/28/88
New York	1.26		6.59		6.96		6.87	1/16/87
Florida		1.24		6.63		--		6.96	4/2/91
Georgia		1.72		-- 		--		5.86	4/4/94
Ohio		1.81		--		--		4.80	6/13/94
Pennsylvania	1.84		--		--		6.23	4/4/94
</TABLE>
    

	Each Portfolio's average annual total return with respect to 
its Class B shares for the one-year period, five-year period, if 
any, and for the life of the Portfolio ended March 31, 1997 is as 
follows:

   
<TABLE>
<CAPTION>
PORTFOLIO	One Year	Five Years	Life	Inception Date
<S>		<C>		<C>		<C>	<C>
National		0.45%		-- 		8.69%	11/7/94
New York	0.46		--		8.52	11/11/94
Florida		0.44		--		5.41	11/16/94
Georgia		0.83		--		5.19	6/15/94
Ohio		1.02		--		4.71	6/14/94
Pennsylvania	1.06		--		5.35	6/20/94
</TABLE>
    

	Each Portfolio's average annual total return with respect to 
its Class C shares for a one-year period, five-year period, if any 
and for the life of the Portfolio's Class C shares through March 
31, 1997 is as follows:

   
<TABLE>
<CAPTION>
PORTFOLIO	One Year	Five Years	Life	Inception Date
<S>		<C>		<C>		<C>	<C>
National		3.90%		--		5.96%	1/5/93
Limited Term	3.10		--		5.08	1/5/93
New York	3.91		--		5.83	1/8/93
Florida		3.95		--		4.82	1/5/93
Georgia		4.28		--		6.57	4/14/94
Ohio		4.48		--		5.68	6/14/94
Pennsylvania	4.51		--		7.09	4/5/94
</TABLE>
    

	Each Portfolio's yield, other than for the California Money 
Market Portfolio and the New York Money Market Portfolio, is 
computed by dividing the net investment income per share earned 
during a specified 30-day period ending at month end by the 
maximum offering price per share on the last day of such period 
and analyzing the result.  For purposes of yield calculation, 
interest income is determined based on a yield to maturity 
percentage for each long-term debt obligation in the Portfolio; 
income or short-term obligations are based on current payment 
rate.  Yield information may be accompanied with information on 
tax equivalent yield computed in the same manner, with adjustment 
for assumed Federal income tax rates.  No taxable instruments are 
presently held by the Fund.

	Each Portfolio's distribution rate, other than those of the 
California Money Market Portfolio and the New York Money Market 
Portfolio, is calculated by analyzing the latest income 
distribution and dividing the result by the maximum offering price 
per share as of the end of the period to which the distribution 
relates.  The distribution rate is not computed in the same manner 
as, and therefore can be significantly different from, the above-
described yield which will be computed in accordance with 
applicable regulations.  A Portfolio may quote its distribution 
rate together with the above-described standard total return and 
yield information in its supplemental sales literature.  The use 
of such distribution rates would be subject to an appropriate 
explanation of, among other matters, how the components of the 
distribution rate differ from the above described yield.

	California Money Market Portfolio's yield with respect to 
its Class A shares for the seven-day period ended March 31, 1997 
was 2.75% (the effective yield was 2.79%) with an average dollar-
weighted portfolio maturity of 37 days; the New York Money Market 
Portfolio's yield with respect to its Class A shares for the 
seven-day period ended March 31, 1997 was 2.80% (the effective 
yield was 2.85%) with an average dollar-weighted portfolio 
maturity of 46 days.  From time to time the California Money 
Market Portfolio and, the New York Money Market Portfolio may 
advertise their yields, effective yields and tax equivalent 
yields.  These yield figures are based on historical earnings and 
are not intended to indicate future performance.  The yield of 
each Portfolio refers to the net investment income generated by an 
investment in each Portfolio over a specific seven-day period 
(which will be stated in the advertisement).  This net investment 
income is then annualized.  The effective yield is calculated 
similarly but, when annualized, the income earned by an investment 
in each Portfolio is assumed to be reinvested.  The effective 
yield will be slightly higher than the yield because of the 
compounding effect of the assumed reinvestment.  The tax 
equivalent yield also is calculated similarly to the yield, except 
that a stated income tax rate is used to demonstrate the taxable 
yield necessary to produce an after-tax yield equivalent to the 
tax-exempt yield of each Portfolio.

	Performance information may be useful in evaluating a 
Portfolio and for providing a basis for comparison with other 
financial alternatives.  Since the performance of each Portfolio 
changes in response to fluctuations in market conditions, interest 
rates and Portfolio expenses, no performance quotation should be 
considered a representation as to the Portfolio's performance for 
any future period.


VALUATION OF SHARES

	The Prospectus states that the net asset value of each 
Portfolio's Classes of shares will be determined on any date that 
the New York Stock Exchange ("NYSE") is open.  The NYSE is closed 
on the following holidays: New Year's Day, Presidents' Day, Good 
Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving 
Day and Christmas Day.

	The California Money Market Portfolio and the New York Money 
Market Portfolio use the "amortized cost method" for valuing 
portfolio securities pursuant to Rule 2a-7 under the 1940 Act (the 
"Rule").  The amortized cost method of valuation of a Portfolio's 
securities (including any securities held in the separate account 
maintained for when-issued securities -- See "Investment Objective 
and Management Policies" and "Portfolio Management" in the 
Prospectus) involves valuing a security at its cost at the time of 
purchase and thereafter assuming a constant amortization to 
maturity of any discount or premium, regardless of the impact of 
fluctuating interest rates on the market value of the instrument.  
The market value of each Portfolio's securities will fluctuate on 
the basis of the creditworthiness of the issuers of such 
securities and with changes in interest rates generally.  While 
the amortized cost method provides certainty in valuation, it may 
result in periods during which value, as determined by amortized 
cost, is higher or lower than the price each Portfolio would 
receive if it sold the instrument.  During such periods the yield 
to investors in each Portfolio may differ somewhat from that 
obtained in a similar company that uses mark-to-market values for 
all its portfolio securities.  For example, if the use of 
amortized cost resulted in a lower (higher) aggregate portfolio 
value on a particular day, a prospective investor in each 
Portfolio would be able to obtain a somewhat higher (lower) yield 
than would result from investment in such similar company, and 
existing investors would receive less (more) investment income.  
The purpose of this method of valuation is to attempt to maintain 
a constant net asset value per share, and it is expected that the 
price of each Portfolio's shares will remain at $1.00; however, 
shareholders should be aware that despite procedures that will be 
followed to have a stable price, including maintaining a maximum 
dollar-weighted average portfolio maturity of 90 days, investing 
in securities that have or are deemed to have remaining maturities 
of only 13 months or less and investing in only United States 
dollar-denominated instruments determined by the Fund's Trustees 
to be of high quality with minimal credit risks and which are 
Eligible Securities (as defined below), there is no assurance that 
at some future date there will not be a rapid change in prevailing 
interest rates, a default by an issuer or some other event that 
could cause each Portfolio's price per share to change from $1.00.

	An Eligible Security is defined in the Rule to mean a 
security which:  (a) has a remaining maturity of 397 days or less; 
(b)(i) is rated in the two highest short-term rating categories by 
any two nationally recognized statistical rating organizations 
("NRSROs") that have issued a short-term rating with respect to 
the security or class of debt obligations of the issuer, or (ii) 
if only one NRSRO has issued a short-term rating with respect to 
the security, then by that NRSRO; (c) was a long-term security at 
the time of issuance whose issuer has outstanding a short-term 
debt obligation which is comparable in priority and security and 
has a rating as specified in clause (b) above; or (d) if no rating 
is assigned by any NRSRO as provided in clauses (b) and (c) above, 
the unrated security is determined by the Trustees to be of 
comparable quality to any such rated security. 


THE MANAGEMENT AGREEMENT

	The Management Agreement for the National Portfolio,         
the Georgia Portfolio, the Ohio Portfolio and Pennsylvania 
Portfolio provides for a daily management fee at the annual rate 
of 0.45% of the Portfolio's average net assets.  The Management 
Agreement for the Limited Term, the Florida Portfolio and the New 
York Portfolio is 0.50% of the Portfolio's average net assets.

	At a Meeting of Shareholders of  the Limited Term Portfolio, 
the Florida Portfolio and the New York Portfolio held on December 
15, 1995, the shareholders of each of these Portfolios approved a 
new Management Agreement that increases the effective management 
fee paid by Smith Barney Muni Funds on behalf of each of these 
Portfolios from 0.45% to 0.50% of each of these Portfolios' 
average daily net assets.

	The Management Agreements for the California Money Market 
Portfolio and the New York Money Market Portfolio provide for the 
payment of an effective management fee at an annual rate based on 
each Money Market Portfolio's average daily net assets in 
accordance with the following schedule:

	0.50% on the first $2.5 billion of net assets;
	0.475% on the next $2.5 billion; and
	0.45% on net assets in excess of $5 billion.

	Based on the current asset levels of each Money Market 
Portfolio, the effective management fee is 0.50%.

   
	For the fiscal years ended March 31, 1995, 1996 and 1997, 
the management fee for each Portfolio was as follows:

<TABLE>
<CAPTION>
Portfolio			1997		1996		1995
<S>			<C>		<C>		<C>
National			$1,780,788	$1,893,904	$1,918,961
Limited Term		1,495,020	1,260,753	1,351,567
New York		3,682,923	996,273		373,385
Florida			876,101		622,090		484,744
California Money (a)	6,706,574	5,870,779	2,239,712
New York Money (b)	4,554,023	4,035,418	1,525,102
Georgia (c)		6,917		--		--
Ohio (d)			--		--		--
Pennsylvania (e)		--		--		--
</TABLE>
(a)	The Manager waived its management fee in excess of 0.03% and 
0.01% of the California Money Market Portfolio's average daily 
net assets for the period from April 1, 1994 through March 31, 
1995 and for the fiscal year ended March 31, 1996.
(b)	The Manager waived its management fee in excess of 0.36% of 
the New York Money Market Portfolio's average daily net assets 
for the fiscal year ended March 31, 1994
(c)	The Manager waived its entire management fee with respect to 
the Georgia Portfolio's average daily net assets for the period 
from April 4, 1994 through March 31, 1996 and its management 
fee in excess of 0.33% of the Portfolio's average daily net 
assets for the fiscal year ended March 31, 1997.
(d)	The Manager waived its entire management fee with respect to 
the Ohio Portfolio's average daily net assets for the period 
from June 14, 1994 through March 31, 1997.
(e)	The Manager waived its entire management fee with respect to 
the Pennsylvania Portfolio's average daily net assets for the 
period from April 4, 1994 through March 31, 1997.
    

	The Management Agreements further provide that all other 
expenses not specifically assumed by the Manager under the 
Management Agreement on behalf of each Portfolio are borne by the 
Fund.  Expenses payable by the Fund include, but are not limited 
to, all charges of custodians (including sums as custodian and 
sums for keeping books and for rendering other services to the 
Fund) and shareholder servicing agents, expenses of preparing, 
printing and distributing all prospectuses, proxy material, 
reports and notices to shareholders, all expenses of shareholders' 
and Trustees' meetings, filing fees and expenses relating to the 
registration and qualification of the Fund's shares and the Fund 
under Federal or state securities laws and maintaining such 
registrations and qualifications (including the printing of the 
Fund's  registration statements), fees of auditors and legal 
counsel, costs of performing portfolio valuations, out-of-pocket 
expenses of Trustees and fees of Trustees who are not "interested 
persons" as defined in the 1940 Act, interest, taxes and 
governmental fees, fees and commissions of every kind, expenses of 
issue, repurchase or redemption of shares, insurance expense, 
association membership dues, all other costs incident to the 
Fund's existence and extraordinary expenses such as litigation and 
indemnification expenses.  Direct expenses of each Portfolio of 
the Fund, including but not limited to the management fee, are 
charged to that Portfolio, and general trust expenses are 
allocated among the Portfolios on the basis of relative net 
assets.  The Manager has voluntarily agreed to waive its fee with 
respect to each Portfolio to the extent it is necessary if in any 
fiscal year the aggregate expenses of the Portfolio, exclusive of 
taxes, brokerage, interest, payments of distribution fees and 
extraordinary expenses such as litigation costs, exceed the most 
restrictive expense limitation imposed by any state in which a 
Portfolio sells shares, if any.

DISTRIBUTOR

	The Fund, on behalf of each Portfolio, has adopted a plan of 
distribution pursuant to Rule 12b-1 (the "Plan") under the 1940 
Act under which a service fee is paid by each class of shares 
(other than Class Y shares ) of each Portfolio to Smith Barney in 
connection with shareholder service expenses.  The service fee is 
equal to 0.15% of the average daily net assets of each class (the 
service fee payable by the Class A shares of the Money Market 
Portfolios is 0.10%).  With respect to Class B and Class C shares 
of each Portfolio, Smith Barney is also paid a distribution fee, 
pursuant to a plan of distribution adopted by each Portfolio.  See 
"Distributor" in each applicable Prospectus.

	For the year ended    March 31, 1997    , the table below 
represents the fees which have been accrued and/or paid to Smith 
Barney under the plans of distribution pursuant to Rule 12b-1 for 
the Fund's Portfolios.  The distribution expenses for 1997 
included compensation of Smith Barney Financial Consultants and 
printing costs of prospectuses and marketing materials.

   
<TABLE>
<CAPTION>
Portfolio		Class A		Class B		Class C		Class Y		Total
<S>		<C>		<C>		<C>		<C>		<C>
National		$551,259	$80,225		$111,179	--		$742,663
Limited Term	405,247		N/A		100,916		--		506,163
Florida		179,380		317,521		27,826		--		524,727
Georgia		17,632		42,074		20,456		--		80,162
New York	815,597		1,192,097	66,175		--		2,037,869
Ohio		5,732		25,312		6,250		--		37,294
Pennsylvania	20,872		96,814		36,310		--		153,996
</TABLE>
    

CUSTODIAN

	All portfolio securities and cash owned by the Fund will be 
held in the custody of PNC Bank, National Association, 17th and 
Chestnut Streets, Philadelphia, Pennsylvania  19103.


INDEPENDENT AUDITORS

	KPMG Peat Marwick LLP, 345 Park Avenue, New York, New York 
10154, has been selected as independent auditors to examine and 
report on the Fund's financial statements for the fiscal year 
ending    March 31, 1998    .


THE FUND

	The interest of a shareholder is in the assets and earnings 
of the Portfolio in which he or she holds shares.  The Trustees 
have authorized the issuance of 20 series of shares, each 
representing shares in one of 20 separate Portfolios.  Pursuant to 
such authority, the Trustees may also authorize the creation of 
additional series of shares and additional classes of shares 
within any series.  The investment objectives, policies and 
restrictions applicable to additional Portfolios would be 
established by the Trustees at the time such Portfolios were 
established and may differ from those set forth in the 
Prospectuses and this Statement of Additional Information.  In the 
event of liquidation or dissolution of a Portfolio or of the Fund, 
shares of a Portfolio are entitled to receive the assets belonging 
to that Portfolio and a proportionate distribution, based on the 
relative net assets of the respective Portfolios, of any general 
assets not belonging to any particular Portfolio that are 
available for distribution.

	The Declaration of Trust may be amended only by a "majority 
shareholder vote" as defined therein, except for certain 
amendments that may be made by the Trustees.  The Declaration of 
Trust and the By-Laws of the Fund are designed to make the Fund 
similar in most respects to a Massachusetts business corporation.  
The principal distinction between the two forms of business 
organization relates to shareholder liability described below.  
Under Massachusetts law, shareholders of a business trust may, 
under certain circumstances, be held personally liable as partners 
for the obligations of the trust, which is not the case with a 
corporation.  The Declaration of Trust of the Fund provides that 
shareholders shall not be subject to any personal liability for 
the acts or obligations of the Fund and that every written 
obligation, contract, instrument or undertaking made by the Fund 
shall contain a provision to the effect that the shareholders are 
not personally liable thereunder.

	Special counsel for the Fund is of the opinion that no 
personal liability will attach to the shareholders under any 
undertaking containing such provision when adequate notice of such 
provision is given, except possibly in a few jurisdictions.  With 
respect to (a) all types of claims in the latter jurisdictions; 
(b) tort claims; (c) contract claims where the provision referred 
to is omitted from the undertaking; (c) claims for taxes; and (d) 
certain statutory liabilities in other jurisdictions, a 
shareholder may be held personally liable to the extent that 
claims are not satisfied by the Fund; however, upon payment of any 
such liability the shareholder will be entitled to reimbursement 
from the general assets of the Fund.  The Trustees intend to 
conduct the operations of the Fund, with the advice of counsel, in 
such a way so as to avoid, as far as possible, ultimate liability 
of the shareholders for liabilities of the Fund.

	The Declaration of Trust further provides that no Trustee, 
officer or employee of the Fund is liable to the Fund or to a 
shareholder, except as such liability may arise from his or her or 
its own bad faith, willful misfeasance, gross negligence, or 
reckless disregard of his or its duties, nor is any Trustee, 
officer or employee personally liable to any third persons in 
connection with the affairs of the Fund.  It also provides that 
all third persons shall look solely to the Fund property or the 
property of the appropriate Portfolio of the Fund for satisfaction 
of claims arising in connection with the affairs of the Fund or a 
particular Portfolio, respectively.  With the exceptions stated, 
the Declaration of Trust provides that a Trustee, officer or 
employee is entitled to be indemnified against all liability in 
connection with the affairs of the Fund.

	Other distinctions between a corporation and a Massachusetts 
business trust include the fact that business trusts are not 
required to issue share certificates or hold annual meetings of 
shareholders.

	The Fund shall continue without limitation of time subject 
to the provisions in the Declaration of Trust concerning 
termination of the Trust or any of the series of the Trust by 
action of the shareholders or by action of the Trustees upon 
notice to the shareholders.


VOTING RIGHTS

	The Trustees themselves have the power to alter the number 
and the terms of office of the Trustees, and they may at any time 
lengthen their own terms or make their terms of unlimited duration 
(subject to certain removal procedures) and appoint their own 
successors, provided that in accordance with the 1940 Act at any 
time at least a majority, but in most instances at least two-
thirds, of the Trustees have been elected by the shareholders of 
the Fund.  Shares do not have cumulative voting rights and 
therefore the holders of more than 50% of the outstanding shares 
of the Fund may elect all of the Trustees irrespective of the 
votes of other shareholders.  Class A, Class B, Class C and Class 
Y shares of a Portfolio of the Fund, if any, represent interests 
in the assets of that Portfolio and have identical voting, 
dividend, liquidation and other rights on the same terms and 
conditions, except that each Class of shares has exclusive voting 
rights with respect to provisions of the Fund's Rule 12b-1 
distribution plan which pertain to a particular class.  For 
example, a change in investment policy for a Portfolio would be 
voted upon only by shareholders of the Portfolio involved.  
Additionally, approval of each Portfolio's Management Agreement is 
a matter to be determined separately by that Portfolio.  Approval 
of a proposal by the shareholders of one Portfolio is effective as 
to that Portfolio whether or not enough votes are received from 
the shareholders of the other Portfolios to approve the proposal 
as to those Portfolios. As of    July 1, 1997    , the following 
shareholders beneficially owned 5% or more of a class of  shares 
of a Portfolio of the Fund :

   
National Portfolio Class B

James R. Scheele
P.O. Box 2477
Williston, ND 58802-2477
owned 201,606.019 (20.6643%) shares

Florida Portfolio Class A

The E.G. Rosenblatt Living Trust
E.G. Rosenblatt, Trustee
2295 South Ocean Blvd.
Palm Beach, FL 33480-5357
owned 626,821.592 (6.4985%) shares

Ohio Portfolio Class A

SBI Seed Money Capital
c/o Sam Harris
Capital Market
388 Greenwich Street
New York, NY 10013-2375
owned 70,107.810 (28.539%) shares

Anne C. Eiselstein, Trustee
FBO William E. Eiselstein U/A/D 10/18/96
P.O. Box 344
South Point, OH 45680-0344
owned 13,028.052 (5.3033%) shares

Ohio Portfolio Class B

Robert Burnett
Sub 1
18078 Williamsburg Oval
Strongsville, OH 44136-7093
owned 14,428.577 (5.0001%) shares

Ohio Portfolio Class C

Merle E. Troutwine and Dorothy D. Troutwine JTWROS
1229 Broadway
Greenville, OH 45331-2450
owned 13,662.160 (20.1309%) shares

Plaford E. Meredith
5063 Waterloo Rd.
Atwater, OH 44201-9345
owned 9,205.924 (13.5647%) shares

Sandhya R. Nuthakki
Municipal Bond Account
4625 Schrubb Dr.
Kettering, OH 45429-1984
owned 4,896.952 (7.2155%) shares

Catherine Dare
1110 Main St.
Hamilton, OH 45013-1604
owned 4,456.769 (6.5669%) shares

Nancy L. Schardt
1648 West Alex-Bell Rd.
Dayton, OH 45459-1246
owned 3,964.406 (5.8414%) shares

Georgia Portfolio Class C

Jeanette L. Griffis
Rt. 1 Box 266
Fargo, GA 31631-9801
owned 19,135.328 (7.3309%) shares

Scruggs Concrete Inc.
Attn:  James Kenneth Scruggs
807 River St.
Valdosta, GA 31601-3750
owned 17,083.702 (6.5449%) shares

Mary Ann Hillyard
P.O. Box 92
Arthur, IL 61911-0092
owned 13,157.605 (5.0408%) shares

Pennsylvania Portfolio Class A

James J. Broussard
530 Derwyn Rd.
Drexel Hill, PA 19026-1203
owned 187,782.518 (15.6295%) shares

Idlewild Farm Associates
c/o Jerry A & Carol L. Shields
Main Account
Idlewild Farm
617 Williamson Road
Bryn Mawr, PA 19010-1932
owned 107,969.722 (8.9865%) shares

Murray L. Katz and Harriet L. Katz JTWROS
186 Commadore Drive
Jupiter, FL 33477-4804
owned 97,523.734 (8.1171%) shares

California Money Market Portfolio Class Y

Howarth & Smith
700 S. Flower St., Suite 2900
Los Angeles, CA 90017-4216
owned 77,262.890 (96.9412%) shares
    

FINANCIAL STATEMENTS

	The following information is hereby incorporated by 
reference to the Fund's    March 31, 1997     Annual Reports to 
Shareholders:

   
<TABLE>
<CAPTION>
					Annual Report	Annual Report
					of National	of Limited
Page(s) in:				Portfolio	Term 	Portfolio
<S>					<C>		<C>
Schedules of Investments			7-18		7-17
Statements of Assets and Liabilities	21		20
Statements of Operations			22		21
Statements of Changes in Net Assets	23		22
Notes to Financial Statements		24-27		23-25
Financial Highlights (for a share of
  each series of beneficial interest
  outstanding throughout each year)	28-30		28
Independent Auditors' Report		31		29
</TABLE>

<TABLE>
<CAPTION>
							Annual Report
					Annual Report	of California
					of Florida	Money Market
Page(s) in:				Portfolio		Portfolio
<S>					<C>		<C>
Schedules of Investments			7-15		4-10
Statements of Assets and Liabilities	18		12
Statements of Operations			19		13
Statements of Changes in Net Assets	20		14
Notes to Financial Statements		21-25		15 - 17
Financial Highlights (for a share of
  each series of beneficial interest
  outstanding throughout each year)	26-28		18
Independent Auditors' Report		29		19
</TABLE>

<TABLE>
<CAPTION>
					Annual Report	Annual Report
					of Ohio,		of New York
					Georgia &	& N.Y.
					Pennsylvania	Money Market
Page(s) in:				Portfolio		Portfolio
<S>					<C>		<C>
Schedules of Investments			14 - 23		8-21
Statements of Assets and Liabilities	26		24
Statements of Operations			27		25
Statements of Changes in Net Assets	28 - 30		26-27
Notes to Financial Statements		31 - 35		28-32
Financial Highlights (for a share of
  each series of beneficial interest
  outstanding throughout each year)	36 - 41		33-35
Independent Auditors' Report		42		36
</TABLE>
    

APPENDIX A

RATINGS OF MUNICIPAL BONDS, NOTES AND COMMERCIAL PAPER

Description of Four Highest Municipal Bond Ratings

Moody's Investors Service, Inc.  ("Moody's"):

Aaa - Bonds that are rated Aaa are judged to be of the best 
quality.  They carry the smallest degree of investment risk and 
are generally referred to as "gilt edge." Interest payments are 
protected by a large or by an exceptionally stable margin and 
principal is secure.  While the various protective elements are 
likely to change, such changes as can be visualized are most 
unlikely to impair the fundamentally strong position of such 
issues.

Aa - Bonds that are rated Aa are judged to be of high quality by 
all standards.  Together with the Aaa group, they comprise what 
are generally known as high-grade bonds.  They are rated lower 
than the best bonds because margins of protection may not be as 
large as in Aaa securities or fluctuation of protective elements 
may be of greater amplitude or there may be other elements present 
which make the long-term risks appear somewhat larger than in Aaa 
securities.

A - Bonds that are rated A possess many favorable investment 
attributes and are to be considered as upper-medium-grade 
obligations.  Factors giving security to principal and interest 
are considered adequate but elements may be present which suggest 
a susceptibility to impairment some time in the future.

Baa - Bonds that are rated Baa are considered medium-grade 
obligations; i.e., they are neither highly protected nor poorly 
secured.  Interest payments and principal security appear adequate 
for the present but certain protective elements may be lacking or 
may be characteristically unreliable over any great length of 
time.  Such bonds lack outstanding investment characteristics and 
in fact have speculative characteristics as well.

Standard & Poor's Ratings Group ("S&P"):

AAA - Debt rated AAA has the highest rating assigned by S&P.  
Capacity to pay interest and repay principal is extremely strong.

AA - Debt rated AA has a very strong capacity to pay interest and 
repay principal and differs from the higher-rated issues only in 
small degree.

A - Debt rated A has a strong capacity to pay interest and repay 
principal although it is somewhat more susceptible to the adverse 
effects of changes in circumstances and economic conditions than 
debt in higher-rated categories.

BBB - Debt rated BBB is regarded as having adequate capacity to 
pay interest and repay principal.  Whereas it normally exhibits 
adequate protection parameters, adverse economic conditions or 
changing circumstances are more likely to lead to a weakened 
capacity to pay interest and repay principal for debt in this 
category than in higher-rated categories.

Description of State and Local Government Municipal Note Ratings

Notes are assigned distinct rating symbols in recognition of the 
differences between short-term and long-term credit risk.  Factors 
affecting the liquidity of the borrower and short-term cyclical 
elements are critical in short-term ratings, while other factors 
of major importance in bond risk-- long-term secular trends for 
example-- may be less important over the short run.

Moody's Investors Service, Inc.:

Moody's ratings for state and municipal notes and other short-term 
loans are designated Moody's Investment Grade ("MIG").  A short-
term rating may also be assigned on an issue having a demand 
feature, a variable-rate demand obligation.  Such ratings will be 
designated as "VMIG."  Short-term ratings on issues with demand 
features are differentiated by the use of the VMIG symbol to 
reflect such characteristics as payment upon periodic demand 
rather than fixed maturity dates and payment relying on external 
liquidity.  Additionally, investors should be alert to the fact 
that the source of payment may be limited to the external 
liquidity with no or limited legal recourse to the issuer in the 
event the demand is not met.  Symbols used are as follows:

MIG/VMIG 1 - Loans bearing this designation are of the best 
quality, enjoying strong protection from established cash flows of 
funds, superior liquidity support or demonstrated broad-based 
access to the market for refinancing.

MIG 2/VMIG 2 - Loans bearing this designation are of high quality, 
with margins of protection ample although not so large as in the 
preceding group.

Standard & Poor's Ratings Group:

SP-1 - Very strong or strong capacity to pay principal interest.  
Those issues determined to possess overwhelming safety 
characteristics will be given a plus (+) designation.

SP-2 - Satisfactory capacity to pay principal and interest.

Description of Highest Commercial Paper Ratings

Moody's Investors Service, Inc.:

Prime-1 - Issuers (or related supporting institutions) rated 
Prime-1 have a superior capacity for repayment of short-term 
promissory obligations.  Prime-1 repayment capacity will normally 
be evidenced by the following characteristics: leading market 
positions in well-established industries; high rates of return on 
funds employed; conservative capitalization structures with 
moderate reliance on debt and ample asset protection; broad 
margins in earnings coverage of fixed financial charges and high 
internal cash generation; and well-established access to a range 
of financial markets and assured sources of alternate liquidity.


Standard & Poor's Ratings Group:

A-1 - This designation indicates that the degree of safety 
regarding timely payment is either overwhelming or very strong.  
Those issues determined to possess overwhelming safety 
characteristics are denoted with a plus (+) sign designation.

   
APPENDIX B

The following information is a summary of special factors 
affecting California municipal obligations.  It does not purport 
to be a complete description and is based on information from 
statements relating to securities offerings of California issuers.

Additional Discussion of Special Factors Relating to California 
Municipal Obligations

Beginning in the 1990-91 fiscal year, California faced the worst 
economic, fiscal and budgetary conditions since the 1930s.  
Construction, manufacturing (especially aerospace), exports and 
financial services, among others, were severely affected.  Job 
losses were the worst of any post-war recession and have been 
estimated to exceed 800,000.

	The recession seriously affected State tax revenues and 
caused increased expenditures for health and welfare programs.  
The State has also faced a structural imbalance in its budget with 
the largest programs supported by the  General Fund--K-12 schools 
and community colleges, health, welfare and corrections--growing 
at rates higher than the growth rates for the principal revenue 
sources of the General Fund (the General Fund, the State's main 
operating fund, consists of revenues which are not required to be 
credited to any other fund).  The State experienced recurring 
budget deficits.  The State Controller reported that expenditures 
exceeded revenues for four of the six fiscal years ending with 
1992-93, and were essentially equal in 1993-94.  According to the 
Department of Finance, the State suffered a continuing budget 
deficit of approximately $2.8 billion in the Special Fund for 
Economic Uncertainties  (Special Funds account for revenues 
obtained from specific revenue sources, and which are legally 
restricted to expenditures for specified purposes).  The 1993-94 
Budget Act incorporated a Deficit Reduction Plan to repay this 
deficit over two years.  The original budget for 1993-94 reflected 
revenues which exceeded expenditures by approximately $2.8 
billion.  As a result of continuing recession, the excess of 
revenues over expenditures for the 1993-94 fiscal year was less 
than $300 million.  The accumulated budget deficit at June 30, 
1994 was not able to be retired by June 30, 1995 as planned.  When 
the economy failed to recover sufficiently in 1993-94, a second 
two-year plan was implemented in 1994-95.  The accumulated budget 
deficits over the past several years, together with expenditures 
for school funding which have not been reflected in the budget, 
and the reduction of available internal borrowable funds, have 
combined to significantly deplete the State's cash resources to 
pay its ongoing expenses.  In order to meet its cash needs, the 
State has had to rely for several years on a series of external 
borrowings, including borrowings past the end of a fiscal year.  
At the end of its 1995-96 fiscal year, however, the State did not 
borrow monies into the subsequent fiscal year.

	Since the severe recession, California's economy has been 
recovering.  Employment has grown by over 500,000 in 1994 and 
1995, and the pre-recession level of total employment is expected 
to be matched by early 1996.  The strongest growth has been in 
export-related industries, business services, electronics, 
entertainment and tourism, all of which have offset the recession-
related losses which were heaviest in aerospace and defense-
related industries (accounting for approximately two-thirds of the 
job losses), finance and insurance.  Residential housing 
construction, with new permits for under 100,000 annual new units 
issued in 1994 and 1995, is weaker than in previous recoveries, 
but has been growing slowly since 1993.

	Sectors which are now contributing to California's recovery 
include construction and related manufacturing, wholesale and 
retail trade, transportation and several service industries such 
as amusements and recreation, business services, and management 
consulting.  Electronics is showing modest growth and the rate of 
decline in aerospace manufacturing is slowly diminishing.  As a 
result of these factors, average 1994 non-farm employment exceeded 
expectations and grew beyond 1993 levels.

	Many California counties continue to be under severe fiscal 
distress.  Such distress has impacted smaller, rural counties and 
larger suburban counties such as Los Angeles and Orange County, 
which declared bankruptcy in 1994.  Orange County has implemented 
significant reductions in services and personnel, and continues to 
face fiscal restraints in the aftermath of its bankruptcy.

1994-95 Budget

	The 1994-95 fiscal year represents the fourth consecutive 
year the Governor and Legislature were faced with a very difficult 
budget environment to produce a balanced budget.  Many program 
cuts and budgetary adjustments have already been made in the last 
three years.  The Governor's May Revision to his Budget proposal 
recognized that the accumulated deficit could not be repaid in one 
year, and proposed a two-year solution.  The May Revision sets 
forth revenue and expenditure forecasts and revenue and 
expenditure proposals which result in operating surpluses for the 
budget for both 1994-95 and 1995-96, and lead to the elimination 
of the accumulated deficit, estimated at about $2 billion at June 
30, 1994, by June 30, 1996.

	The 1994-95 Budget Act, signed by the Governor on July 8, 
1994, projects revenues and transfers of $41.9 billion, about $2.1 
billion higher than revenues in 1993-94.  This reflects the 
Administration's forecast of an improved economy.  Also included 
in this figure is the projected receipt of about $360 million from 
the federal government to reimburse the State for the cost of 
incarcerating undocumented immigrants.  The State will not know 
how much the federal government will actually provide until the 
federal fiscal year 1995 budget is completed, which is expected to 
be by October 1994.  The Legislature took no action on a proposal 
in the Governor's January Budget to undertake expansion of the 
transfer of certain programs to counties, which would also have 
transferred to counties 0.5% of the State current sales tax.  The 
Budget Act projects Special Fund revenues of $12.1 billion, a 
decrease of 2.4% from 1993-94 estimated levels.

	The 1994-95 Budget Act projects General Fund expenditures of 
$40.9 billion, an increase of $1.6 billion over 1993-94.  The 
Budget Act also projects Special Fund expenditures of $13.7 
billion, a 5.4% increase over 1993-94 estimated expenditures.  The 
principal features of the Budget Act were the following:

		1.	Receipt of additional federal aid in 1994-95 of 
about $400 million for costs of refugee assistance and medical 
care for undocumented aliens, thereby offsetting a similar General 
Fund cost.  The State will not know how much of these funds it 
will receive until the federal fiscal year 1994 budget is passed.

		2.	Reductions of approximately $1.1 billion in 
health and welfare programs.

		3.	A General Fund increase of approximately $38 
million in support for the University of California and $65 
million for the California State University.  It is anticipated 
that student fees for the U.C.  and the C.S.U. will increase up to 
10%.

		4.	Proposition 98 funding for K-14 schools is 
increased by $526 million from the 1993-94 levels, representing an 
increase for enrollment growth and inflation.  Consistent with 
previous budget agreements, Proposition 98 funding provides 
approximately $4,217 per student for K-12 schools, equal to the 
level in the past three years.

		5.	Legislation enacted with the Budget Act 
clarifies laws passed in 1992 and 1993 requiring counties and 
other local agencies to transfer funds to local school districts, 
thereby reducing State aid.  Some counties had implemented 
programs providing fewer monies to schools if there were 
redevelopment agencies projects.  The legislation bans this method 
of transfers.

		6.	The Budget Act provides funding for anticipated 
growth in the State's prison inmate population, including 
provisions for implementing recent legislation (the so-called 
"Three Strikes" law) which requires mandatory life sentences for 
certain third-time felony offenders.

		7.	Additional miscellaneous cuts ($500 million) and 
fund transfers ($255 million) totaling in the aggregate 
approximately $755 million.

	The 1994-95 Budget Act contains no tax increases.  Under 
legislation enacted for the 1993-94 Budget, the renters' tax 
credit was suspended for 1993 and 1994.  A ballot proposition to 
permanently restore the renters' credit after this year failed at 
the June 1994 election.  The Legislature enacted a further one-
year suspension of the renters' tax credit, saving about $390 
million in the 1995-96 fiscal year.  The 1994-95 Budget assumes 
that the State will use a cash flow borrowing program in 1994-95 
which combines one-year notes and warrants.  Issuance of the 
warrants allows the State to defer repayment of approximately $1 
billion of its accumulated budget deficit into the 1995-96 fiscal 
year.

1995-96 Budget

	The State began the 1995-1996 Fiscal Year with strengthening 
revenues based on an improving economy and the smallest nominal " 
budget gap" to be closed in many years.

	The 1995-96 Budget Act, signed by the Governor on August 3, 
1995, projects General Fund revenues and transfers of $44.1 
billion, about $2.2 billion higher than projected revenues in 
1994-95.  The Budget Act projects Special Fund revenues of $12.7 
billion, an increase from $12.1 billion projected in 1994-95.

	The Department of Finances released updated projections for 
the 1995-96 fiscal year in May, 1996, estimating that revenues and 
transfers to be $46.1 billion, approximately $2 billion over the 
original fiscal year estimate.  Expenditures also increased, to an 
estimated $45.4 billion, as a result of the requirement to expend 
revenues for schools under Proposition 98, and, among other 
things, failure of the federal government to budget new aid for 
illegal immigrant costs which had been counted on to allow 
reduction in costs.


	The principal features of the Budget Act were the following:

1.	Proposition 98 funding for schools and community colleges 
will increase by about $1 billion (General Fund) and $1.2 
billion total above revised 1994-95 levels.  Because of 
higher-than-projected revenues in 1994-95, an additional 
$543 million is appropriated to the 1994-95 Proposition 98 
entitlement.  A significant component of this amount is a 
block grant of about $54 per pupil for any one-time purpose.  
Per-pupil expenditures are projected to increase by another 
$126 in 1995-96 to $4,435.  A full 2.7% cost-of-living 
allowance is funded for the first time in several years.  
The budget compromise anticipated a settlement of the CTA v. 
Gould litigation.

2.	Cuts in health and welfare costs totaling about $900 
million, some of which would require federal legislative 
approval.

3.	A 3.5% increase in funding for the University of 
California ($90 million General Fund) and the California 
State University system ($24 million General Fund), with no 
increases in student fees.

4.	The updated Budget assumes receipt of $494 million in new 
federal aid for costs of illegal immigrants, in excess of 
federal government commitments.

5.	General Fund support for the Department of Corrections is 
increased by about 8% over 1994-95, reflecting estimates of 
increased prison population.  This amount is less than was 
proposed in the 1995 Governor's Budget.

1996-97 Budget

	The 1996-97 Budget Act was signed by the Governor on July 
15, 1996 and projected General Fund revenues and transfers of 
approximately $47.64 billion and General Fund expenditures of 
approximately $47.25 billion.  The Governor vetoed about $82 
million of appropriations (both General Fund and Special Fund) and 
the State has implemented its regular cash flow borrowing program 
with the issuance of $3 billion of Revenue Anticipation Notes to 
mature on or before June 30, 1997.  The 1996-97 Budget Act 
appropriated a budget reserve in the Special Fund for Economic 
Uncertainties of $305 million, as of June 30, 1997.  The 
Department of Finance projects that, on June 30, 1997, the State's 
available internal borrowable (cash) resources will be 
approximately $2.9 billion, after payment of all obligations due 
by that date, so that no cross-fiscal year borrowing will be 
needed.

	The State Legislature rejected the Governor's proposed 15% 
cut in personal income taxes (to be phased over three years), but 
did approve a 5% cut in bank and corporation taxes, to be 
effective for income years starting on June 1, 1997.  As a result, 
revenues for the Fiscal Year will be an estimated $550 million 
higher than projected in the May Revision to the 1996-97 Budget, 
and are now estimated to total $47.643 billion, a 3.3% increase 
over the final estimated 1995-96 revenues.  Special Fund revenues 
are estimated to be $13.3 billion.

	The Budget Act contains General Fund appropriations totaling 
$47.251 billion, a 4.0% increase over the final estimated 1995-96 
expenditures.  Special Fund expenditures are budgeted at $12.6 
billion.

	The principal features of the Budget Act were the following:

1.	Proposition 98 funding for schools and community college 
districts increased by almost $1.6 billion (General Fund) 
and $1.65 billion total above revised 1995-96 level periods. 
Almost half of this money was budgeted to fund class-size 
reduction in kindergarten and grades 1-3.  Also, for the 
second year in a row, the full cost of living allowance 
(3.2%) was funded.  The Proposition 98 increases have 
brought K-12 expenditures to almost $4,800 per pupil (also 
called per ADA, or Average Daily Attendance), an almost 15% 
increase over the level prevailing during the recession 
years. Community colleges will receive an increase in 
funding of $157 million for 1996-97 out of this $1.6 billion 
total.

2.	Proposed cuts in health and welfare costs totaling about 
$660 million.  All of these cuts require federal law changes 
(including welfare reform), federal waivers or federal 
budget appropriations in order to be achieved.  The 1996-97 
Budget Act assumes approval/action by October, 1996, with 
the savings to be achieved beginning November, 1996. The 
1996-97 Budget Act was based on continuation of previously 
approved assistance levels for Aid to Families with 
Dependent Children and other health and welfare programs, 
which had been reduced in prior years, including suspension 
of State-authorized cost-of-living increases.  Part of the 
federal actions referred to above is approval to maintain 
reduced assistance levels in 1996-97.  The Legislature did 
not approve the Governor's proposal for further cuts in 
these assistance levels.   The 1996-97 Budget Act does 
include some $92 million for a variety of preventive 
programs in health and social service areas such as the 
prevention of teenage pregnancy and domestic violence.

3.	A 4.9% increase in funding for the University of 
California ($130 million General Fund) and the California 
State University system ($101 million General Fund), with no 
increases in student fees, maintaining the second year of 
the Governor's four-year "compact" with the State's higher 
education units.

4.	The 1996-97 Budget Act assumed the federal government 
will provide approximately $700 million in new aid for 
incarceration and health care costs of illegal immigrants.  
These funds reduce appropriations in theses categories that 
would otherwise have to be paid from the General Fund.  (For 
purposes of cash flow projections, the Department of Finance 
expects $540 million of this amount to be received during 
the 1996-97 fiscal year.)

5.	General Fund support for the Department of Corrections 
was increased by about 7% over the prior year, reflecting 
estimates of increased prison population.

6.	With respect to aid to local governments, the principal 
new programs included in the 1996-97 Budget Act are $100 
million in grants to cities and counties for law enforcement 
purposes, and budgeted $50 million for competitive grants to 
local governments for programs to combat juvenile crime.  
The 1996-97 Budget Act also assumed that legislation will be 
adopted to revise the Trial Court Funding program, so that 
future increases in trial court costs will be funded by the 
State; this change will not have a significant impact in 
1996-97.

	The 1996-97 Budget Act did not contain any tax increases.  
As noted, there was a reduction in corporate taxes.  In addition, 
the Legislature approved another one-year suspension of the 
renters' tax credit, saving $520 in expenditures.

	THE FOREGOING IS BASED ON OFFICIAL STATEMENTS AND OTHER 
INFORMATION PROVIDED BY THE STATE OF CALIFORNIA.  THE STATE HAS 
INDICATED THAT ITS DISCUSSION OF BUDGETARY INFORMATION IS BASED ON 
ESTIMATES AND PROJECTIONS OF REVENUES AND EXPENDITURES FOR THE 
CURRENT FISCAL YEAR AND MUST NOT BE CONSTRUED AS STATEMENTS OF 
FACT; THE ESTIMATES AND PROJECTIONS ARE BASED UPON VARIOUS 
ASSUMPTIONS WHICH MAY BE AFFECTED BY NUMEROUS FACTORS, INCLUDING 
FUTURE ECONOMIC CONDITIONS IN THE STATE AND THE NATION, AND THAT 
THERE CAN BE NO ASSURANCE THAT THE ESTIMATES WILL BE ACHIEVED.

Recent Voter Initiative

	"Proposition 218" or the "Right to Vote on Taxes Act" (the 
"Proposition") was approved by the California electorate at the 
November, 1996 general election.  Officially titled "Voter 
Approval For Local Government Taxes, Limitation on Fees, 
Assessments and Charges Initiative Constitutional Amendment," the 
Act was approved by a majority of the voters voting at the 
election and adds Articles XIIIC and XIIID to the California 
Constitution.

	The Proposition, among other things, requires local 
governments to follow certain procedures in imposing or increasing 
any fee or charge as defined.  "Fee" or "charge" is defined to 
mean "any levy other than an ad valorem tax, a special tax or an 
assessment imposed by an agency upon a parcel or upon a person as 
an incident of property ownership, including user fees or charges 
for a property related service."

	The procedure required by the Proposition to impose or 
increase any fee or charge include a public hearing upon the 
proposed fee or charge and the opportunity to present written 
protests by the owners of the parcels subject to the proposed fee 
or charge.  If written protests against the proposed fee or charge 
are presented by a majority of the owners of the identified 
parcels, the local government shall not impose the fee or charge.

The Proposition further provides as follows:

	"Except for fees or charges for sewer, water, and 
refuse collection services, no property related fee or 
charge shall be imposed or increased unless and until such 
fee or charge is submitted and approved by a majority vote 
of the property owners of the property subject to the fee or 
charge or, at the option of the agency, by a two-thirds vote 
of the electorate residing in the affected area."

Additionally, the Proposition provides, with respect to 
stand-by charges as follows:

	"No fee or charge may be imposed for a service unless 
that service is actually used by, or immediately available 
to, the owner of the property in question.  Fees or charges 
based on potential or future use of a service are not 
permitted.  Standby charges, whether characterized as 
charges or assessments, shall be classified as assessments 
and shall not be imposed without compliance with Section 4 
of this Article."

	The Proposition provides that beginning July 1, 1997, all 
fees or charges shall comply with the Proposition's requirements.

	The Proposition is silent with respect to future increases 
of existing fees or charges which are pledged to payment of 
indebtedness or obligations previously incurred by the local 
government.  Presumably, the Proposition cannot preempt 
outstanding contractual obligations protected by the contract 
impairment clause of the federal constitution.  However, with 
respect to any given situation or case, litigation may be the 
method which will settle any question concerning the authority of 
a local government to increase fees or charges outside of the 
strictures or the Proposition in order to meet contractual 
obligations.

	Proposition 218 also contains a new provision subjecting 
"matters of reducing or repealing any local tax, assessments and 
charges" to the initiative power.  This means that no city or 
local agency revenue source is safe from reduction or repeal 
pursuant to the initiative process.

	Litigation concerning various elements of the Proposition 
may ultimately ensue and clarifying legislation may be enacted.

State Appropriations Limit

	The State is subject to an annual appropriations limit 
imposed by Article XIIIB of the State Constitution (the 
"Appropriations Limit"), and is prohibited from spending 
"appropriations subject to limitation" in excess of the 
Appropriations Limit.  Article XIIIB, originally adopted in 1979, 
was modified substantially by Propositions 98 and 111 in 1988 and 
1990, respectively.  "Appropriations subject to limitation" are 
authorizations to spend "proceeds of taxes," which consist of tax 
revenues and certain other funds, including proceeds from 
regulatory licenses, user charges or other fees to the extent that 
such proceeds exceed the reasonable cost of providing the 
regulation, product or service.  The Appropriations Limit is based 
on the limit for the prior year, adjusted annually for certain 
changes, and is tested over consecutive two-year periods.  Any 
excess of the aggregate proceeds of taxes received over such two-
year period above the combined Appropriation Limits for those two 
years is divided equally between transfers to K-14 districts and 
refunds to taxpayers.

	Exempted from the Appropriations Limit are debt service 
costs of certain bonds, court or federally mandated costs, and, 
pursuant to Proposition 111, qualified capital outlay projects and 
appropriations or revenues derived from any increase in gasoline 
taxes and motor vehicle weight fees above January 1, 1990 levels.  
Some recent initiatives were structured to create new tax revenues 
dedicated to specific uses and expressly exempted from the Article 
XIIIB limits.   The Appropriations Limit may also be exceeded in 
cases of emergency arising from civil disturbance or natural 
disaster declared by the Governor and approved by two-thirds of 
the Legislature.  If not so declared and approved, the 
Appropriations Limit for the next three years must be reduced by 
the amount of the excess.

	Article XIIIB, as amended by Proposition 98 on November 8, 
1988, also establishes a minimum level of state funding for school 
and community college districts and requires that excess revenues 
up to a certain limit be transferred to schools and community 
college districts instead of returned to the taxpayers.  
Determination of the minimum level of funding is based on several 
tests set forth in Proposition 98.  During fiscal year 1991-92, 
revenues were smaller than expected, thus reducing the payment 
owed to schools in 1991-92 under alternate "test" provisions.  In 
response to the changing revenue situation, and to fully fund the 
Proposition 98 guarantee in the 1991-92 and 1992-93 fiscal years 
without exceeding it, the Legislature enacted legislation to 
reduce 1991-92 appropriations.  The amount budgeted to schools, 
but which exceeded the reduced appropriation, was treated as a 
non-Proposition 98 short-term loan in 1991-92.  As part of the 
1992-93 Budget, $1.083 billion of the amount budgeted to K-14 
schools was designated to "repay" the prior year loan, thereby 
reducing cash outlays in 1992-93 by that amount.  To ADA funding, 
the 1992-93 Budget included loans of $732 million to K-12 schools 
and $241 million to community colleges, to be repaid from future 
Proposition 98 entitlements.  The 1993-94 Budget also provided new 
loans of $609 million to K-12 schools and $178 million to 
community colleges to maintain ADA funding.  These loans have been 
combined with the 1992-93 fiscal year loans into one loan of $1.76 
billion, to be repaid from future years' Proposition 98 
entitlements, and conditioned upon maintaining current funding 
levels per pupil at K-12 schools.

	A Sacramento County Superior Court in California Teachers' 
Association, et al.  v.  Gould, et al., ruled that the 1992-93 
loans to K-12 schools and community colleges violate Proposition 
98.  As part of the negotiations leading to the 1995-96 Budget 
Act, an oral agreement was reached to settle this case.  The 
parties reached a conditional final settlement of the case in 
April, 1996.  The settlement required adoption of legislation 
satisfactory to the parties to implement its terms, which has 
occurred, and final approval by the court, which was pending in 
early July, 1996.

	The settlement provides, among other things, that both the 
State and K-14 schools share in the repayment of prior year's 
emergency loans to schools.  Of the total $1.76 billion in loans, 
the State will repay $935 million by forgiveness of the amount 
owed, while schools will repay $825 million.  The State share of 
the repayment will be reflected as expenditures above the current 
Proposition 98 base circulation.  The school's share of the 
repayment will count as appropriations that count toward 
satisfying the Proposition 98 guarantee, or from "below" the 
current base.  Repayments are to be spread over the eight-year 
period beginning 1994-95 through 2002-03.  Once the Director of 
Finance certifies that a settlement has occurred, approximately 
$377 million in appropriations from the 1995-96 fiscal year to 
schools will be disbursed.

	Because of the complexities of Article XIIIB, the 
ambiguities and possible inconsistencies in its terms, the 
applicability of its exceptions and exemptions and the 
impossibility of predicting future appropriations, the Sponsor 
cannot predict the impact of this or related legislation on the 
Bonds in the California Money Market Portfolio.  Other 
Constitutional amendments affecting state and local taxes and 
appropriations have been proposed from time to time.  If any such 
initiatives are adopted, the State could be pressured to provide 
additional financial assistance to local governments or 
appropriate revenues as mandated by such initiatives.  
Propositions such as Proposition 98 and others that may be adopted 
in the future, may place increasing pressure on the State's budget 
over future years, potentially reducing resources available for 
other State programs, especially to the extent the Article XIIIB 
spending limit would restrain the State's ability to fund such 
other programs by raising taxes.

State Indebtedness

	As of July 1, 1996, the State had over $18.20 billion 
aggregate amount of its general obligation bonds outstanding.  
General obligation bond authorizations in the aggregate amount of 
approximately $4.31 billion remained unissued as of July 1, 1996.  
The State also builds and acquires capital facilities through the 
use of lease-purchase borrowing.  As of July 1, 1996, the State 
had approximately $5.85 billion of outstanding lease-purchase 
debt.

	In addition to the general obligation bonds, State agencies 
and authorities had approximately $20.77 billion aggregate 
principal amount of revenue bonds and notes outstanding as of June 
30, 1996.  Revenue bonds represent both obligations payable from 
State revenue-producing enterprises and projects, which are not 
payable from the General Fund, and conduit obligations payable 
only from revenues paid by private users of facilities financed by 
such revenue bonds.  Such enterprises and projects include 
transportation projects, various public works and exposition 
projects, education facilities (including the California State 
University and University of California systems), housing, health 
and pollution control facilities.

Litigation

	The State is a party to numerous legal proceedings.  In 
addition, the State is involved in certain other legal proceedings 
that, if decided against the State, might require the State to 
make significant future expenditures or impair future revenue 
sources.  Examples of such cases include challenges to certain 
vehicle license fees and challenges to the State's use of Public 
Employee Retirement System funds to offset future State and local 
pension contributions.  Other cases which could significantly 
impact revenue or expenditures involve challenges of payments of 
wages under the Fair Labor Standards Act, the method of 
determining gross insurance premiums involving health insurance, 
property tax challenges, challenges of transfer of monies from 
State Treasury Special Fund accounts to the State's General Fund 
pursuant to 1991, 1992, 1993 and 1994 Budget Acts.  Because of the 
prospective nature of these proceedings, it is not presently 
possible to predict the outcome of such litigation or estimate the 
potential impact on the ability of the State to pay debt service 
on its obligations.

Ratings

	During 1996, the ratings of California's general obligation 
bonds was upgraded by the following ratings agencies.  Recently 
Standard & Poor's Ratings Group upgraded its rating of such debt 
to A+; the same rating has been assigned to such debt by Fitch 
Investors Service.  Moody's Investors Service has assigned such 
debt an A1 rating.  Any explanation of the significance of such 
ratings may be obtained only from the rating agency furnishing 
such ratings.  There is no assurance that such ratings will 
continue of any given period of time or that they will not be 
revised downward or withdrawn entirely if, in the judgment of the 
particular rating agency, circumstances so warrant.

	The Sponsor believes the information summarized above 
describes some of the more significant aspects relating to the 
California Money Market Portfolio.  The sources of such 
information are Preliminary Official Statements and Official 
Statements relating to the State's general obligation bonds and 
the State's revenue anticipation notes, or obligations of other 
issuers located in the State of California, or other publicly 
available documents.  Although the Sponsor has not independently 
verified this information, it has no reason to believe that such 
information is not correct in all material aspects.

APPENDIX C

The following information is a summary of special factors 
affecting New York municipal obligations.  It does not purport to 
be a complete description and is based on information from 
statements relating to securities offerings of New York issuers.

Additional Discussion of Special Factors Relating to New York 
Municipal Obligations

	The information set forth below is derived from the official 
statements and/or preliminary drafts of official statements 
prepared in connection with the issuance of New York State and New 
York City municipal bonds.  The Sponsor has not independently 
verified the information.

Economic Trends

	Over the long term, the State of New York (the "State") and 
the City of New York (the "City") face serious economic problems.  
The City accounts for approximately 41% of the State's population 
and personal income, and the City's financial health effects the 
State in numerous ways.   The State historically has been one of 
the wealthiest states in the nation.  For decades, however, the 
State has grown more slowly than the nation as a whole, gradually 
eroding its relative economic affluence.  Statewide, urban centers 
have experienced significant changes involving migration of the 
more affluent to the suburbs and an influx of generally less 
affluent residents.  Regionally, the older Northeast cities have 
suffered because of the relative success that the South and West 
have had in attracting people and business.  The City has also had 
to face greater competition as other major cities have developed 
financial and business capabilities which make them less dependent 
on the specialized services traditionally available almost 
exclusively in the City.

	The State has for many years had a very high state and local 
tax burden relative to other states.  The State and its localities 
have used these taxes to develop and maintain their transportation 
networks, public schools and colleges, public health systems and 
other social services and recreational facilities.   Despite these 
benefits, the burden of state and local taxation, in combination 
with the many other causes of regional economic dislocation, has 
contributed to the decision of some businesses and individuals to 
relocate outside, or not locate within, the State.

	Notwithstanding the numerous initiatives that the State and 
its localities may take to encourage economic growth and achieve 
balanced budgets, reductions in federal spending could materially 
and adversely affect the financial condition and budget 
projections of the State and its localities.

The State and its Authorities

	The State's current fiscal year commenced on April 1, 1996, 
and ends on March 31, 1997, and is referred to herein as the 
State's 1996-97 fiscal year.  The State's budget for the 1996-97 
fiscal year was enacted by the Legislature on July 13, 1996, more 
than three months after the start of the fiscal year. The State 
Financial Plan for the 1996-97 fiscal year was formulated on July 
25, 1996 and is based on the State's budget as enacted by the 
Legislature and signed into law by the Governor, as well as actual 
results for the first quarter of the current fiscal year.  The 
State's prior fiscal year commenced on April 1, 1995, and ended on 
March 31, 1996, and is referred to herein as the State's 1995-96 
fiscal year.

	The State closed projected budget gaps of $5.0 billion and 
$3.9 billion for its 1995-96 and 199-97 fiscal years, 
respectively.  The 1997-98 budget gap was projected at $1.44 
billion, based on the Governor's proposed budget of December 1995.  
As a result of changes made in the enacted budget, that gap is now 
expected to be larger.  The gap, however, is not expected to be as 
large as those faced in the prior two fiscal years.  The Governor 
has indicated that he will propose to close any potential 
imbalance primarily through General Fund expenditure reductions 
and without increases in taxes or deferrals of scheduled tax 
reductions.

	The 1996-97 State Financial Plan is projected to be balanced 
on a cash basis.  As compared to the Governor's proposed budget as 
revised on March 20, 1996, the State's adopted budget for 1996-97 
increases General Fund spending by $842 million, primarily from 
increases for education, special education and higher education 
($563 million).  The balance represents funding increases to a 
variety of other programs, including community projects and 
increased assistance to fiscally distressed cities.  Resources 
used to fund theses additional expenditures include $540 million 
in increased revenues projected for 1996-97 based on higher-than-
projected tax collections during the first half of calendar 1996, 
$110 million in projected receipts from a new State tax amnesty 
program, and other resources including certain non-recurring 
resources.  The total amount of non-recurring resources included 
in the 1996-97 State budget is projected by the State Division of 
the Budget ("DOB") to be $1.3 billion, or 3.9% of total General 
Fund receipts.

	The State issued its first update to the cash-basis 1996-97 
State Financial Plan (the "Mid-Year Update") on October 25, 1996.  
The Mid-Year Update reflects a balanced 1996-97 State Financial 
Plan, with a reserve for contingencies in the General Fund of $300 
million.  This reserve will be utilized to help offset a variety 
of potential risks and other unexpected contingencies that the 
State may face during the balance of the 1996-97 fiscal year.
	The State Financial Plan is based on a June 1996 projection 
by DOB of national and State economic activity.  The national 
economy has resumed a more robust rate of growth after a "soft 
landing" in 1995, with over 11 million jobs added nationally since 
early 1992.  The State economy has continued to expand, but growth 
remains somewhat slower that in the nation.  Although the State 
has added approximately 240,000 jobs since late 1992, employment 
growth in the State has been hindered during recent years by 
significant cutbacks in the computer and instrument manufacturing, 
utility, defense and banking industries.  Government downsizing 
has also moderated these job gains.

	In its Mid-Year Update the State revised its forecast of 
national and State economic activity through the end of calendar 
year 1997 to reflect the stronger-than-expected growth in the 
first half of 1996.  The national economic forecast has been 
changed slightly from the initial forecast on which the original 
1996-97 State Financial Plan was based.  The revised forecast 
projects real Gross Domestic Product ("GDP") growth in the nation 
of 2.5% for 1996 and 2.4%  in 1997.  The inflation rate is 
expected to be 3.0% in 1996 and 2.9% in 1997.  The annual rate of 
job growth is expected to slow gradually to about 1.8% in 1997, 
down from 2.2% in 1996.  Growth in personal income and wages is 
expected to slow accordingly.

	The State economic forecast has been changed slightly from 
the one formulated with the July 1996-97 State Financial Plan.  
Moderate growth is projected to continue through the second half 
of 1996, with unemployment, wages and incomes continuing their 
modest rise.  Personal income is projected to increase by 5.2% in 
1996 and 4.7% in 1997, reflecting robust projected wage growth 
fueled in part by financial sector bonus payments.  Overall 
employment growth will continue at a modest rate, reflecting the 
slowdown in the national economy, continued spending restraint in 
government, and restructuring in the health care and financial 
sectors.

	The forecast for continued moderate growth, and any 
resultant impact on the State's 1996-97 Financial Plan, contains 
some uncertainties.  Stronger-than-expected gains in employment 
could lead to a significant improvement in consumption spending.  
Investments could also remain robust.  Conversely, the prospect of 
a continuing deadlock on federal budget deficit reduction or fears 
of excessively rapid economic growth could create upward pressures 
on interest rates.  In addition, the State economic forecast could 
over- or underestimate the level of future bonus payments or 
inflation growth, resulting in forecast average wage growth that 
could differ significantly from actual growth.  Similarly, the 
State forecast could fail to correctly account for expected 
declines in government and banking employment and the direction of 
employment change that is likely to accompany telecommunications 
deregulation.

	The DOB believes that its projections of receipts and 
disbursements relating to the current State Financial Plan, and 
the assumptions on which they are based, are reasonable.  Actual 
results, however, could differ materially and adversely from the 
projections set forth below, and those projections may be changed 
materially and adversely from time to time.

	The economic and financial conditions of the State may be 
affected by various financial, social, economic and political 
factors.  Those factors can be very complex, may vary from fiscal 
year to fiscal year, and are frequently the result of actions 
taken not only by the State and its agencies and 
instrumentatlities, but also by entities, such as the federal 
government, that are not under the control of the State.  Because 
of the uncertainty and unpredictability of changes in these 
factors, their impact cannot be fully included in the assumptions 
underlying the State's projections.  There can be no assurance 
that the State economy will not experience results that are worse 
than predicted, with corresponding material and adverse effects on 
the State's financial projection.

	The General Fund is the principal operating fund of the 
State and is used to account for all financial transactions, 
except those required to be accounted for in another fund.  It is 
the State's largest fund and receives almost all State taxes and 
other resources not dedicated to particular purposes.  In the 
State's 1996-97 fiscal year, the General Fund is expected to 
account for approximately 47% of total governmental-fund receipts 
and 71% of total governmental-fund disbursements.  General Fund 
monies are also transferred to other funds, primarily to support 
certain capital projects and debt service payments in other fund 
types.

	The General Fund is expected to be balanced on a cash basis 
for the 1996-97 fiscal year.  Actual receipts through the first 
two quarters of the 1996-97 fiscal year reflect stronger-than-
expected growth in most taxes, with actual receipts exceeding 
expectations by $276 million.  Based on the revised economic 
outlook and actual receipts for the first six months of 1996-97, 
projected General Fund receipts for the 1996-97 fiscal year have 
been increased by $420 million.  Most of this projected increase 
is in the yield of the personal income tax ($241 million). 
Projected collections from user taxes and fees have been revised 
downward slightly ($5 million). Revisions were also made to both 
miscellaneous receipts and in transfers from other funds (an $11 
million combined projected increase).

	Disbursements through the first six months of the fiscal 
year were $415 million less than projected, primarily because of 
delays in processing payments following delayed enactment of the 
State budget.  As a result, no savings are included in the Mid-
Year Update from this slower-than-expected spending.  Projections 
of 1996-97 General Fund disbursements are increased by $120 
million, since increased General Fund disbursements for education 
are required to replace a projected decrease in lottery receipts.  
This modification is shown in the form of an increased transfer of 
General Fund monies to the Lottery Fund in the Special Revenue 
fund type.  The projected closing fund balance in the General Fund 
of $337 million reflects a balance of $252 million in the Tax 
Stabilization Reserve Fund (following a payment of $15 million 
during the current fiscal year) and a deposit of $85 million to 
the Contingency Reserve Fund.

	On January 13, 1992, Standard & Poor's Ratings Group 
("Standard & Poor's") reduced its ratings on the State's general 
obligation bonds from A to A- and, in addition, reduced its 
ratings on the State's moral obligation, lease-purchase, 
guaranteed and contractual obligation debt. Standard & Poor's also 
continued its negative outlook assessment to stable.  On February 
14, 1994, Standard & Poor's raised its outlook to positive and, on 
August 5, 1996, confirmed its A- rating.  On January 6, 1992, 
Moody's Investors Service ("Moody's") reduced its ratings on 
outstanding limited-liability State lease-purchase and contractual 
obligations from A to Baa1.  On July 26, 1996, Moody's reconfirmed 
its A rating on the State's general obligation long-term 
indebtedness.

New York City and Other Localities

	The City, with a population of approximately 7.3 million, is 
an international center of business and culture.  Its non-
manufacturing economy is broadly based, with the banking and 
securities, life insurance, communications, publishing, fashion 
design, retailing and construction industries accounting for a 
significant portion of the City's total employment earnings.  
Additionally, the City is the nation's leading tourist 
destination.  The City's manufacturing activity is conducted 
primarily in apparel and publishing.

	The national economic recession which began in July 1990 
adversely affected the local economy, which had been declining 
since late 1989.  As a result, the City experienced job losses in 
1990 and 1991 and real Gross City Product ("GCP") fell in those 
two years.  Beginning in calendar year 1992, the improvements in 
the national economy helped stabilize conditions in the City.  
Employment losses moderated toward year-end and real GCP 
increased, boosted by strong wage gains.  After noticeable 
improvements in the City's economy during calendar year 1994, 
economic growth slowed in calendar year 1995, and thereafter 
improved during calendar year 1996, reflecting improved securities 
industry earnings and employment in other sectors. The City's 
current four-year financial plan assumes that moderate growth will 
continue through calendar year 2000, with moderating job growth 
and wage increases.

	For each of the 1981 through 1996 fiscal years, the City 
achieved balanced operating results as reported in accordance with 
generally accepted accounting principles ("GAAP").  The City was 
required to close substantial budget gaps in recent years in order 
to maintain balanced operating results.  There can be no 
assurances that the City will continue to maintain a balanced 
budget as required by State law without additional tax or other 
revenue increases or reductions in City services, which could 
adversely affect the City's economic base. 

	Pursuant to the New York State Financial Emergency Act of 
the City of New York, the City prepares an annual four-year 
financial plan, which is reviewed and revised on a quarterly basis 
and which includes the City's capital, revenue and expense 
projections and outlines proposed gap-closing programs for years 
with projected budget gaps.  The City's current four-year 
financial plan projects substantial budget gaps for each of the 
1999 and 2000 fiscal years, before implementation of the proposed 
gap-closing program contained in the current financial plan.  The 
City is required to submit its financial plans to review bodies 
including the New York State Financial Control Board (the "Control 
Board").

	The City depends on State aid both to enable the City to 
balance its budget and to meet its cash requirements.  The State's 
1995-96 Financial Plan projects a balanced General Fund.  There 
can be no assurance that there will not be reductions in State aid 
to the City from amounts currently projected or that State budgets 
in future fiscal years will be adopted by the April 1 statutory 
deadline and that such reductions or delays will not have adverse 
effects on the City's cash flow or expenditures.  In addition, the 
federal budget negotiation process could result in a reduction in 
or a delay in the receipt of federal grants which could have 
additional adverse effects on the City's cash flow or revenues.

	The Mayor is responsible for preparing the City's four-year 
financial plan, including the City's current financial plan for 
the 1997 through 2000 fiscal years (the "1997-2000 Financial Plan" 
or "Financial Plan").  The City's projections set forth in the 
Financial Plan are based on various assumptions and contingencies 
which are uncertain and which may not materialize.  Changes in 
major assumptions could significantly affect the City's ability to 
balance its budget as required by State law and to meet its annual 
cash flow and financing requirements.  Such assumptions and 
contingencies include the condition of the regional and local 
economies, the impact on real estate tax revenues of the real 
estate market, wage increases for City employees consistent with 
those assumed in the Financial Plan, employment growth, the 
results of a pending actuarial audit of the City's pension system 
which is expected to significantly increase the City's annual 
pension costs, the ability to implement proposed reductions in 
City personnel and other cost reduction initiatives, which may 
require in certain cases the cooperation of the City's municipal 
unions, the ability of the New York City Health and Hospitals 
Corporation ("HHC") and the Board of Education ("BOE") to take 
actions to offset reduced revenues, the ability to complete 
revenue-generating transactions and provisions of State and 
federal aid and mandate relief and the impact on City revenues of 
proposals for federal and State welfare reform and any future 
legislation affecting Medicare or other entitlements.

	Implementation of the Financial Plan is also dependent upon 
the City's ability to market its securities successfully.  The 
City's financing program for fiscal years 1998 through 2000 
contemplates the issuance of $4.2 billion of general obligation 
bonds and $4.2 billion of bonds to be issued by the proposed New 
York City Infrastructure Finance Authority ("Finance Authority") 
to finance City capital projects.  The Finance Authority was 
created as part of the City's effort to assist in keeping the 
City's indebtedness within the forecast level of the 
constitutional restrictions on the amount of debt the City is 
authorized to incur.  In addition, the City issues revenue and tax 
anticipation notes to finance its seasonal working capital 
requirements.  The success of projected public sales of City bonds 
and notes, New York Municipal Water Finance Authority ("Water 
Authority") bonds and Finance Authority bonds will be subject to 
prevailing market conditions, and no assurance can be given that 
such sales will be completed.  If the City were unable to sell its 
general obligation bonds and notes or the Water Authority or the 
Finance Authority were unable to sell its bonds, the City would be 
prevented from meeting its planned capital and operating 
expenditures.  Future developments concerning the City and public 
discussion of such developments, as well as prevailing market 
conditions, may affect the market for outstanding City general 
obligation bonds and notes.

	The City has announced that it expects to sell approximately 
$200 million to $300 million of tax-exempt fixed rate bonds for 
capital purposes, on the basis of competitive bides, in May or 
June 1997.  In addition, depending on market conditions, the City 
may sell approximately $875 million of tax-exempt fixed rate bonds 
before the end of June 1997, most of which are expected to be used 
in connection with a current refunding of certain outstanding City 
bonds.

	The City's operating results for the 1996 fiscal year were 
balanced in accordance with GAAP, after taking into account a 
discretionary transfer of $224 million, the 16th consecutive year 
of GAAP balanced results.  On January 30, 1997, the City submitted 
tot he Control Board the Financial Plan for the 1997 through 2000 
fiscal years, which relates to the City, the BOE, and the City 
University of New  York ("CUNY").  The Financial Plan is a 
modification to the financial plan submitted to the Control Board 
on June 21, 1996 (the "June Financial Plan").

	The June Financial Plan identified actions to close a 
previously projected gap of approximately $2.6 billion for the 
1997 fiscal year.  The proposed actions in the June Financial Plan 
for the 1997 fiscal year included (i) agency actions totaling $1.2 
billion; (ii) a revised tax reduction program which would increase 
projected tax revenues by $369 million due to the four-year 
extension of the 12.5% personal income tax surcharge and other 
actions; (iii) savings resulting from cost containment in 
entitlement programs to reduce city expenditures and additional 
proposed State aid of $75 million; (iv) the assumed receipt of 
revenues relating to rent payments for the City's airports, which 
are currently the subject of a dispute with the Port Authority of 
New York and New Jersey (the "Port Authority"); (v) the sale of 
the City's television station for $207 million; and (vi) pension 
cost savings totaling $134 million resulting from a proposed 
increase in the earnings assumption for pension assets from 8.5% 
to 8.75%.  In March 1997, the 12.5% personal income tax surcharge 
was extended to December 31, 1998.

	The 1997-2000 Financial Plan published on January 30, 1997 
projects revenues and expenditures for the 1997 and 1998 fiscal 
years balanced in accordance with GAAP, and projects gaps of $1.9 
billion and $2.7 billion for the 1999 and 2000 fiscal years, 
respectively.  Changes since the June Fiscal Plan include (i) an 
increase in projected  tax revenues of $571 million, $207 million, 
$73 million and $56 million in fiscal years 1997 through 2000, 
respectively; (ii) a delay in the assumed receipt of $304 million 
relating to projected rent payments for the City airports from the 
1997 fiscal year to the 1999 fiscal year, and a $34 million 
reduction in assumed State and federal aid for the 1997 fiscal 
year; (iii) an approximately $200 to $300 million increase in 
projected overtime and other expenditures in each of the fiscal 
years 1997 through 2000; (iv) a $250 million increase in 
expenditures for BOE in the 1997 and 1998 fiscal years for school 
text books and other initiatives, to be funded by savings from the 
refunding of outstanding indebtedness of the Municipal Assistance 
Corporation for the City of New York; (v) a reduction in projected 
pension costs of $34 million, $50 million, $49 million and $47 
million, in fiscal years 1997 through 2000, respectively; and (vi) 
debt service savings of $44 million in the 1998 fiscal year 
resulting from the refunding of outstanding City bonds consummated 
in the 1997 fiscal year.

	In addition, the Financial Plan sets forth gap-closing 
actions to eliminate a previously projected gap of $1.4 billion 
for the 1998 fiscal year, and to reduce projected gaps for the 
1999 and 2000 fiscal years.  The gap-closing actions for the 1998 
through 2000 fiscal years include (i) additional agency actions 
totaling $558 million, $488 million and $600 million in fiscal 
years 1998 through 2000; (ii) the prepayment in the 1997 fiscal 
year of $391 million of debt service due in the 1998 fiscal year 
for $125 million; (iii) the proposed sale of various assets 
including the U.N. Plaza Hotel in the 1998 fiscal year; (iv) 
additional State aid of $210 million in the 1998 fiscal year and 
$85 million in each of the 1999 and 2000 fiscal years, including a 
proposal that the State accelerate a $142 million revenue sharing 
payment to the City from March 1999; and (v) entitlement savings 
of $415 million in the 1998 fiscal year and $364 million in each 
of the 1999 and 2000 fiscal years, which would result from 
reductions in Medicaid spending for health care providers, 
reimbursement limits and the State making available to the City 
$77 million of additional federal block grant aid, as proposed in 
the Governor's 1997-98 Executive Budget on January 14, 1997.  The 
Financial Plan does not reflect the subsequent amendment of the 
1997-98 Executive Budget by the Governor to restore part of the 
proposed reductions in Medicaid spending for health care 
providers, which might reduce the projected entitlement savings 
for the City, depending upon the method by which such restoration 
is implemented.  The gap-closing actions are partially offset by a 
proposed tax reduction program totaling $250 million, $463 million 
and $518 million in the 1998 through 2000 fiscal years, 
respectively, including the proposed elimination of the 4% City 
sales tax on clothing items  under $500 as of December 1, 1997, 
which is subject to State legislative approval.

	The Financial Plan assumes (i) approval by the Governor and 
the State Legislature of the extension of the 14% personal income 
tax surcharge, which is scheduled to expire on December 31, 1997 
and is projected to provide revenue of $169 million, $504 million 
and $534 million in the 1998 through 2000 fiscal years, 
respectively, and of the extension of the 12.5% personal income 
tax surcharge, which scheduled to expire on December 31, 1998 and 
is projected to provide revenue of $190 million and $528 million 
in the 1999 and 2000 fiscal years, respectively; (ii) collection 
of the projected rent payments for the City's airports, totally 
$270 million and $180 million in the 1998 and 1999 fiscal years, 
respectively, which may depend on the successful completion of 
negotiations with the Port Authority or enforcement of the City's 
rights under the existing leases through pending legal actions; 
(iii) the ability of the HHC and BOE to identify actions to offset 
substantial City and State revenue reductions and the receipt by 
BOE of additional State aid; and (iv) State approval of the cost 
containment initiatives and State aid proposed by the City; as 
gap-closing actions for the 1998 fiscal year, and $115 million in 
additional State aid which is assumed in the Financial Plan but 
not provided for in the Governor's  1997-98 Executive Budget.  The 
Financial Plan does not reflect any increased costs which the City 
might incur as a result of welfare legislation recently enacted by 
Congress or legislation proposed by the Governor, which would, if 
enacted, implement such federal welfare legislation, but does 
assume the entitlement savings and additional federal aid for 
localities provided in the Governor's 1997-98 Executive Budget.  
Moreover, certain proposed entitlement cost containment and other 
initiatives have been previously considered and rejected by the 
State Legislature,  The nature and extent of the impact on the 
City of the State budget, when adopted, is uncertain, and no 
assurance can be given that the State actions included in the 
State adopted budget may not have a significant adverse impact on 
the City's budget and its Financial Plan.  It can be expected that 
the proposals contained in the Financial Plan to close the 
previously projected budget gap for the 1998 fiscal year will 
engender substantial public debate which will continue through the 
time the budget is scheduled to be adopted in June 1997.  
Accordingly, the Financial Plan may be changed significantly by 
the time the budget for the 1998 fiscal year is adopted.  In 
addition, the economic and financial condition of the City may be 
affected by various financial, social, economic and political 
factors which could have a material effect on the City.

	The projections for the 1997 through 2000 fiscal years 
reflect the costs of the settlements with the United Federation of 
Teachers ("UFT") and a coalition of unions headed by District 
Council 37 of the American Federation of State, County and 
Municipal Employees, which together represent approximately two-
thirds of the City's work force, and assume that the City will 
reach agreement with its remaining municipal unions under terms 
which are generally consistent with such settlements.  The 
settlement provides for a wage freeze in the first two years, 
followed by a cumulative effective wage increase of 11% by the end 
of the five-year period covered by the proposed agreements, ending 
in fiscal years 2000 and 2001.  Additional benefit increases would 
raise the total cumulative effective increase to 13% above present 
costs.  Costs associated with similar settlements of all City-
funded employees would total $49 million, $459 million and $1.2 
billion in the 1997, 1998 and 1999 fiscal years, respectively, and 
exceeded $2 billion in each fiscal year after the 1999 fiscal 
year.  There can be no assurance that the City will reach an 
agreement with the unions that have not yet reached a settlement 
with the City on the terms contained in the Financial Plan.

	In the event of a collective bargaining impasse, the terms 
of wage settlements could be determine through statutory impasse 
procedures, which can impose a binding settlement except in the 
case of collective bargaining with the UFT, which may be subject 
to  non-binding arbitration, On January 23, 1996,  the City 
requested the Office of Collective Bargaining to declare an 
impasse against the Patrolmen's Benevolent Association ("PBA") and 
the Uniformed Firefighters Association ("UFA").  However, on April 
7, 1997, the City reached a tentative settlement with the UFA 
covering a 65-month period from January 1, 1995 to May 31, 2000.  
At the request of both the City and the PBA, the City's Office of 
Collective Bargaining declared an impasse between the City and the 
PBA on January 30, 1997.  However, while the parties prepare for 
the impasse proceeding, negotiations are continuing, which may 
eliminate the need for such a proceeding.

	On July 10, 1995, Standard & Poor's revised downward its 
rating on City general obligation bonds from A to BBB+ and removed 
City bonds from Creditwatch.  Standard & Poor's stated that 
"structural budgetary balance remains elusive because of 
persistent softness in the City's economy, highlighted by weak job 
growth and a growing dependence on the historically volatile 
financial services sector."  Other factors identified by Standard 
& Poor's in lowering its rating on City bonds included a trend of 
using one-time measures, including debt refinancing, to close 
projected budget gaps, dependence on unratified labor savings to 
help balance the Financial Plan, optimistic projections of 
additional federal and State aid or mandate relief, a history of 
cash flow difficulties caused by State budget delays and continued 
high debt levels.

	On March 1, 1996, Moody's stated that the rating for City 
general obligation bonds remains under review pending the outcome 
of the adoption of the City's budget for the 1997 fiscal year, 
and, in light of the status of the debt on public assistance and 
Medicaid reform; the enactment of a State budget, upon which major 
assumptions regarding State aid are dependent, which may be 
extensively delayed; and the seasoning of the City's economy with 
regard to its strength and direction in the face of a potential 
national economic shutdown.  Since July 15, 1993, Fitch has rated 
City bonds A-.  On February 28, 1996, Fitch Investors Service 
("Fitch") placed the City's general obligation bonds on FitchAlert 
with negative implications. On November 5, 1996, Fitch removed the 
City's general obligation bonds from FitchAlert, although Fitch 
stated that the outlook remains negative.



Litigation

	A number of court actions have been brought involving State 
finances.  The court actions in which the State is a defendant 
generally involve state programs and miscellaneous tort, real 
property and contractual claims.  While the ultimate outcome and 
fiscal impact, if any, on the State of those proceedings and 
claims are not currently predictable, adverse determinations in 
certain of them might have a material adverse effect upon the 
State's ability to maintain a balanced 1996-97 State Financial 
Plan.

	The claims involving the City, other than routine litigation 
incidental to the performance of their governmental and other 
functions and certain other litigation, arise out of alleged 
constitutional violations, tort, breaches of contract and other 
violations of law and condemnation proceedings.  While the 
ultimate outcome and fiscal impact, if any, on the City of those 
proceedings and claims are not currently predictable, adverse 
determinations in certain of them might have a material adverse 
effect upon the City's ability to carry out the 1997-2000 
Financial Plan.  The City has estimated that its potential future 
liability on account of outstanding claims against it as of June 
30, 1996 amounted to approximately $2.8 billion.


APPENDIX D

	The following information is a summary of special factors 
affecting Florida municipal obligations.  It does not purport to 
be a complete description and is based on information from 
statements relating to securities offerings of Florida issuers.

Additional Discussion of Special Factors Relating to Florida 
Municipal Obligations

	In 1980, Florida was the seventh most populous state in the 
U.S.  The State has grown dramatically since then and as of April 
1, 1995, ranks fourth with an estimated population of 14.1 
million.  Florida's attraction, as both a growth and retirement 
state, has kept net migration at an average of 227,000 new 
residents a year from 1985 through 1995.  The U.S. average 
population increase since 1984 is about 1% annually, while 
Florida's average annual rate of increase is about 2.3%.  Florida 
continues to be the fastest growing of the 11 largest states.  
This strong population growth is one reason the State's economy is 
performing better than the nation as a whole.  In addition to 
attracting senior citizens to Florida as a place for retirement, 
the State is also recognized as attracting a significant number of 
working age individuals.  Since 1985, the prime working age 
population (18-44) has grown at an average annual rate of 2.2%.  
The share of Florida's total working age population (18-59) to 
total State population is approximately 54%.  This share is not 
expected to change appreciably into the 21st century.

	The State's personal income has been growing strongly the 
last several years and has generally outperformed both the U.S. as 
a whole and the Southeast in particular, according to the U.S. 
Department of Commerce and the Florida Consensus Economic 
Estimating Conference.  This is because Florida's population has 
been growing at a very strong pace and, since the early 70's, the 
State's economy has diversified so as to provide a broader 
economic base.  As a result, Florida's real per capita personal 
income has tracked closely with the national average and has 
tracked above the Southeast.  From 1985 through 1995, the State's 
real per capita income rose an average 5.0% a year, while the 
national real per capita income increased at an average 4.9%.

	Because Florida has a proportionately greater retirement age 
population, property income (dividends, interest and rent) and 
transfer payments (Social Security and pension benefits among 
other sources of income) are relatively more important sources of 
income.  For example, Florida's total wages and salaries and other 
labor income in 1995 was 60.6% of total personal income, while a 
similar figure for the nation for 1990 was 70.8%.  Transfer 
payments are typically less sensitive to the business cycle than 
employment income and, therefore, act as stabilizing forces in 
weak economic periods.

	The State's per capita personal income in 1995 of $22,916 
was slightly above the national average of $22,788 and 
significantly ahead of that for the Southeast United States, which 
was $20,645.  Real personal income in the State is estimated to 
increase 4.2% in 1996-97 and 4.4% in 1997-98. Real personal income 
per capita  in the State is projected to grow at 2.3% in 1996-97 
and 2.6% in 1997-98.  The Florida economy appears to be performing 
in line with the U.S. economy and is expected to experience steady 
if unspectacular growth over the next couple of years.

	Since 1985, the State's population has increased an 
estimated 26.1%.  In that same period, Florida's total non-farm 
employment has grown by over 36%.  Since 1985, the job creation 
rate in the state is more than twice that of the nation as whole.  
Contributing to this is the State's rapid rate of growth in 
employment and income is international trade.  Changes to its 
economy has also contributed to the State's strong performance.  
The State is now less dependent on employment from construction, 
construction-related manufacturing and resource-based 
manufacturing, which have declined as a proportion of total State 
employment.  The State's service sector employment is nearly 87% 
of total non-farm employment.  While the Southeast and the nation 
have a greater proportion of manufacturing jobs, which tend to pay 
higher wages, service jobs tend to be less sensitive to swings in 
the business cycle.  The State has a concentration of 
manufacturing jobs in high-tech and high value-added sectors, such 
as electrical and electronic equipment, as well as printing and 
publishing.  These type of manufacturing jobs tend to be less 
cyclical.  The State's unemployment rate throughout the 1980's 
tracked below the nation's.  As the State's economic growth has 
slowed, its unemployment rate has tracked above the national 
average.  The average rate in Florida since 1986 has been 6.2%. 
The national average is also 6.2%.  According to the U.S.  
Department of Commerce, the Florida Department of Labor and 
Employment Security, and the Florida Consensus Economic Estimating 
Conference (together the "Organization") the State's unemployment 
rate was 5.5% during 1995.  As of November 1996, the Organization 
estimates that the unemployment rate will be 5.3% for 1996 and 
5.3% in 1997.

	The State's economy is expected to decelerate along with the 
nation, but is expected to outperform the nation as a whole.  
Total non-farm employment in Florida is expected to grow at an 
increase of 2.9% in 1996-97 and 2.9% in 1997-98.  Trade and 
services, the two largest, account for more than half of the total 
non-farm employment.  Employment in the service sectors should 
experience an increase of 4.3% in 1996-97, and again growing 4.3% 
in 1997-98.  Trade is expected to expand 3.1% in 1997 and 2.9% in 
1998.  The service sector is now the State's largest employment 
category.

Construction

	The State's economy has in the past been highly dependent on 
the construction industry and construction-related manufacturing.  
This dependency has declined in recent years and continues to do 
so as a result of continued diversification of the State's 
economy. For example,  in 1980, total contract construction 
employment as a share of total non-farm employment was just about 
7.5%, and in 1985, the share had edged downward to 5%.  This trend 
is expected to continue as the state's economy continues to 
diversify. Florida, nevertheless, has a dynamic construction 
industry, with single and multi-family housing starts accounting 
for 8.5% of total U.S. housing starts in 1995 while the State's 
population is 5.4% of the U.S. total population.  Florida's 
housing starts in 1995 were 115,000 and since 1985 averaged 
148,500 a year.

	A driving force behind the State's construction industry has 
been the State's rapid rate of population growth.  Although the 
State currently is the fourth most populous state, its annual 
population growth is now projected to slow somewhat as the number 
of people moving into the State is expected to grow close to 
230,000 a year throughout the 1990's.  This population trend 
should provide fuel for business and home builders to keep 
construction activity lively in Florida for some time to come.  
However, other factors do influence the level of construction in 
the State.  For example, federal tax reform in 1986 and other 
changes to the federal income tax code have eliminated tax 
deductions for owners of more than two residential real estate 
properties and have lengthened depreciation schedules on 
investment and commercial properties.  Economic growth and 
existing supplies of homes and buildings also contribute to the 
level of construction in the State.

	Single and multi-family housing starts in 1996-97 are 
projected to reach a combined level of 113,200, increasing to 
116,000 next year.  Lingering recessionary effects on consumers 
and tight credit are some of the reasons for relatively slow core 
construction activity, as well as lingering effects from the 1986 
tax reform legislation discussed above.  Total construction 
expenditures are forecast to increase 5.9% this year and increase 
2.7% next year.

	The State has continuously been dependent on the highly 
cyclical construction and construction-related manufacturing 
industries.  While that dependency has decreased, the State is 
still somewhat at the mercy of the construction and construction-
related manufacturing industries.  The construction industry is 
driven to a great extent by the State's rapid growth in 
population.  There can be no assurance that population growth will 
continue throughout the 1990's, in which case there could be an 
adverse impact on the State's economy through the loss of 
construction and construction-related manufacturing jobs.  Also, 
recent increases in interest rates could significantly adversely 
impact the financing of new construction within the State, thereby 
adversely impacting unemployment and other economic factors within 
the State.  In addition, available commercial office space has 
tended to remain high over the past few years.  So long as this 
glut of commercial rental space continues, construction of this 
type of space will likely remain slow.

Tourism

	Tourism is one of State's most important industries.  
Approximately 40.7 million tourists visited the State in 1995, as 
reported by the Florida Department of Commerce.  In terms of 
business activities and state tax revenues, tourists in Florida in 
1995 represented an estimated 4.5 million additional residents.  
Visitors to the State tend to arrive slightly more by air than by 
car.  The State's tourist industry over the years has become more 
sophisticated, attracting visitors year-round and, to a degree, 
reducing its seasonality.  The dollar's depreciation has enhanced 
the State's tourism industry.  Tourist arrivals are expected to 
increase 2.7% this fiscal year and 3.2% next fiscal year.  Tourist 
arrivals to Florida by air are expected to decrease by 5.2% this 
year and increase by 3.15 next year, while arrivals by car are 
expected fall by 0.3% 1996-97 but increase 3.2% in 1997-98.  By 
the end of the State's current fiscal year, 42.6 million domestic 
and international tourists are expected to have visited the State.  
In 1996-97, tourist arrivals should approximate 43.9 million.

Revenues and Expenses

	Estimated fiscal year 1995-96 General Revenue plus Working 
Capital and Budget Stabilization funds available to the State 
total $15,419.3 million, a 4.0% increase over 1994-95.  Of the 
total General Revenue plus Working Capital and Budget 
Stabilization funds available to the State, $14,651.7 million of 
that is Estimated Revenues, which represents an increase of 7.4% 
over the previous year's Estimated Revenues.  With effective 
General Revenues plus Working Capital Fund and Budget 
Stabilization appropriations at $14.651.7 million, unencumbered 
reserves at the end of 1995-96 are estimated at $697.8 million.  
Estimated, fiscal year 1996-97 General Revenue plus Working 
Capital and Budget Stabilization funds available total $16,601.7 
million, a 7.7% increase over 1995-96.  The $15,566.9 million in 
Estimated Revenues (including recent Measures Affecting Revenues) 
represents an increase of 6.25.6% over the previous year's 
Estimated Revenues.  With Combined General Revenues, Working 
Capital Fund and Budgetary Stabilization appropriations at 
$15,582.2 million, unencumbered reserves as of the end of 1997-97 
are estimated at $1,019.5 million.

	In fiscal year 1994-95, approximately 66% of the State's 
total direct revenue to its three operating funds were derived 
from State taxes, with federal grants and other special revenue 
accounting for the balance.  State sales and use tax, corporate 
income tax, intangible personal property tax, and beverage tax 
amounted to 69%, 7%, 4% and 4%, respectively, of total General 
Revenue Funds available during fiscal 1994-95.  In that same year, 
expenditures for education, health and welfare and public safety 
amounted to approximately 51%, 31% and 14%, respectively, of total 
expenditures from the General Revenue Fund.

	The State's sales and use tax (6%) currently accounts for 
the State's single largest source of tax receipts.  Slightly less 
than 10% of the State's sales and use tax is designated for local 
governments and is distributed to the respective counties in which 
collected for use by the counties, and the municipalities therein.  
In addition to this distribution, local governments may (by 
referendum) assess a 0.5% or a 1.0% discretionary sales surtax 
within their county.  Proceeds from this local option sales tax 
are earmarked for funding local infrastructure programs and 
acquiring land for public recreation or conservation or protection 
of natural resources as provided under applicable Florida law.  
Certain charter counties have other taxing powers, in addition, 
and non-consolidated counties with a population in excess of 
800,000 may levy a local option sales tax to fund indigent health 
care.   It alone cannot exceed 0.5% and when combined with the 
infrastructure surtax cannot exceed 1.0%.  For the fiscal year 
ended June 30, 1996, sales and use tax receipts (exclusive of the 
tax on gasoline and special fuels) totaled $11,461 million, an 
increase of 7.4% over fiscal year 1994-1995.

	The second largest source of State tax receipts is the tax 
on motor fuels.  However, these revenues are almost entirely 
dedicated trust funds for specific purposes and are not included 
in the State's General Revenue Fund.

	The State imposes an alcoholic beverage wholesale tax 
(excise tax) on beer, wine and liquor.  This tax is one of the 
State's major tax sources, with revenues totaling $441.5 million 
in fiscal year ending June 30, 1996.  Alcoholic beverage tax 
receipts increased 1.0% from the previous year's total.  Ninety-
eight percent of the revenues collected from this tax are 
deposited into the State's General Revenue Fund.

	The State imposes a corporate income tax.  All receipts of 
the corporate income tax are credited to the General Revenue Fund.  
For the fiscal year ended June 30, 1996, receipts from this source 
were $1,167.7 million, and increase of 9.3% from fiscal year 1994-
95.

	The State imposes a documentary stamp tax on deeds and other 
documents relating to realty, corporate shares, bonds, 
certificates of indebtedness, promissory notes, wage assignments, 
and retail charge accounts.  The documentary stamp tax collections 
totaled $77.53 million during fiscal year 1995-96, an 11.5% 
increase from the previous fiscal year.  For fiscal year 1994-95, 
62.63% of these taxes were deposited to the General Revenue Fund.

	The State imposes a gross receipts tax on electric, natural 
gas and telecommunications services.  All gross receipts utilities 
tax collections are credited to the State's Public Education 
Capital Outlay and Debt Service Trust Fund.  In fiscal year 1994-
95, this amounted to $543.3 million, an increase of 6.9% over the 
previous year.

	The State imposes an intangible personal property tax on 
stocks, bonds, including bonds secured by liens in Florida real 
property, notes, governmental leaseholds and certain other 
intangibles not secured by liens on Florida real property.  The 
annual rate of tax is 2 mils.  Second, the State imposes a non-
recurring 2 mil tax on mortgages and other obligations secured by 
liens on Florida real property.  In fiscal year 1993-94, total 
intangible personal property tax collections were $895.9 million, 
a 9.5% increase over the prior year.  Of the tax proceeds, 66.5% 
are distributed to the General Revenue Fund.

	The State's severance tax taxes oil, gas and sulfur 
production, as well as the severance of phosphate rock and other 
solid minerals.  Collections from severance taxes total $77.2 
million during fiscal year 1996-97, up 26.1% from the previous 
year.  Currently, 58% of this amount is transferred to the General 
Revenue Fund.

	The State began its own lottery in 1988.  State law requires 
that lottery revenues be distributed 50% to the public in prizes, 
38% for use in enhancing education, and the balance, 12% for the 
costs of administering the lottery.  Fiscal year 1995-965 lottery 
ticket sales totaled $2.07 billion, providing education with 
approximately $788.1 million.

Debt-Balanced Budget Requirement

	At the end of fiscal 1995, approximately $6.83 billion in 
principal amount of debt secured by the full faith and credit of 
the State was outstanding.  In addition, since July 1, 1995, the 
State issued about $1.3 billion in principal amount of full faith 
and credit bonds.

	The State Constitution and statutes mandate that the State 
budget, as a whole, and each separate fund within the State 
budget, be kept in balance from currently available revenues each 
fiscal year.  If the Governor or Comptroller believes a deficit 
will occur in any State fund, by statute, he must certify his 
opinion to the Administrative Commission, which then is authorized 
to reduce all State agency budgets and releases by a sufficient 
amount to prevent a deficit in any fund.  Additionally, the State 
Constitution prohibits issuance of State obligations to fund State 
operations.

Litigation

	Currently under litigation are several issues relating to 
State actions or State taxes that put at risk substantial amounts 
of General Revenue Fund monies.  Accordingly, there is no 
assurance that any of such matters, individually or in the 
aggregate, will not have a material adverse affect on the State's 
financial position.

	Florida law provides preferential tax treatment to insurers 
who maintain a home office in the State.  Certain insurers 
challenged the constitutionality of this tax preference and sought 
a refund of taxes paid.  Recently, the Florida Supreme Court ruled 
in favor of the State.  This case and others, along with pending 
refund claims, total about $150 million.

	Previously the State imposed a $295 fee on the issuance of 
certificates of title for motor vehicles previously titled outside 
the State.  Plaintiffs sued the State alleging that this fee 
violated the Commerce Clause of the U.S. Constitution.  The 
Circuit Court in which the case was filed has granted summary 
judgment for the plaintiffs, enjoined further collection of the 
impact fee and ordered refunds to all those who paid the fee since 
the collection of the fee went into effect.  In the State's appeal 
of the lower court's decision, the Florida Supreme Court ruled 
that this fee was unconstitutional under the Commerce Clause.  
Thus, the Supreme Court approved the lower court's order enjoining 
further collection of the fee and requiring refund of the 
previously collected fees.  The refund exposure of the State has 
been estimated to be in excess of $188 million.

	The State maintains a bond  rating of Aa, AA and AA from 
Moody's Investors Service, Standard & Poor's Ratings Group and 
Fitch Investors Service, respectively, on the majority of its 
general obligation bonds, although the rating of a particular 
series of revenue bonds relates primarily to the project, 
facility, or other revenue source from which such series derives 
funds for repayment.  While these ratings and some of the 
information presented above indicate that the State is in 
satisfactory economic health, there can be no assurance that there 
will not be a decline in economic conditions or that particular 
Florida municipal obligations will not be adversely affected by 
any such changes.

	The sources for the information presented above include 
official statements and financial statements of the State of 
Florida.  While the Sponsor has not independently verified this 
information, the Sponsor has no reason to believe that the 
information is not correct in all material respects.

APPENDIX E

	The following information is a summary of special factors 
affecting Georgia municipal obligations.  It does not purport to 
be a complete description and is based largely on information from 
statements relating to securities offerings of Georgia issuers.

Appropriations and Debt Limitations

	Article III, Section IX, Paragraph IV(b) of the Constitution 
of the State of Georgia (the "Constitution") provides:

The General Assembly shall not appropriate funds for any 
given fiscal year which, in aggregate, exceed a sum equal to 
the amount of unappropriated surplus expected to have 
accrued in the state treasury at the beginning of the fiscal 
year together with an amount not greater than the total 
treasury receipts from existing revenue sources anticipated 
to be collected in the fiscal year, less refunds, as 
estimated in the budget report and amendments thereto.  
Supplement appropriations, if any, shall be made in the 
manner provided in Paragraph V of this section of the 
Constitution; but in no event shall a supplementary 
appropriations Act continue in force and effect beyond the 
expiration of the general appropriations Act in effect when 
such supplementary appropriations Act was adopted and 
approved.

Article VII, Section W, Paragraph f(c), (d), (e) and (f) of the 
Constitution provides that the State may incur public debt of two 
types for public purposes: (1) general obligation debt and (2) 
guaranteed revenue debt.  General obligation debt may be incurred 
to acquire, construct, develop, extend, enlarge or improve land, 
waters, property, highways, buildings, structures, equipment or 
facilities of the State, its agencies, departments, institutions 
and certain State Authorities, to provide educational facilities 
for county and independent school systems, to provide public 
library facilities for county and independent school systems, 
counties, municipalities, and boards of trustees of public 
libraries or boards of trustees of public library systems, to make 
loans to counties, municipal corporations, political subdivisions, 
local authorities and other local government entities for water or 
sewerage facilities or systems, and to make loans to local 
government entities for regional or multi-jurisdictional solid 
waste recycling or solid waste facilities or systems.  Guaranteed 
revenue debt may be incurred by guaranteeing the payment of 
certain revenue obligations issued by an instrumentality of the 
State as set forth in said subparagraph (f) of Paragraph 1, 
Section IV, Article VII of the Constitution.  Article VII, Section 
IV, Paragraph II(b)-(e) of the Constitution further provides that:

"(b) 	No debt may be incurred under subparagraphs (c), (d), 
and (e) of Paragraph I of this section or Paragraph V of 
this section at any time when the highest aggregate annual 
debt service requirements for the then current year or any 
subsequent year for outstanding general obligation debt and 
guaranteed revenue debt, including the proposed debt, and 
the highest aggregate annual payments for the then current 
year or any subsequent fiscal year of the state under all 
contracts then in force to which the provisions of the 
second paragraph of Article IX, Section VI, Paragraph l(a) 
of the Constitution of 1976 are applicable, exceed 10 
percent of the total revenue receipts, less refunds, of the 
state treasury in the fiscal year immediately preceding the 
year in which any such debt is to be incurred.

(c)	No debt may be incurred under subparagraphs (c) and 
(d) of Paragraph I of this section at any time when the term 
of the debt is in excess of 25 years.

(d)	No guaranteed revenue debt may be incurred to finance 
water or sewage treatment facilities or systems when the 
highest aggregate annual debt service requirements for the 
then current year or any subsequent fiscal year of the state 
for outstanding or proposed guaranteed revenue debt for 
water facilities or systems or sewage facilities or systems 
exceed 1 percent of the total revenue receipts less refunds, 
of the state treasury in the fiscal year immediately 
preceding the year in which any debt is to be incurred.

(e)	The aggregate amount of guaranteed revenue debt 
incurred to make loans for educational purposes that may be 
outstanding at any time shall not exceed $18 million, and 
the aggregate amount of guaranteed revenue debt incurred to 
purchase, or to lend or deposit against the security of, 
loans for educational purposes that may be outstanding at 
any time shall not exceed $72 million."

In addition, Article VII, Section IV, Paragraph IV of the 
Constitution provides:

"The state, and all state institutions, departments and 
agencies of the state are prohibited from entering into any 
contract except contracts pertaining to guaranteed revenue 
debt with any public agency, public corporation, authority, 
or similar entity if such contract is intended to constitute 
security for bonds or other obligations issued by any such 
public agency, public corporation, or authority and, in the 
event any contract between the state, or any state 
institution, department or agency of the state and any 
public agency, public corporation, authority or similar 
entity, or any revenues from any such contract, is pledged 
or assigned as security for the repayment of bonds or other 
obligations, then and in either such event, the 
appropriation or expenditure of any funds of the state for 
the payment of obligations under any such contract shall 
likewise be prohibited."

	Article VII, Section IV, Paragraph l(b) of the Constitution 
provides that the State may incur: "Public debt to supply a 
temporary deficit in the state treasury in any fiscal year created 
by a delay in collecting the taxes of that year.  Such debt shall 
not exceed, in the aggregate, 5 percent of the total revenue 
receipts, less refunds, of the state treasury in the fiscal year 
immediately preceding the year in which such debt is incurred.  
The debt incurred shall be repaid on or before the last day of the 
fiscal year in which it is incurred out of taxes levied for that 
fiscal year.  No such debt may be incurred in any fiscal year 
under the provisions of this subparagraph (b) if there is then 
outstanding unpaid debt from any previous fiscal year which was 
incurred to supply a temporary deficit in the state treasury." No 
such debt has been incurred under this provision since its 
inception.

	Virtually all debt obligations represented by bonds issued 
by the State of Georgia, counties, or municipalities or other 
public authorities require validation by a judicial proceeding 
prior to the issuance of such obligation.  The judicial validation 
makes these obligations incontestable and conclusive, as provided 
under the Georgia Constitution.

Revenue

	The State of Georgia operates on a fiscal year beginning on 
July 1 and ending on June 30.  Each year the State Economist, the 
Governor, and the State Revenue Commissioner jointly prepare a 
revenue forecast upon which is based the state budget which is 
considered, amended, and approved by the Georgia General Assembly.  
Since 1975, the Governor and the General Assembly have attempted 
to maintain a $100 million reserve fund, which in 1992 was eroded 
because of a revenue shortfall.  For the first seven months of the 
fiscal year ending June 30, 1996, the State of Georgia enjoyed an 
9.3% growth in revenues and had a $348,837,017.91 increase in 
revenues above the same seven month period in the fiscal year 
1995.

Legal Matters

	The State from time to time is named as a party in certain 
lawsuits, which may or may not have a material adverse impact on 
the financial position of the State if decided in a manner adverse 
to the State's interests.  Certain of such lawsuits which could 
have a significant impact on the State's financial position are 
summarized below.

Age International, Inc. v. State (two cases) Fulton Superior Court 
Civil Action No. E-3793 and Fulton Superior Court Civil Action No. 
E-25073.  Two suits for refund have been filed in state court 
against the State of Georgia by out-of-state producers of 
alcoholic beverages.  The first suit for refund seeks 96 million 
dollars in refunds of alcohol taxes, plus interest imposed under 
Georgia's post-Bacchus (468 U.S. 263) statute, O.C.G.A. 34-60, 
ie., as amended in 1985.  These claims constitute 99% of all such 
taxes paid during the 3 years preceding these claims.  In 
addition, the claimants have filed a second suit for refund for an 
additional 23 million dollars, plus interest, for later time 
periods.  These two cases encompass all known or anticipated 
claims for refund of such type with the apparently applicable 
statutes of limitations for the years in question, i.e., 1989 
through January, 1993.  The cases are pending in the trial court 
at the discovery stage.

DeKalb County v. Schrenko.  This suit, originally filed in Federal 
District Court for the Northern District of Georgia, against the 
State School Superintendent and the State of Georgia is based on a 
claim that the State's funding formula for pupil transportation is 
unconstitutional and a local school board's claim that the State 
should finance the major portion of the costs of its desegregation 
program.  The plaintiffs are seeking approximately $67,500,000 in 
restitution.  The Federal District Court ruled that the State's 
funding formula for pupil transportation is contrary to state law 
but ruled in the State's favor on the school desegregation costs 
issue.  Motions to reconsider and amend the Courts judgment were 
filed by both parties.  The State's motion was granted, in part, 
which reduced the required state payment to approximately 
$28,000,000, as of the date of decision.  Notices of appeal and 
briefs to the Eleventh Circuit Court of Appeals were filed by both 
sides, and oral arguments on appeal were heard in October, 1996.  
The case is still pending in the Eleventh Circuit, awaiting the 
appellate court's ruling.  The State intends to continue to defend 
the suit vigorously.

Buskirk and Estill v. State of Georgia, et al.. On September 1, 
1994, plaintiffs in this case filed a civil action in the Superior 
Court of Fulton County, Georgia (No. E-31547) on behalf of all 
"classified employees of the State of Georgia or its agencies and 
departments during all or part of fiscal years 1992 through 1995 
who were eligible to receive within grade pay increases and who 
would have received same were it not for a freeze of within grade 
pay increases."  The trial court granted the State's motion to 
dismiss and for summary judgment which completely resolved the 
case in the State's favor.  The case was appealed to the Georgia 
Supreme Court.  Oral argument before the Supreme Court was heard 
in November, 1996, and, on March 10, 1997, the Supreme Court 
affirmed the grant of summary judgment to the State.  The 
plaintiffs' motion for rehearing is pending.  If the plaintiffs 
prevail, the parties will conduct separate discovery on the issue 
of damages.  The State believes that it has good and adequate 
defenses to the claims made, but, should the plaintiffs prevail in 
every aspect of their claims, the liability of the State in this 
matter could be as much as $295,000,000, based on best estimates 
currently available.

Employment and Income

	Georgia's annual average unemployment rate was below the 
national average from 1986 until 1990.  Slower economic growth 
caused the unemployment rate in the state to rise to 6.2 percent 
in 1990, and while it dipped to 5.0 percent in 1991 the rate 
increased to 6.5 percent in 1992.  The resumption of faster 
economic growth resulted in a decrease in the state's unemployment 
rate to 5.5 percent in 1993, well below the national average of 
6.9 percent. Georgia's annual average unemployment rates in 1994 
and 1995 were 5.2 and 4.8 percent, compared to national rates of  
6.1 and 5.6 percent, respectively.  As of November, 1996, the 
unemployment rate for the state was 4.5 percent, compared to 5.3 
percent for the United States.

	Wholesale and retail trade employed more people than any 
other non-agricultural sector in the state of Georgia from 1989 to 
1995, followed by the service industry which became the leading 
employer in 1996.  Manufacturing was the third largest employer in 
the state during the period, and earnings in manufacturing in 
1994, the last year for which figures were available, averaged 
$10.35 per hour compared to $10.65 for the Southeast and $12.06 
for the nation.

	Per capita income in the state in 1994 was $20,251, below 
the national figure of $21,809 but above the Southeast's level of 
$19,649 for the same year.  The household median income figures in 
the same year for the state, the nation and the Southeast were 
$28,889, $30,786 and $27,013, respectively.

	Georgia's per capita gross state product, in 1987 dollars, 
for 1992 (the last year for which figures are available) was 
$19,011, close to the national level of $19,611 and well above the 
regional figure of $17,483.  The average annual growth rate in 
personal income for 1990-1995 was 5.7 percent.

Ratings

	Moody's Investors Service, Inc., Standard & Poor's Ratings 
Group, a division of The McGraw-Hill Companies and Fitch Investors 
Service, Inc. have given the General Obligation Bonds, 1997A 
ratings of "Aaa", "AA+" and "AAA," respectively.  Any desired 
explanation of the significance of such ratings should be obtained 
from the rating agency furnishing it.  Generally, rating agencies 
base their ratings on information and materials furnished to the 
agencies and on investigations, studies and assumptions by the 
rating agencies.  There is no assurance that any such rating will 
remain in effect for a given period of time or that it will not be 
lowered or withdrawn entirely if, in the judgment of the agency 
originally establishing the rating, circumstances so warrant.  Any 
such change or withdrawal of the rating could have an adverse 
effect on the market price of the Bonds.  Neither the Commission 
nor the Underwriter has undertaken any responsibility either to 
bring to the attention of the holders of the Bonds any proposed 
revision, suspension or withdrawal of the rating or to oppose any 
such revision, suspension or withdrawal.

APPENDIX F

	The following information is a summary of special factors 
affecting Pennsylvania municipal obligations.  It does not purport 
to be a complete description and is based on information from 
statements relating to securities offerings of Pennsylvania 
issuers.

General

	The Commonwealth of Pennsylvania is one of the most populous 
states, ranking fifth behind California, New York, Texas and 
Florida.  Pennsylvania is an established yet growing state with a 
diversified economy.  It is the headquarters for 58 major 
corporations.  Pennsylvania had been historically identified as a 
heavy industry state.  That reputation has changed over the last 
thirty years as the coal, steel and railroad industries declined 
and the Commonwealth's business environment readjusted to reflect 
a more diversified industrial base.  This economic readjustment 
was a direct result of a long-term shift in jobs, investment and 
workers away from the Northeast part of the nation.  Currently, 
the major sources of growth in Pennsylvania are in the service 
sector, including trade, medical and health services, education 
and financial institutions.

	Pennsylvania's agricultural industries remain an important 
component of the Commonwealth's economic structure, accounting for 
more than $2.6 billion in crop and lives stock products annually.  
Agribusiness and food-related industries support $9 billion in 
economic activity annually, Over 51,000 farms form the backbone of 
the State's agricultural economy.  Farmland in Pennsylvania 
includes over four million acres of harvested cropland and four 
million acres of pasture and farm woodlands--nearly one-third of 
the Commonwealth's total land area.  Agricultural diversity in the 
Commonwealth is demonstrated by the fact that Pennsylvania ranks 
among the top ten states in the production of a number of 
agricultural products.

	Pennsylvania's natural resources include major deposits of 
coal, petroleum, natural gas and cement.  Extensive public and 
private forests provide a vast source of material for the 
lumber/wood products industry and the related furniture industry.  
Additionally, the Commonwealth derives a good water supply from 
underground sources, abundant rainfall, and a large number o 
rivers, streams and man-made and natural lakes.

	Human resources are plentiful in Pennsylvania.  The work 
force is estimated at 5.9 million people, ranking as the sixth 
largest labor pool in the nation.  The high level of education 
embodied in the Commonwealth's work force fosters a wide variety 
of employment capabilities.  Pennsylvania's basic and higher 
education statistics compare favorably with other states in the 
nation.

Population

	The Commonwealth is highly urbanized.  Of the Commonwealth's 
1990 census population, 79 percent residing the 15 Metropolitan 
Statistical Areas ("MSAs") of the Commonwealth.  The largest MSAs 
in the Commonwealth are those which include the cities of 
Philadelphia and Pittsburgh, which together contain almost 44 
percent of the State's total population.  The population of 
Pennsylvania, 12.06 million people in 1996, according to the U.S. 
Bureau of the Census, represents a slight increase from the 1987 
population of 11.81 million.  A high proportion (15.9 percent) of 
Pennsylvania's population is comprised of persons 65 and over.  

Employment

	Non-agricultural employment in Pennsylvania over the ten 
years ending in 1995 increased at an annual rate of 1.02 percent.  
This rate compares to the 0.36 percent rate of the Middle Atlantic 
region and 1.8 percent for the during the period 1986 through 
1995.  For the last three years, employment in the Commonwealth 
has increased 3.4 percent.  The growth in employment experienced 
in Pennsylvania during this period is higher than the 2.9 percent 
growth in the Middle Atlantic region.  Non-manufacturing 
employment in Pennsylvania has increased in recent years to 82.1 
percent of total employment in 1995 and to 82.5 percent as of 
December 1996.  consequently, manufacturing employment constitutes 
a diminished share of total employment within the Commonwealth.  
Manufacturing, contributing 17.9 percent of 1995 non-agricultural 
employment and 17.5 percent as of December 1996, has fallen behind 
both the services sector and the trade sector as the largest 
single source of employment within the Commonwealth.  In 1991, the 
services sector accounted for 28.6 percent of all non-agricultural 
employment while the trade sector accounted for 22.8 percent.

	Pennsylvania's annual average unemployment rate was below 
the national average from 1986 until 1990.  Slower economic growth 
caused the unemployment rate in the Commonwealth to rise to 6.9 
percent in 1991 and 7.5 percent in 1992.  The resumption of faster 
economic growth resulted in a decrease in the Commonwealth's 
unemployment rate to 7.1 percent in 1993.  In 1994 and 1995, 
Pennsylvania's annual average unemployment rate was below the 
Middle Atlantic region's average, but slightly higher than that of 
the nation.  As of January, 1997, the most recent month for which 
data is available, the seasonally adjusted unemployment rate for 
the Commonwealth was 4.7 percent, compared to 5.4 percent for the 
United States.

	Personal income in the Commonwealth for 1995 is $284.4 
billion, an increase of 5.5 percent over the previous year.  
During the same period, national personal income increased at a 
rate of 6.2 percent.  Based on the 1995 personal income estimates, 
per capita income of 1995 is at $23,558 in the Commonwealth, 
compared to per capita income in the United States of $23,208.

	Among the major corporations that maintain their corporate 
headquarters in the Commonwealth are the following: Air Products 
and Chemicals, Inc., Alco Standard Corporation, Arco Chemical, 
Bell Atlantic Corporation, Bethlehem Steel Corporation, Cigna 
Corporation, Comcast Corporation, Consolidated Rail Corporation, 
Hershey Foods Corporation, H.J. Heinz Company, Mellon Bank Corp., 
Pep Boys, Quaker State Corporation, Rhone-Poulenc Rorer, Rite Aid 
Corporation, Union Pacific Corp., Unisys Corporation, U.S. 
Healthcare and Westinghouse Electric Corporation.

	The Commonwealth's 1995 average hourly wage rate of $12.81 
compares favorably to the national average of $12.37 for 1995.


Market and Assessed Value of Property

	Annually, the State Tax Equalization Board (the "STEB") 
determines an aggregate market value of all taxable real property 
in the Commonwealth.  The STEB determines the market value by 
applying assessment to sales ratio studies to assessment 
valuations supplied by local assessing officials.  The market 
values certified by the STEB do not include property that is tax 
exempt but do include an adjustment correcting the data for 
preferential assessments granted to certain farm and forest lands.

Price Data

	Since 1982-1984 (the consumer price index base period), 
price inflation in the Commonwealth's largest MSAs, Philadelphia 
and Pittsburgh, has been comparable to inflation in neighboring 
MSAs and in the nation as a whole.

Commonwealth Government and Fiscal Administration

	The government of the Commonwealth is composed of three 
separate branches.  A general organization chart of the 
Commonwealth's government is shown on the following page.

Legislative Branch  The legislative branch consists of the General 
Assembly and its staff.  The General Assembly is bicameral, 
composed of the Senate and the House of Representatives.  The 50 
members of the Senate serve staggered four-year terms and the 203 
Representatives serve identical two-year terms.  The General 
Assembly meets in regular session biannually beginning on the 
first Tuesday of January following elections.  Special sessions 
may be called by the Governor on petition of a majority of the 
members of each house or whenever the Governor determines that 
public interest so requires.  Legislative leadership includes 
majority and minority leaders in each house, a President Pro 
Tempore of the Senate and a Speaker of the House of 
Representatives.

Executive Branch  The Executive Branch is headed by five elected 
officials and encompasses 19 departments and approximately 37 
independent commissions, boards, authorities and agencies.

	The five elected officials are the Governor, the Lieutenant 
Governor, the Attorney General, the State Treasurer and the 
Auditor General.  The Governor and the Lieutenant Governor are 
elected on the same ballot and serve a four-year term.  The 
Governor is eligible to succeed himself for one term.  The A 
General, the Attorney General and the State Treasurer are elected 
for four-year terms in an even-year election held between 
gubernatorial elections.

	The Governor is the chief executive officer of the 
Commonwealth.  All departments except those of the State 
Treasurer, the Attorney General and the Auditor General are under 
the direct jurisdiction of the Governor.  The head of each of the 
remaining departments is a Secretary who is appointed by the 
Governor and confirmed by a majority vote of the Senate.  Each 
Secretary serves at the Governor's pleasure and is a member of the 
Governor's Cabinet.

	The Lieutenant Governor presides over the Senate and serves 
as Acting Governor during the disability of the Governor and 
becomes Governor in the case of the death, conviction or 
impeachment, failure to qualify or resignation of the Governor.

	The Attorney General is the chief law enforcement officer of 
the Commonwealth and is responsible for upholding and defending 
the constitutionality of all statutes.  He is also responsible for 
reviewing the form and legality of all proposed rules and 
regulations, deeds, leases and contracts to be executed by 
Commonwealth agencies.  The Office of Attorney General is under 
the Attorney General's direct jurisdiction.

	The State Treasurer is charged with receiving, depositing 
and investing all Commonwealth funds and is responsible for the 
pre-audit approval of all requisitions for the disbursements of 
monies in the State Treasury.  The Treasury Department is under 
the State Treasurer's direct jurisdiction.

	The Auditor General is charged with making audits of 
completed financial transactions.  The Department of the Auditor 
General is under the Auditor General's direct jurisdiction.

	Activities of state government are also conducted by various 
independent commissions, boards, authorities and agencies created 
by statute and not under the direct jurisdiction of the executive 
and legislative branches.

Judicial Branch   The judicial power of the Commonwealth is vested 
in a unified judicial system consisting of a Supreme Court and 
various other courts of original and appellate jurisdiction which 
are under the supervision and authority of the Supreme Court.  All 
justices, judges and district justices are elected to office.

Fiscal Organization  Each branch of the Commonwealth's government 
is responsible for its respective fiscal operations subject to 
restrictions embodied in the Constitution, the Administrative 
Code, and the Fiscal Code.  Such restrictions are enforced and 
other central administrative functions are provided by five 
departments: the Office of the Budget ("OB") and the Office of 
Administration ("OA"), the Treasury Department, the Department of 
Revenue and the Department of the Auditor General.  OB and OA are 
administrative offices within the Governor's offices.  The 
Secretary of the Budget and the Secretary of Administration are 
appointed by the Governor and are responsible for the operations 
of their respective offices.  The Department of Revenue is led by 
the Secretary of Revenue, who is appointed by the Governor subject 
to the advice of the Senate.  The Treasury Department and the 
Department of the Auditor General is headed by the respective 
elected official.  

	OB monitors the operation of the Commonwealth's departments, 
operates a central accounting system, compiles and publishes the 
Commonwealth's financial reports, assists in the preparation and 
publication of the budget, coordinates capital improvements and is 
responsible for the issuance of the Commonwealth's debt.  OA is 
responsible for personnel policy and programs, management policy 
and organizational structure, data processing service, and 
electronic data processing policy and planning.  The Treasury 
Department receives, invests and disburses all funds and maintains 
central cash records.  The Department of Revenue administers the 
collection of most taxes.  The Department of the Auditor General 
oversees the examination of the majority of financial 
transactions.

	Commissions, authorities and agencies which are both 
independent by statute and financially self-supporting, operate 
autonomously although their capital projects and financing are 
reviewed by OB and included in the capital budget.

The Budgetary Process  	The Commonwealth operates on a fiscal year 
beginning July I and ending June 30.  For example, "fiscal 1996" 
refers to the fiscal year ending on June 30, 1996.

	The budget process commences in September, nine months prior 
to the beginning of the fiscal year, as departments formulate 
their initial budgets in response to Program Policy Guidelines 
issued by the Governor and hold preliminary hearings with OB and 
other members of the Governor's staff.  By November 1, formal 
budget requests are submitted to OB by all government departments 
and other institutions requesting appropriations.  OB, under the 
direction of the Secretary of the Budget, reviews the requests 
through November and December and may hold formal hearings.

	The Department of Revenue, in conjunction with OB, prepares 
revenue estimates.  In the preparation of such estimates, internal 
analysis, information from selected departments and econometric 
analysis are utilized.  The Commonwealth subscribes to economic 
forecasts prepared by The WEFA Group for national and Pennsylvania 
economic data which are used to estimate economically sensitive 
Commonwealth revenues.  Other econometric forecasts are also 
consulted.

	The Constitution requires that the Governor submit annually 
to the General Assembly a budget consisting of three parts:

(a)	a balanced operating budget for the ensuing fiscal 
year setting forth proposed expenditures and estimated 
revenues from all sources and, if estimated revenues and 
available surplus are less than proposed expenditures, 
recommending specific additional sources of revenue 
sufficient to pay the deficiency;

(b)	a capital budget for the ensuing fiscal year setting 
forth in detail proposed expenditures to be financed from 
the proceeds of obligations of the Commonwealth or of its 
agencies or authorities or from operating funds; and

(c)	a financial plan for not less than the succeeding five 
fiscal years, which includes for each year (i) projected 
operating expenditures classified by department or agency 
and by program, and estimated revenues by major categories 
from existing and additional sources, and (ii) projected 
expenditures for capital projects specifically itemized by 
purpose and their proposed sources of financing.

	All funds received by the Commonwealth are subject by 
statute to appropriation in specific amounts by the General 
Assembly or by executive authorizations by the Governor.  The 
Governor's budget encompasses both annual appropriations and 
executive authorizations.

	The Governor is required to submit the proposed budget as 
soon as possible after the organization of the General Assembly 
but not later than the first full week in February except in his 
first year of office.  The Governor's submission begins with the 
Budget Message delivered in joint session.  The budget in the form 
of a proposed bill is delivered to the appropriations committee of 
one of the houses.  Hearings are held on the bills constituting 
the budget.  In an iterative process, bills are reported from 
committee to floor and considered in and between houses.

	The operating budget is considered in the form of the 
General Appropriations Bill and its supplements.  The Bill is 
limited to appropriations for debt service, public schools and the 
executive, legislative and judicial branches.  Its supplements 
cover appropriations from special revenue funds not included in 
the General Appropriations Bill and for such subjects as capital 
projects funded from current revenues, The operating budget also 
includes single subject bills covering appropriations made to any 
charitable or educational institutions not under the absolute 
control of the Commonwealth other than certain State-owned schools 
("non-preferred appropriations").

	The Constitution mandates that total operating budget 
appropriations made by the General Assembly may not exceed the sum 
of (a) the actual and estimated revenues in a given year, and (b) 
the surplus of the preceding year.  The Constitution further 
specifies that a surplus of operating funds at the end of the 
fiscal year shall be appropriated.  That is, if funds remain from 
the end of a fiscal year they must be appropriated for the ensuing 
year.  Also, if a deficit occurs at year-end, funds must be 
provided for such a deficit.

	Pursuant to the Administrative Code, the revenue estimates 
used in the budget are determined by the executive branch.  In 
practice, the revenue estimates used to balance the operating 
budget consist of the appropriate fund's available surplus and its 
estimated cash receipts for the fiscal year as well as net 
accruals.  Lapses estimated to occur during the year or at year-
end are not included; lapses are not available for appropriation 
until they occur.

	Under this budgetary process a deficit can occur if revenues 
are less than those estimated in the budget and the shortfall is 
not offset by any unappropriated surplus or by lapses during or at 
the end of the year or by legislative action to increase revenues 
or reduce appropriation.

	The Administrative Code was amended in 1978 to provide for 
stronger executive control of expenditures.  All departments under 
the Governor's jurisdiction may be required to submit estimates of 
expenditures during the ensuing month, quarter or any other such 
period as requested by the Governor.  These estimates are subject 
to the approval of the Secretary of the Budget.  The Governor is 
empowered to request the State Treasurer to withhold funds from 
any such department not spending within such estimates.  The 
Secretary of the Budget is empowered to set personnel levels for 
departments.  Departments are required to provide personnel data 
monthly so that the Commonwealth's computerized data file on 
personnel levels can be maintained and used to monitor the 
Commonwealth's largest operating expense.

	The proposed capital budget is considered in the form of the 
Capital Budget Bill and its supplements.  The capital budget 
determines limits for the amount of debt which can be issued in 
that fiscal year for categories of capital projects, itemizes for 
funding all capital projects not previously itemized, authorizes 
the issuance of debt to finance these projects and appropriates 
the proceeds from the issuance of debt.

	All appropriations require the majority vote of all members 
in each house except for non-preferred appropriations and 
appropriations from the Tax Stabilization Reserve Fund and from 
the Sunny Day Fund which require passage by a two-thirds vote.  
During the legislative process, the General Assembly may add, 
change or delete any items in the budget proposed by the Governor.  
Once the bills constituting the budget have passed both houses and 
are returned to the Governor, he may either veto bills or item 
veto appropriations within bills.  A gubernatorial veto can be 
overridden only by a two-thirds majority of all members of each 
house.

Accounting and Budgetary Controls  Every department of the 
executive branch that receives appropriations from the 
Commonwealth, with the exception of the Treasury Department and 
the Departments of the Auditor General and the Attorney General, 
has a comptroller appointed by and under the direct jurisdiction 
of the Governor.  These agencies share a centralized encumbrance-
based accounting system supervised by OB.  Executive departments 
operating separate additional accounting systems include the 
Department of Transportation for the Motor License Fund, the 
Liquor Control Board for the State Stores Fund and the Department 
of Labor and Industry for the payment of unemployment compensation 
benefits.  Officials within the Treasury Department, the 
Departments of the Auditor General and the Attorney General and 
the judicial and legislative branches administer individual 
operations under the jurisdiction of their respective areas.

	Expenditure control occurs at two levels.  The first is by 
appropriations and is enforced by the State Treasurer and 
individual comptrollers.  The second is by allocations and 
allotments and is enforced by OB for all departments receiving 
appropriations, except for the legislative branch.

	Departments receive authorization to spend and commit funds 
in the form of appropriations for a specific amount, purpose and 
time period.  Funds appropriated to a single department may be in 
one or more appropriations as the General Assembly determines.  
When multiple appropriations to a department are enacted, separate 
appropriations are made for general operating expenses, special 
outlays and for specific programs or groupings thereof.  The 
degree to which a department's total appropriations are itemized 
may vary, but control is exercised over both total and individual 
appropriations.

	The Constitution requires that with the exceptions named, 
monies may be paid from the Treasury only if appropriated by law.  
Accordingly, when a voucher is submitted to the State Treasurer, a 
check will not be issued unless the amount is within the balance 
of the agency's total appropriation.

	Departments are prevented by their comptrollers from 
incurring obligations in excess of their unexpended individual 
appropriations by an encumbrance system.  Encumbrance control 
prevents spending beyond remaining individual appropriation 
balances.  When a commitment or obligation is incurred, for 
example, when a contract or purchase order is signed, the required 
portion of the corresponding appropriation is reserved.  This 
reserving of funds is called the encumbrance procedure.  All 
obligations which will require a future disbursement of cash in 
the fiscal year require an encumbrance with the exception of debt 
service.  As the appropriation is used for no purpose other than 
debt service, an encumbrance is not necessary.

	All individual appropriations are allocated by OB to 
departments by major object groups.  For example, a department's 
appropriation for operating expenses may be broken down into such 
major object groups as personnel service, operating expenses and 
supplies, etc.  Additionally, major object groups are subdivided 
into minor object groups.  For example, personnel service would be 
broken down into salaries, benefits, overtime, etc.  Department 
expenditures are monitored to insure that expenditures within an 
allocation do not exceed the designated totals.  The departments, 
however, are free to adjust their expenditures between minor 
object groups as long as they do not exceed the major object group 
allocation.  OB can monitor department expenditures against their 
allocations on a continuing basis as the records of departments 
under the Governor's jurisdiction can be accessed from the central 
system while those of most other departments and branches are 
provided monthly.

	In addition to the preceding controls, another check is 
provided by the financial reporting process.  All department 
records are reconciled by OB on a monthly basis with the Treasury 
Department's records of cash transactions and with the Department 
of Revenue's records of cash collections.

Audits  	The Constitution requires that the financial affairs 
of any entity receiving appropriations and all department boards, 
commissions, agencies, instrumentalities, authorities and 
institutions of the Commonwealth be subject to audits made in 
accordance with generally accepted auditing standards.  Any 
Commonwealth officer whose approval is necessary for any 
transaction may not be charged with the function of auditing that 
transaction after its occurrence.

	The Department of the Auditor General has the responsibility 
for auditing all state-related financial transactions except its 
own, those of the legislative and judicial branches, and boards 
and commissions on which the Auditor General serves and those of 
certain funds.  At least one audit must be made annually of the 
fiscal affairs of the executive branch.  Audits of the 
Commonwealth General Purpose Financial Statements since fiscal 
1985 have been performed jointly by the Department of the Auditor 
General and an independent public accounting firm.

	The Treasury Department is required to pre-audit all 
requests for expenditures to insure that they are in accordance 
with law.  In addition, OB conducts, as a matter of administrative 
policy, periodic audits of comptrollers under the Governor's 
jurisdiction and performance audits of state and federal programs.

APPENDIX G

	The following information is a summary of special factors 
affecting Ohio municipal obligations.  It does not purport to be a 
complete description and is based on information from statements 
relating to securities offerings of Ohio issuers.

Additional Discussion of Special Factors Relating to Ohio 
Municipal Obligations

	The Ohio Portfolio will invest substantially all of its net 
assets in Ohio obligations.  The Ohio Portfolio is therefore 
susceptible to political, economic and regulatory factors that may 
affect issuers of Ohio obligations.  The following information 
constitutes only a brief summary of some of the complex factors 
that may affect the financial situation of issuers in Ohio, and is 
not applicable to "conduit" obligations on which the public issue 
itself has no financial responsibility.

	The creditworthiness of obligations issued by local Ohio 
issuers may be unrelated to the creditworthiness of obligations 
issued by the State, and generally there is no responsibility on 
the part of the State to make payments on those local obligations.  
There may be specific factors that are applicable in connection 
with investment in particular Ohio obligations or in the 
obligations of particular Ohio issuers, and it is possible the 
investment will be in Ohio obligations or in obligations of 
particular issuers as to which such specific factors are 
applicable.  However, the information set forth below is intended 
only as a general summary and not a discussion of any such 
specific factors that may affect any particular issuer or issue of 
Ohio obligations.

State of Ohio

	Most State operations are financed through the general 
revenue fund ("GRF"), with personal income and sales-use taxes 
being the major GRF sources. The last complete fiscal biennium 
ended June 30, 1995 with a GRF fund balance of $928 million. Of 
that $70 million was retained as an unreserved and undesignated 
balance, and $850 million was transferred in various funds 
including $535.2 million into the Budget Stabilization Fund, which 
has a current balance of $828.3 million.

	The Constitution directs or restricts the use of certain 
revenues.  Highway fees and excises, including gasoline taxes, are 
limited in use to highway-related purposes.  Not less that 50% of 
the receipts from State income taxes and estate and inheritance 
taxes must be returned to the originating political subdivision 
and school districts.  Since 1987, all state lottery net profits 
are allocated to elementary, secondary, vocational and special 
education program purposes.

	Constitutional amendments relating to taxation, revenues, 
expenditures, debt or other subjects may be proposed by action of 
three-fifths of the members elected to each house of the General 
Assembly or by initiative petition signed by electors numbering at 
least 10% of the total number of votes last cast for the office of 
governor.  Adoption of a proposed amendment requires approval by a 
majority of electors voting on it at a state-wide election.

	The House in 1995 adopted a resolution that would have 
submitted to the electors a constitutional amendment prohibiting 
the General Assembly from imposing  new tax or increasing an 
existing tax unless approved by a three-fifths vote of each house 
or by a majority vote of the electors.  The Senate did not act on 
the resolution.  No similar proposal has yet been introduced in 
the current General Assembly.

	The Ohio Constitution expressly provides that the General 
Assembly has no power to pass laws impairing the obligation of 
contracts.

The Economy

	Ohio is the seventh most populous state, with a 1990 Census 
Count of 10,847,000 indicating a 0.5% population increase from 
1980.

	Although manufacturing (including auto-related 
manufacturing) remains an important part of the State's economy, 
the greatest growth in Ohio in recent years, consistent with 
national trend, has been in the non-manufacturing area.  Ohio 
ranked fourth in the nation in 1991 gross state product derived 
from manufacturing. Manufacturing was 26.3% of Ohio's gross state 
product, compared to 17.1% of that total being from "services."  
In addition, agriculture and "agribusiness" continue as important 
elements of the Ohio economy.

	Ohio continues as a major "headquarters" state.  Of the top 
500 corporations (industrial and service) based on 1996 revenues 
reported in 1997 by Fortune magazine, 29 had headquarters in Ohio, 
placing Ohio sixth as a corporate headquarters state.

	Payroll employment in Ohio, in the diversifying base, showed 
a steady upward trend until 1979, then decreased until 1982. It 
reached a new high in the summer of 1993 after a slight decrease 
in early 1992, then decreased slightly, and reached a new high in 
1996.  Growth in recent years has been concentrated among non-
manufacturing industries, with manufacturing employment tapering 
off since its 1969 peak.  The non-manufacturing sector employs 
approximately 79% of all non-agricultural payroll workers in Ohio.

	In prior years, the State's overall unemployment rate was 
commonly somewhat higher than the national average.  However, for 
the years 1991 through 1996 the State rate (6.4%, 7.2%, 6.5%, 
5.5%, 4.8% and 4.9%, respectively) was below the national rate 
(6.7%, 7.4%, 6.8%, 6.1%, 5.6% and 5.4%, respectively).  The 
unemployment rate, and its effects, vary among particular 
geographic areas of the State.

	There can be no assurance that future state-wide or regional 
economic difficulties, and the resulting impact on State or local 
government finances generally, will not adversely affect the 
market value of Ohio Obligations held in the portfolio of the Ohio 
Trust or the ability of the particular obligors to make timely 
payments of debt service on (or lease payments relating to) those 
obligations.

Finances

	The GRF appropriations act for the current biennium was 
passed on June 28, 1995 and promptly signed (after selective 
vetoes) by the Governor.  That act provided for total GRF biennial 
expenditures of approximately $33.5 billion, with the following 
examples of GRF major program biennial expenditure increases over 
those for the prior biennium:  higher education, 13.1%; mental 
health and mental retardation, 4.8%; primary and secondary 
education, 15.4%; human services, 9.5%; justice and corrections, 
28%.

	Necessary GRF debt service and lease-rental appropriations 
for the entire biennium were requested in the Governor's proposed 
budget and incorporated in the related appropriations bill as 
introduced, and in the bill's versions as passed by the House and 
the Senate and in the act as passed and signed.  The same is true 
for the separate appropriations acts for the Ohio Department of 
Transportation ("ODOT"), Department of Public Safety ("DPS") and 
Bureau of Workers' Compensation ("BWC"), which included lease-
rental appropriations for certain Ohio Building Authority- ("OBA") 
financed ODOT, DPS and BWC projects.

	In accordance with the appropriations act, the significant 
June 30, 1995 GRF fund balance, after leaving the GRF an 
unreserved and undesignated balance of  $70 million, was 
transferred  to a variety of funds, including $535.2 million to 
the BSF (which has a current balance of $828.3 million), and 
$322.8 million to other funds, including school assistance funds 
and, in anticipation of possible federal programs changes, a human 
services stabilization fund.

	The June 20, 1996 GRF ending fund balance was over $781 
million, which was higher than forecast.  In accordance with 
General Assembly directions, $100 million was promptly transferred 
from the GRF to the fund providing for the elementary and 
secondary school computer network and $30 million to a new fund 
for State transportation infrastructure.  Approximately $400.8 
million is serving as a basis for temporary 1996 personal income 
tax reductions aggregating that mount.  OBM currently projects 
significant biennium-ending GRF ending balances.

	Litigation pending in federal district court and in the Ohio 
Court of Claims contests the Ohio Department of Human Services' 
("DHS") prior Medicaid financial eligibility rules for married 
couples where one spouse is living in a nursing facility and the 
other spouse resides in the community.  DHS promulgated new 
eligibility rules effective January 1, 1996.  It is appealing an 
order of the federal court directing it to provided notice to 
persons potentially affected by the former rules from 1990 through 
1995.  It is not possible at this time to state whether this 
appeal will be successful or, should plaintiffs prevail, the 
period (beyond the current fiscal year) during which necessary 
additional Medicaid expenditures would have to be made.  
Plaintiffs have estimated total additional Medicaid expenditures 
at $600 million for the retroactive period and, based on current 
law, it is estimated that the State's share of those additional 
expenditures is approximately $240 million.  The Court of Claims 
case may come to trial later this year.

State Debt

	The incurring or assumption of debt by the State without a 
popular vote is, with limited exceptions, prohibited by current 
provisions of the State Constitution.  The State may incur debt to 
cover casual deficits or failures in revenues or to meet expenses 
not otherwise provided for, but limited in amount to $750,000.  
The State is expressly precluded from assuming the debts of any 
local government or corporation.  An exception in both cases is 
made for any debt incurred to repel invasion, suppress 
insurrection, or defend the State in war.

	From 1921 to date Ohio voters approved 15 constitutional 
amendments authorizing the incurring of State debt to which taxes 
or excises were pledged for payment.  All related to capital 
facilities financing, except for three funding veterans' bonuses.  
The only such tax-supported debt still authorized to be incurred 
are highway and local infrastructure bonds as discussed below, and 
general obligation coal development and natural resources bonds.

	A 1995 constitutional amendment extended the local 
infrastructure bond program (authorizing an additional $1.2 
billion in state full faith and credit obligations to be issued 
over 10 years for the purpose) and authorized additional highway 
bonds.  The latter supersedes the prior highway bonds 
authorization of not more than $500 million to be outstanding at 
any time and not more that $100 million to be issued annually, and 
authorizes not more than $1.2 billion to be outstanding at any 
time and not more than $220 million to be issued in a fiscal year.

	The State and State agencies have issued revenue bonds that 
are payable from net revenues of or relating to revenue-producing 
facilities or categories of facilities, such as those issued by 
the Ohio Turnpike Commission.  Under interpretations by Ohio 
courts, those revenue bonds are not "debt" within the 
constitutional provisions described above.  The Constitution 
authorizes State bonds (issued by the Ohio Housing Financing 
Agency) for certain housing purposes; tax monies may not be 
obligated or pledged to those bonds.

	In addition, Section 2i of Article VIII of the Constitution 
authorizes the issuance, for certain purposes, of State 
obligations the owners or holders of which are not given the right 
to have excises or taxes levied by the General Assembly to pay 
principal and interest.  Those special obligations include the 
bonds and notes issued by, among others, the Ohio Public 
Facilities Commission ("OPFC") and the OBA and certain obligations 
issued by the Treasurer of State. OPFC issues obligations for 
facilities for higher education, mental health and parks and 
recreation purposes. OBA issues obligations for facilities to 
house branches and agencies of State government and their 
functions, including: State office buildings and facilities for 
the Department of Administrative Services ("DAS") and others; 
juvenile detention facilities, including single-county our joint-
county facilities, for the Department of Youth Services ("DYS") 
and other governmental entities; ODOT buildings; Department of 
Rehabilitation and Correction ("DRC") prisons and correctional 
facilities including certain local and community-based facilities; 
office facilities for the BWC and Department of Natural Resources 
("DNR"); Ohio Arts and Sports Facilities Commission ("ASFC") and 
DPS facilities; and school district computer and security 
facilities.  The Treasurer issues obligations for certain 
elementary and secondary school facilities under leases with the 
State Department of Education.

	The General Assembly has appropriated sufficient monies to 
meet debt service requirements for the current biennium (ending 
June 30, 1997) on all OPFC, OBA and Treasurer special obligations.  
Except for $36.1 million of highway use receipts appropriated for 
obligations issued for ODOT and DPS facilities, and $26,722,000 
for the BWC facility obligations, all those monies have been 
appropriated from the GRF.


Taxation

	Census figures for 1994 showed that Ohio ranked 35th in 
state taxes per capita and 26th in state and local taxes per 
capita.  Since those figures were developed many states, including 
Ohio, have enacted tax revisions.

Personal Income.  Current State personal income tax rates, 
applying generally to federal adjusted gross income, range from 
0.743% on $5,000 or less with increasing bracketed base rates and 
percentages up to a maximum on incomes over $200,000 of $11,506 
plus 7.5% on the amount over $200,000.  The total of those taxes 
for the 1996 tax year have been reduced by approximately 6.609% to 
reflect the $400.8 million from the fiscal year 1996 ending GRF 
balance that was deposited into the new income tax reduction fund.

	The Constitution requires 50% of State income tax receipts 
to be returned to the political subdivisions or school districts 
in which the receipts originate.  There is no present 
constitutional limit placed on income tax rates.

	Municipalities and school districts may also levy certain 
income taxes.  Any municipal rate (applying generally to wages and 
salaries, and net business income) over 1%, and any school 
district income tax (applying generally to the State income tax 
base for individuals and estates), requires voter approval.  The 
highest current municipal tax rate is 2.5%.  Most cities and 
villages levy a municipal income tax.  A school district income 
tax has been approved in 117 districts.

	Since 1960 the ratio of Ohio to U.S. personal income had 
declined, with Ohio moving from fifth among the states in 1960 and 
1970 to seventh in 1995.  This movement in significant measure 
reflects a trend in Ohio toward service sector employment.

Property.  At present the State itself does not levy any ad 
valorem taxes on real or tangible personal property.  Those taxes 
are levied by political subdivisions and local taxing districts. 
The Constitution has since 1934 limited the amount of the 
aggregate levy of ad valorem property taxes, without a vote of the 
electors or municipal charter provision, to 1% of  true value in 
money, and statutes limit the amount of the aggregate levy without 
a vote or charter provision to 10 mils per $1 of assessed 
valuation.  This is commonly referred to in the context of Ohio 
local government finance as the "ten-mil limitation."

Schools and Municipalities

Schools.  Litigation, similar to that in other states, has been 
pending questioning the constitutionality of Ohio's system of 
school funding.  The Ohio Supreme Court concluded in a decision 
released March 24, 1997 that major aspects of the system 
(including basic operating assistance and the loan program) are 
unconstitutional.  The Court also found the R.C. Chapter 3318 
school facilities program constitutionally infirm, but only "to 
the extent it is underfunded."  It ordered the State to provide 
for and fund sufficiently a system complying with the Ohio 
Constitution, staying its order for a year to permit time for 
responsive corrective actions by the General Assembly.  In 
response to a State motion for reconsideration and clarification, 
the Court on April 25 indicated that property taxes may still play 
a role in, but "can no longer be the primary means" of school 
funding.  The Court also confirmed that contractual repayment 
provisions of certain debt obligations issued for school funding 
will remain valid after the stay terminates.

	Under current financial structure, Ohio's 612 public school 
districts and 49 joint vocational school districts receive a major 
portion (state-wide aggregate approximately 44% in recent years) 
of their operating monies from State subsidy appropriations (the 
primary portion known as the Foundation Program) distributed in 
accordance with statutory formulas that take into account both 
local needs and local taxing capacity.  The Foundation Program 
amounts have steadily increased in recent years, including small 
aggregate increases even in those fiscal years in which 
appropriations cutbacks were imposed.

	School districts also rely heavily upon receipts from 
locally voted taxes.  In part because of provisions of some State 
laws, such as that partially limiting the increase in voted 
property tax collections that would otherwise result from 
increased assessed valuations (without further vote of the local 
electorate), some school districts have experienced varying 
degrees of difficulty in meeting mandated and discretionary 
increased costs.  Local electorates have largely determined the 
total monies available for their schools.  Locally elected boards 
of education and their school administrators are responsible for 
managing school programs and budgets within statutory 
requirements.  The State's present school subsidy formulas are 
structured to encourage both program quality and local taxing 
effort.  Until the late 1970's, although there were some temporary 
school closings, most local financial difficulties that arose were 
successfully resolved by the local districts themselves by some 
combination of voter approval of additional property tax levies, 
adjustments in program offerings or other measures.

	To broaden the potential local tax revenue base, local 
school districts also may submit for voter approval income taxes 
on the district income of individuals and estates.  Many districts 
have submitted the question, and income taxes have been approved 
in 117 districts.

	Current requirements of law and levels of State funding are 
intended to prevent and to date have prevented school closings for 
financial reasons.  School districts facing year-end deficits must 
apply to the State for consent to borrow to cover any deficits.  
Current law prohibits school closings for financial reasons.

	State appropriations for primary and secondary education for 
the current 1996-97 biennium, including GRF and lottery 
appropriations, are higher than those in the preceding biennium.  
The total of $10.1 billion is 13.6% over the preceding biennium 
total, and represents increases of 9.2% (actual) in the fiscal 
year 1996 over 1995, and 6.6% in the fiscal year 1997 over 1996.

	The Governor's budget for the 1998-1999 biennium proposed 4% 
and 4.9% increases in State aid for primary and secondary 
education for the biennium's two fiscal years.  The appropriations 
bill as passed by the House enhanced those increases, and the 
Senate is now considering that bill.  OBM expects those biennial 
appropriations will be passed by the General Assembly prior to the 
June 30 end of the fiscal biennium.

	Those total appropriations include the net State lottery 
profits.  A constitutional provision requires that net lottery 
profits be paid into a State fund to be used solely for the 
support of elementary, secondary, vocational and special education 
programs.

Municipalities.  Ohio has a mixture of urban and rural population, 
with approximately three-quarters urban.  There are 943 
incorporated cities and villages (municipalities with populations 
under 5,000) in the State. Six cities have populations of over 
100,000 and 19 over 50,000.

	A 1979 act established procedures for identifying and 
assisting those few cities and villages experiencing defined 
"fiscal emergencies."  A commission composed of State and local 
officials, and private sector members experienced in business and 
finance appointed by the Governor, is to monitor the fiscal 
affairs of a municipality facing substantial financial problems.  
That act requires the municipality to develop, subject to approval 
and monitoring by its commission, a financial plan to eliminate 
deficits and cure any defaults and otherwise remedy fiscal 
emergency conditions, and to take other actions required under its 
financial plan.  It also provides enhanced protection for the 
municipality's bonds and notes and, subject to the act's state 
standards and controls, permits the State to purchase limited 
amounts of the municipality's short-term obligations (used only 
once, in 1980).

	In the 18 years the act has been in effect, its "fiscal 
emergency" provisions have been applied to 11 cities and 13 
villages.  The situations in nine cities and 10 villages have been 
resolved and their commissions terminated.  Only the cities of 
East Cleveland and Nelsonville and three villages remain under the 
procedure.  A new "fiscal watch" status has recently been added, 
with the city of Youngstown the first to be placed in this status.

	The fiscal emergency legislation was recently amended to 
extend its potential application to counties (88 in the State) and 
townships.  This extension is on an "if and as needed" basis, and 
not aimed at particular existing fiscal problems of those 
subdivisions.

Bond Ratings

	The outstanding Highway Bonds issued by the Sinking Fund are 
rated Aa1 by Moody's, AA+ by Fitch and AAA by S&P.  The 
outstanding Highway Obligations Bonds issued by the Sinking Fund 
are rated Aa1 by Moody's, AA+ by Fitch and AAA by S&P.

	The outstanding Natural Resources Bonds and Coal Development 
Bonds issued by the Sinking Fund are rated Aa1 by Moody's, AA+ by 
S&P and AA+ by Fitch.

	The outstanding bonds of the State issued by OPFC and the 
OBA are rated AA- by S&P, Aa3 by Moody's and AA- by Fitch.  
Certain issues or portions of issues of OPFC or OBA are the object 
of municipal bond insurance and bear different ratings.

	There can be no assurance that the ratings assigned will 
continue for any given time, or that a rating will not be lowered 
or withdrawn entirely by a rating agency if in its judgment 
circumstances so warrant.  Any downward change in or withdrawal of 
a rating may have an adverse effect on the marketability or market 
price of the bonds.
    



10
u:\legal\funds\sbmu\1997\secdocs\sai797.doc



PART C Other Information

Item 24.	Financial Statements and Exhibits

(a)	Financial Statements		Location In:

Part A					Part B

					Annual
					Report

Investment Portfolios			*

Statement of Assets and Liabilities		*

Statements of Operations			*

Statements of Changes in Net Assets	*

Notes to Financial Statements		*

Supplementary Information		*

   
* The Registrant's Annual Reports for the fiscal year ended 
March 31, 1997 and the Reports of Independent Accountants dated 
May 9, 1997, May 14, 1997, May 16, 1997 and May 27, 1997 are 
incorporated by reference to the N-30D filed on June 10, 1997 
as Accession # 91155-97-276.
    
All other statements and schedules are omitted because they are 
not applicable or the required information will be shown in the 
financial statements or notes thereto.


(b)	Exhibits

(1)	(a)	Restated Declaration of Trust dated as of April 
23, 1986 is incorporated herein by reference to Exhibit 1 to 
Pre-Effective Amendment No. 1 to the Registration Statement 
No. 2-99861.

	(b)	Instrument of the Trustees Establishing and 
Designating Classes of Shares of Certain Series of the Trust 
is incorporated herein by reference to Exhibit 1(b) to Post-
Effective Amendment No. 24.

(2)	Bylaws of the Trust are incorporated by reference to 
Exhibit 2 to Pre-Effective Amendment No. 2.

(3)	Not applicable.

(4)	Not applicable.

(5)	(a)	Management Agreement between the National 
Portfolio & Mutual Management Corp. is incorporated by 
reference to Exhibit 5(b) to Post-Effective Amendment No. 
18.

	(b)	Management Agreement between the Limited Term 
Portfolio and Mutual Management Corp. is incorporated by 
reference to Exhibit 5(c) to Post-Effective Amendment No. 
18.

	(c)	Management Agreement between the California Portfolio 
and Mutual Management Corp. is incorporated by reference to 
Exhibit 5(d) to Post-Effective Amendment No. 18.

	(d)	Management Agreement between the New York Portfolio 
and Mutual Management Corp. is incorporated by reference to 
Exhibit 5(e)  to Post-Effective Amendment No. 18.

	(e)	Management Agreement between the New Jersey Portfolio 
and Mutual Management Corp. is incorporated by reference to 
Exhibit 5(g) to Post-Effective Amendment No. 18.

	(f)	Management Agreement between the Florida Portfolio and 
Mutual Management Corp. is incorporated by reference to 
Exhibit  (5)(h) to Post-Effective Amendment No. 16.

	(g)	Management Agreement between the California Limited 
Term Portfolio and Mutual Management Corp. is incorporated 
by reference to Exhibit 5(i) to Post-Effective Amendment No. 
25.

	(h)	Management Agreement between the Florida Limited Term 
Portfolio and Mutual Management Corp. is incorporated by 
reference to Exhibit 5(j) to Post-Effective Amendment No. 
25.

	(i)	Management Agreement between the Arizona Portfolio and 
Mutual Management Corp. is incorporated by reference to 
Exhibit 5(k) to Post-Effective Amendment No. 27.

	(j)	Management Agreement between the Connecticut Portfolio 
and Mutual Management Corp. is incorporated by reference to 
Exhibit 5(l) to Post-Effective Amendment No. 27.

	(k)	Management Agreement between the Georgia Portfolio and 
Mutual Management Corp. is incorporated by reference to 
Exhibit 5(m) to Post-Effective Amendment No. 27.

	(l)	Management Agreement between the Massachusetts 
Portfolio and Mutual Management Corp. is incorporated by 
reference to Exhibit 5(n) to Post-Effective Amendment No. 
27.

	(m)	Management Agreement between the Michigan Portfolio 
and Mutual Management Corp. is incorporated by reference to 
Exhibit 5(o) to Post-Effective Amendment No. 27.

	(n)	Management Agreement between the Ohio Portfolio and 
Mutual Management Corp. is incorporated by reference to 
Exhibit 5(p) to Post-Effective Amendment No. 27.

	(o)	Management Agreement between the Pennsylvania 
Portfolio and Mutual Management Corp. is incorporated by 
reference to Exhibit 5(q) to Post-Effective Amendment No. 
27.

	(p)	Management Agreement between the Texas Portfolio and 
Mutual Management Corp. is incorporated by reference to 
Exhibit 5(r)  to Post-Effective Amendment No. 27.

	(q)	Management Agreement between the Washington Portfolio 
and Mutual Management Corp. is incorporated by reference to 
Exhibit 5(s) to Post-Effective Amendment No. 27.

	(r)	Management Agreement between the New Jersey Money 
Market Portfolio and Mutual Management Corp. is incorporated 
by reference to Exhibit 5(t) to Post-Effective Amendment No. 
27.

	(s)	Form of Management Agreement between California Money 
Market Portfolio (or New York Money Market Portfolio, as the 
case may be) and  & Mutual Management Corp. is incorporated 
by reference to Exhibit 5(s) to Post-Effective Amendment No. 
34.

	(t)	Form of Management Agreement between Florida Portfolio 
(or Limited Term Portfolio or New York Portfolio, as the 
case may be) and Smith Barney Mutual Funds Management Inc. 
is incorporated by reference to Exhibit 5(t) to Post-
Effective Amendment No. 36.

(6)	Distribution Agreement between Registrant and Smith 
Barney, Harris Upham & Co. Incorporated is incorporated by 
reference to Exhibit 6  to Post-Effective Amendment No. 7.

(7)	Not applicable.

(8)	Custodian Agreement between Registrant and Provident 
National Bank is incorporated by reference to Exhibit 8 to 
Pre-Effective Amendment No. 1.

(9)	Transfer Agency Agreement between Registrant and 
Provident Financial Processing Corp. is incorporated by 
reference to Exhibit 9 to Post-Effective Amendment No. 12.

(10)	Opinion of Gaston & Snow is incorporated by reference 
to Exhibit 10 to Pre-Effective Amendment No. 1.

(11)	(i) 	Auditors' Report (See the Annual Report to 
Shareholders which is incorporated by reference in the 
Statement of Additional Information).
	(ii)	Auditors' Consent (filed herewith).
	(iii)	Power of Attorney is incorporated by reference to 
Exhibit 11(iii) to Post-Effective Amendment No. 23

(12)	Not applicable.

(13)	Subscription Agreement between Registrant and Mutual 
Management Corp. is incorporated by reference to Exhibit 13 
to Pre-Effective Amendment No. 1.

(14)	Not applicable.

(15)	(a)	Plan of Distribution pursuant to Rule 12b-1 on 
behalf of the California Money Market Portfolio is 
incorporated by reference to Exhibit 15 to Post-Effective 
Amendment No. 21.

	(b)	Plan of Distribution pursuant to Rule 12b-1 on behalf 
of the California Limited Term Portfolio is incorporated by 
reference to Exhibit 15(b) to Post-Effective Amendment No. 
25.

	(c)	Plan of Distribution pursuant to Rule 12b-1 on behalf 
of the Florida Limited Term Portfolio is incorporated by 
reference to Exhibit 15(c) to Post-Effective Amendment No. 
25.

	(d)	Plan of Distribution pursuant to Rule 12b-1 on behalf 
of the Arizona Portfolio is incorporated by reference to 
Exhibit 15(d) to Post-Effective Amendment No. 27.

	(e)	Plan of Distribution pursuant to Rule 12b-1 on behalf 
of the Connecticut Portfolio is incorporated by reference to 
Exhibit 15(e) to Post-Effective Amendment No. 27.

	(f)	Plan of Distribution pursuant to Rule 12b-1 on behalf 
of the Georgia Portfolio is incorporated by reference to 
Exhibit 15(f) to Post-Effective Amendment No. 27.

	(g)	Plan of Distribution pursuant to Rule 12b-1 on behalf 
of the Massachusetts Portfolio is incorporated by reference 
to Exhibit 15(g) to Post-Effective Amendment No. 27.

	(h)	Plan of Distribution pursuant to Rule 12b-1 on behalf 
of the Michigan Portfolio is incorporated by reference to 
Exhibit 15(h) to Post-Effective Amendment No. 27.

	(i)	Plan of Distribution pursuant to Rule 12b-1 on behalf 
of the Ohio Portfolio is incorporated by reference to 
Exhibit 15(i) to Post-Effective Amendment No. 27.

	(j)	Plan of Distribution pursuant to Rule 12b-1 on behalf 
of the Pennsylvania Portfolio is incorporated by reference 
to Exhibit 15(j) to Post-Effective Amendment No. 27.

	(k)	Plan of Distribution pursuant to Rule 12b-1 on behalf 
of the Texas Portfolio is incorporated by reference to 
Exhibit 15(k) to Post-Effective Amendment No. 27.

	(l)	Plan of Distribution pursuant to Rule 12b-1 on behalf 
of the Washington Portfolio is incorporated by reference to 
Exhibit 15(l) to Post-Effective Amendment No. 27.

	(m)	Plan of Distribution pursuant to Rule 12b-1 on behalf 
of the New Jersey Money Market Portfolio is incorporated by 
reference to Exhibit 15(m) to Post-Effective Amendment No. 
27.

	(n)	Form of Plan of Distribution pursuant to Rule 12b-1 on 
behalf of Class A shares of each Portfolio, except the 
California Money Market and the New York Money Market 
Portfolios is incorporated by reference to Exhibit 15(n) to 
Post-Effective Amendment No. 34.

(16)	Schedule of Computation of Performance Quotations is 
incorporated by reference to Exhibit 16 to Post-Effective 
Amendment No. 5.

(17)	Financial Data Schedule (filed herewith)

(18)	Plan pursuant to Rule 18f-3 is incorporated by 
reference to Exhibit 18 to Post-Effective Amendment No. 35.

Item 25.	Persons Controlled by or under Common Control with 
Registrant

	The Registrant is not controlled directly or indirectly by 
any person.  Information with respect to the Registrant's 
investment manager is set forth under the caption 
"Management of the Fund" in the prospectus included in Part 
A of this Post-Effective Amendment on Form N-1A.

Item 26.	Number of Holders of Securities

   
				Number of Recordholders on
Title of Class			July 1, 1997

Arizona Portfolio			0
California Portfolio		0
California Limited Term Portfolio	0
California Money Market Portfolio	29,231
Connecticut Portfolio		0
Florida Portfolio			3,295
Georgia Portfolio			577
Limited Term Portfolio		5,117
Massachusetts Portfolio		0
Michigan Portfolio		0
National Portfolio		7,553
New Jersey Portfolio		0
New Jersey Money Market Portfolio0
New York Money Market Portfolio	26,640
New York Portfolio		15,474
Ohio Portfolio			256
Pennsylvania Portfolio		893
Texas Portfolio			0
Washington Portfolio		0
    

Item 27.	Indemnification

	Reference is made to ARTICLE V of Registrant's Declaration 
of Trust for a complete statement of its terms.  Section 5.2 
of ARTICLE V provides:  "No Trustee, officer, employee or 
agent of the Trust shall be liable to the Trust, its 
Shareholders, or to any Shareholder, Trustee, officer, 
employee or agent thereof for any action or failure to act 
(including without limitation the failure to compel in any 
way any former or acting Trustee to redress any breach of 
trust) except for his own bad faith, willful misfeasance, 
gross negligence or reckless disregard of his or its 
duties." Emphasis added.

Item 28.	Business and other Connections of Investment Adviser

	See the material under the caption "Management of the Fund" 
included in Part A (Prospectus) of this Registration 
Statement and the material appearing under the caption 
"Management Agreement" included in Part B (Statement of 
Additional Information) of this Registration Statement.

	Information as to the Directors and Officers of Smith Barney 
Mutual Funds Management Inc. is included in its Form ADV 
(File No. 801-8314), filed with the Commission, which is 
incorporated herein by reference thereto.

Item 29.	Principal Underwriters
   
(a)	Smith Barney Inc. ("Smith Barney ") also acts as 
principal underwriter for:  Consulting Group Capital Markets 
Funds; Global Horizons Investment Series (Cayman Islands); 
Greenwich Street California Municipal Fund Inc.; Greenwich 
Street Municipal Fund Inc.; High Income Opportunity Fund Inc.; 
The Italy Fund Inc.; Managed High Income Portfolio Inc.; 
Managed Municipals Portfolio II Inc.; Managed Municipals 
Portfolio Inc.; Municipal High Income Fund Inc.; Puerto Rico 
Daily Liquidity Fund Inc.; Smith Barney Adjustable Rate 
Government Income Fund; Smith Barney Aggressive Growth Fund 
Inc.; Smith Barney Appreciation Fund Inc.; Smith Barney Arizona 
Municipals Fund Inc.; Smith Barney California Municipals Fund 
Inc.; Smith Barney Concert Series Inc.; Smith Barney 
Disciplined Small Cap Fund, Inc.; Smith Barney Equity Funds; 
Smith Barney Fundamental Value Fund Inc.; Smith Barney Funds, 
Inc.; Smith Barney Income Funds; Smith Barney Income Trust; 
Smith Barney Institutional Cash Management Fund, Inc.; Smith 
Barney Intermediate Municipal Fund, Inc.; Smith Barney 
Investment Funds Inc.; Smith Barney Investment Trust; Smith
Barney Large Capitalization Growth Fund; Smith Barney
Managed Governments Fund Inc.; Smith Barney Managed 
Municipals Fund Inc.; Smith Barney Massachusetts Municipals 
Fund; Smith Barney Money Funds, Inc.; Smith Barney Muni Funds; 
Smith Barney Municipal Fund, Inc.; Smith Barney Municipal Money 
Market Fund, Inc.; Smith Barney Natural Resources Fund Inc.; 
Smith Barney New Jersey Municipals Fund Inc.; Smith Barney 
Oregon Municipals Fund Inc.; Smith Barney Principal Return 
Fund; Smith Barney Series Fund; Smith Barney Telecommunications 
Trust; Smith Barney Variable Account Funds; Smith Barney World 
Funds, Inc.; Smith Barney Worldwide Special Fund N.V. 
(Netherlands Antilles); Travelers Series Fund Inc.; The USA 
High Yield Fund N.V.; Worldwide Securities Limited (Bermuda); 
Zenix Income Fund Inc. and various series of unit investment 
trusts.
    
	Smith Barney, the distributor of Registrant's shares, is a 
wholly owned subsidiary of Travelers Group Inc.

(b)	The information required by this Item 29 with respect 
to each director and officer of Smith Barney is incorporated 
by reference to Schedule A of Form BD filed by Smith Barney 
pursuant to the Securities Exchange Act of 1934 (SEC File 
No. 8-8177).

(c)	not applicable

Item 30.	Location of Accounts and Records

PNC Bank, National Association, 17th and Chestnut Streets, 
Philadelphia, Pennsylvania 19103, and First Data Investor 
Services Group Inc., One Exchange Place, Boston, Massachusetts 
02109, will maintain the custodian and the shareholders 
servicing agent records, respectively required by Section 
31(a).

All other records required by Section 31(a) are maintained at 
the offices of the Registrant at 388 Greenwich Street, New 
York, New York 10013 (and preserved for the periods specified 
by Rule 31a-2).

Item 31.	Management Services

	Not applicable.

Item 32.	Undertakings

(a)	Not applicable.

(b)	Registrant undertakes, if requested to do so by the 
holders of at least 10% of Registrant's outstanding shares, 
to call a meeting of shareholders for the purpose of voting 
upon the question of removal of a Trustee or Trustees and to 
assist in communications with other shareholders as required 
by Section 16(c).

(c)	Registrant undertakes to furnish each person to whom a 
prospectus is delivered with a copy of Registrant's latest 
report to shareholders, upon request and without charge.


SIGNATURES

Pursuant to the requirements of the Securities Act of 1933 and the 
Investment Company Act of 1940, the Registrant certifies that it 
meets all of the requirements for effectiveness of this Post-
Effective Amendment to the Registration Statement pursuant to Rule 
485(b) under the Securities Act of 1933 and has duly caused this 
Post-Effective Amendment to its Registration Statement to be 
signed on its behalf by the undersigned and where applicable, the 
true and lawful attorney-in-fact, thereto duly authorized, in the 
City of New York, and State of New York on the 28th day of July, 
1997.

SMITH BARNEY MUNI FUNDS

By: /s/Heath B. McLendon
Heath B. McLendon,
Chief Executive Officer

Pursuant to the requirements of the Securities Act of 1933, this 
Post-Effective Amendment to the Registration Statement has been 
signed below by the following persons in the capacities and on the 
date indicated.

Signature			Title
				Date

/s/ Heath B. McLendon		Chief Executive Officer and
(Heath B. McLendon)		Trustee
				7/28/97

/s/Joseph H. Fleiss*		Trustee
(Joseph H. Fleiss)

/s/ Donald R. Foley*		Trustee
(Donald R. Foley)

/s/Paul Hardin*			Trustee
(Paul Hardin III)

/s/Francis P. Martin*		Trustee
(Francis P. Martin)

/s/Roderick C. Rasmussen*	Trustee
(Roderick C. Rasmussen)

/s/ John P. Toolan*		Trustee
(John P. Toolan)

/s/C. Richard Youngdahl*	Trustee
(C. Richard Youngdahl)

/s/Lewis E. Daidone		Senior Vice President 
(Lewis E. Daidone)		and Treasurer
				7/28/97


*By:  /s/Christina T. Sydor	Secretary
Christina T. Sydor		7/28/97
Pursuant to Power of Attorney

EXHIBIT INDEX

Exhibit No. 	Exhibit			Page No.

11(ii)		Auditor's Consent

17		Financial Data Schedule