PROSPECTUS

                                                                    SMITH BARNEY

                                                                         ARIZONA
                                                                      MUNICIPALS
                                                                       FUND INC.


                                                              SEPTEMBER 28, 1998

                                                                          
                                                   Prospectus begins on page one

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Prospectus                                                    September 28, 1998
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      Smith Barney Arizona Municipals Fund Inc.
      388 Greenwich Street
      New York, New York 10013
      (800) 451-2010

      Smith Barney Arizona Municipals Fund Inc. (the "Fund") is a diversified
municipal fund that seeks to provide Arizona investors with the maximum amount
of income exempt from Federal and Arizona state income taxes as is consistent
with the preservation of capital.

      This Prospectus concisely sets forth certain information about the Fund,
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 Fund is contained in a Statement of
Additional Information (the "SAI") dated September 28, 1998, 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 Salomon Smith Barney Financial Consultant. The
SAI has been filed with the Securities and Exchange Commission (the "SEC") and
is incorporated by reference into this Prospectus in its entirety. 

SALOMON SMITH BARNEY INC. 

Distributor

MUTUAL MANAGEMENT CORP.

Investment Adviser and Administrator

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


                                                                               1
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Table of Contents
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Prospectus Summary                                                             3
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Financial Highlights                                                          10
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Investment Objective and Management Policies                                  14
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Valuation of Shares                                                           23
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Dividends, Distributions and Taxes                                            23
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Purchase of Shares                                                            26
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Exchange Privilege                                                            32
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Redemption of Shares                                                          35
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Minimum Account Size                                                          38
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Performance                                                                   38
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Management of the Fund                                                        39
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Distributor                                                                   41
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Additional Information                                                        42
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      No person has been authorized to give any information or to make any
representations in connection with this offering other than those contained in
this Prospectus and, if given or made, such other information and
representations must not be relied upon as having been authorized by the 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.
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2
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Prospectus Summary
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      The following summary is qualified in its entirety by detailed information
appearing elsewhere in this Prospectus and in the SAI. Cross references in this
summary are to headings in the Prospectus. See "Table of Contents."

INVESTMENT OBJECTIVE The Fund is an open-end, diversified management investment
company that seeks to provide Arizona investors with the maximum amount of
income exempt from Federal and Arizona state income taxes as is consistent with
the preservation of capital. Its investments consist primarily of intermediate-
and long-term investment-grade municipal securities issued by the State of
Arizona and its political subdivisions, agencies, authorities and
instrumentalities, and certain other municipal issuers such as the Commonwealth
of Puerto Rico, the Virgin Islands and Guam ("Arizona Municipal Securities")
that pay interest which is excluded from gross income for Federal income tax
purposes and exempt from Arizona state personal income taxes. Intermediate- and
long-term securities have remaining maturities at the time of purchase of three
to in excess of twenty years. See "Investment Objective and Management
Policies."


ALTERNATIVE PURCHASE ARRANGEMENTS The Fund offers several classes of shares
("Classes") to investors designed to provide them with the flexibility of
selecting an investment best suited to their needs. The general public is
offered three Classes of shares: Class A shares, Class B shares and Class L
shares, which differ principally in terms of sales charges and rates 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 $15,000,000. See
"Purchase of Shares" and "Redemption of Shares."


      Class A Shares. Class A shares are sold at net asset value plus an initial
sales charge of up to 4.00% of the purchase price 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.


                                                                               3
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Prospectus Summary (continued)
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      Class B Shares Conversion Feature. Class B shares will convert
automatically to Class A shares, based on relative net asset value, eight years
after the date of the original purchase. Upon conversion, these shares will no
longer be subject to an annual distribution fee. In addition, a certain portion
of Class B shares that have been acquired through the reinvestment of dividends
and distributions ("Class B Dividend Shares") will be converted at that time.
See "Purchase of Shares -- Deferred Sales Charge Alternatives."


      Class L Shares. Class L shares are sold at net asset value plus an initial
sales charge of 1.00% of the purchase price. They are subject to an annual
service fee of 0.15% and an annual distribution fee of 0.55% of the average
daily net assets of the Class, and investors pay a CDSC of 1.00% if they redeem
Class L shares within 12 months of purchase. This CDSC may be waived for certain
redemptions. The Class L shares' distribution fee may cause that Class to have
higher expenses and pay lower dividends than Class A and Class B shares.
Purchases of Fund shares which, when combined with current holdings of Class L
shares of the Fund, 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 $15,000,000. Class Y shares are sold at net asset
value with no initial sales charge or CDSC. They are not subject to any service
or distribution fees.


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


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



4
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Prospectus Summary (continued)
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      Finally, investors should consider the effect of the CDSC period and any
conversion rights of the Classes in the context of their own investment time
frame. For example, while Class L shares have a shorter CDSC period than Class B
shares, they do not have a conversion feature, and therefore, are subject to an
ongoing distribution fee. Thus, Class B shares may be more attractive than Class
L shares to investors with longer term investment outlooks.

      Reduced or No Initial Sales Charge. The initial sales charge on Class A
shares may be waived for certain eligible purchasers and the entire purchase
price would be immediately invested in the Fund. 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 aggregate 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 certain other funds sponsored by Salomon Smith Barney Inc.
("Salomon Smith Barney") listed under "Exchange Privilege." Class A share
purchases may also be eligible for a reduced initial sales charge. See "Purchase
of Shares."

      Salomon 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, Class L and certain
Class A shares is the same as that of an initial sales charge. See "Purchase of
Shares" and "Management of the Fund" for a complete description of the sales
charges and service and distribution fees for each Class of shares and
"Valuation of Shares," "Dividends, Distributions and Taxes" and "Exchange
Privilege" for other differences between the Classes of shares.

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

INVESTMENT MINIMUMS Investors in Class A, Class B and Class L shares may open an
account by making an initial investment of at least $1,000. Investors in Class Y
shares may open an account for an initial investment of $15,000,000. Subsequent
investments of at least $50 may be made for all Classes. The minimum investment
requirements for Class A, Class B and Class L shares and the subsequent
investment for all Classes through the Systematic Investment Plan are described
below.

SYSTEMATIC INVESTMENT PLAN The Fund offers shareholders a Systematic Investment
Plan under which they may authorize the automatic placement of a purchase order
each month or quarter for Fund shares. The minimum initial invest-


                                                                               5
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Prospectus Summary (continued)
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ment requirement for Class A, Class B and Class L shares and the subsequent
investment requirement for all Classes for shareholders purchasing shares
through the Systematic Investment Plan on a monthly basis is $25 and on a
quarterly basis is $50. See "Purchase of Shares."


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


MANAGEMENT OF THE FUND MUTUAL Management Corp. ("MMC" or the "Adviser")
(formerly known as Smith Barney Mutual Funds Management Inc.) serves as the
Fund's investment adviser and administrator. The Adviser provides investment
advisory and management services to investment companies affiliated with Salomon
Smith Barney. The Adviser is a wholly owned subsidiary of Salomon Smith Barney
Holdings Inc. ("Holdings"). Holdings is a wholly owned subsidiary of Travelers
Group Inc. ("Travelers"), a financial services holding company engaged through
its subsidiaries principally in four business segments: Investment Services,
including Asset Management, Consumer Finance Services, Life Insurance Services
and Property & Casualty Insurance Services. See "Management of the Fund."


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


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

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


REINVESTMENT OF DIVIDENDS Dividends and distributions paid on shares of any
Class will be reinvested automatically in additional shares of the same Class at
current net asset value unless otherwise specified by an investor. 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."


6
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Prospectus Summary (continued)
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RISK FACTORS AND SPECIAL CONSIDERATIONS There can be no assurance that the Fund
will achieve its investment objective. Assets of the Fund may be invested in the
municipal securities of non-Arizona municipal issuers ("Other Municipal
Securities"). Dividends paid by the Fund which are derived from interest
attributable to Arizona Municipal Securities will be excluded from gross income
for Federal income tax purposes and exempt from Arizona state personal income
taxes (but not from Arizona state franchise tax or Arizona state corporate
income tax). Dividends derived from interest on obligations of non-Arizona
municipal issuers will be exempt from Federal income taxes, but may be subject
to Arizona state personal income taxes. Dividends derived from certain municipal
securities (including Arizona Municipal Securities), however, may be a specific
tax item for Federal alternative minimum tax purposes. The Fund may invest
without limit in securities subject to the Federal alternative minimum tax. See
"Investment Objective and Management Policies" and "Dividends, Distributions and
Taxes."


      The Fund is more susceptible to factors adversely affecting issuers of
Arizona municipal securities than is a municipal bond fund that does not
emphasize these issuers. See "Investment Objectives and Management Policies" in
the Prospectus and "Special Considerations Relating to Arizona Municipal
Securities" in the SAI for further details about the risks of investing in
Arizona obligations.

      The Fund generally will invest at least 80% of its assets in securities
rated investment grade, and may invest the remainder of its assets in securities
rated as low as C by Moody's Investors Service, Inc. ("Moody's") or D by
Standard & Poor's Ratings Group ("S&P"), or have an equivalent rating by any
nationally recognized statistical rating organization ("NRSRO") or in unrated
obligations deemed by the Adviser to be of comparable quality. Securities in
the fourth highest rating category, though considered to be investment grade,
have speculative characteristics. Securities rated as low as D are extremely
speculative and are in actual default of interest and/or principal payments.


      There are several risks in connection with the use of certain portfolio
strategies by the Fund, such as the use of when-issued securities, puts,
stand-by commitments, municipal leases, financial futures contracts and related
put and call options and options on debt securities and securities indices. See
"Investment Objective and Management Policies -- Certain Portfolio Strategies."


                                                                               7
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Prospectus Summary (continued)
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THE FUND'S EXPENSES The following expense table lists the costs and expenses an
investor will incur either directly or indirectly as a shareholder of the Fund,
based on the maximum sales charge or maximum CDSC that may be incurred at the
time of purchase or redemption based on the Fund's current operating expenses
for its most recent fiscal year:


<TABLE>
<CAPTION>

Smith Barney Arizona Municipals Fund Inc.           Class A   Class B     Class L*   Class Y
============================================================================================
<S>                                                  <C>        <C>        <C>         <C>
Shareholder Transaction Expenses
  Maximum sales charge imposed on purchases
    (as a percentage of offering price)              4.00%      None       1.00%       None
  Maximum CDSC (as a percentage of original cost or
    redemption proceeds, whichever is lower)         None**     4.50%      1.00%       None
============================================================================================
Annual Fund 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        None
  Other expenses****                                 0.20       0.23       0.22        0.20
============================================================================================
TOTAL FUND OPERATING EXPENSES                        0.85%      1.38%      1.42%       0.70%
============================================================================================
</TABLE>

*     Class L shares were called Class C shares until June 12, 1998. For
      shareholders who owned Class C shares of the Fund as of June 12, 1998,
      Class L shares may be purchased without including the 1% initial sales
      charge until June 25, 1999.
**    Purchases of Class A shares of $500,000 or more will be made at net asset
      value with no sales charge, but will be subject to a CDSC of 1.00% on
      redemptions made within 12 months of purchase.
***   Upon conversion of Class B shares to Class A shares, such shares will no
      longer be subject to a distribution fee. Class L shares do not have a
      conversion feature and, therefore, are subject to an ongoing distribution
      fee. As a result, long-term shareholders of Class L shares may pay more
      than the economic equivalent of the maximum front-end sales charge
      permitted by the National Association of Securities Dealers, Inc.
****  For Class Y shares, "Other expenses" have been estimated based on expenses
      incurred by Class A shares because no Class Y shares were outstanding as
      of May 31, 1998.

      Class A shares of the Fund 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 Salomon 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 Fund shares and investors may
actually pay lower or no charges depending on the amount purchased and, in the
case of Class B, Class L and certain Class A shares, the length of time the
shares are held. See "Purchase of Shares" and "Redemption of Shares." Salomon
Smith Barney receives an annual 12b-1 service fee of 0.15% of the value of
average daily net assets of Class A shares. Salomon 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. For Class L shares, Salomon Smith Barney receives an
annual 12b-1 fee of 0.70% 



8
<PAGE>

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Prospectus Summary (continued)
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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 Fund will bear directly or indirectly.
The example assumes payment by the Fund of operating expenses at the levels set
forth in the table above. See "Purchase of Shares," "Redemption of Shares" and
"Management of the Fund."

Smith Barney Arizona Municipals Fund Inc.  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       74        81        151
  Class L                                     34       54        87        178
  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       44        76        151
  Class L                                     24       54        87        178
  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 Fund'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.


                                                                               9
<PAGE>

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Financial Highlights
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      The following information for each of the years in the four-year period
ended May 31, 1998 has been audited by KPMG Peat Marwick LLP, independent
auditors, whose report thereon appears in the Fund's Annual Report dated May 31,
1998. The following information for the fiscal years from May 31, 1989 to May
31, 1994 has been audited by other auditors. This information should be read in
conjunction with the financial statements and related notes that also appear in
the Fund's Annual Report, which is incorporated by reference into the SAI. As of
May 31, 1998, no Class Y shares were outstanding and, accordingly, no comparable
information is available at this time for that class. 

For a share of each class of capital stock outstanding throughout each year(1):

Smith Barney Arizona
Municipals Fund Inc.

<TABLE>
<CAPTION>

Class A Shares                        1998       1997      1996      1995     1994(2)      1993
=================================================================================================
<S>                                  <C>        <C>       <C>       <C>       <C>         <C>
Net Asset Value, Beginning of Year   $10.21     $ 9.95    $10.09    $ 9.82    $10.40      $ 9.84
-------------------------------------------------------------------------------------------------
Income From Operations:                                             
  Net investment income(3)             0.50       0.53      0.53      0.54      0.54        0.58
  Net realized and unrealized                                       
    gain/(loss)                        0.40       0.26     (0.15)     0.33     (0.38)       0.65
-------------------------------------------------------------------------------------------------
Total Income from Operations           0.90       0.79      0.38      0.87      0.16        1.23
=================================================================================================
Less Distributions From:                                            
  Net investment income               (0.52)     (0.53)    (0.52)    (0.54)    (0.53)      (0.57)
  Net realized gains                  (0.05)        --        --     (0.06)    (0.21)      (0.08)
  Capital                                --         --        --        --        --       (0.02)
-------------------------------------------------------------------------------------------------
Total Distributions                   (0.57)     (0.53)    (0.52)    (0.60)    (0.74)      (0.67)
=================================================================================================
Net Asset Value, End of Year         $10.54     $10.21    $ 9.95    $10.09    $ 9.82      $10.40
-------------------------------------------------------------------------------------------------
Total Return                           9.00%      8.06%     3.82%     9.38%     1.33%      12.92%
-------------------------------------------------------------------------------------------------
Net Assets End of Year (in 000's)   $46,183    $37,304   $40,917   $43,222   $44,552     $44,055
-------------------------------------------------------------------------------------------------
Ratios to Average Net Assets:                                       
  Expenses(3)                          0.85%      0.88%     0.82%     0.82%     0.83%       0.77%
  Net investment income                4.87       5.17      5.20      5.37      5.24        5.66
-------------------------------------------------------------------------------------------------
Portfolio Turnover Rate                  42%        27%       22%       21%       49%         44%
=================================================================================================
</TABLE>

(1)   Certain prior year numbers have been restated to reflect current
      year's presentation. Net investment income, net realized gains and net
      assets were not affected by this change.
(2)   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.
(3)   The investment adviser waived all or part of its fees for the five years
      ended May 31, 1996. If such fees had not been waived, the per share effect
      on net investment income and the expense ratios would have been as
      follows:


                Per Share Decreases                     Expense Ratios
             to Net Investment Income                 Without Fee Waiver
         ---------------------------------    --------------------------------
         1996   1995   1994   1993   1992     1996   1995   1994   1993   1992
         ----   ----   ----   ----   ----     ----   ----   ----   ----   ----
Class A  $0.02  $0.04  $0.02  $0.04  $0.02    0.99%  1.01%  1.05%  1.10%  0.90%


10
<PAGE>

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

For a share of each class of capital stock outstanding throughout each year:

Smith Barney Arizona
Municipals Fund Inc.

<TABLE>
<CAPTION>
Class A Shares(1)                             1992        1991        1990       1989
=======================================================================================
<S>                                         <C>         <C>         <C>         <C> 
Net Asset Value, Beginning of Year          $  9.63     $  9.49     $  9.66     $ 9.22
---------------------------------------------------------------------------------------
Income From Operations:
  Net investment income(2)                     0.59        0.68        0.71       0.82
  Net realized and unrealized gain/(loss)      0.32        0.14       (0.12)      0.31
---------------------------------------------------------------------------------------
Total Income from Operations                   0.91        0.82        0.59       1.13
=======================================================================================
Less Distributions From:
  Net investment income                       (0.60)      (0.68)      (0.71)     (0.69)
  Net realized gains                          (0.06)         --       (0.05)        --
  Capital                                     (0.04)         --          --         --
---------------------------------------------------------------------------------------
Total Distributions                           (0.70)      (0.68)      (0.76)     (0.69)
=======================================================================================
Net Asset Value, End of Year                $  9.84     $  9.63     $  9.49     $ 9.66
---------------------------------------------------------------------------------------
Total Return                                   9.86%       8.92%       6.31%     12.70%
---------------------------------------------------------------------------------------
Net Assets End of Year (in 000's)           $38,759     $28,373     $18,167     $4,903
---------------------------------------------------------------------------------------
Ratios to Average Net Assets:
  Expenses(2)                                  0.68%       0.14%       0.03%      0.34%
  Net investment income                        6.02        7.06        7.34       7.23
---------------------------------------------------------------------------------------
Portfolio Turnover Rate                          44%         49%         86%        63%
=======================================================================================
</TABLE>

(1)   Any shares outstanding prior to November 6, 1992 were designated as Class
      A shares.
(2)   The investment adviser waived all or part of its fees for the four years
      ended May 31, 1991. If such fees had not been waived, the per share effect
      on net investment income and the expense ratios would have been as
      follows:

             Per Share Decreases                  Expense Ratios      
          to Net Investment Income              Without Fee Waiver    
          ------------------------              ------------------   
          1991    1990  1989  1988          1991   1990   1989   1988   
          ----    ----  ----  ----          ----   ----   ----   ----
Class A  $0.10   $0.20  $0.66 $0.13         1.13%  2.13%  6.20%  2.58%  


                                                                              11
<PAGE>

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


For a share of each class of capital stock outstanding throughout each year(1):

Smith Barney Arizona
Municipals Fund Inc.

<TABLE>
<CAPTION>
Class B Shares                                1998        1997        1996        1995       1994(2)     1993(3)
=================================================================================================================
<S>                                         <C>         <C>         <C>         <C>         <C>         <C>
Net Asset Value, Beginning of Year          $ 10.21     $  9.95     $ 10.09     $  9.82     $ 10.40     $ 9.97
-----------------------------------------------------------------------------------------------------------------
Income From Operations:
  Net investment income(4)                     0.45        0.48        0.48        0.49        0.49       0.31
  Net realized and unrealized gain/(loss)      0.40        0.26       (0.15)       0.33       (0.37)      0.50
-----------------------------------------------------------------------------------------------------------------
Total Income from Operations                   0.85        0.74        0.33        0.82        0.12       0.81
=================================================================================================================
Less Distributions From:
  Net investment income                       (0.47)      (0.48)      (0.47)      (0.49)      (0.49)     (0.29)
  Net realized gains                          (0.05)         --          --       (0.06)      (0.21)     (0.08)
  Capital                                        --          --          --          --          --      (0.01)
-----------------------------------------------------------------------------------------------------------------
Total Distributions                           (0.52)      (0.48)      (0.47)      (0.55)      (0.70)     (0.38)
=================================================================================================================
Net Asset Value, End of Year                $ 10.54     $ 10.21     $  9.95     $ 10.09     $  9.82     $10.40
-----------------------------------------------------------------------------------------------------------------
Total Return                                   8.46%       7.53%       3.30%       8.78%       0.84%      8.31%++
-----------------------------------------------------------------------------------------------------------------
Net Assets End of Year (in 000's)           $19,721     $19,886     $22,369     $22,838     $19,306     $8,149
-----------------------------------------------------------------------------------------------------------------
Ratios to Average Net Assets:
  Expenses(4)                                  1.38%       1.39%       1.33%       1.33%       1.35%      1.33%+
  Net investment income                        4.35        4.66        4.69        4.85        4.73       5.10+
-----------------------------------------------------------------------------------------------------------------
Portfolio Turnover Rate                          42%         27%         22%         21%         49%        44%
=================================================================================================================
</TABLE>


(1)   Certain prior year numbers have been restated to reflect current year's
      presentation. Net investment income, net realized gains and net assets
      were not affected by this change.
(2)   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.
(3)   For the period from November 6, 1992 (inception date) to May 31, 1993.


(4)   The investment adviser waived all or part of its fees for the four years
      ended May 31, 1996. If such fees had not been waived, the per share effect
      on net investment income and the expense ratios would have been as
      follows:


            Per Share Decreases                       Expense Ratios       
          to Net Investment Income                 Without Fee Waiver
         --------------------------             -------------------------
         1996    1995   1994   1993             1996   1995   1994    1993     
         ----    ----   ----   ----             ----   ----   ----    ----     
Class B  $0.02  $0.03  $0.02  $0.02             1.50%  1.52%  1.57%  1.66%+   
                                             
++    Total return is not annualized, as it may not be representative of the
      total return for the year.
+     Annualized.


12
<PAGE>

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


For a share of each class of capital stock outstanding throughout each year(1):


Smith Barney Arizona
Municipals Fund Inc.


Class L Shares(2)                           1998     1997     1996     1995(3)
================================================================================
Net Asset Value, Beginning of Year         $10.21   $ 9.95   $10.09    $ 9.28
--------------------------------------------------------------------------------
Income From Operations:                                      
  Net investment income(4)                   0.45     0.47     0.48      0.24
  Net realized and unrealized gain (loss)    0.39     0.26    (0.15)     0.86
--------------------------------------------------------------------------------
Total Income from Operations                 0.84     0.73     0.33      1.10
================================================================================
Less Distributions From:                                     
  Net investment income                     (0.47)   (0.47)   (0.47)    (0.23)
  Net realized gains                        (0.05)      --       --     (0.06)
--------------------------------------------------------------------------------
Total Distributions                         (0.52)   (0.47)   (0.47)    (0.29)
================================================================================
Net Asset Value, End of Year               $10.53   $10.21   $ 9.95    $10.09
--------------------------------------------------------------------------------
Total Return                                 8.30%    7.49%    3.26%    12.10%++
--------------------------------------------------------------------------------
  Net Assets End of Year (in 000's)          $875     $822     $554      $386
--------------------------------------------------------------------------------
Ratios to Average Net Assets:                                
  Expenses(4)                                1.42%    1.42%    1.39%     1.38%+
  Net investment income                      4.30     4.63     4.63      4.81+
--------------------------------------------------------------------------------
Portfolio Turnover Rate                        42%      27%      22%       21%
================================================================================


(1)   Certain prior year numbers have been restated to reflect current year's
      presentation. Net investment income, net realized gains and net assets
      were not affected by this change.


(2)   Class L shares were called Class C shares until June 12, 1998.
(3)   For the period from December 8, 1994 (inception date) to May 31, 1995.
(4)   The investment adviser waived all or part of its fees for the two years
      ended May 31, 1996 and the period ended May 31, 1995. If such fees had not
      been waived, the per share effect on net investment income and the expense
      ratios would have been as follows:

            Per Share Decreases         Expense Ratios
         to Net Investment Income     Without Fee Waiver
         ------------------------     ------------------
                1996   1995              1996    1995
                ----   ----              ----    ----
Class L         $0.02  $0.01             1.56%   1.56%+

++    Total return is not annualized, as it may not be representative of the
      total return for the year.
+     Annualized.



                                                                              13
<PAGE>

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

      The investment objective of the Fund is to provide Arizona investors the
maximum amount of income exempt from Federal and Arizona state income taxes as
is consistent with the preservation of capital. This investment objective may
not be changed without the approval of the holders of a majority of the Fund's
outstanding shares. The Fund attempts to achieve its objective by investing
primarily in debt securities, the interest on which is excluded from gross
income for Federal income tax purposes and which is exempt from Arizona state
income taxes. The Fund may purchase and sell financial futures contracts, and
options thereon, and may purchase and sell options on debt securities and
securities indices. There can be no assurance that the Fund's investment
objective will be achieved.


      The Fund will operate subject to an investment policy which provides that,
under normal market conditions, the Fund will invest at least 80% of its net
assets in Arizona Municipal Securities. The Fund may invest up to 20% of its net
assets in Other Municipal Securities, the interest on which is excluded from
gross income for Federal income tax purposes (not including the possible
applicability of a Federal alternative minimum tax), but which is subject to
Arizona state personal income tax. For temporary defensive purposes, the Fund
may invest without limit in non-Arizona municipal issuers and in "Temporary
Investments" as described below.

      The Fund generally will invest at least 80% of its total assets in
investment grade debt obligations rated no lower than Baa, MIG 3 or Prime-1 by
Moody's or BBB, SP-2 or A-1 by S&P, or have the equivalent rating by any NRSRO,
or in unrated obligations deemed by the Adviser to be of comparable quality.
Unrated obligations will be considered to be of investment grade if deemed by
the Adviser to be comparable in quality to instruments so rated, or if other
outstanding obligations of the issuers thereof are rated Baa or better by
Moody's or BBB or better by S&P. The balance of the Fund's assets may be
invested in securities rated as low as C by Moody's or D by S&P, or have the
equivalent rating by any NRSRO, or in unrated obligations deemed by the Adviser
to be of comparable quality, which are sometimes referred to as "junk bonds."
Securities in the fourth highest rating category, though considered to be
investment grade, have speculative characteristics. Securities rated as low as D
are extremely speculative and are in actual default of interest and/or principal
payments. The Fund will not purchase an unrated municipal security if, after
such purchase, more than 20% of the Fund's total assets would be invested in
unrated municipal securities. A description of the rating systems of S&P and
Moody's is contained in the Appendix to the SAI.

      The Fund's average weighted maturity will vary from time to time based on
the judgment of the Adviser. The Fund intends to focus on intermediate- and
long-term obligations -- obligations with remaining maturities at the time of
purchase of from three to in excess of twenty years.


      While the market values of low-rated and comparable unrated securities
tend to react less to fluctuations in interest rate levels than the market
values of higher-


14
<PAGE>

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

rated securities, the market values of certain low-rated and comparable unrated
municipal securities also tend to be more sensitive than higher-rated securities
to short-term corporate and industry developments and changes in economic
conditions (including recession) in specific regions or localities or among
specific types of issuers. In addition, low-rated securities and comparable
unrated securities generally present a higher degree of credit risk. During an
economic downturn or a prolonged period of rising interest rates, the ability of
issuers of low-rated and comparable unrated securities to service their payment
obligations, meet projected goals or obtain additional financing may be
impaired. The risk of loss due to default by such issuers is significantly
greater because low-rated and comparable unrated securities generally are
unsecured and frequently are subordinated to the prior payment of senior
indebtedness. The Fund may incur additional expenses to the extent it is
required to seek recovery upon a default in payment of principal or interest on
its portfolio holdings.

      While the market for municipal securities is considered to be generally
adequate, the existence of limited markets for particular low-rated and
comparable unrated securities may diminish the Fund's ability to (a) obtain
accurate market quotations for purposes of valuing such securities and
calculating its net asset value and (b) sell the securities at fair value either
to meet redemption requests or to respond to changes in the economy or in the
financial markets. The market for certain low-rated and comparable unrated
securities has not fully weathered a major economic recession. Any such
recession, however, would likely disrupt severely the market for such securities
and adversely affect the value of the securities and the ability of the issuers
of such securities to repay principal and pay interest thereon.

      Fixed-income securities, including low-rated securities and comparable
unrated securities, frequently have call or buy-back features that permit their
issuers to call or repurchase the securities from their holders, such as the
Fund. If an issuer exercises these rights during periods of declining interest
rates, the Fund may have to replace the security with a lower yielding security,
thus resulting in a decreased return to the Fund.

      Municipal bonds are debt obligations which generally have a maturity at
the time of issue in excess of one year and are issued to obtain funds for
various public purposes. The two principal classifications of municipal bonds
are "general obligation" and "revenue" bonds. General obligation bonds are
secured by the issuer's pledge of its full faith, credit and taxing power for
the payment of principal and interest. Revenue bonds are payable 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 specific revenue source but
not from the general taxing power. Private activity bonds issued by or on behalf
of public authorities to obtain funds for privately operated facilities are in
most cases revenue bonds which do not generally carry the pledge of the full
faith and credit of the issuer of such bonds, but 


                                                                              15
<PAGE>

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

depend for payment on the ability of the industrial user to meet its obligations
(or any property pledged as security).

      The Fund may invest without limit in private activity bonds which can be
classified as Arizona Municipal Securities. 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 Fund's dividends are derived from interest on these bonds. Dividends derived
from interest income on Arizona Municipal Securities are a component of the
"current earnings" adjustment item for purposes of the Federal corporate
alternative minimum tax.

      The Fund may invest without limit in debt obligations that are repayable
out of revenue streams generated from economically related projects or
facilities or debt obligations whose issuers are located in the same state.
Sizeable investments in such obligations could involve an increased risk to the
Fund should any of the related projects or facilities experience financial
difficulties.


      The Fund may invest without limit in "municipal leases," which generally
are participations in intermediate- and short-term debt obligations issued by
municipalities consisting of leases or installment purchase contracts. Although
lease obligations do not constitute general obligations of the municipality for
which the municipality's taxing power is pledged, a lease obligation is
ordinarily backed by the municipality's covenant to budget for, appropriate and
make the payments due under the lease obligation. However, certain lease
obligations contain "non-appropriation" clauses which provide that the
municipality has no obligation to make lease or installment purchase payments in
future years unless money is appropriated for such purpose on a yearly basis. In
addition to the "non-appropriation" risk, these securities represent a
relatively new type of financing that has not yet developed the depth of
marketability associated with more conventional bonds. Although
"non-appropriation" lease obligations are often secured by the underlying
property, disposition of the property in the event of foreclosure might prove
difficult. In evaluating municipal lease obligations, the Adviser will consider
such factors as it deems appropriate, which may include: (a) whether the lease
can be canceled; (b) the ability of the lease obligee to direct the sale of the
underlying assets; (c) the general creditworthiness of the lease obligor; (d)
the likelihood that the municipality will discontinue appropriating funding for
the leased property in the event such property is no longer considered essential
by the municipality; (e) the legal recourse of the lease obligee in the event of
such a failure to appropriate funding; (f) whether the security is backed by a
credit enhancement such as insurance; and (g) any limitations which are imposed
on the lease obligor's ability to utilize substitute property or services rather
than those covered by the lease obligation.



16
<PAGE>

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


      The Fund may also invest in zero coupon bonds. Such bonds carry an
additional risk in that, unlike bonds which pay interest throughout the period
to maturity, the Fund will realize no cash until the cash payment date unless a
portion of such securities is sold and, if the issuer defaults, the Fund may
obtain no return at all on its investment.


      The value of the Fund's portfolio securities, and therefore its net asset
value per share, may fluctuate due to various factors, including fluctuations in
interest rates generally, as well as changes in the ability of issuers of
municipal securities to pay interest and principal. The Fund's portfolio will be
actively managed in pursuit of its objective, and therefore may have higher
portfolio turnover than that of other funds with similar objectives. A high
portfolio turnover rate may cause the Fund to incur additional expenses.
Portfolio turnover may result in the realization of net gains, which are not
tax-exempt when distributed to shareholders.

      From time to time, proposed legislation restricting or eliminating the
Federal tax-exempt status of issues of municipal securities has been introduced
before Congress. Legislative developments may affect the value of the portfolio
securities of the Fund and therefore the value of the Fund's shares, as well as
the tax-exempt status of dividends. The Fund will monitor the progress of any
such proposals to determine what, if any, defensive action may be taken, if any
legislation which would have a material adverse effect on the ability of the
Fund to pursue its objective were adopted, the investment objective and policies
of the Fund would be reconsidered by the Board of Directors.

      A more detailed explanation of the Fund's investments, together with
certain investment restrictions which the Fund has adopted and which cannot be
changed without the majority vote of the outstanding shares of the Fund, is
discussed below and in the SAI.

      Special Considerations Relating to Arizona Municipal Securities. Because
the Fund concentrates its investments in Arizona Municipal Securities, the Fund
is more susceptible to factors adversely affecting Arizona issuers than is a
municipal bond fund that is not concentrated in these issuers to this degree.
Investors should realize the risks associated with an investment in such
securities.


      Arizona local governmental entities are subject to certain limitations on
their ability to assess taxes and levies which could affect their ability to
meet their financial obligations. If either Arizona or any of its local
governmental entities is unable to meet its financial obligations, the income
derived by the Fund, the ability to preserve or realize appreciation of the
Fund's capital, and the Fund's liquidity could be adversely affected.


      Additional financial considerations relating to the risks associated with
investing in Arizona Municipal Securities are summarized in the SAI.


                                                                              17
<PAGE>

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

      CERTAIN PORTFOLIO STRATEGIES

      In attempting to achieve its investment objective, the Fund may employ,
among others, the following investment techniques:


      When-Issued Securities: New issues of Arizona Municipal Securities (and
other tax-exempt obligations) frequently are offered on a when-issued basis,
which means that delivery and payment for such securities normally take place
within 45 days after the date of the commitment to purchase. The payment
obligation and interest rate that will be received on when-issued securities are
fixed at the time the buyer enters into the commitment. Arizona Municipal
Securities, like other investments made by the Fund, may decline or appreciate
in value before their actual delivery to the Fund. Due to the fluctuations in
the value of securities purchased and sold on a when-issued basis, the yields
obtained on these securities may be higher or lower than the yields available in
the market on the date when the instruments actually are delivered to the
buyers. The Fund will not accrue income with respect to a when-issued security
prior to its stated delivery date. The Fund will establish a segregated account
with the Fund's custodian consisting of cash, debt securities of any grade,
having a value equal to or greater than the Fund's purchase commitments,
provided such securities have been determined by the Adviser to be liquid and
unencumbered, and are marked to market daily, pursuant to guidelines established
by the directors. Placing securities rather than cash in the segregated account
may have a leveraging effect on the Fund's net assets. The Fund generally will
make commitments to purchase Arizona Municipal Securities (and other tax-exempt
obligations) on a when-issued basis only with the intention of actually
acquiring the securities, but the Fund may sell the securities before the
delivery date if it is deemed advisable.


      Puts or Stand-by Commitments. The Fund may purchase municipal securities
together with the right (a "put" or "stand-by commitment") to resell the
securities to the seller at an agreed-upon price or yield within a specified
period prior to the maturity date of the securities. The Fund uses puts for
liquidity purposes (i.e., to provide a ready market for its municipal securities
to meet cash needs).


      Temporary Investments. Under normal market conditions, the Fund may hold
up to 20% of its total assets in cash or money market instruments, including
taxable money market instruments ("Temporary Investments"). In addition, when
the Adviser believes that market conditions warrant, including when acceptable
Arizona Municipal Securities are unavailable, the Fund may take a temporary
defensive posture and invest without limitation in Temporary Investments.
Securities eligible for short-term investment by the Fund are tax-exempt notes
of municipal issuers having, at the time of purchase, a rating within the three
highest grades by Moody's or S&P or having the equivalent rating by any NRSRO
or, if not rated, issued by issuers with outstanding debt securities rated
within the two highest grades by Moody's or S&P or having the equivalent rating
by any NRSRO, 



18
<PAGE>

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

and certain taxable short-term instruments having quality characteristics
comparable to those for tax-exempt investments. To the extent the Fund holds
Temporary Investments, it may not achieve its investment objective.

      The Fund also may invest for the same purpose in repurchase agreements
with certain banks and dealers. the Manager considers the value of the
collateral and the creditworthiness of banks and broker-dealers with which the
Fund enters into repurchase agreements. Repurchase agreements may be entered
into with respect to any securities eligible for investment by the Fund,
including Arizona Municipal Securities. The income from a repurchase agreement
with respect to a municipal security would not be tax-exempt. Since the
commencement of its operations, the Fund has not found it necessary to make
taxable Temporary Investments.

      See the SAI for a further description of short-term municipal and taxable
investments and the Moody's and S&P ratings.

      Financial Futures Contracts and Related Options. The Fund may purchase and
sell financial futures contracts and related options. Financial futures
contracts are commodities contracts which obligate the long or short holder to
take or make delivery at a future date of a specified quantity of a financial
instrument such as Treasury bonds or bills (although they generally are settled
in cash) or the cash value of a securities index. A "sale" of a futures contract
means the undertaking of a contractual obligation to deliver the securities or
the index value called for by the contract at a specified price on a specified
date. A "purchase" of a futures contract means the acquisition of a contractual
obligation to acquire the securities or cash value of an index at a specified
price on a specified date. Currently, futures contracts are available on several
types of fixed-income securities including Treasury bonds, notes and bills,
commercial paper and certificates of deposit, as well as municipal bond indices.

      The Fund will engage in financial futures transactions as a hedge against
the effects of fluctuating interest rates and other market conditions. For
example, if the Fund owned long-term bonds, and interest rates were expected to
rise, it could sell futures contracts ("short hedge") which would have much the
same effect as selling some of the long-term bonds that it owned. If interest
rates did increase, the value of the debt securities in the portfolio would
decline, but the value of the Fund's futures contracts should increase, thus
keeping the net asset value of the Fund from declining as much as it otherwise
would have.

      If the Fund anticipated a decline in long-term interest rates, the Fund
could hold short-term municipal securities and benefit from the income earned by
holding such securities while purchasing futures contracts ("long hedge") in an
attempt to gain the benefit of rising long-term bond prices, because the value
of the futures contracts should rise with the long-term bonds. In so doing, the
Fund could take advantage of the anticipated rise in the value of long-term
bonds without actually buying them.


                                                                              19
<PAGE>

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

      The Fund could accomplish similar results by selling bonds with long
maturities and investing in bonds with short maturities when interest rates are
expected to rise or by buying bonds with long maturities and selling bonds with
short maturities when interest rates are expected to decline. However, by using
futures contracts, the Fund could accomplish the same results more easily and
more quickly due to the generally greater liquidity in the financial futures
markets than in the municipal securities markets.

      The Fund also may purchase and write call and put options on financial
futures contracts. An option on a futures contract gives the purchaser the
right, in return for the premium paid, to assume a position in a futures
contract at a specified exercise price at any time during the period of the
option. Upon exercise, the writer of the option delivers to the holder the
futures position together with the accumulated balance in the writer's futures
margin account (the amount by which the market price of the futures contract
varies from the exercise price). The Fund will be required to deposit or pay
initial margin and maintenance margin with respect to put and call options on
futures contracts written by it.

      The Fund also may purchase and write call and put options on securities
indices. Options on indices are similar to options on securities except that
settlement is made in cash. No physical delivery of the underlying securities in
the index is made. Unlike options on specific securities, gain or loss depends
on the price movements in the securities included in the index rather than price
movements in individual securities. When the Fund writes an option on a
securities index, it will be required to deposit and maintain with a custodian
portfolio securities equal in value to 100% of the exercise price in the case of
a put, or the contract value in the case of a call. In addition, when the
contract value of a call option written by the Fund exceeds the exercise price,
the Fund will segregate cash or cash equivalents equal in value to such excess.


      Regulations of the Commodity Futures Trading Commission applicable to the
Fund require that its transactions in financial futures contracts and options on
financial futures contracts be engaged in for bona fide hedging purposes, or if
the Fund enters into futures contracts for speculative purposes, that the
aggregate initial margin deposits and premiums paid by the Fund will not exceed
5% of the market value of its assets. In addition, the Fund will, with respect
to its purchases of financial futures contracts, establish a segregated account
consisting of cash, cash equivalents, U.S. government securities or debt
securities of any grade (provided such assets are liquid, unencumbered and
marked to market daily) in an amount equal to the total market value of the
futures contracts, less the amount of initial margin on deposit for the
contracts.


      There are certain risks associated with the use of futures contracts and
related options. There is no assurance that the Fund will be able to close out
its futures positions at any time, in which case it would be required to
maintain the margin 


20
<PAGE>

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


deposits on the contract. The costs incurred in connection with futures
transactions could reduce the Fund's yield. There can be no assurance that
hedging transactions will be successful, as they depend upon the Adviser's
ability to predict changes in interest rates. Furthermore, there may be an
imperfect correlation (or no correlation) between the price movements of the
futures contracts and price movements of the Fund's portfolio securities being
hedged. This lack of correlation could result from differences between the
securities being hedged and the securities underlying the futures contracts in
interest rate levels, maturities and creditworthiness of issuers, as well as
from variations in speculative market demand for futures contracts and debt
securities. Where futures contracts are purchased to hedge against an increase
in the price of long-term securities, but the long-term market declines and the
Fund does not invest in long-term securities, the Fund would realize a loss on
the futures contracts, which would not be offset by a reduction in the price of
the securities purchased. Where futures contracts are sold to hedge against a
decline in the value of long-term securities in the Fund's portfolio, but the
long-term market advances, the Fund would lose part or all of the benefit of the
advance due to offsetting losses in its futures positions. Options on futures
contracts and index options involve risks similar to those risks relating to
transactions in financial futures contracts, described above. The use of futures
contracts and related options may be expected to result in taxable income to the
Fund and its shareholders.


      Options on Debt Securities. In connection with its hedging activities, the
Fund may purchase and sell put and call options on debt securities on national
securities exchanges. The Fund proposes to purchase put options as a defensive
measure to minimize the impact of market price declines on the value of certain
of the securities in the Fund's portfolio. The Fund may write listed call
options only if the calls are "covered" throughout the life of the option. A
call is "covered" if the Fund owns the optioned securities or maintains in a
segregated account with the Fund's custodian cash, cash equivalents, U.S.
government securities or debt securities of any grade (provided such assets are
liquid, unencumbered and marked to market daily) with a value sufficient to meet
its obligations under the call. When the Fund writes a call, it receives a
premium and gives the purchaser the right to buy the underlying security at any
time during the call period (usually not more than fifteen months) at a fixed
exercise price regardless of market price changes during the call period. If the
call is exercised, the Fund would forego any gain from an increase in the market
price of the underlying security over the exercise price. The Fund may purchase
a call on securities only to effect a "closing purchase transaction," which is
the purchase of a call covering the same underlying security, and having the
same exercise price and expiration date as a call previously written by the Fund
on which it wishes to terminate its obligations.

      The Fund also may write and purchase put options ("puts"). When the Fund
writes a put, it receives a premium and gives the purchaser of the put the right
to sell the underlying security to the Fund at the exercise price at any time
during the 


                                                                              21
<PAGE>

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

option period. When the Fund purchases a put, it pays a premium in return for
the right to sell the underlying security at the exercise price at any time
during the option period. If any put is not exercised or sold, it will become
worthless on its expiration date. The Fund will not purchase puts if more than
10% of its net assets would be invested in premiums on puts.

      The Fund may write puts only if the puts are "secured." A put is "secured"
if the Fund maintains cash, cash equivalents, U.S. government securities or debt
securities of any grade (provided such assets are liquid, unencumbered and
marked to market daily) with a value equal to the exercise price in a segregated
account or holds a put on the same underlying security at an equal or greater
exercise price. The aggregate value of the obligations underlying puts written
by the Fund will not exceed 50% of its net assets. The Fund also may write
"straddles," which are combinations of secured puts and covered calls on the
same underlying security.

      The Fund will realize a gain (or loss) on a closing purchase transaction
with respect to a call or put previously written by the Fund if the premium,
plus commission costs, paid to purchase the call or put is less (or greater)
than the premium, less commission costs, received on the sale of the call or
put. A gain also will be realized if a call or put which the Fund has written
lapses unexercised, because the Fund would retain the premium.

      The Fund's option positions may be closed out only on an exchange which
provides a secondary market for options of the same series, but there can be no
assurance that a liquid secondary market will exist at a given time for any
particular option. In this regard, trading in options on U.S. government
securities is relatively new, so that it is impossible to predict to what extent
liquid markets will develop or continue. The use of options may be expected to
result in taxable income to the Fund.


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



22
<PAGE>

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


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


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


      The Fund'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 Fund's net assets attributable to each Class by the total number of
shares of that 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 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 investments that mature in 60 days
or less are valued at amortized cost whenever the Board of Directors determines
that amortized cost is fair value. Amortized cost valuation involves valuing an
instrument at its cost initially 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. Securities and
other assets that are not priced by a pricing service and for which quotations
are not available will be valued in good faith at fair value by or under the
direction of the Fund's Board of Directors. Further information regarding the
Fund's valuation policies is contained in the SAI.


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


      DIVIDENDS AND DISTRIBUTIONS

      The Fund's policy is to declare and pay exempt-interest dividends monthly.
Dividends from net realized capital gains, if any, will be distributed annually.
The Fund may also pay additional dividends shortly before December 31 from
certain amounts of undistributed ordinary income and capital gains, in order to
avoid a Federal excise tax liability. If a shareholder does not otherwise
instruct, exempt-interest dividends and capital gain distributions will be
reinvested automatically in 



                                                                              23
<PAGE>

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


additional shares of the same Class at net asset value, with no additional sales
charge or CDSC.

      The per share amounts of the exempt-interest dividends on Class B and
Class L shares may be lower than on Class A and Class Y shares, mainly as a
result of the distribution fees applicable to Class B and Class L shares.
Similarly, the per share amounts of exempt-interest dividends on Class A shares
may be lower than on Class Y shares, as a result of the service fee attributable
to Class A shares. Capital gain distributions, if any, will be the same for all
Classes of Fund shares (A, B, L and Y).

      TAXES

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

      The Fund intends to qualify, as it has in prior years, under Subchapter M
of the Internal Revenue Code for tax treatment as a regulated investment
company. In each taxable year that the Fund qualifies, so long as such
qualification is in the best interests of its shareholders, the Fund will pay no
federal income tax on its net investment income and long-term capital gain that
is distributed to shareholders. The Fund also intends to satisfy conditions that
will enable it to pay "exempt-interest dividends" to shareholders.
Exempt-interest dividends are generally not subject to regular federal income
taxes, although they may be considered taxable for certain state and local
income (or intangible) tax purposes. Arizona resident shareholders will not be
subject to Arizona personal income tax on exempt-interest dividends and capital
gain distributions, attributable to municipal obligations of Arizona and its
political subdivisions, as well as certain other Federal obligations considered
exempt for Arizona purposes. Exempt-interest dividends and capital gain
distributions, may not be excluded from the net income tax computation by
corporate shareholders subject to the Arizona Corporation Business Tax.

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



24
<PAGE>

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


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

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

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

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

      A shareholder's gain or loss on the disposition of Fund shares (whether by
redemption, sale or exchange), generally will be a long-term or short-term gain
or loss depending on the length of time the shares had been owned at
disposition. Losses realized by a shareholder on the disposition of Fund shares
owned for six months or less will be treated as a long-term capital loss to the
extent a capital gain dividend had been distributed on such shares. Gains
resulting from the disposition of Fund shares attributable to interest or gain
from municipal obligations of Arizona and its political subdivisions, as well as
certain other Federal obligations are considered exempt from Arizona personal
income tax. Gains on the disposition of Fund shares by corporate shareholders
are included in the net income tax base for purposes of computing the Arizona
Corporation Business Tax.

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


                                                                              25
<PAGE>

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


      SALES CHARGE ALTERNATIVES

      The following Classes of shares are available for purchase through this
Prospectus. See "Prospectus Summary -- Alternative Purchase Arrangements" for a
discussion of factors to consider in selecting which Class of shares to
purchase.

      Class A Shares. Class A shares are sold to investors at the public
offering price, which is the net asset value plus an initial sales charge as
follows:

                            Sales              Sales               Dealers
                         Charge as a %      Charge as a %       Reallowance as
Amount of Investment    of Transaction   of Amount Invested  % of 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 Salomon Smith Barney, which compensates Salomon
      Smith Barney Financial Consultants and other dealers whose clients make
      purchases of $500,000 or more. The CDSC is waived in the same
      circumstances in which the CDSC applicable to Class B and Class L shares
      is waived. See "Deferred Sales Charge Provisions" 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 "1933 Act"). The reduced sales charges shown above apply
to the aggregate of purchases of Class A shares of the Fund 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.

      Class B Shares. Class B shares are sold without an initial sales charge
but are subject to a CDSC payable upon certain redemptions. See "Deferred Sales
Charge Provisions" below.

      Class L Shares. Class L shares are sold with an initial sales charge of 1%
(which is equal to 1.01% of the amount invested) and are subject to a CDSC
payable upon certain redemptions. See "Deferred Sales Charge Provisions" below.
Until June 25, 1999 purchases of Class L shares by investors who were holders of
Class C shares of the Fund on June 12, 1998 will not be subject to the 1%
front-end sales charge.

      Class Y Shares. Class Y shares are sold without an initial sales charge or
CDSC and are available only to investors investing a minimum of $15,000,000
(except purchase of Class Y shares by Smith Barney Concert Allocation Series
Inc., for which there is no minimum purchase amount).

      GENERAL

      Purchases of Fund shares must by made through a brokerage account
maintained



26
<PAGE>

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


with Salomon Smith Barney, an Introducing Broker or an investment dealer in the
selling group. When purchasing shares of the Fund, investors must specify
whether the purchase is for Class A, Class B, Class L or Class Y shares. Salomon
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 the Fund's
transfer agent, First Data Investor Services Group, Inc. ("First Data" or the
"Transfer Agent") are not subject to a maintenance fee.

      Investors in Class A, Class B and Class L shares may open an account in
the Fund by making an initial investment of at least $1,000. Investors in Class
Y shares may open an account by making an initial investment of $15,000,000.
Subsequent investments of at least $50 may be made for all Classes. For
shareholders purchasing shares of the Fund through the Systematic Investment
Plan on a monthly basis, the minimum initial investment requirement for Class A,
Class B and Class L shares and subsequent investment requirement for all Classes
is $25. For shareholders purchasing shares of the Fund through the Systematic
Investment Plan on a quarterly basis, the minimum initial investment required
for Class A, Class B and Class L shares and the subsequent investment
requirement for all Classes is $50. There are no minimum investment requirements
for Class A shares for employees of Travelers and its subsidiaries, including
Salomon Smith Barney, and Directors/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 Transfer Agent. Share certificates are issued only
upon a shareholder's written request to the Transfer Agent. It is not
recommended that the Fund be used as a vehicle for Keogh, IRA or other qualified
retirement plans.

      Purchase orders received by the Fund or Salomon Smith Barney prior to the
close of regular trading on the NYSE, on any day the Fund 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 Fund 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 Salomon Smith Barney prior to
Salomon Smith Barney's close of business. For shares purchased through Salomon
Smith Barney or Introducing Brokers purchasing through Salomon Smith Barney,
payment for Fund 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 



                                                                              27
<PAGE>

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

   
Systematic Investment Plan, Salomon Smith Barney or the Transfer Agent is
authorized through preauthorized transfers of at least $25 on a monthly basis or
at least $50 on a quarterly basis to charge the shareholder's account held with
a bank or other financial institution on a monthly or quarterly basis as
indicated by the shareholder to provide for systematic additions to the
shareholder's Fund account. A shareholder who has insufficient funds to complete
the transfer will be charged a fee of up to $25 by Salomon Smith Barney or the
Transfer Agent. The Systematic Investment Plan also authorizes Salomon Smith
Barney to apply cash held in the shareholder's Salomon 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 Salomon Smith Barney Financial Consultant.
    
      SALES CHARGE WAIVERS AND REDUCTIONS
      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 Travelers Affiliated Funds
including the Smith Barney Mutual Funds (including retired Board Members and
employees); the immediate families of such persons (including the surviving
spouse of a deceased Board Member or employee); and to a pension, profit-sharing
or other benefit plan for such persons and (ii) employees of members of the
National Association of Securities Dealers, Inc., provided such sales are made
upon the assurance of the purchaser that the purchase is made for investment
purposes and that the securities will not be resold except through redemption or
repurchase, (b) offers of Class A shares to any other investment company to
effect the combination of such company with the Fund by merger, acquisition of
assets or otherwise; (c) purchases of Class A shares by any client of a newly
employed Salomon Smith Barney Financial Consultant (for a period up to 90 days
from the commencement of the Financial Consultant's employment with Salomon
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 Fund (or Class A shares of
another Smith Barney Mutual Fund that is offered with a sales charge) and who
wish to reinvest their redemption proceeds in the Fund, 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 Salomon 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.



28
<PAGE>

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


      RIGHT OF ACCUMULATION

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

      GROUP PURCHASES

      Upon completion of certain automated systems, a reduced sales charge or
purchase at net asset value will also be available to employees (and partners)
of the same employer purchasing as a group, provided each participant makes the
minimum initial investment required. The sales charge applicable to purchases by
each member of such a group will be determined by the table set forth above
under "Sales Charge Alternatives -- 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 employee 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. Salomon Smith
Barney may also offer a reduced sales charge or net asset value purchase for
aggregating related fiduciary accounts under such conditions that Salomon 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 Fund 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 Fund shares at a discount and (c) satisfies uniform
criteria which enable Salomon 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
Fund and the members, and must agree to include sales and other materials
related to the Fund in its publications and mailings to members at no cost to
Salomon Smith Barney. In order to obtain such reduced sales 



                                                                              29
<PAGE>

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


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 Salomon Smith Barney.

      LETTER OF INTENT

      Class A Shares. A Letter of Intent for an amount 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 (i) all Class A shares of the Fund and other Smith Barney Mutual Funds
offered with a sales charge acquired during the term of the Letter plus (ii) the
value of all Class A shares previously purchased and still owned. 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. The term of the Letter
will commence upon the date the Letter is signed, or at the option of the
investor, up to 90 days before such date. Please contact a Salomon Smith Barney
Financial Consultant or the Transfer Agent 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 (except purchases
of Class Y shares by Smith Barney Concert Allocation Series Inc., for which
there is no minimum purchase amount). Such investors must make an initial
minimum purchase of $5,000,000 in Class Y shares of the Fund and agree to
purchase a total of $15,000,000 of Class Y shares of the Fund within 13 months
from the date of the Letter. If a total investment of $15,000,000 is not made
within the 13 month period, all Class Y shares purchased to date will be
transferred to Class A shares, where they will be subject to all fees (including
a service fee of 0.15%) and expenses applicable to the Fund's Class A shares,
which may include a CDSC of 1.00%. Please contact a Salomon Smith Barney
Financial Consultant or the Transfer Agent for further information.

      DEFERRED SALES CHARGE PROVISIONS

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

      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 Fund 



30
<PAGE>

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


assets; (b) reinvestment of dividends or capital gain distributions; (c) with
respect to Class B shares, shares redeemed more than five years after their
purchase; or (d) with respect to Class L shares and Class A shares that are CDSC
Shares, shares redeemed more than 12 months after their purchase.

      Class A shares and Class L 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
Salomon 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."

      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 Fund 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 Salomon 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, 



                                                                              31
<PAGE>

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


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 Fund
with any investment company by merger, acquisition of assets or otherwise. In
addition, a shareholder who has redeemed shares from other 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 Salomon Smith
Barney in the case of shareholders who are also Salomon Smith Barney clients or
by the Transfer Agent 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 at
the net asset value next determined for shares of the same Class in the
following Smith Barney Mutual Funds, to the extent shares are offered for sale
in the shareholder's state of residence. Exchanges of Class A, Class B and Class
L shares are subject to minimum investment requirements and all shares are
subject to the other requirements of the fund into which exchanges are made.


   FUND NAME

   
   Growth Funds
     Concert Peachtree Growth Fund
     Concert Social Awareness Fund
     Smith Barney Aggressive Growth Fund Inc.
     Smith Barney Appreciation Fund Inc.
     Smith Barney Balanced Fund
    


32
<PAGE>

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

   
     Smith Barney Contrarian Fund
     Smith Barney Convertible Fund
     Smith Barney Fundamental Value Fund Inc.
     Smith Barney Funds, Inc. -- Large Cap Value Fund
     Smith Barney Large Cap Blend Fund
     Smith Barney Large Capitalization Growth Fund
     Smith Barney Mid Cap Blend Fund
     Smith Barney Natural Resources Fund Inc.
     Smith Barney Premium Total Return Fund
     Smith Barney Small Cap Blend Fund, Inc.
     Smith Barney Special Equities Fund
    
   Taxable Fixed-Income Funds
  ** Smith Barney Adjustable Rate Government Income Fund
     Smith Barney Diversified Strategic Income Fund
  ++ Smith Barney Funds, Inc. -- Short-Term High Grade Bond Fund
     Smith Barney Funds, Inc. -- U.S. Government Securities Fund
     Smith Barney Government Securities Fund
     Smith Barney High Income Fund
     Smith Barney Investment Grade Bond Fund
     Smith Barney Managed Governments Fund Inc.
     Smith Barney Total Return Bond Fund

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

   Global-International Funds
     Smith Barney Hansberger Global Small Cap Value Fund
     Smith Barney Hansberger Global Value Fund
     Smith Barney World Funds, Inc. -- Emerging Markets Portfolio



                                                                              33
<PAGE>

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

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


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


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

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

  * Available for exchange with Class A, Class L and Class Y shares of the Fund.
 ** Available for exchange with Class A and Class B shares of the Fund.
*** Available for exchange with Class A shares of the Fund.
  + Available for exchange with Class B and Class L shares of the Fund.
 ++ Available for exchange with Class A and Class Y shares of the Fund.


      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 Fund, 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 Fund
that have been exchanged.


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


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


34
<PAGE>

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


detrimental to the Fund's performance and its shareholders. The Adviser may
determine that a pattern of frequent exchanges is excessive and contrary to the
best interests of the Fund's other shareholders. In this event, the Fund may, at
its discretion, decide to limit additional purchases and/or exchanges by a
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 Fund or (b) remain invested in the Fund
or exchange into any 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 Fund 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 Fund 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 Salomon Smith Barney, or if the
shareholder's account is not with Salomon 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 Investment Company Act of 1940, as
amended (the "1940 Act") in extraordinary circumstances. Generally, if the
redemption proceeds are remitted 



                                                                              35
<PAGE>

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


to a Salomon Smith Barney brokerage account, these funds will not be invested
for the shareholder's benefit without specific instruction and Salomon 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 Salomon Smith Barney as custodian must be redeemed by
submitting a written request to a Salomon Smith Barney Financial Consultant.
Shares other than those held by Salomon 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 Arizona Municipals Fund Inc. 
            Class A, B, L or Y (please specify) 
            c/o First Data Investor Services Group, Inc.
            P.O. Box 5128
            Westborough, Massachusetts 01581-5128

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


      AUTOMATIC CASH WITHDRAWAL PLAN

      The Fund 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 Fund. 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


36
<PAGE>

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


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 Salomon Smith Barney Financial Consultant or
their financial consultant, Introducing Broker or dealer in the selling group.


      TELEPHONE REDEMPTION AND EXCHANGE PROGRAM


      Shareholders who do not have a Salomon 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 guarantee that will be provided by First Data upon request.
(Alternatively, an investor may authorize telephone redemption on the new
account application with the applicant's signature guarantee when making his/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
at 1-800-451-2010. Such requests may be made between 9:00 a.m. and 4:00 p.m.
(Eastern 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/her address of record or wired to a bank account predesignated by
the shareholder. Generally, redemption proceeds will be mailed or wired, as the
case may be, on the next business day following the redemption request. In order
to use the wire procedures, the bank receiving the proceeds must be a member of
the Federal Reserve System or have a correspondent relationship with a member
bank. The Fund reserves the right to charge shareholders a nominal fee for each
wire redemption. Such charges, if any, will be assessed against the
shareholder's account from which shares were redeemed. In order to change the
bank account designated to receive redemption proceeds, a shareholder must
complete a new Telephone/Wire Authorization Form and, for the protection of the
shareholder's assets, will be required to provide a signature guarantee and
certain other documentation.


      Exchanges. Eligible shareholders may make exchanges by telephone if the
account registration of the shares of the fund being acquired is identical to
the registration of the shares of the fund exchanged. Such exchange requests may
be made by calling First Data at 1-800-451-2010 between 9:00 a.m. and 4:00 p.m.
(Eastern time) on any day on which the NYSE is open. Exchange requests received



                                                                              37
<PAGE>

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

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 (7) days' prior notice to shareholders.

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

      The Fund reserves the right to involuntarily liquidate any shareholder's
account in the Fund if the aggregate net asset value of the shares held in the
Fund account is less than $500. (If a shareholder has more than one account in
the Fund, 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 accounts up to the minimum to
avoid involuntary liquidation.

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

      YIELD

      From time to time, the Fund may advertise its 30-day "yield" and
"equivalent taxable yield" for each Class of shares. The yield refers to the
income generated by an investment in those shares over the 30-day period
identified in the advertisement and is computed by dividing the net investment
income per share earned by the Class during the period by the maximum public
offering price per share on the last day of the period. This income is
"annualized" by assuming that the amount of income is generated each month over
a one-year period and is compounded semi-annually. The annualized income is then
shown as a percentage of the net asset value.

      The equivalent taxable yield demonstrates the yield on a taxable
investment necessary to produce an after-tax yield equal to the Fund's
tax-exempt yield for each Class. It is calculated by increasing the yield shown
for the Class to the extent necessary to reflect the payment of taxes at
specified tax rates. Thus, the equivalent taxable yield always will exceed the
Fund's yield.


38
<PAGE>

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

      TOTAL RETURN

      From time to time, the Fund may include its total return, average annual
total return and current dividend return in advertisements and/or other types of
sales literature. These figures are computed separately for Class A, Class B,
Class L and Class Y shares of the Fund. These figures are based on historical
earnings and are not intended to indicate future performance. 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 by
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 calculates current dividend return for each Class by
annualizing the most recent monthly distribution and dividing by the net asset
value or the maximum public offering price (including sales charge) on the last
day of the period for which current dividend return is presented. The current
dividend return for each Class may vary from time to time depending on market
conditions, the composition of its investment portfolio and operating expenses.
These factors and possible differences in the methods used in calculating
current dividend return should be considered when comparing a Class' current
return to yields published for other investment companies and other investment
vehicles. 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. or similar independent services that
monitor the performance of mutual funds or other industry publications.

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

      BOARD OF DIRECTORS

      Overall responsibility for management and supervision of the Fund rests
with the Fund's Board of Directors. The Directors approve all significant
agreements between the Fund and the companies that furnish services to the Fund,
including agreements with its distributor, investment adviser and administrator,
custodian and transfer agent. The day-to-day operations of the Fund are
delegated by the Board to the Fund's investment adviser and administrator. The
SAI contains background information regarding each Director and executive
officer of the Fund.


                                                                              39
<PAGE>

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


      INVESTMENT ADVISER AND ADMINISTRATOR

      The Fund's investment adviser, MMC, is a registered investment adviser
whose principal executive offices are located at 388 Greenwich Street, New York,
New York 10013. MMC was incorporated in March, 1968 under the laws of Delaware
and renders investment advice to a wide variety of individual, institutional and
investment company clients that had aggregate assets under management as of
August 31, 1998 in excess of $106 billion.

      Subject to the supervision and direction of the Fund's Board of Directors,
the Adviser manages the Fund's portfolio in accordance with the Fund's stated
investment objective and policies, makes investment decisions for the Fund,
places orders to purchase and sell securities and employs professional portfolio
managers and securities analysts who provide research services to the Fund. For
investment advisory services rendered, the Fund pays the Adviser an investment
advisory fee at the annual rate of 0.30% of the Fund's average daily net assets.
This fee is computed daily and paid monthly. For the fiscal year ended May 31,
1998, the Adviser was paid investment advisory fees equal to 0.30% of the value
of the average daily net assets of the Fund.

      MMC serves as the Fund's administrator and oversees all aspects of the
Fund's administration. For administration services rendered, the Fund pays MMC a
fee at the following annual rates of average daily net assets: 0.20% to $500
million and 0.18% in excess of $500 million. This fee is computed daily and paid
monthly. For the fiscal year ended May 31, 1998, MMC was paid administration
fees equal to 0.20% of the value of the average daily net assets of the Fund.

      PORTFOLIO MANAGEMENT

      Lawrence T. McDermott, an Investment Officer of MMC and a Managing
Director of Salomon Smith Barney, has served as Vice President and Investment
Officer of the Fund since October 1988 and manages the day-to-day operations of
the Fund, including making all investment decisions.

      Management's discussion and analysis and additional performance
information regarding the Fund during the fiscal year ended May 31, 1998 is
included in the Annual Report dated May 31, 1998. A copy of the Annual Report
may be obtained upon request and without charge from a Salomon Smith Barney
Financial Consultant or by writing or calling the Fund at the address or phone
number listed on page one of this prospectus.
   
     On April 6, 1998, Travelers announced that it had entered into a Merger 
Agreement with Citicorp.  The transaction was approved by the 
stockholders of both Travelers and Citicorp on June 22, 1998 and by the 
Federal Reserve Board on September 23, 1998.  The companies expect the 
merger to close on or about October 8, 1998, creating a new entity 
called Citigroup. By approving the merger, the Federal Reserve 
    



40
<PAGE>

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

Board approved Travelers, as the surviving entity, becoming a bank 
holding company subject to regulation under the Bank Holding Company 
Act of 1956 (the "BHCA"), the requirements of the Glass-Steagall Act 
and certain other laws and regulations.  MMC does not believe that its 
compliance with the applicable law will have a material adverse effect 
on its ability to continue to provide the Fund with the same level of 
investment advisory services that it currently receives.


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


      Salomon Smith Barney is located at 388 Greenwich Street, New York, New
York 10013. Salomon Smith Barney distributes shares of the Fund as principal
underwriter and as such conducts a continuous offering pursuant to a "best
efforts" arrangement requiring Salomon 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 Fund under Rule 12b-1 under the 1940 Act (the "Plan"), Salomon
Smith Barney is paid a service fee with respect to Class A, Class B and Class L
shares of the Fund at the annual rate of 0.15% of the value of the average daily
net assets of the respective Class. Salomon Smith Barney is also paid an annual
distribution fee with respect to Class B and Class L shares at the annual rate
of 0.50% and 0.55%, respectively, of the average daily net assets attributable
to those Classes. Class B shares which 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 Salomon Smith Barney to pay its Financial
Consultants for servicing shareholder accounts and, in the case of Class B and
Class L shares, to cover expenses primarily intended to result in the sale of
those shares. These expenses include: advertising expenses; the cost of printing
and mailing prospectuses to potential investors; payments to and expenses of
Salomon 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 Salomon Smith Barney in connection
with the sale of Fund shares, including lease, utility, communications and sales
promotion expenses.

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

      Payments under the Plan are not tied exclusively to the distribution and
shareholder services expenses actually incurred by Salomon Smith Barney and the



                                                                              41
<PAGE>

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


payments may exceed distribution expenses actually incurred. The Fund's Board of
Directors 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 Salomon Smith Barney, amounts received under the Plan and
proceeds of the CDSC.

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


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

      The Fund was incorporated under the laws of the State of Maryland on May
4, 1987 and is registered with the SEC as a diversified, open-end management
investment company.

      Each Class of the Fund represents an identical interest in the Fund's
investment portfolio. As a result, the Classes have the same rights, privileges
and preferences, except with respect to: (a) the designation of each Class; (b)
the effect of the respective sales charges, if any, for each Class; (c) the
distribution and/or service fees borne by each Class; (d) the expenses allocable
exclusively to each Class; (e) voting rights on matters exclusively affecting a
single Class; (f) the exchange privilege of each Class; and (g) the conversion
feature of the Class B shares. The Board of Directors does not anticipate that
there will be any conflicts among the interests of the holders of the different
Classes. The Directors, on an ongoing basis, will consider whether any such
conflict exists and, if so, take appropriate action.

      The Fund does not hold annual shareholder meetings. There normally will be
no meeting of shareholders for the purpose of electing Directors unless and
until such time as less than a majority of the Directors holding office have
been elected by shareholders. The Directors will call a meeting for any purpose
upon written request of shareholders holding at least 10% of the Fund's
outstanding shares and the Fund will assist shareholders in calling such a
meeting as required by the 1940 Act. When matters are submitted for shareholder
vote, shareholders of each Class will have one vote for each full share owned
and a proportionate, fractional vote for any fractional share held of that
Class. Generally, shares of the Fund vote on a Fund-wide basis on all matters
except matters affecting only the interests of one Class.

      PNC Bank, National Association, is located at 17th and Chestnut Streets,


                                                                              42
<PAGE>

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

Philadelphia, Pennsylvania 19103, and serves as custodian of the Fund's
investments.


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

      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 Fund at the end of the reporting period. 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 Financial
Consultants or the Fund's Transfer Agent.


                                                                              43
<PAGE>

                                                            SALOMON SMITH BARNEY
                                              ----------------------------------
                                              A Memember of TravelersGroup[LOGO]


                                                                    Smith Barney
                                                                         Arizona
                                                                      Municipals
                                                                       Fund Inc.


                                                            388 Greenwich Street
                                                        New York, New York 10013
                                                                  (800) 451-2010


                                                                     FD0238 9/98