<DOCUMENT>
<TYPE>N-2
<SEQUENCE>1
<FILENAME>dn2.txt
<DESCRIPTION>FORM N-2
<TEXT>
<PAGE>




    As filed with the Securities and Exchange Commission on January 16, 2002
                                                      1933 Act File No. 333-
                                                      1940 Act File No. 811-6629
================================================================================

                     U.S. SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                                    FORM N-2

                            (CHECK APPROPRIATE BOXES)

           [x] REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933

                         [ ] PRE-EFFECTIVE AMENDMENT NO.

                        [ ] POST-EFFECTIVE AMENDMENT NO.

                                     and/or

       [x] REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940

                             [x] AMENDMENT NO. 12
<TABLE>

                        MANAGED MUNICIPALS PORTFOLIO INC.
--------------------------------------------------------------------------------
                Exact Name of Registrant as Specified in Charter
<S>           <C>          <C>

                                125 Broad Street
                            New York, New York 10004
--------------------------------------------------------------------------------
Address of Principal Executive Offices (Number, Street, City, State and Zip Code)

                                (212) 291-3776
--------------------------------------------------------------------------------
               Registrant's Telephone Number, including Area Code

                          Christina T. Sydor, Secretary
                                666 Fifth Avenue
                            New York, New York 10103
--------------------------------------------------------------------------------
Name and Address (Number, Street, City, State and Zip code) of Agent for Service
</TABLE>

                          COPIES OF COMMUNICATIONS TO:
<TABLE>
<CAPTION>
<S>                                  <C>                            <C>
 Burton M. Leibert, Esq.          Lewis G. Cole, Esq.              Sarah E. Cogan, Esq.
 Willkie Farr & Gallagher    Stroock & Stroock & Lavan LLP     Simpson Thacher & Bartlett
    787 Seventh Avenue              180 Maiden Lane              425 Lexington Avenue
 New York, New York 10019       New York, New York 10038        New York, New York 10017
</TABLE>


APPROXIMATE DATE OF PROPOSED PUBLIC OFFERING: As soon as practicable after the
effective date of this Registration Statement.

If any of the securities being registered on this Form will be offered on a
delayed or continuous basis in reliance on Rule 415 under the Securities Act of
1933, other than securities offered in connection with a dividend reinvestment
plan, check the following box. [ ]

        CALCULATION OF REGISTRATION FEE UNDER THE SECURITIES ACT OF 1933

<TABLE>
<CAPTION>
                                                                   PROPOSED          PROPOSED
                                                     AMOUNT        MAXIMUM            MAXIMUM
                                                      BEING     OFFERING PRICE       AGGREGATE          AMOUNT OF
TITLE OF SECURITIES BEING REGISTERED               REGISTERED    PER UNIT/(1)/    OFFERING PRICE   REGISTRATION FEE/(2)/
<S>                                                <C>          <C>              <C>               <C>
Municipal Auction Rate Cumulative
Preferred Stock, par value $.001 per share            400           $25,000         $10,000,000           $2,390
</TABLE>

(1) As calculated pursuant to Rule 457 (c) under the Securities Act of 1933, as
    amended.

(2) $2,390 was wired to the Securities and Exchange Commission's account at
    Mellon Bank, Pittsburgh, Pennsylvania in payment of the required
    registration fee due in connection with this Registration Statement.

     THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATES AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.

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

<PAGE>


                        MANAGED MUNICIPALS PORTFOLIO INC.
                                    Form N-2

                              Cross-Reference Sheet

                               Part A - Prospectus
<TABLE>
<CAPTION>
<S>                                                            <C>

Items in part A of Form N-2                                    Location in Prospectus
---------------------------                                    ----------------------
1.  Outside Front Cover ....................................   Front Cover Page
2.  Cover Pages; Other Offering Information ................   Front Cover Page; Outside Back Cover Page
3.  Fee Table and Synopsis .................................   Prospectus Summary
4.  Financial Highlights ...................................   Financial Highlights
5.  Plan of Distribution ...................................   Front Cover Page; Prospectus Summary; Underwriting
6.  Selling Shareholders ...................................   Not Applicable
7.  Use of Proceeds ........................................   Use of Proceeds
8.  General Description of the Registrant ..................   Front Cover Page; Prospectus Summary; The Fund; The
                                                               Fund's Investments; Risk Factors; How the Fund
                                                               Manages Risk; Description of Preferred Shares;
                                                               Description of Common Stock
9.  Management .............................................   Prospectus Summary; The Fund; Financial Highlights;
                                                               The Fund's Investments; How the Fund Manages Risk;
                                                               Management of the Fund; Custodian, Transfer Agent,
                                                               Dividend Paying Agent and Registration Agent
10.  Capital Stock, Long-Term Debt, and Other
     Securities ............................................   Prospectus Summary; Capitalization; The Fund's
                                                               Investments; Risk Factors; Description of Preferred
                                                               Shares; Description of Common Stock; Repurchase of
                                                               Common Stock; Conversion to Open-End Fund; Tax Matters

11.  Defaults and Arrears on Senior Securities .............   Not Applicable
12.  Legal Proceedings .....................................   Not Applicable
13.  Table of Contents of the Statement of Additional
     Information ...........................................   Table of Contents of the Statement of Additional
                                                               Information

                  Part B - Statement of Additional Information

14.  Cover Page ............................................   Front Cover Page
15.  Table of Contents .....................................   Front Cover Page
16.  General Information and History .......................   General Information
17.  Investment Objective and Policies .....................   The Fund's Investments; Investment Restrictions
18.  Management ............................................   Investment Manager; Management of the Fund
19.  Control Persons and Principal Holders of Securities ...   Principal Stockholders
20.  Investment Advisory and Other Services ................   Investment Manager; Experts; Custodian, Transfer
                                                               Agent, Dividend Paying Agent and Registration Agent;
                                                               Principal Stockholders
</TABLE>

<PAGE>

<TABLE>

<S>                                                         <C>

21.  Brokerage Allocation and Other Practices .............   Investment Manager
22.  Tax Status ...........................................   Tax Matters
23.  Financial Statements .................................   Experts
</TABLE>

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

                                       -2-

<PAGE>

PROSPECTUS                         SUBJECT TO COMPLETION, DATED JANUARY 16, 2002

The information in this Prospectus is not complete and may be changed. We may
not sell these securities until the registration statement filed with the
Securities and Exchange Commission is effective. This Prospectus is not an offer
to sell these securities and it is not soliciting an offer to buy these
securities in any state where the offer or sale is not permitted.


                                 $______________

                        MANAGED MUNICIPALS PORTFOLIO INC.

                MUNICIPAL AUCTION RATE CUMULATIVE PREFERRED STOCK

                   ("PREFERRED SHARES") Series _ and Series _

                              ______________ SHARES

                    LIQUIDATION PREFERENCE $25,000 PER SHARE

                             ______________________


         Managed Municipals Portfolio Inc., or the Fund, is selling ________
shares of Series ______ and  _____ shares of Series _____ Municipal Auction
Rate Cumulative Preferred Stock. The Fund is a non-diversified, closed-end
management investment company. The Fund's investment objective is to seek as
high a level of current income exempt from federal income tax as is consistent
with the preservation of capital. The Fund invests primarily in long-term
investment grade municipal debt securities issued by state and local
governments, political subdivisions, agencies and public authorities (municipal
obligations). Under normal market conditions, the Fund will invest at least 80%
of its total assets in municipal obligations rated investment grade at the time
of investment. Investment grade debt securities are those rated in one of the
four highest rating categories by a nationally recognized statistical rating
organization. There is no assurance that the Fund will achieve its investment
objective.

         Investors in Preferred Shares will be entitled to receive cash
dividends at an annual rate that may vary for the successive dividend periods
for such Preferred Shares. The dividend rate on Preferred Shares for the period
from and including the date of issue to but excluding      , 2002 will be  % per
year for Series _____ and __% per year for Series ____. For each subsequent
period, the Auction Agent will determine the dividend rate for a particular
period by an auction conducted on the business day prior to that period. The
auction is usually held weekly. Investors in Preferred Shares may participate in
auctions through their broker-dealers in accordance with the procedures
specified in this Prospectus and in the Statement of Additional Information. The
Fund may redeem Preferred Shares as described under "Description of Preferred
Shares -- Redemption."

         Preferred Shares are not listed on an exchange. You may only buy or
sell Preferred Shares through an order placed at an auction with or through a
broker-dealer that has entered into an agreement with the Auction Agent and the
Fund, or in a secondary market maintained by certain broker-dealers. These
broker-dealers are not required to maintain this market, and it may not provide
you with liquidity.

         Preferred Shares will be senior to shares of the Fund's outstanding
Common Stock, par value $.001 per share. The Fund's Common Stock is traded on
the New York Stock Exchange under the symbol "MMU." It is a condition of the
closing of this offering that Preferred Shares be offered with a rating of "AAA"
from Fitch, Inc. and "Aaa" from Moody's Investors Services, Inc.

         This Prospectus sets forth concisely the information you should know
before investing, including information about risks. You should read this
Prospectus before you invest and keep it for future reference. The Fund's
Statement of Additional Information, dated        , 2002, contains additional
information about the Fund and is incorporated by reference into (which means it
is considered to be a part of) this Prospectus. You may obtain a free copy of
the Statement of Additional Information by calling the Fund at 1-800-331-1710,
or by writing to the Fund at 125 Broad Street, New York, New York 10004. A
table of contents to the Statement of Additional Information is located at
page   of this Prospectus. The Statement of Additional Information is also
available, along with other Fund-related materials, on the Securities and
Exchange Commission's internet web site (http://www.sec.gov2).
                                         ------------------

         Investing in Preferred Shares involves certain risks. See "Risk
Factors" beginning on page __.

         Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if this
prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.

--------------------------------------------------------------------------------
                                             Per Share              Total
                                      ----------------------  ------------------
Public Offering Price                       $25,000               $
Sales Load                                  $250                  $
Proceeds to Fund(1) (before expenses)       $                     $
--------------------------------------------------------------------------------

(1)  Not including offering expenses payable by the Fund estimated to be
     $_________. The Fund and Smith Barney Fund Management LLC have agreed to
     indemnify the underwriter against certain liabilities, including
     liabilities under the Securities Act of 1933, as amended, and the
     Investment Company Act of 1940, as amended.

         The underwriter is offering Preferred Shares subject to certain
conditions. The underwriter expects to deliver Preferred Shares to purchasers,
in book-entry form through the Depository Trust and Clearing Corporation, on or
about       , 2002.
                             ______________________

                              SALOMON SMITH BARNEY

<PAGE>

         You should rely only on the information contained in or incorporated by
reference into this Prospectus. Neither the Fund nor the Underwriter has
authorized anyone to provide you with different information. If anyone provides
you with different information, you should not rely on it. Neither the Fund nor
the Underwriter is making an offer to sell these securities in any jurisdiction
where the offer or sale is not permitted. You should not assume that the
information contained in this Prospectus is accurate as of any date other than
the date on the front of this Prospectus. The Fund's business, financial
conditions, results of operations and prospects may have changed since that
date.

                                TABLE OF CONTENTS

                                                                            Page

PROSPECTUS SUMMARY ........................................................... 3
FINANCIAL HIGHLIGHTS ......................................................... 7
THE FUND .................................................................... 10
USE OF PROCEEDS ............................................................. 10
CAPITALIZATION .............................................................. 11
THE FUND'S INVESTMENTS ...................................................... 13
RISK FACTORS ................................................................ 17
HOW THE FUND MANAGES RISK ................................................... 21
MANAGEMENT OF THE FUND ...................................................... 21
DESCRIPTION OF PREFERRED SHARES ............................................. 22
THE AUCTION ................................................................. 29
DESCRIPTION OF COMMON STOCK ................................................. 32
CERTAIN PROVISIONS IN THE CHARTER AND BYLAWS ................................ 32
REPURCHASE OF COMMON STOCK; CONVERSION TO OPEN-END FUND ..................... 33
TAX MATTERS ................................................................. 33
CUSTODIAN, TRANSFER AGENT, DIVIDEND PAYING AGENT AND REGISTRAR .............. 34
UNDERWRITING ................................................................ 34
LEGAL OPINIONS .............................................................. 35
AVAILABLE INFORMATION ....................................................... 35
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS ........................... 35




                                       -2-

<PAGE>

                               PROSPECTUS SUMMARY

         The following summary is qualified in its entirety by reference to the
more detailed information included elsewhere in this Prospectus, the Statement
of Additional Information and the Fund's Articles Supplementary Establishing and
Creating the Rights and Preferences of Shares of Municipal Auction Rate
Cumulative Preferred Stock (the "Articles Supplementary"). Cross references in
this summary are to headings in the body of this Prospectus or the Statement of
Additional Information. Capitalized terms used but not defined in this
Prospectus shall have the meanings given to such terms in the Articles
Supplementary.

The Fund .................  Managed Municipals Portfolio Inc. (the "Fund") is a
                            non-diversified, closed-end management investment
                            company. The Fund's principal office is located at
                            125 Broad Street, New York, New York 10004 and its
                            telephone number is 1-800-331-1710. See "The Fund."
                            The Fund's outstanding shares of common stock, par
                            value $.001 per share (the "Common Stock"), are
                            listed on the New York Stock Exchange under the
                            symbol "MMU." See "Description of Common Stock." As
                            of ___________ __, 2002, the Fund had ____________
                            shares of Common Stock outstanding and net assets of
                            $_______________.

Investment Objective and    The Fund's investment objective is to seek as high a
Investment Strategies ....  level of current income exempt from federal income
                            tax as is consistent with the preservation of
                            principal. This income, if any, will be distributed
                            to common shareholders after the satisfaction of the
                            obligation to pay dividends on Preferred Shares. The
                            Fund seeks to achieve its objective by investing
                            primarily in investment grade municipal debt
                            securities issued by state and local governments,
                            political subdivisions, agencies and public
                            authorities (municipal obligations).

                            Under normal market conditions, the Fund will invest
                            at least 80% of its total assets in municipal
                            obligations rated investment grade at the time of
                            investment. Investment grade debt securities are
                            those rated in one of the four highest rating
                            categories by a nationally recognized statistical
                            rating organization ("NRSRO"). There is no assurance
                            that the Fund will achieve its investment objective.
                            See "The Fund's Investments."

                            The Fund's investments are subject to
                            diversification, liquidity and related guidelines
                            established in connection with the Fund's receipt
                            from Moody's Investors Service, Inc. ("Moody's") and
                            Fitch IBCA, Inc. ("Fitch") of ratings of "Aaa" and
                            "AAA", respectively, for Preferred Shares.

                            Ratings issued by nationally recognized statistical
                            rating agencies ("NRSROs"), including Fitch and
                            Moody's, do not eliminate or mitigate the risk of
                            investing in the Fund's securities.

Investment Manager .......  Smith Barney Fund Management LLC (formerly known as
                            SSB Citi Fund Management LLC) ("Smith Barney" or the
                            "Manager") serves as the Fund's investment manager.
                            Smith Barney is a wholly-owned subsidiary of
                            Citigroup Inc Smith Barney also serves as the Fund's
                            administrator. Smith Barney selects and manages the
                            Fund's investments in accordance with the Fund's
                            investment objective and policies. The Fund pays
                            Smith Barney for the services it provides to the
                            Fund a fee computed daily and paid monthly at the
                            annual rate of 0.70% of the value of the Fund's
                            average daily total net assets. In addition, Smith
                            Barney serves as the Fund's administrator and is
                            paid a fee by the Fund that is computed daily and
                            paid monthly at an annual rate of 0.20% of the value
                            of the Fund's average daily total net assets. See
                            "Management of the Fund" and "Underwriting."

The Offering ............   The Fund is offering _________ shares of Series____
                            and _____ shares of Series _____ of Municipal
                            Auction Rate Cumulative Preferred Stock at a
                            purchase price of $25,000 per share plus dividends,
                            if any, that have accumulated from the date the Fund
                            first issues the shares. Preferred Shares are being
                            offered by Salomon Smith Barney Inc. as the
                            underwriter. Salomon Smith Barney is an affiliate of
                            the Manager and a wholly owned subsidiary of
                            Citigroup Inc. See "Underwriting."


                                       -3-

<PAGE>



Risk Factors Summary.....   Risk is inherent in all investing. Therefore, before
                            investing in Preferred Shares, you should consider
                            carefully certain risks. The primary risks of
                            investing in Preferred Shares are:

                            -   if an auction fails you may not be able to
                                sell some or all of your shares;

                            -   because of the nature of the market for
                                Preferred Shares, you may receive less than
                                the price you paid for your shares if you
                                sell them outside of the auction, especially
                                when market interest rates are rising;

                            -   a rating agency could downgrade the rating
                                assigned to Preferred Shares, which could
                                affect liquidity;

                            -   the Fund may be forced to redeem your shares
                                to meet regulatory or rating agency
                                requirements or may voluntarily redeem your
                                shares in certain circumstances;

                            -   in extraordinary circumstances, the Fund may
                                not earn sufficient income from its
                                investments to pay dividends on Preferred
                                Shares;

                            -   if the Fund redeems your Preferred Shares,
                                you may not be able to find as good a yield
                                on an investment with similar terms and
                                quality;

                            -   if long-term interest rates rise, or if the
                                value of the Fund's investment portfolio
                                declines for other reasons, the asset
                                coverage for Preferred Shares will be
                                reduced; and

                            -   if an issuer of a municipal bond in which the
                                Fund invests is downgraded or defaults, there
                                may be a negative impact on the income and/or
                                net asset value of the Fund's portfolio.

                            For additional general risks of investing in the
                            Fund and Preferred Shares, see "Risk Factors" below.

Trading Market...........   Preferred Shares are not listed on an exchange.
                            Instead, you may buy or sell Preferred Shares at an
                            auction that normally is held weekly by submitting
                            orders to a broker-dealer that has entered into an
                            agreement with the Auction Agent and the Fund (a
                            "Broker-Dealer"), or to a broker-dealer that has
                            entered into a separate agreement with a
                            Broker-Dealer.

                            In addition to the auctions, Broker-Dealers and
                            other broker-dealers may maintain a secondary
                            trading market in Preferred Shares outside of
                            auctions, but may discontinue this market at any
                            time. There is no assurance that a secondary market
                            will provide shareholders with liquidity. You may
                            transfer shares outside of auctions only to or
                            through a Broker-Dealer, or a broker-dealer that has
                            entered into a separate agreement with a
                            Broker-Dealer.

                            The first auction date for Preferred Shares will be
                            _________ __, 2002, the business day before the
                            dividend payment date for the initial rate period
                            for Preferred Shares. The auction date for the
                            Series ___ Preferred Shares will be a business day,
                            normally a _______, and the auction date for
                            Series ___ will be a business day, normally a ____.
                            The start date for subsequent rate periods
                            normally will be the following business day,
                            typically a ______ for Series _____  and a_____ for
                            Series _____, unless the then-current rate period is
                            a special rate period, or the day that normally
                            would be the auction date. The first day of the
                            subsequent rate period is not a business day

Dividends and Rate Periods..The dividend rate for the initial rate period of
                            Preferred Shares offered in this Prospectus is __%
                            per annum for Series _____ and _____% per annum for
                            Series _____. For subsequent rate periods, Series
                            _____ Preferred Shares will pay dividends based on a
                            rate set at auction, normally held weekly. In most
                            instances dividends are also paid weekly, on the day
                            following the end of the rate period. The rate set
                            at auction will not exceed the Maximum Rate. See
                            "Description of Preferred Shares -- Dividends and
                            Dividend Periods --

                                      -4-

<PAGE>

                            General."

                            The date from which dividends on Preferred Shares
                            will accumulate at the initial rate is ______
                            for Series _____ and _____ for Series_____. The
                            dividend payment date for the initial rate period
                            and the day on which dividends will normally be paid
                            is _________ for Series _____ and _____ for Series
                            _____. If the day on which dividends are payable is
                            not a business day, then your dividends will be paid
                            on the first business day that falls after that day.

                            The number of days of the initial rate period for
                            Preferred Shares is __ days for Series ____and ____
                            days for Series _____. Subsequent rate periods
                            generally will be seven days. The dividend payment
                            date for special rate periods of more than 28 days
                            will be set out in the notice designating a special
                            rate period. See "Description of Preferred Shares --
                            Dividends and Dividend Periods -- Designation of
                            Special Rate Periods."

Taxation.................   Because under normal circumstances the Fund will
                            invest substantially all of its assets in municipal
                            obligations that pay interest which is exempt from
                            regular federal income taxes, the dividends paid on
                            the Preferred Shares will ordinarily be similarly
                            exempt. However, dividends paid on the Preferred
                            Shares may be subject to state and local taxes. All
                            or a portion of the interest paid on the municipal
                            obligations held by the Fund will be subject to the
                            federal alternative minimum tax, with the result
                            that all or a portion of the dividends paid on
                            Preferred Shares will also be subject to such tax.
                            Preferred Shares thus may not be a suitable
                            investment if you are subject to this tax or would
                            become subject to such tax by investing in Preferred
                            Shares. Taxable income or gain earned by the Fund
                            and interest income that is subject to the federal
                            alternative minimum tax will be allocated
                            proportionately to holders of Preferred Shares and
                            shares of Common Stock, based on the percentage of
                            total dividends paid to each class for that year.
                            Accordingly, certain specified Preferred Shares
                            dividends may be subject to regular federal income
                            tax. The Fund intends to notify holders of Preferred
                            Shares, before any applicable auction for a rate
                            period of 28 days or less, of the amount of any
                            taxable income and gain for regular federal income
                            tax purposes to be paid as dividends on Preferred
                            Shares for the period relating to that auction. For
                            longer periods, the Fund may notify holders of
                            Preferred Shares of such amount. In certain
                            circumstances, the Fund will make holders of
                            Preferred Shares whole for taxes owing on dividends
                            paid to holders of Preferred Shares that include
                            taxable income and gain. See "Tax Matters."

Ratings..................   It is a condition of the closing of the offering
                            described in this Prospectus that Preferred Shares
                            be issued with a rating of "Aaa" from Moody's and
                            "AAA" from Fitch. Because the Fund is required to
                            maintain at least one of these ratings, it must own
                            portfolio securities of a sufficient value and with
                            adequate credit quality to meet the rating agencies'
                            guidelines. See "Description of Preferred Shares --
                            Rating Agency Guidelines and Asset Coverage."

Redemption...............   The Fund will not ordinarily redeem Preferred
                            Shares. However, it may be required to redeem shares
                            if, for example, the Fund does not meet an asset
                            coverage ratio required by law or correct a failure
                            to meet a rating agency guideline in a timely
                            manner. The Fund voluntarily may redeem Preferred
                            Shares under certain conditions. See "Description of
                            Preferred Shares -- Redemption" and "Description of
                            Preferred Shares -- Rating Agency Guidelines and
                            Asset Coverage."

Liquidation Preference...   The liquidation preference of each Preferred Share
                            will be $25,000 plus any accumulated but unpaid
                            dividends to the date of distribution, if any,
                            whether or not earned or declared. See "Description
                            of Preferred Shares -- Liquidation."

Voting Rights............   The holders of Preferred Shares have the right to
                            elect at least two directors at all times and to
                            elect a majority of the directors in the event two
                            years' dividends on Preferred Shares are unpaid.
                            In each case, the remaining directors will be
                            elected by holders of shares of Common Stock and
                            holders of Preferred Shares, voting together as a
                            single class. The holders of Preferred Shares will
                            vote as a separate class or classes on certain other
                            matters as required under the Articles
                            Supplementary, the Investment Company Act of 1940,
                            as amended (the "1940 Act") and Maryland law. See
                            "Description of Preferred Shares -- Voting Rights"
                            and "Certain Provisions in the Charter and Bylaws."

                                      -5-

<PAGE>

                              FINANCIAL HIGHLIGHTS

       The tables below set forth selected financial information for an
outstanding share of Common Stock throughout each period presented. The
financial highlights for the six years ended May 31, 2001 have been audited by
KPMG LLP, the Fund's current independent auditors, whose reports are included in
the Fund's Annual Report dated May 31, 2001 and incorporated by reference into
the Fund's Statement of Additional Information. The financial highlights for the
period June 26, 1992 through May 31, 1993 and for the fiscal years ended May 31,
1994 and 1995 have been audited by other independent auditors. The financial
highlights should be read in conjunction with the financial statements and notes
thereto included in the Fund's May 31, 2001 Annual Report, which is available
without charge by calling the Fund at 1-800-331-1710.

      PER COMMON SHARE OPERATING PERFORMANCE THROUGHOUT EACH PERIOD (1)(2)

<TABLE>
<CAPTION>
                                                                        Year Ended May 31,
                             --------------------------------------------------------------------------------------------
                              2001       2000       1999       1998       1997      1996       1995       1994      1993*
                              ----       ----       ----       ----       ----      ----       ----       ----      ----
<S>                           <C>       <C>       <C>        <C>        <C>       <C>         <C>        <C>       <C>
Net Asset Value,
  Beginning of Period .....  $10.93     $11.97    $12.37     $11.90     $12.11    $12.55      $12.26     $13.00    $12.00
                              -----      -----     -----      -----      -----     -----       -----      -----     -----
Income (Loss) from
     Operations:

   Net Investment
     Income(1) ............   0.60       0.58       0.58       0.54       0.67      0.67       0.72       0.67       0.63

   Net Realized and
     Unrealized Gain
     (Loss) on
     Securities ...........   0.79      (1.14)     (0.32)      0.83       0.08     (0.35)      0.49      (0.23)      0.97
                              ----      ------     ------      ----       ----     ------      ----      ------      ----
Total Income (Loss)
  from Investment
  Operations ..............   1.39      (0.56)      0.26       1.37       0.75      0.32       1.21       0.44       1.60
                              ----      ------      ----       ----       ----      ----       ----       ----       ----
Offering Cost
  Charges to
  Paid-In-Capital..........    ---       ---         ---        ---       ---        ---        ---        ---      (0.02)

Gains from
  Repurchase of
  Treasury Stock...........   0.02       0.12        ---        ---       ---        ---        ---        ---       ---

 Less Distributions
   from Net
   Investment Income ......  (0.60)     (0.60)     (0.54)     (0.61)     (0.66)    (0.75)     (0.67)     (0.67)     (0.55)

   In excess of Net
     Investment
     Income ...............              ---         ---        ---       ---        ---        ---        ---       ---

   Net Realized Gains .....    ---       ---       (0.12)     (0.29)     (0.30)    (0.01)     (0.25)     (0.51)     (0.03)
                               ---       ---       ------     ------     ------    ------     ------     ------     ------

Total Distributions .......  (0.60)     (0.60)     (0.66)     (0.90)     (0.96)    (0.76)     (0.92)     (1.18)     (0.58)

Net Asset Value, End
  of Period ...............  $11.74     $10.93    $11.97     $12.37     $11.90    $12.11     $12.55      $12.26     $13.00
                              =====      =====     =====      =====      =====     =====      =====       =====      =====

Market Value, End of
  Period...................  $10.67     $9.38      $10.38    $11.00     $11.63     $11.69    $11.50      $11.50    $12.25*
                              =====      ====       =====     =====      =====      =====     =====       =====     =====

Total Return, Based
  on Market Value(3) ......  20.69%     (3.88)%     0.11%      2.08%     7.89%      8.26%      8.40%      2.98%     7.02++

Total Return, Based
  on Net Asset
  Value(3) ................  13.90%     (2.82)%     2.66%     12.14%     6.59%      2.79%     10.96%      3.45%     13.58++
</TABLE>

(1)      On September 21, 1999 the Fund's investment adviser converted to a
         limited liability company and changed its name to SSB Citi Fund
         Management LLC ("SSB Citi") from SSBC Fund Management Inc.
         On ___________ __, _____, SSB Citi changed its name to Smith Barney
         Fund Management LLC ("SBFM").
(2)      SBFM waived a portion of its management fees for the years ended May
         31, 2001 and 2000. In addition, SBFM waived a portion of its
         management and administration fees for the year ended May 31, 1999. If
         such fees were not waived, the per share decreases in net investment
         income and actual expense ratios would have been as follows:


                            Per share decreases in           Expense ratios
                            net investment income         without fee waivers
                            ----------------------        -------------------
             2001                  $0.04                        1.01%
             2000                   0.02                        1.04
             1999                   0.01                        1.02

(3)   The total return calculation assumes that dividends are reinvested in
      accordance with the Fund's dividend reinvestment plan. * For the period
      from June 26, 1992 (commencement of operations) to May 31, 1993.


                                       -6-

<PAGE>

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

                                       -7-

<PAGE>

                            RATIOS/SUPPLEMENTAL DATA
<TABLE>
<CAPTION>
                                                       Year Ended May 31,
                           ------------------------------------------------------------------------------------
                            2001       2000      1999      1998     1997      1996     1995      1994     1993
                           ------     ------    ------    ------   ------    ------   ------    ------   ------
<S>                         <C>        <C>       <C>       <C>      <C>       <C>      <C>       <C>      <C>
Net assets, end of
  period (in millions)      $ 374      $ 352    $ 414     $ 428    $ 411     $ 418     $ 433    $ 423     $ 444
Ratio of Expenses to
  Average Net Assets(1)     0.68%      0.89%    0.74%     0.99%    1.00%     1.00%     1.02%    1.00%     0.98+
Ratio of Net Income to
  Average Net Assets        5.15%      5.19%    4.42%     4.35%    5.56%     5.35%     5.97%    5.15%     5.48+
Supplemental Data:
Portfolio Turnover Rate       58%        35%      23%       87%      113%      45%       93%      72%      169%
</TABLE>

(1)  [To be completed]
+    Annualized.


                                       -8-

<PAGE>

                                    THE FUND

         Managed Municipals Portfolio Inc. is a non-diversified, closed-end
management investment company registered under the 1940 Act. The Fund was
incorporated under the laws of the State of Maryland on April 9, 1992 pursuant
to Articles of Incorporation (the "Articles" and together with the Articles
Supplementary referred to as the "Charter") under the name "Quality Managed
Municipals Portfolio Inc." On May 7, 1992, the Fund changed its name to "Managed
Municipals Portfolio Inc." On June 22, 1992, the Fund issued an aggregate of
[30,000,000] shares of Common Stock, par value $.001 per share, pursuant to the
initial public offering thereof and commenced its operations. The Fund's Common
Stock is traded on the New York Stock Exchange (the "Exchange") under the symbol
"MMU." The Fund's principal office is located at 125 Broad Street New York, New
York 10004, and its telephone number is 1-800-331-1710.

       The following provides information about the Fund's outstanding shares as
of _______ __, 2002:

<TABLE>
<CAPTION>
                                                                                   AMOUNT HELD
                                                                                  BY THE FUND OR
TITLE OF CLASS                                          AMOUNT AUTHORIZED         FOR ITS ACCOUNT        AMOUNT OUTSTANDING
--------------                                          -----------------         ---------------        ------------------
<S>                                                     <C>                         <C>                  <C>
Common ............................................       500,000,000*                   0                 _______________
Preferred Shares ..................................       [          ]                   0                        0
</TABLE>

*    A total of 500,000,000 shares of capital stock of the Fund are authorized
     under the Articles, all designated Common Stock pursuant to the Articles.
     The Board of Directors of the Fund (the "Board") may classify or reclassify
     any unissued shares of capital stock by setting or changing the
     preferences, conversion and other rights, voting powers, restrictions,
     limitations as to dividends, qualifications and terms and conditions of
     redemption of such shares of stock. The Board has authorized the issuance
     of the Preferred Shares.

                                 USE OF PROCEEDS

     The net proceeds of this offering will be approximately $_____________
after payment of the sales load and estimated offering costs.

     The Fund will invest the net proceeds of the offering in accordance with
the Fund's investment objective and policies as stated below. It is presently
anticipated that the Fund will be able to invest substantially all of the net
proceeds in municipal obligations that meet those investment objective and
policies at or shortly (within [three] months) after the completion of the
offering. Pending such investment, it is anticipated that the proceeds will be
invested in short-term, tax-exempt securities.

                                      -9-

<PAGE>

                                 CAPITALIZATION

         The following table sets forth the unaudited capitalization of the Fund
as of _________ __, 2002, and as adjusted to give effect to the issuance of
Preferred Shares offered by this Prospectus.

<TABLE>
<CAPTION>
                                                               ACTUAL          AS ADJUSTED
                                                               ------          -----------
                                                                      (UNAUDITED)
<S>                                                     <C>                    <C>
SHAREHOLDERS' EQUITY:
   Municipal Auction Rate Cumulative Preferred
     Stock, $25,000 per share liquidation
     preference; _________ shares authorized
     (no shares issued and ______ shares issued, as
     adjusted, respectively) ........................   $ _____________        $ ____________
   Common Stock, $.001 par value per share;
     500,000,000 shares authorized* (__________
     shares outstanding and _________  shares
     outstanding, as adjusted)** ...................      _____________          ____________
   Capital in excess of par value*** ...............      _____________          ____________
   Balance of undistributed net investment
     income ........................................      _____________          ____________
   Accumulated net realized gain (loss) from
     investment transactions .......................      _____________          ____________
   Net unrealized appreciation (depreciation) of
     investments ...................................      _____________          ____________

   Total Net Assets                                     $                      $
   Net assets less liquidation value of Preferred
     Shares ........................................    $                      $
                                                          =============          ============
   Total Net Assets                                     $                      $
   Net assets attributable to Common Stock
     outstanding ...................................    $                      $
                                                          =============          ============
</TABLE>

----------
*     A total of 500,000,000 shares of capital stock of the Fund are authorized
      under the Articles, all designated Common Stock pursuant to the Articles.
      The Board may classify or reclassify any unissued shares of capital stock
      by setting or changing the preferences, conversion and other rights,
      voting powers, restrictions, limitations as to dividends, qualifications
      and terms and conditions of redemption of such shares of stock. The Board
      has authorized the issuance of the Preferred Shares.

**    None of these outstanding shares are held by or for the account of the
      Fund as of _________ __, 2002.

***   As adjusted capital in excess of par value reflects a reduction for the
      sales load and estimated offering costs of the Preferred Shares issuance
      ($___________).


                                      -10-

<PAGE>

                              PORTFOLIO COMPOSITION

         As of __________ __, 2002, ____% of the market value of the Fund's
portfolio was invested in long-term municipal obligations, ___% in
intermediate-term municipal obligations and ____% in short-term municipal
obligations. The following table sets forth certain information with respect to
the composition of the Fund's investment portfolio as of _______ __, 2002. This
information reflects the average composition of the Fund's assets as of
__________ __, 2002, and is not necessarily representative of the Fund as of the
current fiscal year or at any time in the future.

<TABLE>
<CAPTION>
               CREDIT RATING             VALUE          PERCENT
               -------------             -----          -------
<S>                                      <C>            <C>
Aaa/AAA* ..........................          $            %
Aa/AA .............................
A/A ...............................
Baa/BBB ...........................
Other .............................
Short-term ........................      _____

   Total ..........................          $           100.00%
</TABLE>

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

*[Includes securities that are backed by an escrow or trust containing
     sufficient U.S. Government securities or U.S. Government agency securities
     to ensure the timely payment of principal and interest.]


                                      -11-

<PAGE>

                             THE FUND'S INVESTMENTS

INVESTMENT OBJECTIVE AND POLICIES

         The Fund's investment objective is to seek as high a level of current
income exempt from federal income tax as is consistent with the preservation of
principal. This income, if any, will be distributed to common shareholders after
the satisfaction of the obligation to pay dividends on Preferred Shares.

         The Fund may not achieve its investment objective. The Fund's
investment objective may be changed only with the approval of a majority of the
Fund's outstanding voting securities. As defined in the 1940 Act, "majority"
means the lesser of (i) more than 50% of the Fund's outstanding common stock and
of any outstanding shares of preferred stock, voting by class, and (ii) 67% of
the Fund's outstanding common stock and of any outstanding shares of preferred
stock, voting by class, present at a meeting at which holders of more than 50%
of the outstanding shares of each such class are present in person or by proxy.
All other investment policies or practices, unless otherwise stated, are
considered by the Fund not to be fundamental and accordingly may be changed
without shareholder approval.

         The Fund invests primarily in investment grade municipal debt
securities issued by state and local governments, political subdivisions,
agencies and public authorities (municipal obligations). The Fund will seek to
invest substantially all of its assets in municipal obligations, and under
normal conditions at least 80% of the Fund's total assets will be invested in
investment grade municipal obligations.

         The Fund may invest in municipal obligations rated as low as Baa by
Moody's, "BBB" by S&P or "BBB" by Fitch or in unrated municipal obligations
deemed to be of comparable quality. Although such securities are considered
investment grade, they may be subject to greater risks than other higher-rated
investment grade securities. The Fund will not invest in municipal obligations
that are not rated investment grade by any NRSRO, at the time of purchase.
Investment grade debt securities are those rated "BBB" or higher by S&P, "Baa"
or higher by Moody's or within one of the four highest rating categories by an
NRSRO.

  Municipal obligations include bonds and notes such as:

     . general obligation bonds issued for various public purposes and supported
       by the municipal issuer's credit and taxing power;

     . revenue bonds whose principal and interest is payable only from the
       revenues of a particular project or facility; industrial revenue bonds
       depend on the credit standing of a private issuer and may be subject to
       the federal alternative minimum tax; and

     . notes that are short-term obligations of municipalities or agencies sold
       in anticipation of a bond sale, collection of taxes or receipt of other
       revenues.

         Municipal obligations may have all types of interest rate payment and
reset terms, including fixed rate, adjustable rate, zero coupon, payment in kind
and auction rate features.

         Securities rated "BBB" by S&P are regarded by S&P as having an adequate
capacity to pay interest and repay principal; whereas bonds in this group
normally exhibit adequate protection parameters, adverse economic conditions or
changing circumstances are more likely to lead to a weakened capacity to pay
interest and repay principal for debt in this category than in higher rated
categories. Securities rated "Baa" by Moody's are regarded by Moody's as being
medium grade obligations; they are neither highly protected nor poorly secured.
Although interest payment and principal payments for these securities appear
adequate for the present, they may lack certain protective elements or may be
characteristically unreliable over any great length of time. They also may lack
outstanding investment characteristics and may have speculative characteristics.
The Fund may be more dependent upon the Manager's investment analysis of unrated
municipal obligations than is the case with rated municipal obligations.

                                      -12-

<PAGE>

MUNICIPAL OBLIGATIONS

         Municipal obligations are obligations issued by or on behalf of states,
territories and possessions of the United States and the District of Columbia
agencies and instrumentalities, the interest on which, in the opinion of bond
counsel or other counsel to the issuer of such securities is, at the time of
issuance, not includable in gross income for federal income tax purposes. Under
normal market conditions, at least 80% of the Fund's total assets will be
invested in municipal obligations. This policy is fundamental and cannot be
changed without shareholder approval.

         The Fund invests with the objective that dividends paid by the Fund may
be excluded by shareholders from their gross income for federal income tax
purposes. A portion of the Fund's dividends may be taxable. The Fund may invest
without limit in private activity bonds. Income from theses bonds may be a
special preference item for purposes of the federal alternative minimum tax.
Preferred Shares may not be a suitable investment for investors who are already
subject to the federal alternative minimum tax or who would become subject to
the federal alternative minimum tax as a result of an investment in Preferred
Shares. See "Tax Matters."

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

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

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

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

SELECTION OF INVESTMENTS

         The Fund is classified as a non-diversified fund under the 1940 Act,
which means that the Fund is not limited by the 1940 Act in the proportion of
its assets that it may invest in the obligations of a single issuer. The Fund
intends to conduct its operations, however, so as to qualify as a "regulated
investment company" for purposes of the Internal Revenue Code of l986, as
amended (the "Code"), which will relieve the Fund of any liability for federal
income tax to the extent its earnings are distributed to shareholders. To
qualify as a regulated investment

                                      -13-

<PAGE>

company, the Fund, among other things, limits its investments so that, at the
close of each quarter of its taxable year (i) not more than 25% of the market
value of the Fund's total assets is invested in the securities of a single
issuer and (ii) with respect to 50% of the market value of its total assets, not
more than 5% of the market value of its total assets is invested in the
securities of a single issuer. See "Tax Matters."

         The Fund generally will not invest more than 25% of its total assets in
a single industry. Governmental issuers of municipal obligations are not
considered part of any "industry". However, municipal obligations backed only by
the assets and revenues of non-governmental users may for this purpose be deemed
to be issued by such nongovernmental users, and the 25% limitation would apply
to the industries of such non-governmental users. The Fund may invest more than
25% of its total assets in a broad segment of the municipal obligations market,
if the Manager determines that the yields available from obligations in a
particular segment of the market justify the additional risks associated with a
large investment in that segment. The Fund reserves the right to invest more
than 25% of its assets in industrial development bonds or in issuers located in
the same state. If the Fund were to invest more than 25% of its total assets in
issuers located in the same state, it would be more susceptible to adverse
economic, business, or regulatory conditions in that state.

         [From time to time, the Fund may invest in securities of a municipal
issuer, most or all of which is held by the Fund, by itself or together with
other funds or accounts managed by the Manager. Because there may be relatively
few potential purchasers for such investments and, in some cases, there may be
contractual restrictions on resales, the Fund may find it more difficult to sell
such securities at a time when the Manager believes it advisable to do so.]

[TEMPORARY DEFENSIVE STRATEGIES

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

"WHEN-ISSUED" AND "DELAYED DELIVERY" TRANSACTIONS

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

                                      -14-

<PAGE>

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

STAND-BY COMMITMENTS

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

FINANCIAL FUTURES AND OPTIONS TRANSACTIONS

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

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

LENDING SECURITIES

         The Fund is authorized to lend securities it holds to brokers, dealers
and other financial organizations, but it will not lend securities to any
affiliate of the manager unless the Fund applies for and receives specific
authority to do so from the SEC. Loans of the Fund's securities, if and when
made, may not exceed 33-1/3% of the value of the Fund's total assets. The Fund's
loans of securities will be collateralized by cash, letters of credit or U.S.
government securities that will be maintained at all times in a segregated
account in an amount equal to the current market value of the loaned securities.

                                      -15-

<PAGE>

REPURCHASE AGREEMENTS

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

          See the Statement of Additional Information for a more detailed
discussion of the Fund's investment practices.

                                  RISK FACTORS

         Risk is inherent in all investing. Investing in any investment company
security involves risk, including the risk that you may receive little or no
return on your investment or even that you may lose part or all of your
investment. Therefore, before investing, you should consider carefully the
following risks that you assume when you invest in Preferred Shares.

INTEREST RATE RISK

         Municipal obligations often are fixed-income securities which are
sensitive to changes in interest rates. Generally, when interest rates are
rising, the value of the portfolio's fixed-income securities can be expected to
decrease. When interest rates are declining, the value of the Fund's
fixed-income securities can be expected to increase. The Fund's net asset value
may fluctuate in response to the increasing or decreasing value of the
portfolio's fixed-income securities.

         Pursuant to this Prospectus, the Fund will issue Preferred Shares,
which pay dividends based on short-term interest rates, and intends to use the
proceeds to buy municipal obligations which pay interest based on long-term
yields. Long-term municipal obligation yields are typically, although not
always, higher than short-term interest rates. Both long-term and short-term
interest rates may fluctuate. If short-term interest rates rise, Preferred
Shares dividend rates may rise so that the amount of dividends paid to holders
of Preferred Shares exceeds the income from the portfolio securities purchased
with the proceeds from the sale of Preferred Shares. Because income from the
Fund's entire investment portfolio (not just the portion of the portfolio
purchased with the proceeds of the Preferred Shares offering) is available to
pay Preferred Shares dividends, however, Preferred Shares dividend rates would
need to greatly exceed the Fund's net portfolio income before the Fund's ability
to pay Preferred Shares dividends would be jeopardized. If long-term interest
rates rise, the value of the Fund's investment portfolio will decline, reducing
the amount of assets serving as asset coverage for Preferred Shares.

AUCTION RISK

         You may not be able to sell your Preferred Shares at an auction if the
auction fails; that is, if there are more Preferred Shares offered for sale than
there are buyers for those shares. Also, if you place hold orders (orders to
retain Preferred Shares) at an auction only at a specified rate, and that bid
rate exceeds the rate set at the auction, you will not retain your Preferred
Shares. Additionally, if you buy shares or elect to retain shares without
specifying a rate below which you would not wish to continue to hold those
shares, and the auction sets a below-market rate, you may receive a lower rate
of return on your shares than the market rate. Finally, the dividend period may
be changed, subject to certain conditions and with notice to the holders of the
Preferred Shares which could affect the liquidity of your investment. See
"Description of Preferred Shares" and "The Auction -- Auction Procedures."

                                      -16-

<PAGE>

SECONDARY MARKET RISK

         If you try to sell your Preferred Shares between auctions, you may not
be able to sell any or all of your shares, or you may not be able to sell them
for $25,000 per share or $25,000 per share plus accumulated dividends. If the
Fund has designated a special rate period (a rate period of more than seven
days), changes in interest rates could affect the price you would receive if you
sold your shares in the secondary market. Broker-dealers that maintain a
secondary trading market for Preferred Shares are not required to maintain this
market, and the Fund is not required to redeem shares either if an auction or an
attempted secondary market sale fails because of a lack of buyers. Preferred
Shares are not registered on a stock exchange or the Nasdaq stock market. If you
sell your Preferred Shares to a broker-dealer between auctions, you may receive
less than the price you paid for them, especially when market interest rates
have risen since the last auction. Investors who purchase Preferred Shares in an
auction for a special rate period should note that because the dividend will be
fixed for a larger period, the value of the Preferred Shares may fluctuate in
response to changes in interest rates, and may be more or less than their
original cost if sold on the open market in advance of the next auction. Accrued
Preferred Share dividends, however, should at least partially compensate for the
increased market interest rates.

RATINGS AND ASSET COVERAGE RISK

         While Moody's and Fitch assign ratings of "Aaa" or "AAA", respectively,
to Preferred Shares, the ratings do not eliminate or necessarily mitigate the
risks of investing in Preferred Shares. A rating agency could downgrade the
Preferred Shares rating which may make your shares less liquid at an auction or
in the secondary market, though probably with higher resulting dividend rates.
If a rating agency downgrades the rating of Preferred Shares, the Fund will
alter its portfolio or redeem Preferred Shares. The Fund may voluntarily redeem
Preferred Shares under certain circumstances. See "Description of Preferred
Shares -- Rating Agency Guidelines and Asset Coverage" for a description of the
asset maintenance tests the Fund must meet.

INFLATION RISK

         Inflation is the reduction in the purchasing power of money resulting
from the increase in the price of goods and services. Inflation risk is the risk
that the inflation-adjusted (or "real") value of your Preferred Shares
investment or the income from that investment will be worth less in the future.
As inflation occurs, the real value of Preferred Shares and distributions
declines. In an inflationary period, however, it is expected that, through the
auction process, Preferred Shares dividend rates would increase, tending to
offset this risk.

CREDIT RISK

         Credit risk is the risk that an issuer of a municipal bond will become
unable to meet its obligation to make interest and principal payments. In
general, lower rated municipal obligations carry a greater degree of credit
risk. If rating agencies lower their ratings of municipal obligations in the
Fund's portfolio, the value of those obligations could decline, which could
jeopardize the rating agencies' ratings of Preferred Shares. In addition, the
underlying revenue source for a municipal obligation other than a general
obligation bond may be insufficient to pay principal or interest in a timely
manner. Because the primary source of income for the Fund is the interest and
principal payments on the municipal obligations in which it invests, any default
by an issuer of a municipal obligation could have a negative impact on the
Fund's ability to pay dividends on Preferred Shares and could result in the
redemption of some or all Preferred Shares. This risk of default may be greater
for private activity bonds or other municipal obligations whose payments are
dependent upon a specific source of revenue. Even if the issuer does not
actually default, adverse changes in the issuer's financial condition may
negatively affect its credit rating or presumed credit worthiness. These
developments would adversely affect the market value of the issuer's
obligations.

REINVESTMENT RISK

         Reinvestment risk is the risk that income from the Fund's portfolio
will decline if and when the Fund invests the proceeds from matured, traded,
prepaid or called fixed-income securities at lower interest rates. A decline in
income could affect the Fund's ability to pay dividends on Preferred Shares.
Reinvestment risk also exists

                                      -17-

<PAGE>

for holders of Preferred Shares because the shares are subject to involuntary
redemption under circumstances where the investor may not be able to achieve a
comparable yield or an investment with similar terms and quality.

INCOME RISK

         The Fund's income is based primarily on the interest it earns from its
investments, which can vary widely over the short- and long-term. If interest
rates drop, the Fund's income available over time to make dividend payments with
respect to Preferred Shares could drop as well if the Fund purchases securities
with lower interest coupons. This risk is magnified when prevailing short-term
interest rates increase and the Fund holds residual interest municipal bonds.

CALL RISK

         If interest rates fall, it is possible that issuers of callable bonds
with higher interest coupons will "call" (or prepay) their bonds before their
maturity date. If a call were exercised by the issuer during a period of
declining interest rates, the Fund is likely to replace such called security
with a lower yielding security.

LIQUIDITY RISK

         The market for municipal obligations may be less liquid than for
corporate bonds. The market for special obligation bonds, lease obligations,
participation certificates and variable rate instruments, which the Fund may
purchase, may be less liquid than for general obligation bonds.

         Less liquid markets tend to be more volatile and react more negatively
to adverse publicity and investor perception than more liquid markets. If
markets are less liquid, the Fund may not be able to dispose of municipal
obligations in a timely manner and at a fair price. Some of the Fund's
investments may be restricted as to resale. Although restricted securities may
be sold in private transactions, a security's value may be less than the price
originally paid by the Fund. The ability of the Manager to value illiquid or
restricted securities will be more difficult and the Manager's judgment may play
a greater role in their valuation.

REPURCHASE AGREEMENTS

         The Fund may use repurchase agreements to manage its cash position. If
the other party to the agreement defaults, the Fund may not be able to sell the
underlying securities. If the Fund must assert its rights against the other
party to recover the securities, the Fund will incur unexpected expenses, risk
losing the income on the security and assume the risk of loss in the value of
the security.

LENDING SECURITIES

         If the party borrowing the Fund's securities fails financially, the
Fund may be unable to recover the loaned securities.

FINANCIAL FUTURES AND OPTIONS

         The Fund may use financial futures contracts and options on these
contracts to protect the Fund from a decline in the price of municipal
obligations it owns or an increase in the price of a municipal obligation it
plans to buy. There are risks associated with futures and options transactions,
including correlation risks. These risks are described in the Statement of
Additional Information.

                                      -18-

<PAGE>

RISKS OF CERTAIN INVESTMENTS OF THE FUND

         In addition to the risks described above, the Fund's investments are
subject to certain other kinds of risk, such as:

               . the Manager's judgment about the attractiveness, value or
                 income potential of a particular municipal obligation may prove
                 to be incorrect;

               . municipal obligations may fall out of favor with investors;

               . a rise in interest rates could cause the value of the Fund's
                 portfolio generally to decline; and

               . unfavorable legislation may affect the tax-exempt status of
                 municipal obligations.

         The Fund may invest more than 25% of its assets in municipal
obligations that finance the same or similar types of facilities in issuers
located in the same state. If the Fund invests more than 25% of its assets in
such segments, it will be more susceptible to economic, business, political,
regulatory and other developments generally affecting issuers of those segments
of the municipal market.

         The Fund may concentrate its assets in municipal securities that
finance the same or similar facilities or in issuers located in the same state.
If the Fund concentrates its assets, it may be more adversely affected by events
affecting those issuers than if it were investing in a broader range of
securities. In addition, the Fund is non-diversified within the meaning of the
1940 Act. This means that, compared to a diversified fund, the Fund may invest a
greater portion of its assets in the obligations of a smaller number of issuers.
As a result, the Fund may be subject to greater risk than a diversified fund.

         The Fund may invest in lease obligations. These leases frequently
contain clauses that permit the governmental issuer to stop making interest and
principal payments if money is not appropriated by the legislature annually or
on some other periodic basis. These leases are less liquid than municipal
obligations and may be difficult to value and to sell at a fair price. If the
issuer is foreclosed upon, the assets securing these leases may be difficult to
dispose of.

         The Fund invests in investment grade debt securities, and unrated
securities that the Manager believes are of comparable quality. Investment grade
securities that are not in the highest rating category may be subject to greater
risk of downgrade and issuer default than higher rated securities and may have
speculative characteristics. The Fund may experience more difficulty selling
unrated securities because markets for these securities may be less liquid.

         The Fund may invest in zero coupon bonds. Because these securities
usually trade at a deep discount, they will be subject to greater fluctuations
of market value in response to changing interest rates than debt obligations of
comparable maturities which make periodic distributions of interest. On the
other hand, because there are no periodic interest payments to be reinvested
prior to maturity, zero coupon securities eliminate the reinvestment risk and
lock in a rate of return to maturity.

         It is possible that some of the Fund's income may be subject to federal
income taxation. The Fund may realize taxable gain on some of its securities,
and some of the Fund's income may be subject to the federal alternative minimum
tax.

         The Fund may invest in derivatives. A derivative contract will obligate
or entitle the Fund to deliver or receive an asset or cash payment that is based
on the change in value of one or more securities or indices. Even a small
investment in derivative contracts can have a big impact on the Fund's
interest-rate exposure. Therefore, using derivatives can disproportionately
increase losses and reduce opportunities for gains when interest rates are
changing. The Fund may not fully benefit from or may lose money on derivatives
if changes in their value do not correspond accurately to changes in the value
of the Fund's holdings. The other parties to certain derivative


                                      -19-

<PAGE>

contracts present the same types of default risk as issuers of fixed
income securities. Derivatives can also make the Fund less liquid and harder to
value, especially in declining markets.

                            HOW THE FUND MANAGES RISK

INVESTMENT LIMITATIONS

         The Fund has adopted certain investment limitations designed to limit
investment risk and maintain portfolio diversification. These limitations are
fundamental and may not be changed without the approval of the holders of a
majority (as such term is defined in the 1940 Act) of the outstanding shares of
Common Stock and Preferred Shares voting together as a single class, and the
approval of the holders of a majority (as such term is defined in the 1940 Act)
of the outstanding Preferred Shares voting as a separate class. The following
are several of the restrictions applicable to the Fund. For a complete listing
of the investment restrictions applicable to the Fund, see "Investment
Restrictions" in the SAI. Any percentage limits apply only at the time of
initial investment. The Fund is not required to sell securities if the limits
are exceeded after the investment is completed. The Fund may not:

         . Borrow money, except for temporary or emergency purposes, and then
           not in amounts that are greater than 15% of total assets (including
           the amount borrowed).

         . Buy more securities if the Fund had borrowed money in amounts greater
           than 5% of net assets.

         . Invest more than 25% of total assets in securities of issuers in a
           single industry. This restriction does not apply to the fund's
           investments in municipal obligations and U.S. government securities.

         [The Fund may use various investment strategies designed to limit the
risk of bond price fluctuations and to preserve capital. These hedging
strategies include purchasing put and call options and using financial futures
contracts and related options contracts. See "Investment Policies and
Techniques" in the Statement of Additional Information.]

                             MANAGEMENT OF THE FUND

DIRECTORS AND OFFICERS

         The Board is responsible for the management of the Fund, including
supervision of the duties performed by Smith Barney. There are nine directors of
the Fund, one of whom is an "interested person" (as defined in the 1940 Act) and
eight of whom are not "interested persons." The names and business addresses of
the directors and officers of the Fund and their principal occupations and other
affiliations during the past five years are set forth under "Management of the
Fund" in the Statement of Additional Information.

INVESTMENT MANAGER

         Smith Barney Fund Management LLC (formerly known as SSB Citi Fund
Management LLC), located at 125 Broad Street, New York, New York 10004,
serves as the Fund's investment manager. The Manager, through its predecessors,
has been in the investment counseling business since 1968, and renders
investment advice to a wide variety of individual, institutional and investment
company clients with aggregate assets under management as of [      ], 200[ ] in
excess of $[     ]. The Manager is an affiliate of Salomon Smith Barney. The
Manager and Salomon Smith Barney are subsidiaries of Citigroup Inc.
("Citigroup"). Citigroup businesses produce a broad range of financial
services--asset management, banking and consumer finance, credit and charge
cards, insurance, investments, investment banking and trading--and use diverse
channels to make them available to consumer and corporate customers around the
world. See the Statement of Additional Information under "Management of the
Fund - Investment Manager."

          The Fund pays the Manager for the services it provides to the Fund a
fee that is computed daily and paid monthly at the annual rate of 0.70% of the
value of the Fund's average daily total net assets. In addition, Smith

                                      -20-

<PAGE>

Barney serves as the Fund's administrator and is paid a fee by the Fund
that is computed daily and paid monthly at an annual rate of 20% of the value of
the fund's average daily total net assets.

         The Manager is responsible for execution of specific investment
strategies and day-to-day investment operations. Joseph P. Deane, Vice President
and Investment Officer of the Fund, is primarily responsible for management of
the Fund's assets. Mr. Deane has served in this capacity since the Fund
commenced operations in 1992 and manages the day-to-day operations of the Fund,
including making all investment decisions. Mr. Deane is a Managing Director of
Smith Barney and is the senior asset manager for a number of investment
companies and other accounts investing in tax-exempt securities.

         The Fund bears expenses incurred in its operation including: fees of
the investment, adviser and administrator; taxes, interest, brokerage fees and
commissions, if any; fees of directors who are not officers, directors
shareholders or employees of Salomon Smith Barney; SEC fees and state blue sky
qualification fees; charges of the custodian; transfer and dividend disbursing
agent's fees; certain insurance premiums; outside auditing and legal expenses;
costs of any independent pricing service; costs of maintaining corporate
existence; costs attributable to investor services (including allocated
telephone and personnel expenses); costs of preparation and printing of
prospectuses and statements of additional information for regulatory purposes
and for distribution to shareholders; shareholders' reports and corporate
meetings of the officers, the Board and the shareholders of the Fund.

                         DESCRIPTION OF PREFERRED SHARES

         The following is a brief description of the terms of Preferred Shares.
This description does not purport to be complete and is subject to and qualified
in its entirety by reference to the more detailed description of Preferred
Shares in the Fund's Articles Supplementary, which is attached as Appendix A to
the Statement of Additional Information, and other charter documents, which have
been filed with the Commission.

GENERAL

         Under the Articles, the Fund is authorized to issue up to 500,000,000
shares of capital stock, designated Common Stock. Pursuant to the Articles, the
Board may classify or reclassify unissued shares of capital stock by setting or
changing the preferences, conversion and other rights, voting powers,
restrictions, limitations as to dividends, qualifications and terms and
conditions of redemption, prior to issuance. The Board has authorized the
issuance of _____ shares of Municipal Auction Rate Cumulative Preferred Stock,
or Preferred Shares. All Preferred Shares will have a liquidation preference of
$25,000 per share plus an amount equal to accumulated but unpaid dividends
(whether or not earned or declared).

         Preferred Shares will rank on parity with shares of any other class or
series of preferred stock of the Fund as to the payment of dividends and the
distribution of assets upon liquidation. All Preferred Shares carry one vote per
share on all matters on which such shares are entitled to be voted. Preferred
Shares are, when issued, fully paid and non-assessable and have no preemptive,
exchange, conversion or cumulative voting rights.

DIVIDENDS AND DIVIDEND PERIODS

         General. The initial Rate Period of Preferred Shares will be a period
consisting of       days for Series ____ and _____ days for Series _____. Any
Subsequent Rate Period of Preferred Shares will be a Minimum Rate Period (seven
Rate Period Days), unless the Fund, subject to certain conditions, designates
such Subsequent Rate Period as a Special Rate Period. See "--Designation of
Special Rate Periods" below.

         Dividends on Preferred Shares shall be payable, when, as and if
declared by the Board out of funds legally available therefor in accordance with
the Charter and applicable law, on _____________, 2002, and thereafter on each
[_______]; provided, however, that (i) if the _______ on which dividends would
otherwise be payable as set forth above is not a Business Day, then such
dividends shall be payable on such shares on the first Business Day that falls
after such _______; and (ii) the Fund may specify different Dividend Payment
Dates in respect of any Special Rate Period of more than 28 Rate Period Days.

                                      -21-

<PAGE>

         The amount of dividends per share payable on Preferred Shares on any
date on which dividends shall be payable shall be computed by multiplying the
Applicable Rate in effect for such Dividend Period or part thereof for which
dividends have not been paid by a fraction, the numerator of which shall be the
number of days in such Dividend Period or part thereof and the denominator of
which shall be 365 if such Dividend Period consists of seven Rate Period Days
and 360 for all other Dividend Periods, and applying the rate obtained against
$25,000.

         Dividends will be paid through the Securities Depository on each
Dividend Payment Date in accordance with its normal procedures, which currently
provide for it to distribute dividends in next-day funds to Agent Members, who
in turn are expected to distribute such dividend payments to the persons for
whom they are acting as agents. Each of the current Broker-Dealers, however, has
indicated to the Fund that such Broker-Dealer or the Agent Member designated by
such Broker-Dealer will make such dividend payments available in same-day funds
on each Dividend Payment Date to customers that use such Broker-Dealer or its
designee as Agent Member.

         Dividends on Preferred Shares will accumulate from the Date of Original
Issue. The dividend rate for the initial Rate Period shall be   % per annum. For
each Subsequent Rate Period, the dividend rate will be the Applicable Rate that
the Auction Agent advises the Fund results from an Auction, except as provided
below. The Applicable Rate that results from an Auction will not be greater than
the Maximum Rate, which is:

         (a) in the case of any Auction Date which is not the Auction Date
immediately prior to the first day of any proposed Special Rate Period, the
product of (i) the Reference Rate on such Auction Date for the next Rate Period
and (ii) the Rate Multiple on such Auction Date, unless Preferred Shares have or
had a Special Rate Period (other than a Special Rate Period of 28 Rate Period
Days or fewer) and an Auction at which Sufficient Clearing Bids existed has not
yet occurred for a Minimum Rate Period after such Special Rate Period, in which
case the higher of:

                  (A) the dividend rate for the then-ending Rate Period; and

                  (B) the product of (x) the higher of (I) the Reference Rate on
          such Auction Date for a Rate Period equal in length to the then-ending
          Rate Period, if such then-ending Rate Period was 364 Rate Period Days
          or fewer, or the Treasury Note Rate on such Auction Date for a Rate
          Period equal in length to the then-ending Rate Period, if such
          then-ending Rate Period was more than 364 Rate Period Days, and (II)
          the Reference Rate on such Auction Date for a Rate Period equal in
          length to such Special Rate Period, if such Special Rate Period was
          364 Rate Period Days or fewer, or the Treasury Note Rate on such
          Auction Date for a Rate Period equal in length to such Special Rate
          Period, if such Special Rate Period was more than 364 Rate Period Days
          and (y) the Rate Multiple on such Auction Date; or

          (b) in the case of any Auction Date which is the Auction Date
immediately prior to the first day of any proposed Special Rate Period, the
product of (i) the highest of (x) the Reference Rate on such Auction Date for a
Rate Period equal in length to the then-ending Rate Period, if such then-ending
Rate Period was 364 Rate Period Days or fewer, or the Treasury Note Rate on such
Auction Date for a Rate Period equal in length to the then-ending Rate Period,
if such then-ending Rate Period was more than 364 Rate Period Days, (y) the
Reference Rate on such Auction Date for the Special Rate Period for which the
Auction is being held if such Special Rate Period is 364 Rate Period Days or
fewer or the Treasury Note Rate on such Auction Date for the Special Rate Period
for which the Auction is being held if such Special Rate Period is more than 364
Rate Period Days, and (z) the Reference Rate on such Auction Date for Minimum
Rate Periods and (ii) the Rate Multiple on such Auction Date.

         If an Auction for any Subsequent Rate Period is not held for any reason
other than as described below, the dividend rate for such Subsequent Rate Period
will be the Maximum Rate on the Auction Date for such Subsequent Rate Period.

         If the Fund fails to pay in a timely manner to the Auction Agent the
full amount of any dividend on, or the redemption price of, any Preferred Shares
during any Rate Period (other than any Special Rate Period of more than 364 Rate
Period Days or any Rate Period succeeding any Special Rate Period of more than
364 Rate Period Days during which such a failure occurred that has not been
cured), but, prior to 12:00 Noon on the third Business Day next succeeding the
date such failure occurred, such failure shall have been cured and the Fund
shall have paid a late charge, as described more fully in the Articles
Supplementary, no Auction will be held in for the first Subsequent

                                      -22-

<PAGE>

Rate Period thereafter and the dividend rate for such Subsequent Rate Period
will be the Maximum Rate on the Auction Date for such Subsequent Rate Period.

         If the Fund fails to pay in a timely manner to the Auction Agent the
full amount of any dividend on, or the redemption price of, any Preferred Shares
during any Rate Period (other than any Special Rate Period of more than 364 Rate
Period Days or any Rate Period succeeding any Special Rate Period of more than
364 Rate Period Days during which such a failure occurred that has not been
cured), and, prior to 12:00 Noon on the third Business Day next succeeding the
date on which such failure occurred, such failure shall not have been cured or
the Fund shall not have paid a late charge, as described more fully in the
Articles Supplementary, no Auction will be held for the first Subsequent Rate
Period thereafter (or for any Rate Period thereafter to and including the Rate
Period during which such failure is so cured and such late charge so paid) (such
late charge to be paid only in the event Moody's is rating such shares at the
time the Fund cures such failure), and the dividend rate for each such
Subsequent Rate Period shall be a rate per annum equal to the Maximum Rate on
the Auction Date for such Subsequent Rate Period (but with the prevailing rating
for Preferred Shares, for purposes of determining such Maximum Rate, being
deemed to be "Below `ba3'/BB2").

         If the Fund fails to pay in a timely manner to the Auction Agent the
full amount of any dividend on, or the redemption price of, any Preferred Shares
during a Special Rate Period of more than 364 Rate Period Days, or during any
Rate Period succeeding any Special Rate Period of more than 364 Rate Period Days
during which such a failure occurred that has not been cured, and such failure
shall not have been cured or the Fund shall not have paid a late charge, as
described more fully in the Articles Supplementary, no Auction will be held for
such Subsequent Rate Period (or for any Rate Period thereafter to and including
the Rate Period during which such failure is so cured and such late charge so
paid) (such late charge to be paid only in the event Moody's is rating such
shares at the time the Fund cures such failure), and the dividend rate for each
such Subsequent Rate Period shall be a rate per annum equal to the Maximum Rate
on the Auction Date for each such Subsequent Rate Period (but with the
prevailing rating for Preferred Shares, for purposes of determining such Maximum
Rate, being deemed to be "Below `ba3'/BB2").

         A failure to pay dividends on, or the redemption price of, Preferred
Shares shall have been cured with respect to any Rate Period if, within the
respective time periods described in the Articles Supplementary, the Fund shall
have paid to the Auction Agent (a) all accumulated and unpaid dividends on
Preferred Shares and (b) without duplication, the redemption price for shares,
if any, for which notice of redemption has been mailed by the Fund; provided,
however, that the foregoing clause (b) shall not apply to the Fund's failure to
pay the redemption price in respect of Preferred Shares when the related notice
of redemption provides that redemption of such shares is subject to one or more
conditions precedent and any such condition precedent shall not have been
satisfied at the time or times and in the manner specified in such notice of
redemption.

         [Gross-up Payments. Holders of Preferred Shares are entitled to
receive, when, as and if declared by the Board, out of funds legally available
therefore in accordance with the Articles, including the Articles Supplementary,
and applicable law, dividends in an amount equal to the aggregate Gross-up
Payments in accordance with the following:

         If, in the case of any Minimum Rate Period or any Special Rate Period
of 28 Rate Period Days or fewer, the Fund allocates any net capital gain or
other income taxable for regular federal income tax purposes to a dividend paid
on Preferred Shares without having given advance notice thereof to the Auction
Agent as described below under "The Auction - Auction Procedures" (a "Taxable
Allocation") solely by reason of the fact that such allocation is made
retroactively as a result of the redemption of all or a portion of the
outstanding Preferred Shares or the liquidation of the Fund, the Fund will,
prior to the end of the calendar year in which such dividend was paid, provide
notice thereof to the Auction Agent and direct the Fund's dividend disbursing
agent to send such notice with a Gross-up Payment to each holder of shares
(initially Cede & Co., as nominee of the Securities Depository) that was
entitled to such dividend payment during such calendar year at such holder's
address as the same appears or last appeared on the stock books of the Fund.

         If, in the case of any Special Rate Period of more than 28 Rate Period
Days, the Fund makes a Taxable Allocation to a dividend paid on Preferred Shares
without having given advance notice thereof to the Auction Agent, the Fund
shall, prior to the end of the calendar year in which such dividend was paid,
provide notice thereof to the

                                      -23-

<PAGE>

Auction Agent and direct the Fund's dividend disbursing agent to send
such notice with a Gross-up Payment to each holder of shares that was entitled
to such dividend payment during such calendar year at such holder's address as
the same appears or last appeared on the stock books of the Fund.

         A "Gross-up Payment" means payment to a holder of Preferred Shares of
an amount which, when taken together with the aggregate amount of Taxable
Allocations made to such holder to which such Gross-up Payment relates, would
cause such holder's dividends in dollars (after regular federal income tax
consequences) from the aggregate of such Taxable Allocations and the related
Gross-up Payment to be equal to the dollar amount of the dividends which would
have been received by such holder if the amount of the aggregate Taxable
Allocations would have been excludable from the gross income of such holder for
federal income tax purposes. Such Gross-up Payment shall be calculated: (a)
without consideration being given to the time value of money; (b) assuming that
no holder of Preferred Shares is subject to the federal alternative minimum tax
with respect to dividends received from the Fund; and (c) assuming that each
Taxable Allocation and each Gross-up Payment (except to the extent such Gross-up
Payment is designated as an exempt-interest dividend under Section 852(b)(5) of
the Internal Revenue Code or successor provisions) would be taxable in the hands
of each holder of Preferred Shares at the maximum marginal regular federal
income tax rate applicable to ordinary income or net capital gain, as
applicable, or the maximum marginal regular federal corporate income tax rate
applicable to ordinary income or net capital gain, as applicable, whichever is
greater, in effect at the time such Gross-up Payment is made.]

         Restrictions on Dividends and Other Distributions. Except as otherwise
described herein, for so long as any Preferred Shares are outstanding, the Fund
may not declare, pay or set apart for payment any dividend or other distribution
(other than a dividend or distribution paid in, or in options, warrants or
rights to subscribe for or purchase, its shares of Common Stock) in respect of
its Common Stock or other shares of the Fund ranking junior to, or on parity
with, Preferred Shares as to the payments of dividends or the distribution of
assets upon dissolution, liquidation or winding up, or call for redemption,
redeem, purchase or otherwise acquire for consideration any shares of Common
Stock or other such junior shares or other such parity shares (except by
conversion into or exchange for shares of the Fund ranking junior to Preferred
Shares as to the payment of dividends and the distribution of assets upon
liquidation), unless (a) full cumulative dividends on Preferred Shares through
the most recently ended Dividend Period shall have been paid or shall have been
declared and sufficient funds for the payment thereof deposited with the Auction
Agent and (b) the Fund shall have redeemed the full number of Preferred Shares
required to be redeemed by any provision for mandatory redemption pertaining
thereto. Except as otherwise described herein, for so long as any Preferred
Shares are outstanding, the Fund may not declare, pay or set apart for payment
any dividend or other distribution (other than a dividend or distribution paid
in shares of, or in options, warrants or rights to subscribe for or purchase,
shares of Common Stock or other shares, if any, ranking junior to Preferred
Shares as to the payment of dividends and the distribution of assets upon
dissolution, liquidation or winding up) in respect of shares of Common Stock or
any other shares of the Fund ranking junior to Preferred Shares as to the
payment of dividends or the distribution of assets upon dissolution, liquidation
or winding up, or call for redemption, redeem, purchase or otherwise acquire for
consideration any shares of Common Stock or any other such junior shares (except
by conversion into or exchange for shares of the Fund ranking junior to
Preferred Shares as to the payment of dividends and the distribution of assets
upon dissolution, liquidation or winding up), unless immediately after such
transaction the Discounted Value of the Fund's portfolio would at least equal
the Preferred Shares Basic Maintenance Amount in accordance with guidelines of
the rating agency or agencies then rating Preferred Shares.

         Except as set forth in the next sentence, no dividends shall be
declared or paid or set apart for payment on the shares of any class or series
of Fund shares ranking, as to the payment of dividends, on a parity with
Preferred Shares for any period unless full cumulative dividends have been or
contemporaneously are declared and paid on Preferred Shares through the most
recent Dividend Payment Date. When dividends are not paid in full upon Preferred
Shares through the most recent Dividend Payment Date or upon the shares of any
other class or series of shares ranking on a parity as to the payment of
dividends with Preferred Shares through their most recent respective dividend
payment dates, all dividends declared upon Preferred Shares and any such other
class or series of shares ranking on a parity as to the payment of dividends
with Preferred Shares shall be declared pro rata so that the amount of dividends
declared per share on Preferred Shares and such other class or series of shares
shall in all cases bear to each other the same ratio that accumulated dividends
per share on Preferred Shares and such other class or series of shares bear to
each other.

                                      -24-

<PAGE>

         Designation of Special Rate Periods. The Fund, at its option, may
designate any succeeding Subsequent Rate Period as a Special Rate Period
consisting of a specified number of Rate Period Days evenly divisible by seven
and not more than 1,820 (approximately 5 years), subject to certain adjustments.
A designation of a Special Rate Period shall be effective only if, among other
things, (a) the Fund shall have given certain notices to the Auction Agent, (b)
an Auction shall have been held on the Auction Date immediately preceding the
first day of such proposed Special Rate Period and Sufficient Clearing Bids
shall have existed in such Auction and (c) if the Fund shall have mailed a
notice of redemption with respect to any Preferred Shares, the redemption price
with respect to such shares shall have been deposited with the Auction Agent.
The Fund will give holders of Preferred Shares notice of a Special Rate Period
as provided in the Articles Supplementary.

REDEMPTION

         Mandatory Redemption. In the event the Fund does not timely cure a
failure to maintain (a) a Discounted Value of its portfolio equal to the
Preferred Shares Basic Maintenance Amount or (b) the 1940 Act Preferred Shares
Asset Coverage, in each case in accordance with the requirements of the rating
agency or agencies then rating Preferred Shares, Preferred Shares will be
subject to mandatory redemption on a date specified by the Board out of funds
legally available therefor in accordance with the Charter and applicable law, at
the redemption price of $25,000 per share plus an amount equal to accumulated
but unpaid dividends thereon (whether or not earned or declared) to (but not
including) the date fixed for redemption. Any such redemption will be limited to
the number of Preferred Shares necessary to restore the required Discounted
Value or the 1940 Act Preferred Shares Asset Coverage, as the case may be.

         Optional Redemption. Preferred Shares are redeemable, at the option of
         the Fund:

         (a) as a whole or from time to time in part, on the second Business
     Day preceding any Dividend Payment Date, out of funds legally available
     therefor in accordance with the Charter and applicable law, at the
     redemption price of $25,000 per share plus an amount equal to accumulated
     but unpaid dividends thereon (whether or not earned or declared) to (but
     not including) the date fixed for redemption; provided, however, that (i)
     shares may not be redeemed in part if after such partial redemption fewer
     than 250 shares would remain outstanding; (ii) shares are redeemable by the
     Fund during the Initial Rate Period only on the second Business Day next
     preceding the last Dividend Payment Date for the Initial Rate Period; and
     (iii) the notice establishing a Special Rate Period, as delivered to the
     Auction Agent and filed with the Secretary of the Fund, may provide that
     shares shall not be redeemable during the whole or any part of such Special
     Rate Period (except as provided in clause (b) below) or shall be redeemable
     during the whole or any part of such Special Rate Period only upon payment
     of such redemption premium or premiums as shall be specified therein; and

         (b) as a whole but not in part, out of funds legally available therefor
     in accordance with the Charter and applicable law, on the first day
     following any Dividend Period included in a Rate Period of more than 364
     Rate Period Days if, on the date of determination of the Applicable Rate
     for such Rate Period, such Applicable Rate equaled or exceeded on such date
     of determination the Treasury Note Rate for such Rate Period, at a
     redemption price of $25,000 per share plus an amount equal to accumulated
     but unpaid dividends thereon (whether or not earned or declared) to (but
     not including) the date fixed for redemption.

         Notwithstanding the foregoing, if any dividends on Preferred Shares
(whether or not earned or declared) are in arrears, no Preferred Shares shall be
redeemed unless all outstanding Preferred Shares are simultaneously redeemed,
and the Fund shall not purchase or otherwise acquire any Preferred Shares;
provided, however, that the foregoing shall not prevent the purchase or
acquisition of all outstanding Preferred Shares pursuant to the successful
completion of an otherwise lawful purchase or exchange offer made on the same
terms to, and accepted by, holders of all outstanding Preferred Shares.

LIQUIDATION

         Subject to the rights of holders of any series or class or classes of
shares ranking on a parity with Preferred Shares with respect to the
distribution of assets upon liquidation of the Fund, upon a liquidation of the
Fund, whether voluntary or involuntary, the holders of Preferred Shares then
outstanding will be entitled to receive and to be paid out of the assets of the
Fund available for distribution to its shareholders, before any payment or
distribution

                                      -25-

<PAGE>

shall be made on the shares of Common Stock, an amount equal to the liquidation
preference with respect to such shares ($25,000 per share), plus an amount equal
to all dividends thereon (whether or not earned or declared) accumulated but
unpaid to (but not including) the date of final distribution in same-day funds,
together with any applicable Gross-up Payments in connection with the
liquidation of the Fund. After the payment to the holders of Preferred Shares of
the full preferential amounts provided for as described herein, the holders of
Preferred Shares as such shall have no right or claim to any of the remaining
assets of the Fund.

         Neither the sale of all or substantially all the property or business
of the Fund, nor the merger or consolidation of the Fund into or with any other
corporation nor the merger or consolidation of any other corporation into or
with the Fund, shall be a liquidation, whether voluntary or involuntary, for the
purposes of the foregoing paragraph.

RATING AGENCY GUIDELINES AND ASSET COVERAGE

         The Fund is required under the 1940 Act and Moody's and Fitch
guidelines to maintain assets having in the aggregate a Discounted Value at
least equal to the Preferred Shares Basic Maintenance Amount. Moody's and Fitch
have each established separate guidelines for determining Discounted Value. To
the extent any particular portfolio holding does not satisfy the applicable
rating agency's guidelines, all or a portion of such holding's value will not be
included in the calculation of Discounted Value (as defined by such rating
agency). The Moody's and Fitch guidelines do not impose any limitations on the
percentage of the Fund's assets that may be invested in holdings not eligible
for inclusion in the calculation of the Discounted Value of the Fund's
portfolio. The amount of such assets included in the portfolio at any time may
vary depending upon the rating, diversification and other characteristics of the
eligible assets included in the portfolio, although it is not anticipated that
in the normal course of business the value of such assets would exceed [20]% of
the Fund's total assets. The Preferred Shares Basic Maintenance Amount includes
the sum of (a) the aggregate liquidation preference of Preferred Shares then
outstanding and (b) certain accrued and projected payment obligations of the
Fund.

         The Fund is also required under the 1940 Act and rating agency
guidelines to maintain, with respect to Preferred Shares, as of the last
Business Day of each month in which any such shares are outstanding, asset
coverage of at least 200% with respect to senior securities which are shares,
including Preferred Shares (or such other asset coverage as may in the future be
specified in or under the 1940 Act as the minimum asset coverage for senior
securities which are shares of a closed-end investment company as a condition of
declaring dividends on its common shares) ("1940 Act Preferred Shares Asset
Coverage"). Based on the composition of the portfolio of the Fund and market
conditions as of ___________ __, 2002, 1940 Act Preferred Shares Asset Coverage
with respect to Preferred Shares, assuming the issuance of all Preferred Shares
offered hereby and giving effect to the deduction of sales load and offering
costs related thereto estimated at $______________, would have been computed as
follows:

    Value of Fund assets less liabilities
      not constituting senior securities             $
-----------------------------------------------
                                                =                     =     %
Senior securities representing indebtedness          $
plus liquidation value of Preferred Shares

         In the event the Fund does not timely cure a failure to maintain (a) a
Discounted Value of its portfolio equal to the Preferred Shares Basic
Maintenance Amount or (b) the 1940 Act Preferred Shares Asset Coverage, in each
case in accordance with the requirements of the rating agency or agencies then
rating Preferred Shares, the Fund will be required to redeem Preferred Shares as
described under "Redemption - Mandatory Redemption" above.

         The Fund may, but is not required to, adopt any modifications to the
guidelines that may hereafter be established by Moody's or Fitch. Failure to
adopt any such modifications, however, may result in a change in the ratings
described above or a withdrawal of ratings altogether. In addition, any rating
agency providing a rating for Preferred Shares may, at any time, change or
withdraw any such rating. The Board may, without shareholder approval, amend,
alter or repeal any or all of the definitions and related provisions which have
been adopted by the Fund pursuant to the rating agency guidelines in the event
the Fund receives written confirmation from Moody's or

                                      -26-

<PAGE>

Fitch, or both, as appropriate, that any such amendment, alteration or repeal
would not impair the ratings then assigned by Moody's and Fitch to Preferred
Shares.

         As described by Moody's and Fitch, a preferred stock rating is an
assessment of the capacity and willingness of an issuer to pay preferred stock
obligations. The ratings on Preferred Shares are not recommendations to
purchase, hold or sell those shares, inasmuch as the ratings do not comment as
to market price or suitability for a particular investor. The rating agency
guidelines described above also do not address the likelihood that an owner of
Preferred Shares will be able to sell such shares in an Auction or otherwise.
The ratings are based on current information furnished to Moody's and Fitch by
the Fund and the Manager and information obtained from other sources. The
ratings may be changed, suspended or withdrawn as a result of changes in, or the
unavailability of, such information. The Common Stock has not been rated by an
NRSRO.

         A rating agency's guidelines will apply to Preferred Shares only so
long as such rating agency is rating such shares. The Fund will pay certain fees
to Moody's or Fitch, or both, for rating Preferred Shares.

VOTING RIGHTS

         Except as otherwise provided in this Prospectus and in the Statement of
Additional Information, in the Charter or as otherwise required by law, holders
of Preferred Shares will have equal voting rights with holders of shares of
Common Stock and holders of any other shares of preferred stock of the Fund (one
vote per share) and will vote together with holders of shares of Common Stock
and holders of any other shares of preferred stock of the Fund as a single
class. There is presently no other preferred stock of the Fund authorized or
issued.

         In connection with the election of the Fund's directors, holders of
outstanding Preferred Shares, voting as a separate class, are entitled to elect
two of the Fund's directors, and the remaining directors are elected by holders
of shares of Common Stock and Preferred Shares, voting together as a single
class. In addition, if at any time dividends (whether or not earned or declared)
on outstanding Preferred Shares shall be due and unpaid in an amount equal to
two full years' dividends thereon, and sufficient cash or specified securities
shall not have been deposited with the Auction Agent for the payment of such
dividends, then, as the sole remedy of holders of outstanding Preferred Shares,
the number of directors constituting the Board shall be increased by the
smallest number that, when added to the two directors elected exclusively by the
holders of Preferred Shares, as described above, would constitute a majority of
the Board as so increased by such smallest number, and at a special meeting of
shareholders which will be called and held as soon as practicable, and at all
subsequent meetings at which directors are to be elected, the holders of
Preferred Shares, voting as a separate class, will be entitled to elect the
smallest number of additional directors that, together with the two directors
which such holders will be in any event entitled to elect, constitutes a
majority of the total number of directors of the Fund as so increased. The terms
of office of the persons who are directors at the time of that election will
continue. If the Fund thereafter shall pay, or declare and set apart for
payment, in full, all dividends payable on all outstanding Preferred Shares, the
voting rights stated in the second preceding sentence shall cease, and the terms
of office of all of the additional directors elected by the holders of Preferred
Shares (but not of the directors with respect to whose election the holders of
shares of Common Stock were entitled to vote or the two directors the holders of
Preferred Shares have the right to elect in any event), will terminate
automatically.

         So long as any Preferred Shares are outstanding, the Fund will not,
without the affirmative vote or consent of the holders of at least a majority of
Preferred Shares outstanding at the time (voting as a separate class):

         (a) authorize, create or issue any class or series of stock ranking
     prior to or on a parity with Preferred Shares with respect to the payment
     of dividends or the distribution of assets upon liquidation, or authorize,
     create or issue additional shares of any series of Preferred Shares (except
     that, notwithstanding the foregoing, but subject to certain rating agency
     approvals, the Board, without the vote or consent of the holders of
     Preferred Shares, may from time to time authorize and create, and the Fund
     may from time to time issue additional shares of, any series of Preferred
     Shares, or classes or series of other preferred stock ranking on a parity
     with Preferred Shares with respect to the payment of dividends and the
     distribution of assets upon liquidation; provided, however, that if Moody's
     or Fitch is not then rating Preferred Shares, the aggregate liquidation
     preference of all preferred stock of the Fund outstanding after any such
     issuance, exclusive of accumulated and unpaid dividends, may not exceed
     $________________); or

                                      -27-

<PAGE>

         (b) amend, alter or repeal the provisions of the Charter whether by
     merger, consolidation or otherwise, so as to affect any preference, right
     or power of such Preferred Shares or the holders thereof; provided,
     however, that (i) none of the actions permitted by the exception to (a)
     above will be deemed to affect such preferences, rights or powers and (ii)
     the authorization, creation and issuance of classes or series of stock
     ranking junior to Preferred Shares with respect to the payment of dividends
     and the distribution of assets upon liquidation will be deemed to affect
     such preferences, rights or powers only if Moody's or Fitch is then rating
     Preferred Shares and such issuance would, at the time thereof, cause the
     Fund not to satisfy the 1940 Act Preferred Shares Asset Coverage or the
     Preferred Shares Basic Maintenance Amount. So long as any Preferred Shares
     are outstanding, the Fund shall not, without the affirmative vote or
     consent of the holders of at least 66 2/3% of Preferred Shares outstanding
     at the time, voting as a separate class, file a voluntary application for
     relief under federal bankruptcy law or any similar application under state
     law for so long as the Fund is solvent and does not foresee becoming
     insolvent.

         The Board may, without shareholder approval, amend, alter or repeal any
or all of the definitions and related provisions which have been adopted by the
Fund pursuant to the rating agency guidelines in the event the Fund receives
written confirmation from Moody's or Fitch, or both, as appropriate, that any
such amendment, alteration or repeal would not impair the ratings then assigned
by Moody's and Fitch to Preferred Shares. Unless a higher percentage is provided
for in the Articles (see "Certain Provisions in the Charter and Bylaws"), (A)
the affirmative vote of the holders of at least a majority of the outstanding
Preferred Shares, voting as a separate class, shall be required to approve any
conversion of the Fund from a closed-end to an open-end investment company and
(B) the affirmative vote of the holders of a majority of the outstanding
Preferred Shares, voting as a separate class, shall be required to approve any
plan of reorganization (as such term is used in the 1940 Act) adversely
affecting such shares. The affirmative vote of the holders of a majority of the
outstanding Preferred Shares, voting as a separate class, shall be required to
approve any action not described in the preceding sentence requiring a vote of
security holders of the Fund under Section 13(a) of the 1940 Act.

         The foregoing voting provisions will not apply with respect to
Preferred Shares if, at or prior to the time when a vote is required, such
shares shall have been (i) redeemed or (ii) called for redemption and sufficient
funds shall have been deposited in trust to effect such redemption.

                                   THE AUCTION
GENERAL

         The Articles Supplementary provide that, except as otherwise described
herein, the Applicable Rate for Preferred Shares for each Rate Period after the
Initial Rate Period shall be equal to the rate per annum that the Auction Agent
advises has resulted on the Business Day preceding the first day of such
Subsequent Rate Period (an "Auction Date") from implementation of the auction
procedures (the "Auction Procedures") set forth in the Articles Supplementary
and summarized below, in which persons determine to hold or offer to sell or,
based on dividend rates bid by them, offer to purchase or sell Preferred Shares.
Each periodic implementation of the Auction Procedures is referred to herein as
an "Auction." See the Articles Supplementary for a more complete description of
the Auction process.

         Auction Agency Agreement. The Fund has entered into an Auction Agency
Agreement (the "Auction Agency Agreement") with the Auction Agent (currently,
Bankers Trust Company) which provides, among other things, that the Auction
Agent will follow the Auction Procedures for purposes of determining the
Applicable Rate for Preferred Shares so long as the Applicable Rate is to be
based on the results of an Auction.

         The Auction Agent may terminate the Auction Agency Agreement upon
notice to the Fund on a date no earlier than 45 days after such notice. If the
Auction Agent should resign, the Fund will use its best efforts to enter into an
agreement with a successor Auction Agent containing substantially the same terms
and conditions as the Auction Agency Agreement. The Fund may remove the Auction
Agent provided that prior to such removal the Fund shall have entered into such
an agreement with a successor Auction Agent.

         Broker-Dealer Agreements. Each Auction requires the participation of
one or more Broker-Dealers. The Auction Agent has entered into agreements
(collectively, the "Broker-Dealer Agreements") with several Broker-

                                      -28-

<PAGE>

Dealers selected by the Fund, which provide for the participation of those
Broker-Dealers in Auctions for Preferred Shares.

         The Auction Agent after each Auction for Preferred Shares will pay to
each Broker-Dealer, from funds provided by the Fund, a service charge at the
annual rate of 1/4 of 1% in the case of any Auction immediately preceding a Rate
Period of less than one year, or a percentage agreed to by the Fund and the
Broker-Dealers in the case of any Auction immediately preceding a Rate Period of
one year or longer, of the purchase price of Preferred Shares placed by such
Broker-Dealer at such Auction. For the purposes of the preceding sentence,
Preferred Shares will be placed by a Broker-Dealer if such shares were (a) the
subject of Hold Orders deemed to have been submitted to the Auction Agent by the
Broker-Dealer and were acquired by such Broker-Dealer for its own account or
were acquired by such Broker-Dealer for its customers who are Beneficial Owners
or (b) the subject of an Order submitted by such Broker-Dealer that is (i) a
Submitted Bid of an Existing Holder that resulted in such Existing Holder
continuing to hold such shares as a result of the Auction or (ii) a Submitted
Bid of a Potential Holder that resulted in such Potential Holder purchasing such
shares as a result of the Auction or (iii) a valid Hold Order.

         The Fund may request the Auction Agent to terminate one or more
Broker-Dealer Agreements at any time, provided that at least one Broker-Dealer
Agreement is in effect after such termination.

AUCTION PROCEDURES

         Prior to the Submission Deadline on each Auction Date for Preferred
Shares, each customer of a Broker-Dealer who is listed on the records of that
Broker-Dealer (or, if applicable, the Auction Agent) as a holder of Preferred
Shares (a "Beneficial Owner") may submit orders ("Orders") with respect to such
Preferred Shares to that Broker-Dealer as follows:

         - Hold Order - indicating its desire to hold such shares without regard
           to the Applicable Rate for the next Rate Period thereof.

         - Bid - indicating its desire to sell such shares at $25,000 per share
           if the Applicable Rate for the next Rate Period thereof is less than
           the rate specified in such Bid (also known as a hold-at-a-rate
           order).

         - Sell Order - indicating its desire to sell such shares at $25,000
           per share without regard to the Applicable Rate for the next Rate
           Period thereof.

         A Beneficial Owner may submit different types of Orders to its
Broker-Dealer with respect to Preferred Shares then held by such Beneficial
Owner. A Beneficial Owner that submits a Bid with respect to such shares to its
Broker-Dealer having a rate higher than the Maximum Rate on the Auction Date
will be treated as having submitted a Sell Order with respect to such shares to
its Broker-Dealer. A Beneficial Owner that fails to submit an Order with respect
to such shares to its Broker-Dealer will be deemed to have submitted a Hold
Order with respect to such shares to its Broker-Dealer; provided, however, that
if a Beneficial Owner fails to submit an Order with respect to such shares to
its Broker-Dealer for an Auction relating to a Rate Period of more than 28 Rate
Period Days, such Beneficial Owner will be deemed to have submitted a Sell Order
with respect to such shares to its Broker-Dealer. A Sell Order shall constitute
an irrevocable offer to sell Preferred Shares subject thereto. A Beneficial
Owner that offers to become the Beneficial Owner of additional Preferred Shares
is, for purposes of such offer, a Potential Beneficial Owner as discussed below.

         A customer of a Broker-Dealer that is not a Beneficial Owner of
Preferred Shares but that wishes to purchase Preferred Shares, or that is a
Beneficial Owner of Preferred Shares that wishes to purchase additional
Preferred Shares (in each case, a "Potential Beneficial Owner"), may submit Bids
to its Broker-Dealer in which it offers to purchase Preferred Shares at $25,000
per share if the Applicable Rate for the next Rate Period is not less than the
rate specified in such Bid. A Bid placed by a Potential Beneficial Owner
specifying a rate higher than the Maximum Rate on the Auction Date will not be
accepted.

         The Broker-Dealers in turn will submit the Orders of their respective
customers who are Beneficial Owners and Potential Beneficial Owners to the
Auction Agent, designating themselves (unless otherwise permitted by the

                                      -29-

<PAGE>

Fund) as Existing Holders in respect of shares subject to Orders submitted or
deemed submitted to them by Beneficial Owners and as Potential Holders in
respect of shares subject to Orders submitted to them by Potential Beneficial
Owners. However, neither the Fund nor the Auction Agent will be responsible for
a Broker-Dealer's failure to comply with the foregoing. Any Order placed with
the Auction Agent by a Broker-Dealer as or on behalf of an Existing Holder or a
Potential Holder will be treated in the same manner as an Order placed with a
Broker-Dealer by a Beneficial Owner or Potential Beneficial Owner. Similarly,
any failure by a Broker-Dealer to submit to the Auction Agent an Order in
respect of any Preferred Shares held by it or customers who are Beneficial
Owners will be treated in the same manner as a Beneficial Owner's failure to
submit to its Broker-Dealer an Order in respect of Preferred Shares held by it.
A Broker-Dealer may also submit Orders to the Auction Agent for its own account
as an Existing Holder or Potential Holder, provided it is not an affiliate of
the Fund.

         If Sufficient Clearing Bids for Preferred Shares exist (that is, the
number of Preferred Shares subject to Bids submitted or deemed submitted to the
Auction Agent by Broker-Dealers as or on behalf of Potential Holders with rates
equal to or lower than the Maximum Rate is at least equal to the number of
Preferred Shares subject to Sell Orders submitted or deemed submitted to the
Auction Agent by Broker-Dealers as or on behalf of Existing Holders), the
Applicable Rate for the next succeeding Rate Period will be the lowest rate
specified in the Submitted Bids which, taking into account such rate and all
lower rates bid by Broker-Dealers as or on behalf of Existing Holders and
Potential Holders, would result in Existing Holders and Potential Holders owning
the Preferred Shares available for purchase in the Auction. If Sufficient
Clearing Bids do not exist, the Applicable Rate for the next succeeding Rate
Period will be the Maximum Rate on the Auction Date. In such event, Beneficial
Owners that have submitted or are deemed to have submitted Sell Orders may not
be able to sell in such Auction all shares subject to such Sell Orders. If
Broker-Dealers submit or are deemed to have submitted to the Auction Agent Hold
Orders with respect to all Existing Holders of Preferred Shares, the Applicable
Rate for the next succeeding Rate Period will be the All Hold Order Rate.

         The Auction Procedures include a pro rata allocation of shares for
purchase and sale, which may result in an Existing Holder continuing to hold or
selling, or a Potential Holder purchasing, a number of Preferred Shares that is
fewer than the number of Preferred Shares specified in its Order. To the extent
the allocation procedures have that result, Broker-Dealers that have designated
themselves as Existing Holders or Potential Holders in respect of customer
Orders will be required to make appropriate pro rata allocations among their
respective customers.

         Settlement of purchases and sales will be made on the next Business Day
(also a Dividend Payment Date) after the Auction Date through the Securities
Depository. Purchasers will make payment through their Agent Members in same-day
funds to the Securities Depository against delivery to their respective Agent
Members. The Securities Depository will make payment to the sellers' Agent
Members in accordance with the Securities Depository's normal procedures, which
now provide for payment against delivery by their Agent Members in same-day
funds.

         The Auctions for Preferred Shares will normally be held every [Monday]
and each Subsequent Rate Period will normally begin on the following [Tuesday].

         Whenever the Fund intends to include any net capital gain or other
income taxable for regular federal income tax purposes in any dividend on
Preferred Shares, the Fund shall, in the case of Minimum Rate Periods or Special
Rate Periods of 28 Rate Period Days or fewer, and may, in the case of any other
Special Rate Period, notify the Auction Agent of the amount to be so included
not later than the Dividend Payment Date next preceding the Auction Date on
which the Applicable Rate for such dividend is to be established. Whenever the
Auction Agent receives such notice from the Fund, it will be required in turn to
notify each Broker-Dealer, who, on or prior to such Auction Date, in accordance
with its Broker-Dealer Agreement, will be required to notify its customers who
are Beneficial Owners and Potential Beneficial Owners believed by it to be
interested in submitting an Order in the Auction to be held on such Auction
Date.

SECONDARY MARKET TRADING AND TRANSFER OF PREFERRED SHARES

         The Broker-Dealers are expected to maintain a secondary trading market
in Preferred Shares outside of Auctions, but are not obligated to do so, and may
discontinue such activity at any time. There can be no assurance that such
secondary trading market in Preferred Shares will provide owners with liquidity
of investment. Preferred

                                      -30-

<PAGE>

Shares are not registered on any stock exchange or on the Nasdaq Stock Market.
Investors who purchase shares in an Auction for a Special Rate Period should
note that because the dividend rate on such shares will be fixed for the length
of such Rate Period, the value of the shares may fluctuate in response to
changes in interest rates, and may be more or less than their original cost if
sold on the open market in advance of the next Auction therefor, depending upon
market conditions.

         A Beneficial Owner or an Existing Holder may sell, transfer or
otherwise dispose of Preferred Shares only in whole shares and only (1) pursuant
to a Bid or Sell Order placed with the Auction Agent in accordance with the
Auction Procedures, (2) to a Broker-Dealer or (3) to such other persons as may
be permitted by the Fund; provided, however, that (a) a sale, transfer or other
disposition of Preferred Shares from a customer of a Broker-Dealer who is listed
on the records of that Broker-Dealer as the holder of such shares to that
Broker-Dealer or another customer of that Broker-Dealer shall not be deemed to
be a sale, transfer or other disposition for purposes of the foregoing if such
Broker-Dealer remains the Existing Holder of the shares so sold, transferred or
disposed of immediately after such sale, transfer or disposition and (b) in the
case of all transfers other than pursuant to Auctions, the Broker-Dealer (or
other person, if permitted by the Fund) to whom such transfer is made shall
advise the Auction Agent of such transfer.

                           DESCRIPTION OF COMMON STOCK

         The Articles authorize the issuance of 500,000,000 shares of capital
stock of the Fund, designated pursuant to the Articles as Common Stock, par
value $.001 per share. Pursuant to the Articles, the Board may classify or
reclassify any unissued shares of capital stock from time to time by setting or
changing the preferences, conversion or other rights, voting powers,
restrictions, limitations as to dividends, qualifications and terms and
conditions of redemption of such shares of stock. All shares of Common Stock
have non-cumulative voting rights and equal rights with respect to dividends,
assets and liquidations. Shares of Common Stock are fully paid and
non-assessable when issued and have no preemptive, conversion or exchange
rights. Whenever Preferred Shares are outstanding, shareholders of Common Stock
will not be entitled to receive any distributions from the Fund unless all
accrued dividends on Preferred Shares have been paid, and unless asset coverage
(as defined in the 1940 Act) with respect to Preferred Shares would be at least
200% after giving effect to the distributions.

                  CERTAIN PROVISIONS IN THE CHARTER AND BYLAWS

         The Articles and the Fund's bylaws include provisions that could limit
the ability of other entities or persons to acquire control of the Fund, to
cause it to engage in certain transactions or to modify its structure.

         The affirmative vote of at least 75% of the directors and of the
holders of at least 75% of the shares of the Fund is required to authorize any
of the following transactions; (1) any merger, consolidation or share exchange
of the Fund with or into any other person; (2) with certain exceptions, the
issuance or transfer by the Fund of any securities of the Fund to any other
person or entity for cash, securities or other property having an aggregate fair
market value of $1,000,000 or more; (3) the sale, lease, exchange, mortgage,
pledge, transfer or other disposition by the Fund (in one or a series of
transactions in any 12-month period) to or with any person of any assets of the
Fund having an aggregate fair market value of $1,000,000 or more, except for
portfolio transactions effected by the Fund in the ordinary course of its
business; (4) the dissolution or liquidation of the Fund; and (5) any
shareholder proposal as to specific investment decisions made or to be made with
respect to the Fund's assets. However, in the case of clauses (1) through (4)
above, a 75% shareholder vote will not be required if the transaction is
approved by a vote of at least 75% of the Continuing Directors (as defined in
the Articles) or if certain other conditions and requirements are satisfied. In
that event, a majority of the votes entitled to be cast will be required to
approve such transaction if it is a transaction described in clauses (1) or (3)
with respect to which a shareholder vote is required under Maryland law or if it
is a transaction described in clause (4), and no shareholder vote will be
required otherwise. The percentage vote required under these provisions is
higher than that required under Maryland law or by the 1940 Act. The Board
believes that the provisions of the Articles relating to such a higher vote are
in the best interest of the Fund and its shareholders. The affirmative vote of
at least 75% of the shares will be required to amend the Articles or bylaws to
change any of the foregoing provisions. See the Statement of Additional
Information under "Certain Provisions in the Articles of Incorporation".

         The Board is classified into three classes, each with a term of three
years. Each year, the term of one class expires and the successor or successors
elected to such class will serve for a three-year term. Such classification may
prevent replacement of a majority of the Directors for up to a two-year period.
Directors may be removed from office with or without cause and only by vote of
the holders of 75% of the shares of the Fund entitled to be voted on that
matter.

         Reference should be made to the Articles on file with the SEC for the
full text of these provisions.

         See the Statement of Additional Information under "Certain Provisions
in the Articles of Incorporation, for a discussion of the voting requirements
applicable to certain other transactions.

                                      -31-

<PAGE>

             REPURCHASE OF COMMON STOCK; CONVERSION TO OPEN-END FUND

         The Fund is a closed-end investment company and as such its
shareholders do not have the right to cause the Fund to redeem their shares.
Instead, the Fund's shares of Common Stock trade in the open market at a price
that is a function of several factors, including dividend levels (which are in
turn affected by expenses), net asset value, call protection, dividend
stability, portfolio credit quality, relative demand for and supply of such
shares in the market, general market and economic conditions and other factors.
Shares of common stock of closed-end investment companies frequently trade at a
discount from net asset value, although in some cases they may trade at a
premium. Some closed-end companies have taken certain actions, including the
repurchase of common stock in the market at market prices and the making of one
or more tender offers for common stock at net asset value, in an effort to
reduce or mitigate any such discount. Others have converted to an open-end
investment company, the shares of which are redeemable at net asset value. The
Board has seen no reason to adopt any of these steps with respect to the Fund.
Accordingly, the Fund cannot assure you that the Board will decide to take any
of these actions, or, if taken, that share repurchases or tender offers will
cause the Fund's shares to trade at a price equal to their net asset value.

         The Fund's Manager may voluntarily waive its fees from time to time in
order to increase the Fund's dividend yield in an effort to reduce the discount.
Any such waiver may be terminated at any time, and there can be no assurance
that such actions would be successful at reducing the discount.

         If the Fund converted to an open-end company, it would be required to
redeem all Preferred Shares then outstanding (requiring in turn that it
liquidate a portion of its investment portfolio), and the Fund's Common Stock
would no longer be listed on the NYSE. In contrast to a closed-end investment
company, shareholders of an open-end investment company may require the company
to redeem their shares at any time (except in certain circumstances as
authorized by or under the 1940 Act) at their net asset value, less any
redemption charge that is in effect at the time of redemption. See this
Prospectus under "Certain Provisions in the Charter and Bylaws" for a discussion
of the voting requirements applicable to the conversion of the Fund to an
open-end company.

         Before deciding whether to take any action if the shares of Common
Stock trade below net asset value, the Board would consider all relevant
factors, including the extent and duration of the discount, the liquidity of the
Fund's portfolio, the impact of any action that might be taken on the Fund or
its shareholders, and market considerations. Based on these considerations, even
if the Fund's shares should trade at a discount, the Board may determine that,
in the interest of the Fund and its shareholders, no action should be taken. See
the Statement of Additional Information under "Repurchase of Fund Shares;
Conversion to Open-End Fund" for a further discussion of possible action to
reduce or eliminate such discount to net asset value.

                                   TAX MATTERS

FEDERAL INCOME TAX MATTERS

         The discussion below and in the Statement of Additional Information
provides general tax information. Because tax laws are complex and often change,
you should consult your tax advisor about the tax consequences of an investment
in Preferred Shares.

         The Fund has qualified and intends to continue to qualify each year as
a regulated investment company under Subchapter M of the Internal Revenue Code
of 1986, as amended (the "Code"). In addition, the Fund intends to satisfy each
year conditions contained in the Code that will enable interest from municipal
obligations, excluded from gross income for federal income tax purposes with
respect to the Fund, to retain that status when distributed to the holders of
Common Stock and holders of Preferred Shares (that is, to be classified as
"exempt-interest dividends" of the Fund). Therefore, it is not expected that the
Fund will be subject to any federal income tax to the extent its earnings and
gains are so distributed. A shareholder treats an exempt-interest dividend as
interest on state and local bonds exempt from regular federal income tax. Some
or all of an exempt-interest dividend, however, may be subject to a federal
alternative minimum tax imposed on the shareholder. Different federal
alternative minimum tax rules apply to individuals and to corporations. In
addition to exempt-interest dividends, the Fund also may distribute to its
shareholders amounts that are treated as long-term capital gain or ordinary
income. The Fund will

                                      -32-

<PAGE>

allocate distributions to shareholders that are treated as interest that is
exempt from regular federal income taxes and as long-term capital gain and
ordinary income, if any, proportionately among the shares of Common Stock and
Preferred Shares. The Fund will also allocate interest that is subject to the
federal alternative minimum tax proportionately among the shares of Common Stock
and Preferred Shares. The Fund intends to notify holders of Preferred Shares in
advance if it will allocate to them income that is not exempt from regular
federal income tax. [In certain circumstances the Fund will make payments to
holders of Preferred Shares to offset the tax effects of the taxable
distribution. See "Description of Preferred Shares- Dividends and Dividend
Periods - Gross-Up Payments."] The sale or other disposition of shares of Common
Stock or Preferred Shares of the Fund will normally result in capital gain or
loss to shareholders. Present law taxes both long-term and short-term capital
gains of corporations at the rates applicable to ordinary income. For
non-corporate taxpayers, under current law short-term capital gains and ordinary
income will be taxed at a maximum rate of 39.6% while long-term capital gains
will generally be taxed at a maximum rate of 20%. Because of certain limitations
on itemized deductions and the deduction for personal exemptions applicable to
higher income taxpayers, the effective rate of tax may be higher in certain
circumstances. Losses realized by a shareholder on the sale or exchange of
shares of the Fund held for six months or less are disallowed to the extent of
any distribution of exempt-interest dividends received with respect to such
shares, and, if not disallowed, such losses are treated as long-term capital
losses to the extent of any distribution of long-term capital gain received with
respect to such shares. Under certain circumstances, a shareholder's holding
period may have to restart after, or may be suspended for, any periods during
which the shareholder's risk of loss is diminished as a result of holding one or
more other positions in substantially similar or related property, or through
certain options or short sales. Any loss realized on a sale or exchange of
shares of the Fund will be disallowed to the extent those shares of the Fund are
replaced by other shares within a period of 61 days beginning 30 days before and
ending 30 days after the date of disposition of the original shares. In that
event, the basis of the replacement shares of the Fund will be adjusted to
reflect the disallowed loss. Although dividends generally will be treated as
distributed when paid, dividends declared in October, November or December,
payable to shareholders of record on a specified date in one of those months and
paid during the following January, will be treated as having been distributed by
the Fund (and received by the shareholders) on December 31 of the year declared.
The Fund is required in certain circumstances to withhold 30.5% (30% in 2002) of
taxable dividends and certain other payments paid to non-corporate holders of
the Fund's shares who do not furnish to the Fund their correct taxpayer
identification number (in the case of individuals, their social security number)
and certain certifications, or who are otherwise subject to backup withholding.
The Statement of Additional Information contains a more detailed summary of the
federal tax rules that apply to the Fund and its shareholders. Legislative,
judicial or administrative action may change the tax rules that apply to the
Fund or its shareholders and any such change may be retroactive. You should
consult with your tax adviser about federal income tax matters.

         CUSTODIAN, TRANSFER AGENT, DIVIDEND PAYING AGENT AND REGISTRAR

         PNC Bank, located at 17th and Chestnut Streets, Philadelphia,
Pennsylvania 19103, acts as the fund's custodian and has custody of all
securities and cash of the fund. The custodian, among other things, attends to
the collection of principal and income, and payment for securities bought and
sold by the fund. PFPC, located at P.O. Box 8030, Boston, Massachusetts 02266,
serves as the fund's transfer agent, dividend-paying agent and registrar.

                                  UNDERWRITING

         Salomon Smith Barney Inc. is acting as underwriter for this offering.
Subject to the terms and conditions of the Underwriting Agreement between the
Underwriter and the Fund (the "Underwriting Agreement") dated the date hereof,
the Underwriter has agreed to purchase, and the Fund has agreed to sell, all
Preferred Shares offered hereby.

         The Underwriting Agreement provides that the obligations of the
Underwriter to purchase the shares included in this offering are subject to the
approval of certain legal matters by counsel and to certain other conditions.
The Underwriter is obligated to purchase all of the Preferred Shares offered
hereby if it purchases any of the Preferred Shares. In the Underwriting
Agreement, the Fund and the Manager have agreed to indemnify the Underwriter
against certain liabilities, including liabilities arising under the Securities
Act of 1933, as amended, or to contribute payments the Underwriter may be
required to make for any of those liabilities.

         The Fund has been advised by the Underwriter that it proposes initially
to offer some of the Preferred Shares directly to the public at the public
offering price set forth on the cover page of this Prospectus and some of

                                      -33-

<PAGE>

the shares to selected dealers at the public offering price less a concession
not in excess of $     per share. The underwriting commission the Fund will pay
of $     per share is equal to   % of the initial offering price. After the
initial public offering, the Underwriter may change the public offering price
and the concession.

         The Fund anticipates that the Underwriter may from time to time act as
a broker or dealer in connection with the execution of its portfolio
transactions after it has ceased to be an underwriter. The Fund anticipates that
the Underwriter or one of its affiliates may from time to time act in auctions
as a Broker-Dealer and will receive fees as described under "The Auction" in
this Prospectus and in the Statement of Additional Information. The underwriter
is an active underwriter of, and dealer in, securities and acts as a market
maker in a number of such securities, and therefore can be expected to engage in
portfolio transactions with the Fund. The principal business address of Salomon
Smith Barney Inc. is 388 Greenwich Street, New York, New York 10013.

         The settlement date for the purchase of Preferred Shares will be     ,
2002, as agreed upon by the Underwriter, the Fund and the Manager pursuant to
Rule 15c6-1 under the Securities Exchange Act of 1934.

                                 LEGAL OPINIONS

         Certain legal matters in connection with the Preferred Shares offered
hereby will be passed upon for the Fund by Willkie Farr & Gallagher, New York,
New York, and for the Underwriter by Simpson Thacher & Bartlett, New York, New
York. Willkie Farr & Gallagher and Simpson Thacher & Bartlett may rely as to
certain matters of Maryland law on the opinion of Venable, Baetjer and Howard,
LLP, Baltimore, Maryland.

                             ADDITIONAL INFORMATION

         The Fund is subject to the information requirements of the Securities
Exchange Act of 1934 and the 1940 Act, and in accordance therewith files reports
and other information with the Commission. Such reports, proxy and public
statements and other information can be inspected and copied at the public
reference facilities maintained by the Commission at 450 Fifth Street, N.W.,
Washington, DC 20549. Call 1-202-942-8090 for information about the public
reference facilities. Copies of such material can be obtained from the Public
Reference Section of the Commission at 450 Fifth Street, N.W., Washington, DC
20549 at prescribed rates. Such reports and other information concerning the
Fund may also be inspected at the offices of the New York Stock Exchange. The
Commission maintains a Web site (http:\\www.sec.gov) that contains the Statement
of Additional Information, material incorporated by reference into this
Prospectus and the Statement of Additional Information, and reports, proxy and
information statements and other information regarding registrants that file
electronically with the Commission. In addition, reports, proxy and information
statements and other information concerning the Fund can be inspected at the
offices of the New York Stock Exchange.

         The registration statement may be inspected without a charge at the
Commission's office in Washington, D.C. and copies of all or any part thereof
may be obtained from such office after payment of the fees prescribed by the
Commission.

         This Prospectus does not contain all of the information in the Fund's
Registration Statement, including amendments, exhibits, and schedules.
Statements in this Prospectus about the contents of any contract or other
document are not necessarily complete and in each instance reference is made to
the copy of the contract or other document filed as an exhibit to the
registration statement, each such statement being qualified in all respects by
this reference.

                SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

         Certain statements in this Prospectus constitute forward-looking
statements, which involve known and unknown risks, uncertainties and other
factors that may cause the actual results, levels of activity, performance or
achievements of the Fund to be materially different from any future results,
levels of activity, performance or achievements expressed or implied by such
forward-looking statements. Such factors include, among others, those listed
under "Risk Factors" and elsewhere in this Prospectus. As a result of the
foregoing and other factors, no

                                      -34-

<PAGE>

assurance can be given as to the future results, levels of activity or
achievements, and neither the Fund nor any other person assumes responsibility
for the accuracy and completeness of such statements.

                                      -35-

<PAGE>

       TABLE OF CONTENTS FOR THE STATEMENT OF ADDITIONAL INFORMATION
                                                                           PAGE

Investment Objective ......................................................  S-
Investment Restrictions ...................................................  S-
Investment Policies and Techniques ........................................  S-
Management of the Fund ....................................................  S-
Portfolio Transactions ....................................................  S-
Net Asset Value ...........................................................  S-
Additional Information Concerning the Auctions for
  Preferred Shares ........................................................  S-
Certain Provisions in the Charter and Bylaws. .............................  S-
Repurchase of Common Stock; Conversion to Open-End Fund ...................  S-
Tax Matters ...............................................................  S-
Experts ...................................................................  S-


                                      -36-

<PAGE>

                                                                     APPENDIX A

                        TAXABLE EQUIVALENT YIELD TABLE

   The taxable equivalent yield is the current yield you would need to earn on
a taxable investment in order to equal a stated tax-free yield for federal
regular income tax purposes on a municipal investment. To assist you to more
easily compare municipal investments like the Fund with taxable alternative
investments, the table below presents the taxable equivalent yield for a range
of hypothetical tax-free yields assuming the stated marginal Federal tax rates
for 2002 listed below:

                     Taxable Equivalent of Tax-Free Yields

                                Tax-Free Yield

<TABLE>
<CAPTION>
Tax Rate                                1.00% 1.50% 2.00% 2.50% 3.00%
--------                                ----- ----- ----- ----- -----
<S>                                     <C>   <C>   <C>   <C>   <C>

10.00%................................. 1.11% 1.67% 2.22% 2.78% 3.33%
15.00%................................. 1.18% 1.76% 2.35% 2.94% 3.53%
27.00%................................. 1.37% 2.05% 2.74% 3.42% 4.11%
30.00%................................. 1.43% 2.14% 2.86% 3.57% 4.29%
35.00%................................. 1.54% 2.31% 3.08% 3.85% 4.62%
38.6%.................................. 1.63% 2.44% 3.26% 4.07% 4.89%
</TABLE>
--------

* In the table above, the taxable equivalent yields are calculated assuming
  that the Fund's exempt interest dividends are 100% federally tax-free. To the
  extent the Fund were to invest in federally taxable investments (which it
  does not expect to do), its taxable equivalent yield would be lower.

   The following tables show the approximate taxable yields for individuals
that are equivalent to tax-free yields under Federal taxes, using published
2002 marginal Federal tax rates currently available and scheduled to be in
effect.

<TABLE>
<CAPTION>
 Single Return   Joint Return    Tax
    Bracket        Bracket       Rate  1.00% 1.50% 2.00% 2.50% 3.00%
 -------------  --------------- ------ ----- ----- ----- ----- -----
<S>             <C>             <C>    <C>   <C>   <C>   <C>   <C>

   $0-6,000        $0-12,000    10.00% 1.11% 1.67% 2.22% 2.78% 3.33%
 6,000-27,950    12,000-46,700  15.00% 1.18% 1.76% 2.35% 2.94% 3.53%
 27,950-67,700  46,700-112,850  27.00% 1.37% 2.05% 2.74% 3.42% 4.11%
67,700-141,250  112,850-171,950 30.00% 1.43% 2.14% 2.86% 3.57% 4.29%
141,250-307,050 171,950-307,050 35.00% 1.54% 2.31% 3.08% 3.85% 4.62%
 Over 307,050    Over 307,050    38.6% 1.63% 2.44% 3.26% 4.07% 4.89%
</TABLE>
--------
* Please note that the table does not reflect (i) any federal limitations on
  the amounts of allowable itemized deductions, phase-outs of personal or
  dependent exemption credits or other allowable credits, (ii) any state or
  local taxes imposed, or (iii) any alternative minimum taxes or any taxes
  other than personal income taxes.

                                      A-1

<PAGE>

No dealer, salesman or other person has been authorized to give any information
or to make any representation not contained in this Prospectus in connection
with the offer contained in this Prospectus, and, if given or made, any
information or representation must not be relied upon as having been authorized
by the Fund, the Fund's investment manager or by the underwriter of the offering
described in this Prospectus. This Prospectus does not constitute an offer to
sell, or a solicitation of an offer to buy, any securities in any jurisdiction
to any person to whom it is unlawful to make an offer or solicitation in such
jurisdiction. Neither the delivery of this prospectus nor any sale made pursuant
to this Prospectus, under any circumstances, is intended to create an
implication that there has been no change in the affairs of the Fund since the
date of this prospectus or that the information in this Prospectus is correct as
of any time subsequent to its date. However, if any material change occurs while
this prospectus is required by law to be delivered, this Prospectus will be
supplemented or amended accordingly.

Until _________________ __, 2002 (25 days after the effective date of this
Prospectus), all dealers effecting transactions in the registered securities,
whether or not participating in this distribution, may be required to deliver a
Prospectus. This is in addition to the obligation of dealers to deliver a
Prospectus when acting as underwriters and with respect to their unsold
allotments or subscriptions.


                                      A-2

<PAGE>


                                        $


                        MANAGED MUNICIPALS PORTFOLIO INC.
               MUNICIPAL AUCTION RATE CUMULATIVE PREFERRED STOCK

                           _____ SHARES SERIES _____

                           _____ SHARES SERIES _____



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


                                   PROSPECTUS

                              ____________ __, 2002

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



                              SALOMON SMITH BARNEY

<PAGE>


The information in this Statement of Additional Information is not complete and
may be changed. We may not sell these securities until the registration
statement filed with the Securities and Exchange Commission is effective. This
Statement of Additional Information is not an offer to sell these securities and
it is not soliciting an offer to buy these securities in any state where the
offer or sale is not permitted.

                SUBJECT TO COMPLETION, DATED JANUARY 16, 2002

                        MANAGED MUNICIPALS PORTFOLIO INC.

                       STATEMENT OF ADDITIONAL INFORMATION

                  This Statement of Additional Information relating to this
offering does not constitute a prospectus, but should be read in conjunction
with the Prospectus relating thereto dated __________ __, 2002. This Statement
of Additional Information does not include all information that a prospective
investor should consider before purchasing shares of Preferred Shares in this
offering, and investors should obtain and read the Prospectus prior to
purchasing such shares. A copy of the Prospectus may be obtained without charge
by calling 1-800-___-____. Capitalized terms used but not defined in this
Statement of Additional Information have the meanings ascribed to them in the
Prospectus.

                                TABLE OF CONTENTS

                                                                          PAGE
                                                                          ----

Investment Objective ..................................................     S-
Investment Restrictions ...............................................     S-
Investment Policies and Techniques ....................................     S-
Management of the Fund ................................................     S-
Portfolio Transactions ................................................     S-
Net Asset Value .......................................................     S-
Additional Information Concerning the Auctions for Preferred Shares ...     S-
Certain Provisions in the Articles of Incorporation ...................     S-
Repurchase of Common Stock; Conversion to Open-End Fund ...............     S-
Tax Matters ...........................................................     S-
Experts ...............................................................     S-


Appendix A - Ratings of Investments
Appendix B - Glossary


The date of this Statement of Additional Information is ____________, ___, 2002.


<PAGE>

                              INVESTMENT OBJECTIVE

                  The Fund's investment objective is to seek as high a level of
current income exempt from federal income tax as is consistent with the
preservation of principal. The Fund's investment objective is a fundamental
policy of the Fund which may be changed only with the approval of a majority of
the Fund's outstanding voting securities (as defined in the 1940 Act).

                  The Fund invests with the objective that dividends paid by the
Fund may be excluded by shareholders from their gross income for federal income
tax purposes. However, the Fund has not established any limit on the percentage
of its portfolio that may be invested in municipal obligations subject to the
alternative minimum tax provisions ("AMT") of federal tax law. In addition, a
portion of the Fund's dividends may be taxable. The Fund may invest without
limit in private activity bonds. Income from these bonds may be a special
preference item for purposes of the AMT. Preferred Shares therefore would not
ordinarily be a suitable investment for investors who are subject to the AMT or
who would become subject to such tax by purchasing Preferred Shares. The
suitability of an investment in Preferred Shares will depend upon a comparison
of the after-tax yield likely to be provided from the Fund with that from
comparable tax-exempt investments not subject to the AMT, and from comparable
fully taxable investments, in light of each such investor's tax position.
Special considerations apply to corporate investors. See "Tax Matters."

                  The Fund will seek to invest substantially all of its assets
in municipal obligations, and under normal conditions at least 80% of the Fund's
total assets will be invested in investment grade municipal obligations.

                  The Fund may invest in municipal obligations rated, at the
time of investment, as low as "Baa" by Moody's, "BBB" by S&P" or "BBB" by Fitch
IBCA, Inc. ("Fitch") or in unrated municipal obligations deemed by the Manager
to be of comparable quality. Although such securities are considered investment
grade, they may be subject to greater risks than other higher-rated investment
grade securities.

                  The net asset value of the Common Stock will change with
changes in the value of the Fund's securities. Because the Fund will invest
primarily in fixed-income securities, the net asset value of the Common Stock
can be expected to change as levels of interest rates fluctuate; generally, when
prevailing interest rates increase, the value of fixed-income securities held by
the Fund can be expected to decrease and when prevailing interest rates
decrease, the value of the fixed-income securities held by the Fund can be
expected to increase. The value of the fixed-income securities held by the Fund
and thus the net asset value of the Comment Stock, may also be affected by other
economic, market and credit factors.

                             INVESTMENT RESTRICTIONS

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

                                      S-2

<PAGE>

resulting from changing market values will not be considered a deviation from
policy. The Fund may not:

     1. Purchase securities other than municipal obligations and taxable
investments as those terms are described in the Prospectus and this SAI.

     2. Borrow money, except for temporary or emergency purposes, or for
clearance of transactions, and then only in amounts not exceeding 15% of its
total assets (not including the amount borrowed) and as otherwise described in
the Prospectus and this SAI. When the Fund's borrowings exceed 5% of the value
of its total assets, the Fund will not make any additional investments.

     3. Sell securities short or purchase securities on margin, except for such
short-term credits as are necessary for the clearance of transactions, but the
Fund may make margin deposits in connection with transactions in options,
futures and options on futures.

     4. Underwrite any issue of securities, except to the extent that the
purchase of municipal obligations may be deemed to be an underwriting.

     5. Purchase, hold or deal in real estate or oil and gas interests, except
that the Fund may invest in municipal obligations secured by real estate or
interests in real estate.

     6. Invest in commodities, except that the Fund may enter into futures
contracts, including those relating to indexes and options on futures contracts
or indexes described in the Prospectus and this SAI.

     7. Lend any funds or other assets except through purchasing municipal
obligations or taxable investments, lending portfolio securities and entering
into repurchase agreements consistent with the Fund's investment objective.

     8. [Issue senior securities, except to the extent permitted under the
Investment Company Act of 1940, as amended, and as interpreted, modified or
otherwise permitted by appropriate regulatory authorities.]

     9. Invest more than 25% of its total assets in the securities of issuers in
any single industry, except that this limitation will not be applicable to the
purchase of municipal obligations and U.S. government securities.

     10. Make any investments for the purpose of exercising control or
management of any company.

                       INVESTMENT POLICIES AND TECHNIQUES

                  The following information supplements the discussion of the
Fund's investment objective, policies, and techniques that are described in the
Prospectus.

                  The Fund's policy is to invest substantially all of its assets
in municipal obligations and, under normal conditions, at least 80% of the
Fund's total assets will be invested

                                      S-3

<PAGE>

in investment grade municipal obligations. This policy is fundamental and cannot
be changed without shareholder approval.

                  Investment in Municipal Obligations. Municipal obligations are
                  -----------------------------------
obligations issued by or on behalf of states and local governments, political
subdivisions, agencies and instrumentalities, the interest on which, in the
opinion of bond counsel or other counsel to the issuer of such securities is, at
the time of issuance, not includable in gross income for federal income tax
purposes.

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

                  Municipal obligations generally are understood to include debt
obligations issued to obtain funds for various public purposes, including the
construction of a wide range of public facilities, refunding of outstanding
obligations, payment of general operating expenses and extensions of loans to
public institutions and facilities. Private activity bonds that are issued by or
on behalf of public authorities to obtain funds to provide privately operated
facilities are included within the term municipal obligations if the interest
paid thereon qualifies as excludable from gross income (but not necessarily from
alternative minimum taxable income) for federal income tax purposes in the
opinion of bond counsel to the issuer.

                  Municipal obligations may have fixed or variable interest
rates. The Fund may purchase floating and variable rate demand notes, which are
municipal obligations normally having a stated maturity in excess of one year,
but which permit the holder to tender the notes for purchase at the principal
amount thereof. The interest rate on a floating rate demand note is based on a
known lending rate, such as a bank's prime rate, and is adjusted each time such
rate is adjusted. The interest rate on a variable rate demand note is adjusted
at specified intervals. There generally is no secondary market for these notes,
although they may be tendered for redemption or remarketing at face value. Each
such note purchased by the Fund will meet the criteria established for the
purchase of municipal obligations.

                  THE FUND'S INVESTMENTS IN MUNICIPAL OBLIGATIONS MAY BE SUBJECT
TO CERTAIN RISKS. IN ADDITION TO THOSE DESCRIBED IN THE PROSPECTUS, THEY INCLUDE
THE FOLLOWING.

                  Municipal obligations that have fixed rates of interest are
sensitive to changes in interest rates. Generally, when interest rates are
rising, the value of the Fund's fixed-income securities can be expected to
decrease. When interest rates are declining, the value of the Fund's
fixed-income securities can be expected to increase. The Fund's net asset value
may fluctuate in response to the increasing or decreasing value of the Fund's
fixed-income securities.

     The yields on municipal obligations are dependent upon a variety of
factors, including general economic and monetary conditions, general money
market conditions, general conditions of the municipal obligations market, the
financial condition of the issuer, the size of a particular offering, the
maturity of the obligation offered and the rating of the issue. Municipal

                                       S-4

<PAGE>

obligations are also subject to the provisions of bankruptcy, insolvency and
other laws affecting the rights and remedies of creditors, such as the Federal
Bankruptcy Code, and laws, if any, that may be enacted by Congress or state
legislatures extending the time for payment of principal or interest, or both,
or imposing other constraints upon enforcement of the obligations or upon the
ability of municipalities to levy taxes. There is also the possibility that as a
result of litigation or other conditions the power or ability of any one or more
issuers to pay, when due, principal of and interest on its, or their, municipal
obligations may be materially affected.

                  The issuer of a municipal obligation might declare bankruptcy
and the Fund could experience delays collecting interest and principal. To
enforce its rights, the Fund might be required to take possession of and manage
the assets securing the issuer's obligation. This may increase the Fund's
expenses, reduce its net asset value and increase the amount of the Fund's
distribution that are in taxable form. If the Fund took possession of a bankrupt
issuer's assets, income derived from the fund's ownership and management of the
assets may not be tax exempt. Shareholders may receive more of the total
distributions from the Fund in taxable form. The Fund might not be able to take
possession of the assets of a bankrupt issuer because of laws protecting state
and local institutions, limits on the investments the Fund is permitted to make,
and the nature of the income the fund is entitled to receive the assets and
enforce its rights, the value of the security may be greatly diminished. This
could reduce the fund's net asset value.

                  From time to time, the Fund's investments may include
securities as to which the Fund, by itself or together with other funds or
accounts managed by the Manager, holds a major portion or all of an issue of
municipal obligations. Because relatively few potential purchasers may be
available for these investments and, in some cases, contractual restrictions may
apply on resales, the Fund may find it more difficult to sell these securities
at a time when the Manager believes it is advisable to do so.

                  The U.S. government has enacted laws that have restricted or
diminished the income tax exemption on some municipal obligations and it may do
so again in the future. If this were to happen, shareholders could receive more
of the distributions from the Fund in taxable form. The issuer of a municipal
obligation may be obligated to redeem the security at face value, but if the
Fund paid more than face value for the security, the Fund may lose money on the
security when it is sold. Market rates of interest may be lower for municipal
obligations than for taxable securities but this may be offset by the federal
income tax on income derived from taxable securities. There may be less
extensive information available about the financial condition of issuers of
municipal obligations than for corporate issuers with publicly traded
securities.

                  Municipal Leases. Municipal leases may take the form of a
lease or an installment purchase contract issued by state and local government
authorities to obtain funds to acquire a wide variety of equipment and
facilities such as fire and sanitation vehicles, computer equipment and other
capital assets. These obligations have evolved to make it possible for state and
local government authorities to acquire property and equipment without meeting
constitutional and statutory requirements for the issuance of debt. Thus,
municipal leases have special risks not normally associated with municipal
obligations. These obligations frequently contain "non-appropriation" clauses
providing that the governmental issuer of the obligation has no obligation to
make future payments under the lease or contract unless money is appropriated

                                       S-5

<PAGE>

for such purposes by the legislative body on a yearly or other periodic basis.
In addition to the "non-appropriation" risk, municipal leases represent a type
of financing that has not yet developed the depth of marketability associated
with municipal obligations, moreover, although the obligations will be secured
by the leased equipment, the disposition of the equipment in the event of
foreclosure might prove difficult.

                  To limit the risks associated with municipal leases, the Fund
will invest no more than 5% of its total assets in lease obligations that
contain non-appropriation clauses and will only purchase a non-appropriation
lease obligation with respect to which (1) the nature of the leased equipment or
other property is such that its ownership or use is reasonably essential to a
governmental function of the issuing municipality (2) the lease payments will
begin to amortize the principal balance due at an early date, resulting in an
average life of five years or less for the lease obligation, (3) appropriate
covenants will be obtained from the municipal obligor prohibiting the
substitution or purchase of similar equipment or other property if lease
payments are not appropriated, (4) the lease obligor has maintained good market
acceptability in the past, (5) the investment is of a size that will be
attractive to institutional investors and (6) the underlying leased equipment or
other property has elements of portability and/or use that enhance its
marketability in the event that foreclosure on the underlying equipment or other
property were ever required.

                  Municipal leases that the Fund may acquire will be both rated
and unrated. Rated leases that may be held by the Fund include those rated
investment grade at the time of investment (that is, rated no lower than "Baa"
by Moody's, "BBB" by S&P or "BBB" by Fitch). The Fund may acquire unrated issues
that the Manager deems to be comparable in quality to rated issues in which the
Fund is authorized to invest. A determination by the Manager that an unrated
lease obligation is comparable in quality to a rated lease obligation will be
made on the basis of, among other things, a consideration of whether the nature
of the leased equipment or other property is such that its ownership or use is
reasonably essential to a governmental function of the issuing municipality. In
addition, all such determinations made by the Manager will be subject to
oversight and approval by the Board.

                  Municipal leases held by the Fund will be considered illiquid
securities unless the Board determines on an ongoing basis that the leases are
readily marketable. An unrated municipal lease with a non-appropriation risk
that is backed by an irrevocable bank letter of credit or an insurance policy
issued by a bank or insurer deemed by the Manager to be of high quality and
minimal credit risk is not deemed to be illiquid solely because the underlying
municipal lease is unrated if the Manager determines that the lease is readily
marketable because it is backed by the letter of credit or insurance policy.

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

                                       S-6

<PAGE>

                  Participation Interests. The Fund may invest up to 5% of its
total assets in participation interests in municipal bonds, including IDBs, PABs
and floating and variable rate securities. A participation interest give the
Fund an undivided interest in a municipal bond owned by a bank. The Fund has the
right to sell the instrument back to the bank. If the participation interest is
unrated, it will be backed by an irrevocable letter of credit or guarantee of a
bank that the Board has determined meets certain credit quality standards or the
payment obligation will otherwise be collateralized by U.S. government
securities.

                  The Fund will have the right, with respect to certain
participation interests, to draw on the letter of credit on demand, after
specified notice for all or any part of the principal amount of the Fund's
participation interest, plus accrued interest. Generally, the Fund intends to
exercise the demand under the letters of credit or other guarantees only upon a
default under the terms of the underlying bond, or to maintain the Fund's assets
in accordance with its investment objective and policies. The ability of a bank
to fulfill its obligations under a letter of credit or guarantee might be
affected by possible financial difficulties of its borrowers, adverse interest
rate or economic conditions, regulatory limitations or other factors. The
Manager will monitor the pricing, quality and liquidity of the participation
interests held by the Fund and the credit standing of the banks issuing letters
of credit or guarantees supporting such participation interests on the basis of
published financial information reports of rating services and bank analytical
services.

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

                  Custodial Receipts. The Fund may acquire custodial receipts or
certificates underwritten by securities dealers or banks that evidence ownership
of future interest payments, principal payments or both on certain municipal
obligations. The underwriter of these certificates or receipts typically
purchases municipal obligations and deposits the obligations in an irrevocable
trust or custodial account with a custodian bank, which then issues receipts or
certificates that evidence ownership of the periodic unmatured coupon payments
and the final principal payment on the obligations.

                  Custodial receipts evidencing specific coupon or principal
payments have the same economic attributes as zero coupon municipal obligations
described above. Although under the terms of the custodial receipt the Fund
would be typically authorized to asset its rights directly against the issuer of
the underlying obligation, the Fund could be required to assert thought the
custodian bank those rights that may exist against the underlying issuer. Thus,
in the event the underlying issuer fails to pay principal or interest when due,
the Fund may be subject to delays, expenses and risks that are greater than
those that would have been involved if the Fund

                                       S-7

<PAGE>

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

                  Use of Ratings as Investment Criteria. In general, the ratings
                  -------------------------------------
of Moody's, S&P and Fitch and other NRSROs represent the opinions of the NRSROs
as to the quality of the municipal obligations and other debt securities they
rate. It should be emphasized, however, that such ratings are relative and
subjective, are not absolute standards of quality and do not evaluate the market
risk of securities. These ratings will be used as initial criteria for the
selection of securities, but the Fund also will rely upon the independent advice
of the Manager. Among the factors that will also be considered by the Manager in
evaluating potential municipal obligations to be held by the Fund are the price,
coupon and yield to maturity of the obligations, the Manager's assessment of the
credit quality of the issuer of the obligations, the issuer's available cash
flow and the related coverage ratios, the property, if any, securing the
obligations, and the terms of the obligations, including subordination, default,
sinking fund and early redemption provisions. To the extent the Fund invests in
lower-rated and comparable unrated securities, the Fund's achievement of its
investment objective may be more dependent on the Manager's credit analysis of
such securities than would be the case for a portfolio consisting entirely of
higher-rated securities. The Appendix to this Statement of Additional
Information contains information concerning the ratings of Moody's, S&P and
Fitch and their significance.

                  Subsequent to its purchase by the Fund, an issue of municipal
obligations may cease to be rated or its rating may be reduced below the rating
given at the time the securities were acquired by the Fund. Neither event will
require the sale of such municipal obligations by the Fund, but the Manager will
consider such event in its determination of whether the Fund should continue to
hold the municipal obligations. In addition, to the extent the ratings change as
a result of changes in the rating systems or due to a corporate restructuring of
Moody's, S&P or Fitch, the Fund will attempt to use comparable ratings as
standards for its investments in accordance with its investment objectives and
policies.

                  While the market for municipal obligations is considered to be
generally adequate, the existence of limited markets for particular lower-rated
and comparable unrated securities may diminish the Fund's ability to (1) obtain
accurate market quotations for purposes of valuing such securities and
calculating its net asset value and (2) sell the securities at fair value to
respond to changes in the economy or in the financial markets. The market for
certain lower-rated and comparable unrated securities is relatively new and has
not fully weathered a major economic recession. Any such economic downturn could
adversely affect the ability of the issuers of such securities to repay
principal and pay interest thereon.

INVESTMENT TECHNIQUES

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

                                       S-8

<PAGE>

                  In connection with the investment objective and policies
described in this SAI and in the Prospectus, the Fund may: lend securities;
enter into repurchase agreements; purchase and sell municipal securities on a
"when-issued" or "delayed delivery" basis; invest in financial futures contracts
and invest in options on financial futures contracts; [and issue senior
securities to the extent permitted under the 1940 Act.] These investment
practices entail risks. The Manager may use some or all of the following hedging
and risk management practices when their use appears appropriate. Although the
Manager believes that these investment practices may further the Fund's
investment objective, no assurance can be given that these investment practices
will achieve this result. The Manager may also decide not to engage in any of
these investment practices.

                  Lending Securities. By lending its securities, the Fund can
                  ------------------
increase its income by continuing to receive interest on the loaned securities,
by investing the cash collateral in short-term instruments or by obtaining yield
in the form of interest paid by the borrower when U.S. government securities are
used as collateral. The Fund will adhere to the following conditions whenever it
lends its securities: (1) the Fund must receive at least 100% cash collateral or
equivalent securities from the borrower, which will be maintained by daily
marking-to-market; (2) the borrower must increase the collateral whenever the
market value of the securities loaned rises above the level of the collateral;
(3) the Fund must be able to terminate the loan at any time; (4) the Fund must
receive reasonable interest on the loan, as well as any dividends, interest or
other distributions on the loaned securities, and any increase in market value;
(5) the Fund may pay only reasonable custodian fees in connection with the loan;
and (6) voting rights on the loaned securities may pass to the borrower, except
that, if a material event adversely affecting the investment in the loaned
securities occurs, the Board must terminate the loan and retain the Fund's right
to vote the securities. From time to time, the Fund may pay a part of the
interest earned from the investment of collateral received for securities loaned
to the borrower and/or a third party that is unaffiliated with the Fund and that
is acting as a "finder."

                  Repurchase Agreements. The Fund may enter into repurchase
                  ---------------------
agreements with certain member banks of the Federal Reserve System and certain
dealers on the Federal Reserve Bank of New York's list of reporting dealers.
Under the terms of a typical repurchase agreement, the Fund would acquire an
underlying debt obligation for a relatively short period (usually not more than
one week) subject to an obligation of the seller to repurchase and the Fund to
resell the obligation at an agreed-upon price and time thereby determining the
yield during the Fund's holding period. Under each repurchase agreement, the
selling institution will be required to maintain the value of the securities
subject to the repurchase agreement at not less than their repurchase price. The
Manager acting under the supervision of the Board, reviews on an ongoing basis
the value of the collateral and the creditworthiness of those banks and dealers
with which the Fund enters into repurchase agreements to evaluate potential
risks. In entering into a repurchase agreement, the Fund will bear a risk of
loss in the event that the other party to the transaction defaults on its
obligations and the Fund is delayed or prevented from exercising its rights to
dispose of the underlying securities, including the risk of a possible decline
in the value of the underlying securities during the period in which the Fund
seeks to assert its rights to them, the risk of incurring expenses associated
with asserting those rights and the risk of losing all or a part of the income
from the agreement.

                                       S-9

<PAGE>

                  Borrowing and Leverage. The Fund may borrow money, only for
                  ----------------------
temporary or emergency purposes, or for clearance of transactions, and then only
in amounts not exceeding 15% of its total assets (not including the amount
borrowed). When the Fund's borrowings exceed 5% of the value of its total
assets, the Fund will not make any additional investments. [The Fund is also
permitted under its Articles of Incorporation to issue preferred stock,
including the Preferred Shares issued pursuant to the Registration Statement of
which the Prospectus and this SAI form a part, which would permit it to assume
leverage in an amount up to 50% of its total assets]. Preferred stock,
including, when issued, the Preferred Shares, would have a priority on the
income and assets of the Fund over the Common Stock and would have certain other
rights with respect to voting and the election of directors. In certain
circumstances, the net asset value of and dividends payable on shares of Common
Stock could be adversely affected by such preferences. The use of leverage
creates an opportunity for increased returns to holders of the Common Stock,
but, at the same time, creates special risks. The Fund will only utilize
leverage when there is an expectation that it will benefit the Fund or the
holders of Common Stock. To the extent the income or other gain derived from
securities purchased with the proceeds of preferred stock issuances exceed the
dividends the Fund would have to pay thereon, the Fund's net income or other
gain would be greater than if leverage had not been used. Conversely, if the
income or other gain from the securities purchased through leverage is not
sufficient to cover the cost of such leverage the total return of the Fund would
be less than if leverage had not been used. If leverage is used, in certain
circumstances the Fund could be required to liquidate securities it would not
otherwise sell in order to satisfy dividend or interest obligations. See
"Investment Restrictions."

                  When-Issued and Delayed Delivery Transactions Securities. The
                  --------------------------------------------------------
Fund may purchase municipal obligations on a "when-issued" or "delayed delivery"
basis (i.e. for delivery beyond the normal settlement date at a stated price and
yield). The payment obligation and the interest rate that will be received on
the municipal obligations purchased on a when-issued basis are each fixed at the
time the buyer enters into the commitment. Although the Fund will purchase
municipal obligations on a when-issued basis only with the intention of actually
acquiring the securities, the Fund may sell these securities before the
settlement date if it is deemed advisable as a matter of investment strategy.

                  Municipal obligations are subject to changes in value based
upon the public's perception of the creditworthiness of the issuers and changes,
real or anticipated, in the level of interest rates. In general, municipal
obligations tend to appreciate when interest rates decline and depreciate when
interest rates rise. Purchasing municipal obligations on a when-issued basis,
therefore, can involve the risk that the yields available in the market when the
delivery takes place actually may be higher than those obtained in the
transaction itself. To account for this risk, a separate account of the Fund
will be established. Such separate account shall consist of cash, U.S.
government securities, equity securities or debt securities of any grade equal
to or greater than the amount of the when-issued commitments, provided such
securities have been determined by the Manager to be liquid and unencumbered,
and are marked to market daily pursuant to guidelines established by the Fund's
directors. For the purpose of determining the adequacy of the securities in the
account, the deposited securities will be valued at market or fair value. If the
market or fair value of such securities declines additional cash or securities
will be placed in the account on a daily basis so that the value of the account
will equal the amount of such commitments by the Fund. Placing securities rather
than cash in the segregated account

                                      S-10

<PAGE>

may have a leveraging effect on the Fund's net assets. That is, to the extent
the Fund remains substantially fully invested in securities at the same time it
has committed to purchase securities on a when-issued basis, there will be
greater fluctuations in its net assets than if it had set aside cash to satisfy
its purchase commitment. Upon the settlement date of the when-issued securities,
the Fund will meet its obligation from then-available cash flow, sale of
securities held in the segregated account, sale of other securities or, although
it would not normally expect to do so, from the sale of the when-issued
securities themselves (which may have a value greater or less than the Fund's
payment obligations). Sales of securities to meet such obligations may involve
the realization of capital gains, which are not exempt from federal income
taxes.

                  When the Fund engages in when-issued transactions, it relies
on the seller to consummate the trade. Failure of the seller to do so may result
in the Fund's incurring a loss or missing an opportunity to obtain a price
considered to be advantageous.

                  Investment in Other Investment Companies. The Fund does not
                  ----------------------------------------
presently invest in investment companies and does not currently intend to invest
in investment companies, but the Fund may, consistent with the provisions of the
1940 Act determine to do so in the future in appropriate circumstances.
Presently, under the 1940 Act, the Fund may hold securities of another
investment company in amounts which (i) do not exceed 3% of the total
outstanding voting stock of such company, (ii) do not exceed 5% of the value of
the Fund's total assets and (iii) when added to all other investment company
securities held by the Fund, do not exceed 10% of the value of the Fund's total
assets.

                  In the event of such an investment, as a shareholder in an
investment company the Fund would bear its ratable share of the investment
company's expenses, including management fees, and would remain subject to
payment of the Fund's administration fees and other expenses with respect to
assets so invested.

                  Financial Futures Contracts. The Fund may invest in municipal
                  ---------------------------
obligation index and interest rate futures contracts and options on interest
rate futures contracts that are traded on a domestic exchange or board of trade.
Such investments may be made by the Fund solely for the purpose of hedging
against changes in the value of its portfolio securities due to anticipated
changes in interest rates and market conditions, and not for purposes of
speculation.

                  Municipal Obligation Index and Interest Rate Futures
Contracts. A municipal obligation index futures contract is an agreement to take
or make delivery of an amount of cash equal to a specific dollar amount times
the difference between the value of the index at the close of the last trading
day of the contract and the price at which the index contract is originally
written. No physical delivery of the underlying municipal obligations in the
index is made. Interest rate futures contracts are contracts for the future
purchase or sale of specified interest rate sensitive debt securities of the
U.S. Treasury, such as U.S. Treasury bills, bonds and notes, obligations of the
Government National Mortgage Association and bank certificates of deposit.
Although most interest rate futures contracts require the delivery of the
underlying securities, some settle in cash. Each contract designates the price
date, time and place of delivery.

                  The purpose of the Fund's entering into a municipal obligation
index or interest rate futures contract, as the holder of long-term municipal
obligations, is to protect the Fund

                                      S-11

<PAGE>

from fluctuation in interest rates on tax-exempt securities without actually
buying or selling municipal obligations. The Fund will, with respect to its
purchases of financial futures contracts establish a segregated account
consisting of cash, U.S. government securities, equity securities or debt
securities of any grade in an amount at least equal to the total market value of
the futures contracts less the amount of initial margin on deposit for the
contracts.

                  Unlike the purchase or sale of a municipal obligation, no
consideration is paid or received by the Fund upon the purchase or sale of a
futures contract. Initially, the Fund will be required to deposit with the
futures commission merchant an amount of cash or cash equivalents equal to
approximately 5% of the contract amount (this amount is subject to change by the
board of trade on which the contract is traded and members of such board of
trade may charge a higher amount). This amount is known as "initial margin" and
is in the nature of a performance bond or good faith deposit on the contract
which is returned to the Fund upon termination of the futures contract, assuming
that all contractual obligations have been satisfied. Subsequent payments known
as "variation margin", to and from the futures commission merchant, will be made
on a daily basis as the price of the index or securities fluctuates making the
long and short positions in the futures contract more or less valuable, a
process known as marking-to-market. At any time prior to the expiration of the
contract, the Fund may elect to close the position by taking an opposite
position, which will operate to terminate the Fund's existing position in the
futures contract.

                  There are several risks in connection with the use of
municipal obligation index and interest rate futures contracts as a hedging
device. Successful use of these futures contracts by the Fund is subject to the
Manager's ability to predict correctly movements in the direction of interest
rates. Such predictions involve skills and techniques which may be different
from those involved in the management of a long-term municipal obligation
portfolio. In addition, there can be no assurance that a correlation would exist
between movements in the price of the municipal obligation index or the debt
security underlying the futures contract and movement in the price of the
municipal obligations which are the subject of the hedge. The degree of
imperfection of correlation depends upon various circumstances, such as
variations in speculative market demand for futures contracts and municipal
obligations and technical influences on futures trading. The Fund's municipal
obligations and the municipal obligations in the index may also differ in such
respects as interest rate levels, maturities and creditworthiness of issuers. A
decision of whether, when and how to hedge involves the exercise of skill and
judgment and even a well-conceived hedge may be unsuccessful to some degree
because of market behavior or unexpected trends in interest rates.

                  Although the Fund intends to enter into futures contracts only
if an active market exists for such contracts, there can be no assurance that an
active market will exist for a contract at any particular time, most domestic
futures exchanges and boards of trade limit the amount of fluctuation permitted
in futures contract prices during a single trading day. The daily limit
establishes the maximum amount the price of a futures contract may vary either
up or down from the previous day's settlement price at the end of a trading
session. Once the daily limit has been reached in a particular contract, no
trades may be made that day at a price beyond that limit. The daily limit
governs only price movement during a particular trading day and therefore does
not limit potential losses because the limit may prevent the liquidation of
unfavorable positions. It is possible that futures contract prices could move to
the daily limit for several consecutive trading

                                      S-12

<PAGE>

days with little or no trading, thereby preventing prompt liquidation of futures
positions and subjecting some futures traders to substantial losses. In such
event it will not be possible to close a futures position and in the event of
adverse price movements, the Fund would be required to make daily cash payments
of variation margin. In such circumstances, an increase in the value of the
portion of the Fund being hedged, if any, may partially or completely offset
losses on the futures contract. As described above, however, there is no
guarantee the price of municipal obligations will, in fact, correlate with the
price movements in a futures contract and thus provide an offset to losses on a
futures contract.

                  If the Fund has hedged against the possibility of an increase
in interest rates adversely affecting the value of municipal obligations it
holds and rates decrease instead, the Fund will lose part or all of the benefit
of the increased value of the municipal obligations it has hedged because it
will have offsetting losses in its futures positions. In addition, in such
situations, if the Fund has insufficient cash, it may have to sell securities to
meet daily variation margin requirements. Such sales of securities may, but will
not necessarily, be at increased prices which reflect the decline in interest
rates. The Fund may have to sell securities at a time when it may be
disadvantageous to do so.

                  Options on Interest Rate Futures Contracts. The Fund may
purchase put and call options on interest rate futures contracts which are
traded on a domestic exchange or board of trade as a hedge against changes in
interest rates, and may enter into closing transactions with respect to such
options to terminate existing positions. The Fund will sell put and call options
on interest rate futures contracts only as part of closing sale transactions to
terminate its options positions. There is no guarantee such closing transactions
can be effected.

                  Options on interest rate futures contracts, as contrasted with
the direct investment in such contracts, give the purchaser the right, in return
for the premium paid, to assume a position in interest rate futures contracts at
a specified exercise price at any time prior to the expiration date of the
options. Upon exercise of an option, the delivery of the futures position by the
writer of the option to the holder of the option will be accompanied by delivery
of the accumulated balance in the writer's futures margin account, which
represents the amount by which the market price of the futures contract exceeds,
in the case of a call, or is less than, in the case of a put, the exercise price
of the option on the futures contract. The potential loss related to the
purchase of an option on interest rate futures contracts is limited to the
premium paid for the option (plus transaction costs). Because the value of the
option is fixed at the point of sale, there are no daily cash payments to
reflect changes in the value of the underlying contract; however, the value of
the option does change daily and that change would be reflected in the net asset
value of the Fund.

                  There are several risks relating to options on interest rate
futures contracts. The ability to establish and close out positions on such
options will be subject to the existence of a liquid market. In addition, the
Fund's purchase of put or call options will be based upon predictions as to
anticipated interest rate trends by the Manager which could prove to be
inaccurate. Even if the Manager's expectations are correct, there may be an
imperfect correlation between the change in the value of the options and of the
Fund's securities.

                                      S-13

<PAGE>

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

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

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

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

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

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

                  Any security, option or futures contract, delayed delivery
transaction, or other position entered into or held by the Fund in conjunction
with any other position held by the Fund may constitute a "straddle" for Federal
income tax purposes. A straddle of which at least one, but not all, the
positions are section 1256 contracts will constitute a "mixed straddle". In

                                      S-14

<PAGE>

general, straddles are subject to certain rules that may affect the character
and timing of the Fund's gains and losses with respect to straddle positions by
requiring, among other things, that loss realized on disposition of one position
of a straddle be deferred to the extent of any unrealized gain in an offsetting
position until such position is disposed of; that the Fund's holding period in
certain straddle positions not begin until the straddle is terminated (possibly
resulting in gain being treated as short-term capital gain rather than long-term
capital gain); and that losses recognized with respect to certain straddle
positions, that otherwise constitute short-term capital losses, be treated as
long-term capital losses. Different elections are available to the Fund which
may mitigate the effects of the straddle rules, particularly with respect to
mixed straddles.] [COVER MEMO NOTE]

PORTFOLIO TURNOVER RATE

                  The Fund's portfolio turnover rate (the lesser of purchases or
sales of portfolio securities during the last fiscal year, excluding purchases
or sales of short-term securities, divided by the monthly average value of
portfolio securities) generally is not expected to exceed 100%, but the Fund
turnover rate will not be a limiting factor whenever the Fund deems it desirable
to sell or purchase securities. Securities may be sold in anticipation of a rise
in interest rates (market decline) or purchased in anticipation of a decline in
interest rates (market rise) and later sold. In addition, a security may be sold
and another security of comparable quality may be purchased at approximately the
same time in order to take advantage of what the fund believes to be a temporary
disparity in the normal yield relationship between the two securities. These
yield disparities may occur for reasons not directly related to the investment
quality of particular issues or the general movement of interest rates, such as
changes in the overall demand for or supply of various types often-exempt
securities. For the fiscal years ended May 31, 1999, 2000 and 2001 the Fund's
portfolio turnover rate was 23%, 35% and ___%, respectively.

                             MANAGEMENT OF THE FUND

OFFICERS AND DIRECTORS

                  The business and affairs of the Fund, including the general
supervision of the duties performed by the Manager under the Investment
Management Agreement, are the responsibility of the Board. The Board currently
has nine Directors, one of whom is an "interested person" (as such term is
defined in the 1940 Act) and eight of whom are not interested persons. The names
and business addresses of the Directors and officers of the Fund and their
principal occupations and other affiliations during the past five years are set
forth below.

                                      S-15

<PAGE>

<TABLE>
<CAPTION>

                                        POSITIONS AND               PRINCIPAL OCCUPATIONS
                                       OFFICES WITH THE             DURING PAST FIVE YEARS
   NAME AND ADDRESS                          FUND                          AND AGE
-------------------------------   ---------------------------   ----------------------------------
<S>                                  <C>                        <C>

Heath B. McLendon*+ (68)             Chairman of the Board of   Managing Director of Salomon Smith
   125 Broad Street                  Directors, Chief           Barney; Director  of 77 investment
   New York, NY 10004                Executive Officer and      companies associated with
                                     President                  Citigroup; President and Director
                                                                of SBFM and Travelers Investment
                                                                Adviser, Inc. ("TIA"); formerly
                                                                Chairman of the Board of Smith
                                                                Barney Strategy Advisors Inc.

+Martin Brody (80)                   Director                   Consultant, HMK Associates;
   c\o HMK Associates                                           retired Vice Chairman of the Board
   30 Columbia Turnpike                                         of Restaurant Associates Corp.
   Florham Park, NJ 07932

+Allan J. Bloostein (71)             Director                   President of Allan J. Bloostein
   717 Fifth Avenue                                             Associates, a consulting firm;
   21st Floor                                                   retired Vice Chairman and Director
   New York, NY 10022                                           of May Department Stores Company;
                                                                Director of Taubman Centers, Inc.;
                                                                retired Director of CVS
                                                                Corporation.

+Dwight B. Crane (63)                Director                   Professor, Harvard Business
   Harvard Business School                                      Director of Micro Forum, Inc.
   Soldiers Field Road
   Boston, MA 02163

+Paulo M. Cucchi (59)                Director                   Vice President and Dean of College
   Drew University                                              of Liberal Arts at Drew University.
   108 Brothers College
   Madison, NJ 07940

+Robert A. Frankel (74)              Director                   Managing Partner of Robert A.
   8 John Walsh Blvd.                                           Frankel Management Consultants;
   Peekskill, NY 10566                                          formerly Corporate Vice President
                                                                of The Reader's Digest
                                                                Association, Inc.

+Dr. Paul Hardin (70)                Director                   Chancellor Emeritus and Professor
   12083 Morehead                                               of Law at the University of North
   Chapel Hill, NC 27514-8426                                   Carolina at Chapel Hill; formerly
                                                                Chancellor of the University of
                                                                North Carolina at Chapel Hill.


+William R. Hutchinson (58)          Director                   President, WR Hutchinson &
   535 N. Michigan                                              Associates, Inc.; formerly Group
   Suite 1012                                                   Vice President, Mergers &
   Chicago, IL  60611                                           Acquisitions BP Amoco p.l.c.;
                                                                formerly Vice President-Financial
                                                                Operations Amoco Corp.; Director
                                                                of Associated Bank and of
</TABLE>

                                      S-16

<PAGE>

<TABLE>
<CAPTION>

                                        POSITIONS AND               PRINCIPAL OCCUPATIONS
                                       OFFICES WITH THE             DURING PAST FIVE YEARS
   NAME AND ADDRESS                          FUND                          AND AGE
-------------------------------   ---------------------------   ----------------------------------
<S>                               <C>                           <C>
                                                                Associated Bank-Corp.

+George M. Pavia (72)                Director                   Senior Partner, Pavia & Harcourt,
   Pavia & Harcourt                                             Attorneys.
   600 Madison Avenue
   New York, NY, 10022

Joseph P. Deane (54)                 Vice President and         Managing Director of Salomon Smith
   333 West 34th Street              Investment Officer         Barney; Investment Officer of SBFM.
   New York, NY 10001

David Fare (38)                      Investment Officer         Investment Officer of SBFM.
   333 West 34th Street
   New York, NY 10001

Lewis E. Daidone (44)                Senior Vice President,     Managing Director of Salomon
    125 Broad Street                 Chief Financial and        Smith Barney, Senior Vice
    New York, NY 10004               Accounting Officer and     President or Executive Vice
                                     Treasurer                  President and Treasurer of 61
                                                                investment companies associated
                                                                with Citigroup; Director and
                                                                Senior Vice President of SBFM
                                                                and TIA.

Christina T. Sydor (50)              Secretary                  Managing Director of Salomon Smith
   666 Fifth Avenue                                             Barney and Secretary of 61
   New York, NY  10103                                          investment companies associated
                                                                with Citigroup; Secretary and
                                                                General Counsel of SBFM and TIA.
</TABLE>

* Denotes a director who is an "interested person" of the Fund as defined in the
1940 Act.
+ Director, trustee and/or general partner of other investment companies
registered under the 1940 Act with which Salomon Smith Barney is affiliated.

                  The Fund pays each of its directors who is not a director,
officer or employee of SBFM, or any of its affiliates, an annual fee of $5,000
plus $500 for each in-person board meeting and $100 for each telephonic board
meeting attended. In addition, the Fund will reimburse these directors for
travel and out-of-pocket expenses incurred in connection with Board meetings.
The board meeting fees and out-of-pocket expenses are borne proportionately by
each individual fund or portfolio in the Fund Complex. For the fiscal year ended
May 31, 2001, such fees totaled $_________.

                  The following table sets forth compensation paid by the Fund
to each person who was a Director during the Fund's most recent fiscal year
(from June 1, 2000 through May 31, 2001). The Fund does not have a retirement or
pension plan.

                                      S-17

<PAGE>

<TABLE>
<CAPTION>
                                                     PENSION OR
                                                     RETIREMENT           TOTAL
                                     AGGREGATE    BENEFITS ACCRUED      COMPENSATION
                                   COMPENSATION   AS PART OF FUND        FROM FUND
     NAME OF DIRECTOR                FROM FUND        EXPENSES            COMPLEX
-------------------------------  ---------------  ----------------  --------------------
<S>                              <C>              <C>               <C>

Martin Brody .................        $ 6,517            $0              $ 132,950
Paolo M. Cucchi ..............        $ 2,250            $0              $  12,250
Dwight B. Crane ..............        $ 6,033            $0              $ 153,175
Allan J. Bloostein+ ..........        $ 6,533            $0              $ 109,500
Robert A. Frankel. ...........        $ 7,033            $0              $  72,850
Dr. Paul Hardin ..............        $ 1,250            $0              $  93,150
Heath B. McLendon* ...........        $   0              $0              $       0
William R. Hutchinson+ .......        $ 6,550            $0              $  38,300
George M. Pavia ..............        $ 1,750            $0              $  18,350
</TABLE>

-----
* Designates a Director who is an "interested person" of the Fund.

                  At the end of the calendar year during which a Director
attains the age of 80, the Director is required to change to emeritus status.
Directors emeritus are entitled to serve in emeritus status for a maximum of 10
years during which time they are paid 50% of the annual retainer fee and meeting
fees otherwise applicable to the Fund Directors, together with reasonable
out-of-pocket expenses for each meeting attended. During the Fund's fiscal year
ended May 31, 2001, aggregate compensation paid by the Fund to emeritus
directors totaled $[__].

[ADD A DESCRIPTION ON COMMITTEES]

INVESTMENT MANAGER AND ADMINISTRATOR

                  Smith Barney Fund Management LLC, or SBFM (formerly known as
SSB Citi Fund Management LLC), serves as investment adviser to the Fund pursuant
to the Investment Management Agreement, dated July 30, 1993, a form of which was
most recently approved by the Board, including a majority of those directors who
are not "interested persons" of the Fund or the Manager ("non-interested
directors"), on [August 23, 2000]. Pursuant to the Investment Management
Agreement, the Fund has retained the Manager to manage the investment of the
Fund's assets and to provide such investment research, advice and supervision,
in conformity with the Fund's investment objective and policies, as may be
necessary for the investment activities of the Fund.

                  The Investment Management Agreement also provides that the
Manager will not be liable for any error of judgment or mistake of law or for
any loss suffered by the Fund in connection with the Investment Management
Agreement, except a loss resulting from willful misfeasance, bad faith or gross
negligence on the part of the Manager in the performance of its duties or from
reckless disregard of its duties and obligations under the Investment Management
Agreement. The Investment Management Agreement is terminable by vote of the
Board or by the holders of a majority of common stock, at any time without
penalty on 60 days written notice to the Manager. The Investment Management
Agreement may also be terminated by the Manager on 90 days' written notice to
the Fund. The Investment Management Agreement will

                                      S-18

<PAGE>

terminate automatically in the event of its assignment (as such term is defined
in the 1940 Act and the rules thereunder).

                  For investment adviser services rendered to the Fund, the
Manager receives from the Fund a fee, computed and paid monthly at the annual
rate 0.70% of the value of the Fund's average daily net assets. For the fiscal
years ended May 31, 1999, 2000 and 2001 such fees amounted to $2,712,616,
$2,089,549 and $_______ respectively. Effective September 1, 1998, the Manager
instituted a voluntary fee waiver whereby its advisory fees were received at an
annual rate of 0.56% of average daily net assets for the fiscal year ended May
31, 2000.

                  SBFM also serves as administrator of the Fund pursuant to a
written agreement dated June 1, 1994 ("the Administration Agreement"), a form of
which was most recently approved by the Board, including a majority of
non-interested directors, on [August 23, 2000]. SBFM oversees the Fund's
non-investment operations and its relations with its service providers. SBFM
administers the Fund's corporate affairs subject to the supervision of the Board
and in connection therewith furnishes the Fund with office facilities together
with such ordinary clerical and bookkeeping services (e.g., preparation of
annual and other reports to shareholders and the Commission and the filing of
federal, state and local income tax returns) as are not being furnished by the
Fund's custodian.

                  For administrative services rendered to the Fund, SBFM
received from the Fund a fee computed and paid monthly at the annual rate 0.20%
of the value of the Fund's average daily assets. For the fiscal years ended May
31, 1999, 2000 and 2001, SBFM or its predecessor received $775,034, $759,060 and
$_____________ respectively, in administration fees.

                  The Manager pays the salary of any officer or employee who is
employed by both it and the Fund. The Manager bears all expenses in connection
with the performance of its services as investment adviser.

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

                  Joseph P. Deane, vice-president and investment officer of the
Fund, has been primarily responsible for the day-to-day management of the Fund
since 1992, when the Fund commenced operations. Mr. Deane is the senior
portfolio manager for a number of investment companies and other accounts
investing in tax-exempt securities.

                                      S-19

<PAGE>

CODE OF ETHICS

                  Pursuant to Rule 17j-1 of the 1940 Act, the Fund and the
Manager have adopted codes of ethics that permit personnel to invest in
securities for their own accounts, including securities that may be purchased or
held by the Fund. All personnel must place the interests of clients first and
avoid activities, interests and relationships that might interfere with the duty
to make decisions in the best interests of the clients. All personal securities
transactions by employees must adhere to the requirements of the codes and must
be conducted in such a manner as to avoid any actual or potential conflict of
interest, the appearance of such a conflict, or the abuse of an employee's
position of trust and responsibility.

                  The Fund's Code of Ethics can be reviewed and copied at the
Commission's Public Reference Room in Washington, D.C. In addition, information
on the operation of the Public Reference Room may be obtained by calling the
Commission at 1-202-942-8090. The Code of Ethics is available on the EDGAR
Database on the Commission's Internet site at http://www.sec.gov. A copy of the
                                              ------------------
Code of Ethics may be obtained for a duplicating fee by electronic request at
the following e-mail address: publicinfo@sec.gov, or by writing the Commission's
                              ------------------
Public Reference Section, Washington, D.C. 20549-0102.

                             PORTFOLIO TRANSACTIONS

                  Subject to the general supervision of the Board, the Manager
is responsible for decisions to buy and sell securities and the selection of
broker-dealers to effect the transactions.

                  Newly issued securities normally are purchased directly from
the issuer or from an underwriter acting as principal. Other purchases and sales
usually are placed with those dealers from which it appears the best price or
execution will be obtained; those dealers may be acting as either agents or
principals. The purchase price paid by the Fund to underwriters of newly issued
securities usually includes a concession paid by the issuer to the underwriter,
and purchases of after-market securities from dealers normally are executed at a
price between the bid and asked prices. [The Fund has paid no brokerage
commissions since its commencement of operations.]

                  Allocation of transactions, including their frequency, to
various dealers is determined by the Manager in its best judgment and in a
manner deemed fair and reasonable to shareholders. The primary considerations
are availability of the desired security and the prompt execution of orders in
an effective manner at the most favorable prices. Subject to these
considerations, dealers that provide supplemental investment research and
statistical or other services to the Manager may receive orders for fund
transactions by the Fund. Information so received is in addition to, and not in
lieu of, services required to be performed by the Manager and the fees of the
Manager are not reduced as a consequence of their receipt of such supplemental
information. Such information may be useful to the Manager in serving both the
Fund and other clients and conversely, supplemental information obtained by the
placement of business of other clients may be useful to the Manager in carrying
out its obligations to the Fund.

                  The Fund will not purchase municipal obligations during the
existence of any underwriting or selling group relating thereto of which Salomon
Smith Barney or its affiliates are

                                      S-20

<PAGE>

members except to the extent permitted by the SEC including under Rule 10f-3
under the 1940 Act. Under certain circumstances, the Fund may be at a
disadvantage because of this limitation in comparison with other investment
companies which have a similar investment objective but which are not subject to
such limitation.

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

                  The Board will review periodically the commissions paid by the
Fund to determine if the commissions paid over representative periods of time
were reasonable in relation to the benefits inuring to the Fund.

                                 NET ASSET VALUE

                  The Fund's net asset value is calculated as of the close of
regular trading of the NYSE (normally 4:00 p.m., New York time) on the last day
on which the NYSE is open for trading of each week and month. For the purposes
of determining the net asset value per share of the Common Stock, the value of
the Fund's net assets shall be deemed to equal the value of the Fund's assets
less (1) the Fund's liabilities, (2) the aggregate liquidation value (i.e.,
$25,000 per outstanding share) of the Preferred Shares and (3) accumulated and
unpaid dividends on the outstanding Preferred Shares. Investments in U.S.
Government securities having a maturity of 60 days or less are valued at
amortized cost. All other securities and assets are taken at fair value as
determined in good faith by or under the direction of the Board.

                  The valuation of the Fund's assets is made by the Manager
after consultation with an independent pricing service (the "service") approved
by the Board. When, in the judgment of the 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 prices
and asked prices. Investments for which, in the judgment of the service, no
readily obtainable market quotation is available (which may constitute a
majority of the Fund's securities), are carried at fair value as determined by
the service. The service may use electronic data processing techniques and/or a
matrix system to determine valuations. The procedures of the service are
reviewed periodically by the officers of the Fund under the general supervision
and responsibility of the Board, which may replace the service at any time if it
determines it to be in the best interests of the Fund to do so.

                        ADDITIONAL INFORMATION CONCERNING
                       THE AUCTIONS FOR PREFERRED SHARES

GENERAL

                                      S-21

<PAGE>

                  Auction Agency Agreement. The Fund has entered into an Auction
                  ------------------------
Agency Agreement (the "Auction Agency Agreement") with the Auction Agent
(currently, Bankers Trust Company) which provides, among other things, that the
Auction Agent will follow the Auction Procedures for purposes of determining the
Applicable Rate for Preferred Shares so long as the Applicable Rate for
Preferred Shares is to be based on the results of an Auction.

                  Broker-Dealer Agreements. Each Auction requires the
                  ------------------------
participation of one or more Broker-Dealers. The Auction Agent has entered into
agreements (collectively, the "Broker-Dealer Agreements") with several
Broker-Dealers selected by the Fund, which provide for the participation of
those Broker-Dealers in Auctions for Preferred Shares. See "Broker-Dealers"
below.

                  Securities Depository. The Depository Trust Company ("DTC")
                  ---------------------
will act as the Securities Depository for the participants in Preferred Shares
(the "Agent Members") with respect to Preferred Shares. One certificate for all
of the Preferred Shares will be registered in the name of Cede & Co., as nominee
of the Securities Depository. Such certificate will bear a legend to the effect
that such certificate is issued subject to the provisions restricting transfers
of Preferred Shares contained in the Statement. The Fund will also issue
stop-transfer instructions to the transfer agent for Preferred Shares. Prior to
the commencement of the right of holders of Preferred Shares to elect a majority
of the Fund's Directors, as described under "Description of Preferred Shares --
Voting Rights" in the Prospectus, [Cede & Co.] will be the holder of record of
all Preferred Shares and owners of such shares will not be entitled to receive
certificates representing their ownership interest in such shares.

                  DTC, a New York-chartered limited purpose trust company,
performs services for its participants (including the Agent Members), some of
whom (and/or their representatives) own DTC. DTC maintains lists of its
participants and will maintain the positions (ownership interests) held by each
such Agent Member in Preferred Shares, whether for its own account or as a
nominee for another person.

CONCERNING THE AUCTION AGENT

                  The Auction Agent is acting as agent for the Fund in
connection with Auctions. In the absence of bad faith or negligence on its part,
the Auction Agent will not be liable for any action taken, suffered, or omitted
or for any error of judgment made by it in the performance of its duties under
the Auction Agency Agreement and will not be liable for any error of judgment
made in good faith unless the Auction Agent will have been negligent in
ascertaining the pertinent facts.

                  The Auction Agent may rely upon, as evidence of the identities
of the Existing Holders of Preferred Shares, the Auction Agent's registry of
Existing Holders, the results of Auctions and notices from any Broker-Dealer (or
other Person, if permitted by the Fund) with respect to transfers described
under "The Auction -- Secondary Market Trading and Transfer of Preferred Shares"
in the Prospectus and notices from the Fund. The Auction Agent is not required
to accept any such notice for an Auction unless it is received by the Auction
Agent by 3:00 p.m., New York City time, on the Business Day preceding such
Auction.

                                      S-22

<PAGE>

                  The Auction Agent may terminate the Auction Agency Agreement
upon notice to the Fund on a date no earlier than 45 days after such notice. If
the Auction Agent should resign, the Fund will use its best efforts to enter
into an agreement with a successor Auction Agent containing substantially the
same terms and conditions as the Auction Agency Agreement. The Fund may remove
the Auction Agent provided that prior to such removal the Fund shall have
entered into such an agreement with a successor Auction Agent.

BROKER-DEALERS

                  The Auction Agent after each Auction for shares of Preferred
Shares will pay to each Broker-Dealer, from funds provided by the Fund, a
service charge at the annual rate of 1/4 of 1% in the case of any Auction
immediately preceding a Rate Period of less than one year, or a percentage
agreed to by the Fund and the Broker-Dealers in the case of any Auction
immediately preceding a Rate Period of one year or longer, of the purchase price
of shares of Preferred Shares placed by such Broker-Dealer at such Auction. For
the purposes of the preceding sentence, shares of Preferred Shares will be
placed by a Broker-Dealer if such shares were (a) the subject of Hold Orders
deemed to have been submitted to the Auction Agent by the Broker-Dealer and were
acquired by such Broker-Dealer for its own account or were acquired by such
Broker-Dealer for its customers who are Beneficial Owners or (b) the subject of
an Order submitted by such Broker-Dealer that is (i) a Submitted Bid of an
Existing Holder that resulted in such Existing Holder continuing to hold such
shares as a result of the Auction or (ii) a Submitted Bid of a Potential Holder
that resulted in such Potential Holder purchasing such shares as a result of the
Auction or (iii) a valid Hold Order.

                  The Fund may request the Auction Agent to terminate one or
more Broker-Dealer Agreements at any time, provided that at least one
Broker-Dealer Agreement is in effect after such termination.

                  The Broker-Dealer Agreement provides that a Broker-Dealer
(other than an affiliate of the Fund) may submit Orders in Auctions for its own
account, unless the Fund notifies all Broker-Dealers that they may no longer do
so, in which case Broker-Dealers may continue to submit Hold Orders and Sell
Orders for their own accounts. Any Broker-Dealer that is an affiliate of the
Fund may submit Orders in Auctions, but only if such Orders are not for its own
account. If a Broker-Dealer submits an Order for its own account in any Auction,
it might have an advantage over other Bidders because it would have knowledge of
all Orders submitted by it in that Auction; such Broker-Dealer, however, would
not have knowledge of Orders submitted by other Broker-Dealers in that Auction.

               CERTAIN PROVISIONS IN THE ARTICLES OF INCORPORATION

The Articles of Incorporation include provisions that could have the effect of
limiting the ability of other entities or persons to acquire control of the Fund
or to change the composition of its Board and could have the effective of
depriving shareholders of an opportunity to sell their shares at a premium over
the prevailing market prices by discouraging a third party from seeking to
obtain control of the Fund. The Board is classified into three classes each with
a term of three years. Each year, the term of one class expires and the
successor or successors elected to such class will serve for a three-year term.
Such classification

                                      S-23

<PAGE>

may prevent replacement of a majority of the Directors for up to a two-year
period. The Articles of Incorporation provide that the maximum number of
directors that may constitute the Fund's entire board is 12. Director may be
removed from office with or without cause, only by a vote of the holders of 75%
of the shares of the Fund entitled to be voted on that matter.

                  The Articles of Incorporation require the affirmative vote of
at least two-thirds of the outstanding shares of the Fund to authorize the
conversion of the Fund from a closed-end to an open-end investment company as
defined in the 1940 Act, unless approved by at least two-thirds of the
Continuing Directors (as defined below). In the latter case, the affirmative
vote of at least a majority of the shares outstanding and entitled to vote will
be required to approve the amendment to the Articles of Incorporation providing
for the conversion of the Fund.

                  The affirmative votes of at least 75% of the directors and the
holders of at least 75% of the shares of the Fund are required to authorize any
of the following transactions (referred to individually as a "Business
Combination"): (1) a merger, consolidation or share exchange of the Fund with or
into any other person (referred to individually as a "Reorganization
Transaction"); (2) the issuance or transfer by the Fund (in one or a series of
transactions in any 12-month period) of any securities of the Fund to any other
person or entity for cash, securities of other property (or combinations
thereof) having an aggregate fair market value of $1,000,000 or more, excluding
sales of securities of the Fund in connection with a public offering, issuance
of securities of the Fund pursuant to a dividend reinvestment plan adopted by
the Fund and issuance's of securities of the Fund upon the exercise for any
stock subscriptions rights distributed by the Fund; or (3) a sale, lease,
exchange, mortgage, pledge, transfer or other disposition by the Fund (in one or
a series of transactions in any 12-month period) to or with any person of any
assets of the Fund having aggregate fair market value of $1,000,000 or more,
except for transactions in securities effected by the Fund in the ordinary
course of its business (each such sale, lease, exchange, mortgage, pledge,
transfer or other disposition being referred to individually as a "Transfer
Transaction"). The same affirmative votes are required with respect to: any
proposal as to the voluntary liquidation or dissolution of the Fund or any
amendment to the Fund's Articles of Incorporation to terminate its existence
(referred to individually as a "Termination Transaction"); and any shareholder
proposal as to specific investment decisions made or to be made with respect to
the Fund's assets.

                  A 75% shareholder vote will not be required with respect to a
Business Combination if the transaction is approved by a vote of a least 75% of
the Continuing Directors (as defined below) or if certain conditions regarding
the consideration paid by the person entering into, or proposing to enter into,
a Business Combination with the Fund and various other requirements are
satisfied. In such case, a majority of the votes entitled to be cast by
shareholders of the Fund will be required to approve the transaction if it is a
Reorganization Transaction or a Transfer Transaction that involves substantially
all of the Fund's assets and no shareholder vote will be required to approve the
transaction if it is any other Business Combination. In addition, a 75%
shareholder vote will not be required with respect to a Termination Transaction
if it is approved by a vote of at least 75% of the Continuing Directors, in
which case a majority of the votes outstanding and then entitled to be cast by
shareholders of the Fund will be required to approve the transaction.

                                      S-24

<PAGE>

                  The voting provisions described above could have the effect of
depriving common shareholders of the Fund of an opportunity to sell their shares
at a premium over prevailing market prices by discouraging a third party from
seeking to obtain control of the Fund in a tender offer or similar transaction.
In the view of the Board, however, these provisions offer several possible
advantages including: (1) requiring persons seeking control of the Fund to
negotiate with its management regarding the price to be paid for the amount of
capital stock required to obtain control; (2) promoting continuity and
stability; and (3) enhancing the Fund's ability to pursue long-term strategies
that are consistent with its investment objective and management policies. The
percentage vote required under these provisions is higher than that required
under Maryland law or by the 1940 Act. The Board believes that the provisions of
Articles relating to such a higher vote are in the best interest of the Fund and
its shareholders.

                  A "Continuing Director" as used in the discussion above, is
any member of the Board (1) who is not person or affiliate of a person who
enters or proposes to enter into a Business Combination with the Fund (such
person or affiliate being referred to individually as an "Interested party") and
(2) who has been a member of the Board for a period of least 12 months or is a
successor of a Continuing Director who is unaffiliated with an Interested party
and is recommended to succeed a Continuing Director by a majority of the
Continuing Directors.

                  Reference should be made to the Articles on file with the SEC
for the full text of these provisions.

             REPURCHASE OF COMMON STOCK; CONVERSION TO OPEN-END FUND

                  The Fund may repurchase shares of its Common Stock in the open
market or in privately negotiated transactions when the Fund can do so at prices
below their then current net asset value per share on terms that the Board
believes represent a favorable investment opportunity, but has no obligation to
do so.

                  The market prices of the Fund shares may, among other things,
be determined by the relative demand for and supply of the shares in the market,
the Fund's investment performance, the Fund's dividends and yield and investor
perception of the Fund's overall attractiveness as an investment as compared
with other investment alternatives. Any acquisition of Common Stock by the Fund
will decrease the total assets of the Fund and therefore have effect of
increasing the Fund's expense ratio. The Fund may borrow money to finance the
repurchase of shares subject to the limitations described in the Prospectus. Any
interest on the borrowings will reduce the Fund's net income.

                  If a tender offer is authorized to be made by the Board, it
will be an offer to purchase at a price equal to the net asset value of all (but
not less than all) of the shares owned by the shareholder (or attributed to him
or her for federal income tax purposes under Sections 318(a) and 302(c) of the
Code). A shareholder who tenders all of the shares actually and constructively
owned by that shareholder will realize a taxable gain or loss depending upon the
amount of cash received and his or her basis in his or her shares.

                  In addition, at any time when the Fund's Preferred Shares are
outstanding, the Fund may not purchase, redeem or otherwise acquire any of its
Common Stock unless (1) all accrued Preferred Shares dividends have been paid
and (2) at the time of such purchase,

                                      S-25

<PAGE>

redemption or acquisition, the net asset value of the Fund's portfolio
(determined after deducting the acquisition price of the Common Shares) is at
least 200% of the liquidation value of the outstanding Preferred Shares
(expected to equal the original purchase price per share plus any accrued and
unpaid dividends thereon).

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

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

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

                  The repurchase by the Fund of its shares of Common Stock at
prices below net asset value will result in an increase in the net asset value
of those shares of Common Stock that remain outstanding. However, there can be
no assurance that share repurchases or tenders at or below net asset value will
result in the Fund's shares of Common Stock trading at a price equal to their
net asset value.

                  In addition, a purchase by the Fund of its shares of Common
Stock will decrease the Fund's total assets which would likely have the effect
of increasing the Fund's expense ratio. Any purchase by the Fund of its shares
of Common Stock at a time when Preferred Shares are outstanding will increase
the leverage applicable to the outstanding shares of Common Stock then
remaining.

                  See "Certain Provisions in the Charter and Bylaws" in the
Prospectus and "Certain Provisions in the Articles of Incorporation" in this
Statement of Additional Information for a discussion of voting requirements
applicable to conversion of the Fund to an open-end company. If the Fund
converted to an open-end company, it would be required to redeem all Preferred
Shares then outstanding, and the Fund's shares of Common Stock would no longer
be listed on the New York Stock Exchange. Holders of common stock of an open-end
investment company may require the company to redeem their shares on any
business day (except in certain circumstances as authorized by or under the 1940
Act) at their net asset value, less such

                                      S-26

<PAGE>

redemption charge, if any, as might be in effect at the time of redemption. In
order to avoid maintaining large cash positions or liquidating favorable
investments to meet redemptions, open-end companies typically engage in a
continuous offering of their common stock. Open-end companies are thus subject
to periodic asset in-flows and out-flows that can complicate portfolio
management.

                                   TAX MATTERS

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

                  The Fund has qualified and intends to continue to qualify each
year under Subchapter M of the Internal Revenue Code of 1986, as amended (the
"Code") as a regulated investment company and to satisfy conditions contained in
the Code which will enable interest from municipal obligations owned by the Fund
to be exempt from regular federal income tax in the hands of owners of the
Fund's shares, subject to the possible application of the AMT.

                  To qualify under Subchapter M for tax treatment as a regulated
investment company, the Fund must, among other things: (a) distribute to its
shareholders at least 90% of the sum of (i) its investment company taxable
income (as that term is defined in the Code determined without regard to the
deduction for dividends paid) and (ii) its net tax-exempt income (the excess of
its gross tax-exempt interest income over certain disallowed deductions) and (b)
diversify its holdings so that, at the end of each quarter of the Fund's taxable
year (i) at least 50% of the market value of the Fund's assets is represented by
cash, cash items, U.S. government securities, securities of other regulated
investment companies, and other securities, with such other securities limited,
with respect to any one issuer, to an amount not greater in value than 5% of the
Fund's total assets, [and to not more than 10% of the outstanding voting
securities of such issuer], and (ii) not more than 25% of the market value of
the Fund's assets is invested in the securities (other than U.S. government
securities or securities of other regulated investment companies) of any one
issuer or two or more issuers controlled by the Fund and engaged in the same,
similar or related trades or businesses. In meeting these requirements of
Subchapter M of the Code, the Fund may be restricted in the utilization of
certain of the investment techniques described under "The Fund's Investments" in
the Prospectus and "Investment Policies and Techniques" in this Statement of
Additional Information. If in any year the Fund should fail to qualify under
Subchapter M for tax treatment as a regulated investment company, the Fund would
incur a regular federal corporate income tax upon its taxable income for that
year (computed without any deduction for the dividends paid by the Fund to its
shareholders), and distributions by the Fund to its shareholders would be
taxable to such holders as ordinary income to the extent of the current or
accumulated earnings and profits of the Fund. A regulated investment company
that fails to distribute, by the close of each calendar year, an amount equal to
the sum of 98% of its ordinary taxable income for such year and 98% of its
capital gain net income for the one-year period ending October 31 in such year,
plus any shortfalls from the prior year's required distribution, is liable for a
4% excise tax on the excess of the required distribution for such calendar year
over the distributed amount for such calendar year. To avoid the imposition of
this excise tax, the Fund generally intends to make the required distributions
of its

                                      S-27

<PAGE>

ordinary taxable income, if any, and its capital gain net income, to the extent
possible, by the close of each calendar year.

                  As described above, the Fund may invest in financial futures
contracts and options on financial futures contracts that are traded on a U.S.
exchange or board of trade. As a general rule, these investment activities will
increase or decrease the amount of long-term and short-term capital gains or
losses realized by the Fund and, thus, will affect the amount of capital gains
distributed to the Fund's shareholders.

                  For federal income tax purposes, gain or loss on the futures
and options described above (collectively referred to as "Section 1256
Contracts") would, as a general rule, be taxed pursuant to a special
"mark-to-market" system. Under the mark-to-market system, the Fund may be
treated as realizing at the end of its taxable years a greater or lesser amount
of gains or losses than actually realized. As a general rule, gain or loss on
Section 1256 Contracts is treated as 60% long-term capital gain or loss and 40%
short-term capital gain or loss, and as a result, the mark-to-market system will
generally affect the amount of capital gains or losses taxable to the Fund and
the amount of distributions taxable to a shareholder. Moreover, if the Fund
invests in both Section 1256 Contracts and offsetting positions in those
contracts, then the Fund might not be able to receive the benefit of certain
realized losses for an indeterminate amount of time. The Fund expects that its
activities with respect to Section 1256 Contracts and offsetting positions in
those Contracts (1) will not cause it or its shareholders to be treated as
receiving a materially greater amount of capital gains or distributions than
actually realized or received and (2) will permit it to use substantially all of
its losses for the taxable years in which the losses actually occur (to the
extent it realizes corresponding gains in such years).

                  The Fund intends to qualify to pay "exempt-interest"
dividends, as defined in the Code, on its shares of Common Stock and Preferred
Shares by satisfying the requirement that at the close of each quarter of its
taxable year, at least 50% of the value of its total assets consists of
tax-exempt municipal obligations. Exempt-interest dividends are dividends or any
part thereof (other than a capital gain dividend) paid by the Fund which are
attributable to interest on tax-exempt municipal obligations and are so
designated by the Fund. Exempt-interest dividends will be exempt from regular
federal income tax, but may be subject to the federal alternative minimum tax
(the "AMT"). Insurance proceeds received by the Fund under any insurance
policies in respect of scheduled interest payments on defaulted municipal
obligations will generally be excludable from federal gross income under Section
103(a) of the Code. In the case of municipal lease obligations, however, there
can be no assurance that bond insurance payments received in lieu of interest on
such obligations in the event of a "non-appropriation" will be excludable from
gross income for federal income tax purposes. See "Investment Policies and
Techniques" above. Gains of the Fund that are attributable to market discount on
certain municipal obligations are treated as ordinary taxable income.
Distributions to shareholders by the Fund of net income received, if any, from
taxable temporary investments and net short-term capital gains, if any, realized
by the Fund will be taxable to its shareholders as ordinary income.
Distributions by the Fund of its net capital gains (i.e., the excess of net
long-term capital gain over net short-term capital loss), if any, are taxable as
long-term capital gain regardless of the length of time the shareholder has
owned shares of Common Stock or Preferred Shares. The amount of taxable income
allocable to the Fund's Preferred Shares will depend upon the amount of such
income realized by the Fund, but is not generally expected to be significant.
Except for

                                      S-28

<PAGE>

dividends paid on Preferred Shares which include an allocable portion of any net
capital gain or other taxable income, the Fund anticipates that all other
dividends paid on Preferred Shares will constitute exempt-interest dividends for
federal income tax purposes. Distributions, if any, in excess of the Fund's
earnings and profits will first reduce the adjusted tax basis of a shareholder's
shares and, after that basis has been reduced to zero, will constitute capital
gain to the shareholder (assuming the shares are held as a capital asset). As
long as the Fund qualifies as a regulated investment company under the Code, no
part of its distributions to shareholders will qualify for the dividends -
received deduction available to corporate shareholders.

                  The Internal Revenue Service (the "IRS") requires that a
regulated investment company which has two or more classes of shares must
designate to each such class proportionate amounts of each type of its income
for each taxable year based upon the percentage of total dividends distributed
to each class for such year. The Fund intends each year to allocate, to the
fullest extent practicable, net interest which is exempt from regular federal
income taxes, net interest which is subject to the federal alternative minimum
tax, net capital gain and other taxable income, if any, between its shares of
Common Stock and Preferred Shares in proportion to the total dividends paid to
each class with respect to such year. To the extent permitted under applicable
law, the Fund reserves the right to make special allocations of income within a
class, consistent with the objectives of the Fund. The Fund will, in the case of
a Minimum Rate Period or a Special Rate Period of 28 Rate Period Days, and may,
in the case of any other Special Rate Period, notify the Auction Agent of the
amount of any net capital gain or other income taxable for regular federal
income tax purposes to be included in any dividend on Preferred Shares prior to
the Auction establishing the Applicable Rate for such dividend period. [If (a)
in the case of any Minimum Rate Period or any Special Rate Period of 28 Rate
Period Days or fewer, the Fund allocates any net capital gain or other income
taxable for regular federal income tax purposes to a dividend paid on Preferred
Shares without having given advance notice thereof to the Auction Agent as
required by the Articles Supplementary solely by reason of the fact that such
allocation is made retroactively as a result of the redemption of all or a
portion of the outstanding Preferred Shares or the liquidation of the Fund or
(b) in the case of any Special Rate Period of more than 28 Rate Period Days, the
Fund allocates any net capital gain or other taxable income for regular federal
income tax purposes to Preferred Shares without having given advance notice
thereof as described above, the Fund will make certain payments to owners of
Preferred Shares to which such allocation was made to offset the federal income
tax effect thereof as described under "Description of Preferred Shares --
Dividends and Dividend Periods -- Gross-up Payments" in the Prospectus.]

                  In order for any distributions to owners of Preferred Shares
to be eligible to be treated as exempt-interest dividends, such shares must be
treated as stock for federal income tax purposes. The Manager believes the
Preferred Shares should be treated as stock for federal income tax purposes.

                  If at any time when the Preferred Shares are outstanding, the
Fund fails to meet the Preferred Shares Basic Maintenance Amount or the 1940 Act
Preferred Shares Asset Coverage, the Fund will be required to suspend
distributions to holders of its shares of Common Stock until such maintenance
amount or asset coverage, as the case may be, is restored. See "Description of
Preferred Shares -- Dividends and Dividend Periods -- Restrictions on Dividends
and Other Distributions" in the Prospectus. This may prevent the Fund from
distributing at least

                                      S-29

<PAGE>

90% of its investment company taxable income and net tax-exempt income (as that
term is defined in the Code determined without regard to the deduction for
dividends paid), and may therefore jeopardize the Fund's qualification for
taxation as a regulated investment company or cause the Fund to incur a tax
liability or a non-deductible 4% excise tax on the undistributed taxable income
(including gain), or both. Upon failure to meet the Preferred Shares Basic
Maintenance Amount or the 1940 Act Preferred Shares Asset Coverage, the Fund
will be required to redeem its shares of Preferred Shares in order to maintain
or restore such maintenance amount or asset coverage and avoid the adverse
consequences to the Fund and its shareholders of failing to qualify as a
regulated investment company. There can be no assurance, however, that any such
redemption would achieve such objectives.

                  The Code provides that interest on indebtedness incurred or
continued to purchase or carry the Fund's shares is not deductible for federal
income tax purposes. Under rules used by the IRS for determining when borrowed
funds are considered used for the purpose of purchasing or carrying particular
assets, the purchase or ownership of the Fund's shares may be considered to have
been made with borrowed funds even though such funds are not directly used for
the purchase or ownership of such shares.

                  The interest on private activity bonds is not federally
tax-exempt to a holder who is a "substantial user" of a facility financed by
such bonds or a "related person" of such "substantial user." As a result, the
Fund may not be an appropriate investment for shareholders who are considered
either a "substantial user" or a "related person" within the meaning of the
Code. In general, a "substantial user" of a facility includes a "non-exempt
person who regularly uses a part of such facility in his trade or business."
"Related persons" are in general defined to include persons among whom there
exists a relationship, either by family or business, which would result in a
disallowance of losses in transactions among them under various provisions of
the Code (or if they are members of the same controlled group of corporations
under the Code), including a partnership and each of its partners (and certain
members of their families), an S corporation and each of its shareholders (and
certain members of their families) and various combinations of these and other
relationships. The foregoing is not a complete description of all of the
provisions of the Code covering the definitions of "substantial user" and
"related person."

                  The Fund may, at its option, redeem Preferred Shares in whole
or in part, and is required to redeem Preferred Shares to the extent required to
maintain the Preferred Shares Basic Maintenance Amount and the 1940 Act
Preferred Shares Asset Coverage. Gain or loss, if any, resulting from a
redemption of Preferred Shares will be taxed as gain or loss from the sale or
exchange of Preferred Shares under Section 302 of the Code rather than as a
dividend, but only if the redemption distribution (a) is deemed not to be
essentially equivalent to a dividend, (b) is in complete redemption of an
owner's interest in the Fund, (c) is substantially disproportionate with respect
to the owner, or (d) with respect to non-corporate owners, is in partial
liquidation of the Fund. For purposes of (a), (b) and (c) above, an owner's
ownership of shares of Common Stock will be taken into account.

                  Nonresident alien individuals and certain foreign corporations
and other entities ("foreign investors") generally are subject to U.S.
withholding tax at the rate of 30% (or possibly a lower rate provided by an
applicable tax treaty) on distributions of taxable net investment income and net
short-term capital gain. To the extent received by foreign investors, exempt-

                                      S-30

<PAGE>

interest dividends, distributions of net long-term capital gain and gain from
the sale or other disposition of Preferred Shares generally are exempt from U.S.
taxation. Different tax consequences may result if foreign the owner is engaged
in a trade or business in the United States or, in the case of an individual, is
present in the United States for more than 182 days during a taxable year.

                  Although dividends generally will be treated as distributed
when paid, dividends declared in October, November or December, payable to
shareholders of record on a specified date in one of those months and paid
during the following January will be treated as having been distributed by the
Fund (and received by the shareholders) on December 31 of the year declared.

                  Certain of the Fund's investment practices are subject to
special provisions of the Code that, among other things, may defer the use of
certain deductions or losses of the Fund and affect the holding period of
securities held by the Fund and the character of the gains or losses realized by
the Fund. These provisions may also require the Fund to recognize income or gain
without receiving cash with which to make distributions in the amounts necessary
to satisfy the requirements for maintaining regulated investment company status
and for avoiding income and excise taxes. The Fund will monitor its transactions
and may make certain tax elections in order to mitigate the effect of these
rules and prevent disqualification of the Fund as a regulated investment
company.

                  The sale or other disposition of shares of Common Stock or
Preferred Shares of the Fund (other than redemptions, the rules for which are
described above) will normally result in capital gain or loss to shareholders if
such shares are held as capital assets. Present law taxes both long-term and
short-term capital gains of corporations at the rates applicable to ordinary
income. For non-corporate taxpayers, however, under current law short-term
capital gains and ordinary income will be taxed at a maximum rate of 39.1% while
long-term capital gains generally will be taxed at a maximum rate of 20%.
However, because of the limitations on itemized deductions and the deduction for
personal exemptions applicable to higher income taxpayers, the effective rate of
tax may be higher in certain circumstances. Losses realized by a shareholder on
the sale or exchange of shares of the Fund held for six months or less are
disallowed to the extent of any distribution of exempt-interest dividends
received with respect to such shares, and, if not disallowed, such losses are
treated as long-term capital losses to the extent of any distribution of
long-term capital gain received with respect to such shares. Under certain
circumstances, a shareholder's holding period may have to restart after, or may
be suspended for any periods during which, the shareholder's risk of loss with
respect to its shares is diminished as a result of holding one or more other
positions in substantially similar or related property, or through certain
options or short sales. Any loss realized on a sale or exchange of shares of the
Fund will be disallowed to the extent those shares of the Fund are replaced by
other shares within a period of 61 days beginning 30 days before and ending 30
days after the date of disposition of the original shares. In that event, the
basis of the replacement shares of the Fund will be adjusted to reflect the
disallowed loss.

                  Federal tax law imposes the AMT with respect to corporations,
individuals, trusts and estates. Interest on certain municipal obligations, such
as bonds issued to make loans for housing purposes or to private entities (but
not to certain tax-exempt organizations such as universities and non-profit
hospitals) is included as an item of tax preference in determining the

                                      S-31

<PAGE>

amount of a taxpayer's alternative minimum taxable income. To the extent that
the Fund receives income from municipal obligations which is subject to the AMT,
a portion of the dividends paid by it, although otherwise exempt from federal
income tax, will be taxable to its shareholders to the extent that their tax
liability is determined under the AMT. The Fund will annually supply a report
indicating the percentage of the Fund's income attributable to municipal
obligations subject to the AMT. In addition, for certain corporations,
alternative minimum taxable income is increased by 75% of the difference between
an alternative measure of income ("adjusted current earnings") and the amount
otherwise determined to be the alternative minimum taxable income. Interest on
all municipal obligations, and therefore all distributions by the Fund that
would otherwise be tax-exempt, is included in calculating a corporation's
adjusted current earnings. Certain small corporations are not subject to the
federal AMT.

                  Tax-exempt income, including exempt-interest dividends paid by
the Fund, is taken into account in calculating the amount of social security and
railroad retirement benefits that may be subject to federal income tax.

                  If a shareholder fails to furnish a correct taxpayer
identification number, fails to report fully dividend or interest income, or
fails to certify that he has provided a correct taxpayer identification number
and that he is not subject to "backup withholding," the shareholder may be
subject to a 30.5% (30% after December 31, 2001) "backup withholding" tax with
respect to (1) taxable dividends and distributions and (2) the proceeds of any
sales or repurchases of shares of Common Stock and Preferred Shares. An
individual's taxpayer identification number is his social security number. The
backup withholding tax is not an additional tax and may be credited against a
taxpayer's federal income tax liability.

                  The Code provides that every shareholder required to file a
tax return must include for information purposes on such return the amount of
tax-exempt interest received during the taxable year, including any
exempt-interest dividends received from the Fund.

                  The value of shares of Common Stock acquired pursuant to the
Fund's Dividend Reinvestment Plan will generally be excluded from gross income
for federal income tax purposes to the extent that the cash amount reinvested
would be excluded from gross income.

                  The foregoing is a general summary of the provisions of the
Code and regulations thereunder presently in effect as they directly govern the
taxation of the Fund and its shareholders. These provisions are subject to
change by legislative or administrative action, and any such change may be
retroactive. Moreover, the foregoing does not address many of the factors that
may be determinative of whether an investor will be liable for the AMT.
Shareholders are advised to consult their own tax advisors for more detailed
information concerning the federal income tax consequences of purchasing,
holding and disposing of Fund shares.

                                     EXPERTS

                  The financial statements of the Fund as of May 31, 2001
incorporated by reference in this Statement of Additional Information have been
audited by KPMG LLP, independent auditors, as set forth in their report thereon
incorporated by reference therein, and is

                                      S-32

<PAGE>

included in reliance upon such report given upon the authority of said firm as
experts in accounting and auditing.

                                      S-33

<PAGE>


                                                                     Appendix A

                             RATINGS OF INVESTMENTS

                         MOODY'S INVESTORS SERVICE, INC.

                  A brief description of the applicable Moody's Investors
Service, Inc. ("Moody's") rating symbols and their meanings (as published by
Moody's) follows: DESCRIPTION OF MOODY'S MUNICIPAL BOND RATINGS:

                  Aaa Bonds that are rated Aaa are judged to be of the best
quality. They carry the smallest degree of investment risk and are generally
referred to as "gilt edge." Interest payments are protected by a large or by an
exceptionally stable margin and principal is secure. While the various
protective elements are likely to change, such changes as can be visualized are
most unlikely to impair the fundamentally strong position of such issues.

                  Aa Bonds that are rated Aa are judged to be of high quality by
all standards. Together with the Aaa group they comprise what are generally
known as high grade bonds. They are rated lower than the best bonds because
margins of protection may not be as large as in Aaa securities or fluctuation of
protective elements may be of greater amplitude or there may be other elements
present which make the long-term risks appear somewhat larger than in Aaa
securities.

                  A Bonds that are rated A possess many favorable investment
attributes and are to be considered as upper medium grade obligations. Factors
giving security to principal and interest are considered adequate, but elements
may be present which suggest a susceptibility to impairment sometime in the
future.

                  Baa Bonds that are rated Baa are considered as medium grade
obligations, i.e., they are neither highly protected nor poorly secured.
Interest payments and principal security appear adequate for the present but
certain protective elements may be lacking or may be characteristically
unreliable over any great length of time. Such bonds lack outstanding investment
characteristics and may have speculative characteristics as well.

                  Moody's applies the numerical note modifiers 1, 2 and 3 in
each generic rating classification from Aa through Baa. The modifier 1 indicates
that the security ranks in the higher end of its generic rating category; the
modifier 2 indicates a mid-range ranking; and the modifier 3 indicates that the
issue ranks in the lower end of its generic rating category. Advanced refunded
issues that are secured by escrowed funds held in cash, held in trust,
reinvested in direct non-callable United States government obligations or
non-callable obligations unconditionally guaranteed by the United States
government are identified with a number (hatchmark) symbol, e.g., Aaa.

DESCRIPTION OF MOODY'S MUNICIPAL NOTE RATINGS:

                  Moody's ratings for state and municipal notes and other
short-term loans are designated Moody's Investment Grade (MIG) and for variable
demand obligations are designated

                                       A-1

<PAGE>

Variable Moody's Investment Grade (MVIG). This distinction recognizes the
difference between short-term credit risk and long-term risk. Loans bearing the
designation MIG 1/VMIG 1 are of the best quality, enjoying strong protection
from established cash flows of funds for their servicing, superior liquidity
support or from established and broad-based access to the market for
refinancing. Loans bearing the designation MIG 2/VMIG 2 are of high quality with
margins of protection ample although not so large as in the preceding group.
Loans bearing the designation MIG 3/VMIG 3 are of favorable quality, with all
security elements accounted for but lacking the undeniable strength of the
preceding grades. Liquidity and cash flow protection may be narrow and market
access for refinancing, in particular, is likely to be less well established.

DESCRIPTION OF MOODY'S COMMERCIAL PAPER RATINGS:

                  The rating Prime-1 is the highest commercial paper rating
assigned by Moody's. Issuers rated Prime-1 (or related supporting institutions)
are considered to have a superior capacity for repayment of short-term
promissory obligations. Issuers rated Prime-2 (or related supporting
institutions) are considered to have a strong capacity for repayment of
short-term promissory obligations. This will normally be evidenced by many of
the characteristics of issuers rated Prime-1 but to a lesser degree. Earnings
trends and coverage ratios, while sound, will be more subject to variation.
Capitalization characteristics, while still appropriate, may be more affected by
external conditions. Ample alternative liquidity is maintained.

                         STANDARD & POOR'S RATINGS GROUP

                  A brief description of the applicable Standard & Poor's
Ratings Group ("S&P") rating symbols and their meanings (as published by S&P)
follows:

DESCRIPTION OF S&P MUNICIPAL BOND RATINGS:

                  AAA - Debt rated AAA has the highest rating assigned by S&P.
Superior financial security on an absolute and relative basis. Capacity to meet
policyholder obligations is extremely strong under a variety of economic and
underwriting conditions.

                  AA - Debt rated AA is an excellent financial instrument.
Capacity to meet policyholder obligations is strong under a variety of economic
and underwriting conditions.

                  A - Debt rated A is a good financial instrument. Capacity to
meet policyholder obligations is somewhat susceptible to adverse economic and
underwriting conditions.

                  BBB - Debt rated BBB is an adequate financial security.
Capacity to meet policyholder obligations is susceptible to adverse economic and
underwriting conditions.

                  Plus (+) or Minus (-): The ratings from AA to B may be
modified by the addition of a plus or minus sign to show relative standing
within the major rating categories.

                  Provisional Ratings: The letter "p" indicated that the rating
is provisional. A provisional rating assumes the successful completion of the
project being financed by the debt being rated and indicates that payment of
debt service requirements is largely or entirely dependent upon the successful
and timely completion of the project. This rating, however, while

                                       A-2

<PAGE>

addressing credit quality subsequent to completion of the project, makes no
comment on the likelihood of, or the risk of default upon failure of, such
completion. The investor should exercise judgment with respect to such
likelihood and risk.

     L - The letter "L" indicates that the rating pertains to the principal
amount of those bonds where the underlying deposit collateral is fully insured
by the Federal Savings & Loan Insurance Corp. or the Federal Deposit Insurance
Corp.

     + - Continuance of the rating is contingent upon S&P's receipt of closing
documentation confirming investments and cash flow.

     * - Continuance of the rating is contingent upon S&P's receipt of an
executed copy of the escrow agreement.

     NR - Indicates no rating has been requested, that there is insufficient
information on which to base a rating, or that S&P does not rate a particular
type of obligation as a matter of policy.

DESCRIPTION OF S&P MUNICIPAL NOTE RATINGS:

                  Municipal notes with maturities of three years or less are
usually given note ratings (designated SP1, -2, or -3) to distinguish more
clearly the credit quality of notes as compared to bonds. Notes rated SP-1 have
a very strong or strong capacity to pay principal and interest. Those issues
determined to possess overwhelming safety characteristics are given the
designation of SP-1+. Notes rated SP-2 have a satisfactory capacity to pay
principal and interest.

DESCRIPTION OF S&P COMMERCIAL PAPER RATINGS:

                  Commercial paper rated A-1 by S&P indicates that the degree of
safety regarding timely payment is either overwhelming or very strong. Those
issues determined to possess overwhelming safety characteristics are denoted
A-1+. Capacity for timely payment on commercial paper rated A-2 is strong, but
the relative degree of safety is not as high as for issues designated A-1.

                                FITCH IBCA, INC.

DESCRIPTION OF FITCH'S MUNICIPAL BOND RATINGS:

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

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

     A - Bonds rated A by Fitch are considered to have a low expectation of
credit risk. The capacity for timely payment of financial commitments is
considered to be strong, but

                                       A-3

<PAGE>

may be more vulnerable to changes in economic conditions and circumstances than
bonds with higher ratings.

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

     Plus and minus signs are used by Fitch to indicate the relative position of
a credit within a rating category. Plus and minus signs, however, are not used
in the AAA category.

DESCRIPTION OF FITCH SHORT-TERM RATINGS:

     Fitch's short-term ratings apply to debt obligations that are payable on
demand or have original maturities of generally up to three years, including
commercial paper, certificates of deposit, medium-term notes, and municipal and
investment notes.

     The short-term rating places greater emphasis than a long-term rating on
the existence of liquidity necessary to meet financial commitments in a timely
manner.

     Fitch's short-term ratings are as follows:

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

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

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

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

                                       A-4

<PAGE>

                           PART C - OTHER INFORMATION

ITEM 24:  FINANCIAL STATEMENTS AND EXHIBITS

       1.       Financial Statements

              Financial Statements included in Part A of this Registration
Statement:

                       Financial Highlights for each of the years ended May 31,
                       1993, 1994, 1995, 1996, 1997, 1998, 1999, 2000 and
                       2001.**

              Financial Statements included in Part B of this Registration
Statement:

                       Statement of assets and liabilities as of May 31, 2001.**

                       Statement of operations for the year ended May 31,
                       2001.**

                       Statement of Changes in net assets for each of the years
                       ended May 31, 2000 and 2001.**

                       Report of Independent Auditors.**

              --------------------
              **     Incorporated by reference to Registrant's May 31, 2001
                     Annual Report.

<PAGE>

2.        Exhibits:

a.  (1)  Articles of Incorporation of Registrant.**

    (2)  Article of Amendment to Articles of Incorporation of
    Registrant.**

    (3)  Form of Articles Supplementary Creating and Fixing the Rights
    of Municipal Auction Rate Cumulative Preferred Stock.*

b.  (1)  By-Laws of Registrant.**

    (2)  Amended By-Laws of Registrant.**

c.  Not applicable.

d.  (1)  Specimen Certificate of Common Stock, par value $.001 per share.**

    (2)  Form of Specimen Stock Certificate representing shares of
    Preferred Stock, par value $.001 per share.*

e.  Registrant's Dividend Reinvestment Plan.+

f.  Not applicable.

g.  (1)  Form of Investment Advisory Agreement between Registrant and
    Shearson Lehman Advisors.**

    (2)  Form of Investment Advisory Agreement between Registrant and
    Greenwich Street Adviser.****

h.  (1)  Form of Underwriting Agreement for the issuance of Common
    Stock.***

    (2)  Form of Underwriting Agreement for the issuance of Preferred
    Stock.*

i.  Not applicable.

j.  Form of Custody Agreement.++

k.  (1)  Transfer Agency and Registrar Agreement.+++

    (2)  Administration Agreement.++++

    (3)  Form of Auction Agency Agreement between the Fund and Bankers
    Trust Company.*

    (4)  Form of Broker-Dealer Agreement between the Fund and Salomon
    Smith Barney Inc.*

<PAGE>

         (5) Form of Master Purchaser's Letter.*

         (6) Form of Letter of Representations.*

l.       (1) Opinion and Consent of Simpson Thatcher & Bartlett.*

         (2) Opinion and Consent of Willkie Farr & Gallagher.*

         (3) Opinion and Consent of Venable, Baetjer and Howard, LLP.*

m.       Not applicable.

n.       (1) Consent of KPMG LLP.

         (2) Power of Attorney.*****

o.       Not applicable.

p.       Purchase Agreement.**

q.       Not applicable.

r.       Code of ethics.+++++

---------------------------
*         To be filed by amendment.

**        Incorporated by reference to the Registrant's Pre-Effective Amendment
          No. 1 to the Registration Statement No. 33-47116, filed by Registrant
          on May 14, 1992.

***       Incorporated by reference to the Registrant's Pre-Effective Amendment
          No. 3 to the Registration Statement No. 33-47116 filed by Registrant
          on June 18, 1992.

****      Incorporated by reference to the Registrant's Post-Effective Amendment
          No. 5 to the Registration Statement No. 33-47116 filed by Registrant
          on October 14, 1993.

*****     Included on signature page to this Registration Statement.

+         Incorporated by reference to Registrant's Post-Effective Amendment
          No. 10 to the Registration Statement No. 33-47116 filed by Registrant
          on August 16, 1999.

++        Incorporated by reference to the Registrant's Post-Effective Amendment
          No. 8 to the Registration Statement No. 33-47116 filed by Registrant
          on September 23, 1996.

<PAGE>

 +++      Incorporated by reference to the Registrant's Post-Effective Amendment
          No. 4 to the Registration Statement No. 33-47116 filed by Registrant
          on August 4, 1993.

 ++++     Incorporated by reference to the Registrant's Post-Effective
          Amendment No. 7, ________.

 +++++    Incorporated by reference to the Registrant's Post-Effective Amendment
          No. 11 to the Registration Statement No. 33-7116 filed by Registrant
          on August 31, 2000.

          ITEM 25:  MARKETING ARRANGEMENTS

          Reference is made to the Form of Underwriting Agreement for the
Preferred Shares to be filed as Exhibit h.2.

ITEM 26:  OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION

        Securities and Exchange Commission fees.......     $
        Printing and engraving expenses...............
        Legal Fees....................................
        Accounting expenses...........................
        Rating Agency Fees............................
        Miscellaneous expenses........................   -------
               Total..................................     $
                                                         =======

ITEM 27:  PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT

          Not applicable.

ITEM 28:  NUMBER OF HOLDERS OF SECURITIES

          At            , 2002:

        ----------------------------------------- ----------------------
                                                         NUMBER OF
                    TITLE OF CLASS                   RECORD HOLDERS
                    --------------                   ---------------
        ----------------------------------------------------------------
        Common Stock, $.001 par value

        ----------------------------------------- ----------------------
        Preferred Shares, $.001 par value                   0

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

ITEM 29:  INDEMNIFICATION

          Under Registrant's Articles of Incorporation, the directors and
officers of Registrant will be indemnified by the Registrant to the fullest
extent permitted by the Maryland General Corporation Law, including the
advancing of expenses, subject to any limitations imposed by the Investment
Company Act of 1940, as amended (the "1940 Act"), the Securities Act of 1933, as
amended (the "1933 Act") and the rules and regulations promulgated thereunder.

<PAGE>

          Article 2, Section 405.2 of the Maryland General Corporation Law
provides that the Articles of Incorporation of a Maryland corporation may limit
the extent to which directors or officers may be personally liable to the
corporation or its shareholders for money damages in certain instances. Article
VII of the Registrant's Articles of Incorporation provides that a director or
officer of the Registrant will not be liable to the Registrant or its
shareholders for damages except to the extent such exemption from liability or
limitation thereof is not permitted by law as currently in effect or as the same
may hereafter be amended. The Registrant's Articles of Incorporation also
provide that no amendment to the Articles of Incorporation will affect any right
of any person under this Article VII based on any event, omission or proceeding
prior to the amendment.

          Reference is also made to the Investment Advisory Agreement between
the Registrant and Greenwich Street Advisers incorporated by reference to
Post-Effective Amendment No. 5 to the Registration Statement (No. 33-47116)
filed by Registrant on October 14, 1993 and to the Underwriting Agreement for
the issuance of Preferred Stock (to be filed as an Exhibit to this Registration
Statement).

          Insofar as indemnification for liabilities under the 1933 Act may be
permitted to the directors and officers, the Registrant has been advised that in
the opinion of the Securities and Exchange Commission such indemnification is
against public policy as expressed in such Act and is therefore unenforceable.
If a claim for indemnification against such liabilities under the 1933 Act
(other than for expenses incurred in a successful defense) is asserted against
the Fund by the directors or officers in connection with the Preferred Shares,
the Registrant will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate jurisdiction
the question of whether such indemnification by it is against public policy as
expressed in such Act and will be governed by the final adjudication of such
issue.

ITEM 30:  BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISER

          Investment Adviser: Smith Barney Fund Management LLC (formerly known
as SSB Citi Fund Management LLC) ("Smith Barney Fund Management").

          Smith Barney Fund Management serves as the Fund's investment manager.
Through its predecessors, Smith Barney Fund Management has been in the
investment counseling business since 1934 and is a registered investment adviser
under the Investment Advisers Act of 1940 (the "Adviser Act"). Smith Barney Fund
Management is a wholly-owned subsidiary of Salomon Smith Barney Holdings Inc.
("Holdings"), which is in turn a wholly-owned subsidiary of Citigroup Inc.
("Citigroup"). See "Management of the Fund" in the Prospectus.

          Registrant is fulfilling the requirement of this Item 30 to provide a
list of the offices and directors of its investment adviser, together with
information as to any other business, profession, vocation or employment of a
substantial nature engaged in by that entity or those of its officers and
directors during the past two years, by incorporating herein by reference the
information contained in the current Form ADV filed with the

<PAGE>

Securities and Exchange Commission by Smith Barney Fund Management pursuant to
the Investment Advisers Act of 1940, as amended.

ITEM 31:  LOCATION OF ACCOUNTS AND RECORDS

       PNC Bank, N.A., 17th and Chestnut Streets, Philadelphia, Pennsylvania
19103, and PFPC Global Fund Services, P.O. Box 9699, Providence, Rhode Island,
02940 respectively maintain the custodian and the shareholders servicing agent
records required by Section 31(a).

       All other records required by Section 31(a) are maintained at the offices
of the Registrant at 125 Broad Street, New York, New York 10004 (and preserved
for the periods specified by Rule 31a-2).

ITEM 32:  MANAGEMENT SERVICES

       Not applicable.

ITEM 33:  UNDERTAKINGS

             (1) Registrant undertakes to suspend the offering of its shares
             until it amends its Prospectus if (i) subsequent to the effective
             date of its Registration Statement, the net asset value declines
             more than 10 percent from its net asset value as of the effective
             date of the Registration Statement, or (ii) the net asset value
             increases to an amount greater than its net proceeds as stated in
             the Prospectus. (2) Not applicable.

             (2) Not applicable.

             (3) Not applicable.

             (4) Not applicable.

             (5) The Registrant undertakes that:

                 a.  For purposes of determining any liability
                     under the Securities Act of 1933, the
                     information omitted from the form of
                     prospectus filed as part of a registration
                     statement in reliance upon Rule 430A and
                     contained in the form of prospectus filed by
                     the Registrant under Rule 497(h) under the
                     Securities Act of 1933 shall be deemed to be
                     part of the Registration Statement as of the
                     time it was declared effective.

                 b.  For the purpose of determining any liability
                     under the Securities Act of 1933, each
                     post-effective amendment that contains a
                     form of prospectus shall be deemed to be a
                     new registration statement relating to the
                     securities offered

<PAGE>

                                    therein, and the offering of the securities
                                    at that time shall be deemed to be the
                                    initial bona fide offering thereof.

                  (6) The Registrant undertakes to send by first class mail or
                  other means designed to ensure equally prompt delivery, within
                  two business days of receipt of a written or oral request, any
                  Statement of Additional Information.

<PAGE>

                                   SIGNATURES

                  Pursuant to the requirements of the Securities Act of 1933,
the Registrant has duly caused this Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of New York,
State of New York, on January 16, 2002.

                                       MANAGED MUNICIPALS PORTFOLIO INC.

                                       By: /s/ Heath B. McLendon
                                          --------------------------------------
                                          Heath B. McLendon
                                          Chief Executive Officer,
                                          President and Chairman of the Board of
                                          Directors

                                POWER OF ATTORNEY

KNOW ALL THESE PERSONS BY THESE PRESENTS, that each of the undersigned hereby
constitutes and appoints Heath B. McLendon, Lewis E. Daidone and Christina T.
Sydor, and each and any of them, his or her attorneys-in-fact and agents, each
with full power of substitution and resubstitution, for him or her and in his or
her name, place and stead, in any and all capacities, to sign any and all
amendments (including post-effective amendments) to this Registration Statement,
and to sign any registration statement for the same offering covered by this
Registration Statement that is to be effective upon filing pursuant to Rule
462(b) promulgated under the Securities Act of 1933, and all post-effective
amendments thereto, and to file the same, with all exhibits thereto and other
documents in connection therewith, with the Securities and Exchange Commission,
granting unto said attorneys-in-fact and agents, and each of them, full power
and authority to do and perform each and every act and thing requisite and
necessary to be done in and about the premises, as fully to all intents and
purposes as he or she might or could do in person, hereby ratifying and
confirming all that said attorneys-in-fact and agents or any of them, or his or
her or their substitute or substitutes, may lawfully do or cause to be done by
virtue hereof.

<PAGE>

                                   SIGNATURES

                  Pursuant to the requirements of the Securities Act of 1933,
this Registration Statement has been signed by the following persons in the
capacities and on the dates indicated:
<TABLE>
<CAPTION>
<S>                                                      <C>                                 <C>

                     Signature                                    Title                        Date
                     ---------                                    -----                        ----

PRINCIPAL EXECUTIVE OFFICER:

/s/ Heath B. McLendon
-------------------------------------------------        Chief Executive Officer,         January 16, 2002
Heath B. McLendon                                     President and Chairman of the
                                                            Board of Directors
PRINCIPAL FINANCIAL AND
PRINCIPAL ACCOUNTING OFFICER:

/s/ Lewis E. Daidone
-------------------------------------------------      Senior Vice President, Chief       January 16, 2002
Lewis E. Daidone                                         Financial and Accounting
                                                          Officer and Treasurer

ADDITIONAL DIRECTORS:
                                                                   Director               January 16, 2002
/s/ Martin Brody
-------------------------------------------------
Martin Brody
                                                                   Director               January 16, 2002
/s/ Allan J. Bloostein
-------------------------------------------------
Allan J. Bloostein
                                                                   Director               January 16, 2002
/s/ Dwight B. Crane
-------------------------------------------------
Dwight B. Crane
                                                                   Director               January 16, 2002
/s/ Paulo M. Cucchi
-------------------------------------------------
Paulo M. Cucchi
                                                                   Director               January 16, 2002
/s/ Robert A. Frankel
-------------------------------------------------
Robert A. Frankel
                                                                   Director               January 16, 2002
/s/ Paul Hardin
-------------------------------------------------
Paul Hardin
                                                                   Director               January 16, 2002
/s/ William R. Hutchinson
-------------------------------------------------
William R. Hutchinson
                                                                   Director               January 16, 2002
/s/ George M. Pavia
-------------------------------------------------
George M. Pavia
</TABLE>

<PAGE>

                                  EXHIBIT INDEX

----------------- ---------------------------------------------------------
EXHIBIT
NUMBER             DESCRIPTION
------             -----------
----------------- ---------------------------------------------------------
  n.1             Consent of KPMG.
----------------- ---------------------------------------------------------
  n.2             Power of Attorney.*
----------------- ---------------------------------------------------------
*Included on signature page to this Registration Statement.


</TEXT>
</DOCUMENT>
